After nearly two years of false starts, last-ditch proposals and pleas for more time, real estate giant China Evergrande has been ordered to be dismantled. That’s a big moment. After Evergrande went bankrupt in 2021, China’s housing market slumped. Concerns about the real estate industry, where most households spend their savings, contributed to the economic downturn.
The scale of Evergrande’s empire is enormous. Its development covers hundreds of cities. The company controls dozens of businesses and has more than $300 billion in debt, far more than many people think its assets are worth. The company’s liquidation will put it in the same position as Lehman Brothers, the U.S. bank that filed for bankruptcy in 2008 with $600 billion in debt.
Evergrande’s bankruptcy will also occur in Hong Kong and China. Courts in these two jurisdictions may decide who wins and loses for the company’s creditors. Government officials in Beijing may eventually become involved. This process will take years and is sure to be complicated.
What’s the latest news?
Hong Kong judge Linda Chan on Monday ordered Evergrande to be liquidated and appointed bankruptcy specialist Alvarez & Marsal as the administrator of the bankruptcy proceedings. The company’s role is to help creditors, particularly foreign investors who lent money to Evergrande, recover some of their funds. Alvarez & Marsal executives told reporters outside Hong Kong’s High Court that they would meet with the company to decide next steps.
“Our priority is to maintain, reorganize or continue operations as much as possible,” said Tiffany Wong, managing director of the restructuring company. He added that he would work with Evergrande executives to raise funds for creditors in a manner that “minimizes disruption.”
Alvarez & Marsal will need the help of Evergrande executives to figure out what assets remain and how to distribute them to creditors. If that doesn’t work, the company could sue in mainland China courts.
Hong Kong has long maintained a semi-autonomous status within China, distinguishing it from other regions. A mutual agreement between Hong Kong and Beijing allows mainland Chinese courts to recognize judgments by Hong Kong judges. In this case, approval from mainland courts could effectively allow Evergrande’s foreign creditors to make claims against the company’s assets.
Who is in charge of Evergrande now?
The simple answer is Alvarez & Marsal, which will replace the board of directors of China Evergrande Group. China Evergrande Group is the parent company that oversees its core real estate development business and a number of other entities, including an electric vehicle developer.
There is also another answer. Because the Chinese government is closing in on the entire process. In general, Beijing controls foreign investors in China. If Chinese authorities don’t want Evergrande’s creditors to try to claim its assets in China, courts can block them.
Alvarez & Marsal may attempt to physically take over Evergrande’s Chinese subsidiary by replacing its legal representatives. But Evergrande has hundreds of subsidiaries, and local authorities in those units, or even employees at the subsidiaries, could try to block the takeover.
What is the Chinese government’s bet on Evergrande’s fate?
The Chinese government plays an important role in all aspects of the economy, but especially in the real estate sector. The severe and alarming slowdown in home sales began after the Chinese government restricted the industry’s excessive borrowing. The government wanted to take the heat out of the real estate boom.
This led to the weeding out of dozens of private real estate developers. Many defaulted on their debts and Evergrande was the largest company ever. Along the way, developers in desperate need of cash began making risky decisions, such as selling apartments before they were built. Currently, hundreds of thousands of home buyers are paying for unfinished apartments from companies that no longer exist. The Chinese government needs someone to pay for it.
Evergrande is one company. Why is this important for a country the size of China?
This is important because Evergrande’s liquidation will be a litmus test for foreign investors in troubled Chinese companies. This is also a test of China’s legal system and its attitude towards accepting the rule of law in Hong Kong. China has long benefited from Hong Kong’s status as the world financial capital, and the predictability of its legal system has helped cement that position.
Restructuring transactions and liquidations involving Chinese real estate companies are relatively new. They involve some of the world’s biggest investors, including the companies that manage U.S. workers’ pension funds. Dozens of cases like Evergrande’s are being fought in court in Hong Kong.
“This crisis is reflected in real estate companies and the real estate market in general,” said David Goodman, director of the University of Sydney’s China Research Center. “We need to be careful because the Chinese economy is the center of the global economy and even small economic shocks can destabilize the Chinese economy.”