Roving Periscope: H-K court orders a $300 bn liquidation of China’s Evergrande

Virendra Pandit

New Delhi: A decade after he became China’s President, the collapse of Xi Ping’s ‘magic’ both at home and overseas potentially accelerated on Monday when a Hong Kong court dealt a body blow to the Dragon’s tottering economy, ordering real estate giant Evergrande to liquidate liabilities worth USD 300 billion.

This move is likely to send ripples through China’s crumbling financial markets as policymakers scramble to contain a deepening crisis, the media reported.

Justice Linda Chan ordered the liquidation of the world’s most indebted developer, with over USD 300 billion of total liabilities, after noting Evergrande had failed to offer a concrete restructuring plan despite months of delays and several court hearings.

“It is time for the court to say enough is enough,” said Chan, who will give her detailed reasoning later in the day.

The decision sets the stage for what might become a prolonged and complicated process with likely political repercussions at the highest levels.

China’s overseas investors will now focus on how the Chinese government treats foreign creditors when a company fails. “It is not an end but the beginning of the prolonged process of liquidation, which will make Evergrande’s daily operations even harder,” an expert was quoted as saying.

As most of Evergrande’s assets are in mainland China, there are uncertainties about how creditors can seize the assets and the repayment rank of offshore bondholders, and the situation can be even worse for shareholders.

Before the court hearing on Monday, Evergrande’s shares were already trading down as much as 20 percent. After the verdict, trading was halted in China Evergrande and its listed subsidiaries China Evergrande New Energy Vehicle Group and Evergrande Property Services.

A real estate behemoth, Evergrande, which has USD 240 billion of assets, sent a struggling property sector into a tailspin when it defaulted on its debt in 2021. The fresh liquidation ruling might jolt the already fragile Chinese capital and property markets further, the reports said.

Beijing is grappling with an underperforming economy, its worst property market in nine years and a stock market wallowing near five-year lows. So any fresh jolt to investor confidence could further undermine policymakers’ efforts to rejuvenate growth.

Evergrande applied for another adjournment on Monday, stating it had made “some progress” on the restructuring proposal. In the latest offer, the developer proposed creditors swap their debts into all the shares the company holds in its two Hong Kong units, compared to stakes of about 30 percent in the subsidiaries ahead of the last hearing in December.

The company argued that liquidation could harm its operations, as well as those of its property management and electric vehicle units, which would in turn hurt the group’s ability to repay all creditors.

The giant had been working on a USD 23-billion debt revamp plan with a group of creditors known as the ad hoc bondholder group for nearly two years.

However, the talks between Evergrande and the creditors group fell apart last week because the developer’s latest offer would hurt the interest of some creditors.

Evergrande cited a Deloitte analysis during a Hong Kong court hearing in July 2023 that estimated a recovery rate of 3.4 percent if the developer were liquidated. After Evergrande said in September its flagship unit and its chairman Hui Ka Yan were being investigated by the authorities for unspecified crimes, creditors now expect a recovery rate of less than 3 percent.

However, some say the ruling might have little impact on the company’s operations, including home construction projects in the near term, as it could take months or years for the offshore liquidator appointed by the creditors to take control of subsidiaries across mainland China, a different jurisdiction from Hong Kong.

Ahead of the Evergrande decision, China’s Supreme Court and Hong Kong’s Department of Justice said they signed an arrangement on the reciprocal recognition and enforcement of judgments in civil and commercial cases effective immediately in both places.

The liquidation petition was first filed in June 2022 by Top Shine, an investor in Evergrande unit Fangchebao, which said the developer had failed to honor an agreement to repurchase shares it had bought in the subsidiary.

Before Monday, at least three Chinese developers have been ordered by a Hong Kong court to liquidate since the current debt crisis unfolded in mid-2021.