What if the real estate giant is liquidated? – DW – 01/28/2024

Troubled property developer China Evergrande could be liquidated as early as Monday, a court has ruled Hong Kong A winding up petition is heard against the company by foreign creditors.

The legal action is being brought by Samoa-registered Top Shine, an investor in one of Evergrande's subsidiaries.

Reuters news agency reported this week that a group of overseas bondholders also plan to join the petition to liquidate the company's assets.

crackdown three years ago China Over two decades of real estate speculation, it caused a worsening real estate crisis and left Evergrande $300 billion (€277 billion) in debt.

Months later, the company defaulted on its external debt obligations, and creditors last month rejected a proposal to restructure its debt.

The liquidation hearing was postponed to January after Evergrande's lawyers argued that none of its creditors had sought to liquidate the $240 billion company.

But the judge warned that the latest session would be the last before a decision is made on issuing a liquidation order, in the absence of a “concrete” restructuring plan.

In a sign that liquidation is imminent, Bloomberg News reported this week that the court is set to seek a possible regulatory order on Monday.

Legal experts are unsure whether any judgment issued in Hong Kong will be recognized in mainland ChinaPhotograph: Vernon Yuen/Photo Alliance/AP

What will happen if Evergrande is liquidated?

First, the case is seen as a test of whether a liquidation order issued in Hong Kong will be recognized in mainland China.

Hong Kong's common law system, which remained in place after the former British colony returned to China in 1997, is favored by foreign creditors when it comes to recovering debts on the mainland.

Beijing agreed two years ago to recognize Hong Kong insolvency orders in the Chinese cities of Shenzhen, Shanghai and Xiamen.

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But in practice, liquidation orders have been difficult to enforce due to China's ambiguous legal system.

Mainland courts have, to date, only recognized one such matter, and they have the ability to exercise their discretion as to whether recognition is justified.

If a Chinese court accepts the order, Evergrande will be placed in the hands of liquidators who will then try to sell its assets to repay its creditors.

Liquidators can propose a new debt restructuring plan to external creditors if they decide that the company has sufficient assets.

They will also investigate the company's affairs and can refer any suspected misconduct to Hong Kong prosecutors.

Several other Chinese developers face liquidation orders in Hong Kong courts in the coming months.

How is China's economic slowdown spreading across Asia?

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What will be the impact on the Chinese economy?

Evergrande's liquidation would be a major setback for The second largest economy in the worldactually Struggling to recover From the strict zero Covid policy that kept most of the country in lockdown during the pandemic.

China's real estate sector has been a major driver of growth over the past two decades, helping Beijing's leaders achieve double-digit economic growth at times.

By comparison, China's economy grew just 5.3% last year, thanks in part to weak export and domestic demand, high youth unemployment, and a worsening real estate crisis.

However, in recent years, several others real estate development It was forced into bankruptcy while construction company spending fell by 10% annually for two years in a row.

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Last year, new home sales from the top 100 real estate companies fell by more than a third, to 451.3 billion yuan ($64 billion, 59 billion euros).

The country's local governments, which rely on land sales for real estate to bolster their budgets, are burdened by debt and have had to cut spending.

Much of the $300 billion owed by Evergrande was deposits paid by ordinary Chinese citizens on newly built apartments.

It is unclear whether they will be given priority during any liquidation over foreign creditors.

Most economists already expect China to grow more slowly in 2024. A worsening real estate crisis could further dampen demand and shake the country's financial system.

Last month, Oxford Economics estimated that it would take four to six years to complete all the unfinished housing estates.

Fortunes have been made and now lost betting on the future value of Chinese real estatePhoto: Image Alliance/CFOTO

Why is China's real estate sector in trouble?

China is a nation of homeowners. About 80% of households own their homes, and more than 20% of urban households own multiple properties.

Over the past two decades, Chinese consumers have poured their savings into real estate investment, helping developers' profits rise significantly.

Speculation has pushed real estate prices to unsustainable levels. By 2021, the average cost of a new urban housing unit will be nearly 10 times the average salary.

Many economists say the massive real estate bubble was allowed to fester too long before Beijing took action.

In August 2020, in the middle of the epidemic, Chinese Pres Xi Jinping It announced new limits on the amount of debt developers like Evergrande can raise.

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The three red lines launched by Xi Jinping meant that companies must ensure that their liabilities do not exceed 70% of their assets, that net debt remains less than 100% of equity, and that financial reserves remain at the level of 100% of short-term debt.

The new restrictions revealed the scale of what was referred to as the massive Ponzi scheme that Evergrande was running. For years, the company has been using deposits on future real estate development projects to finance current construction projects.

Edited by: Christy Bladson

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