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Evergrande’s liquidation: how bad is China’s property crisis?

Property Investment
By Alice Cho
30 January 2024
Financial & Professional Services
Investors, Funds & Debt Advisors
Financial Communications

China’s property giant Evergrande, once the world’s biggest builder, is now its most indebted, resulting in it being handed a liquidation order in a Hong Kong court on Monday.

With a staggering $300 billion onshore debt in mainland China, coupled with years of failed negotiations between the company and its creditors over the restructuring, the court has finally declared that “enough is enough”.

The key question remains whether the decision will be followed by mainland China, facing off against cross-jurisdictional hurdles.

While most of Evergrande’s assets ($242 billion) are located in mainland China, it is listed in Hong Kong, with international creditors holding up to $20 billion in overseas debt. If the Chinese court shrugs off the order, the fallout won't be contained within China's borders. International investors will stand to lose the tens of billions they have invested in Evergrande, and it risks dealing a further blow to the growing concern among investors that their interests will always be secondary to those of the Communist Party.

Hong Kong’s legal system, rooted in English common law, contrasts markedly from China’s socialist legal system, where the Communist Party possesses absolute authority. Even if liquidation orders are granted in the mainland (a big if, given Chinese courts’ discretionary power), overseas creditors face an uphill battle.

Liquidating a company of Evergrande’s size through a Hong Kong court is unprecedented. The process would demand collaboration with a myriad of creditors, with foreign claims taking a backseat to domestic loans. The public will be watching closely to see whether creditors’ rights are being respected, which will have long-term implications for foreign investment into China. It may also heighten social tensions, leaving 1.6 million homebuyers in limbo after putting down large deposits into homes that remain unfinished.

Evergrande is just the latest casualty among a number of developers crumbling under pressure from the Communist Party to curb skyrocketing debt, viewed as a threat to China's economic growth.

China's property market constitutes about 30% of China's GDP, making it the single biggest contributor to the world's second-largest economy. If the Chinese property market plunges into turmoil over the difficulties of Evergrande, there could be a knock-on effect, which could put global real estate projects, including those as far away as the UK, at risk.

The road to liquidation promises no smooth ride and my heart goes out to the homebuyers and families whose dreams of a future home now hang in limbo.