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The Bigger They Are…

China Evergrande, once a titan in China’s property development sector, is on the brink of becoming the country’s most complex and largest corporate dissolution. The company, which was a symbol of China’s embrace of capitalism and a key driver of the nation’s economic growth, is now facing a potential liquidation ordered by a Hong Kong bankruptcy judge. This decision could mark the end of a tumultuous two-year period for investors who are owed billions of dollars.

The company’s downfall began with its default in early December 2021. Evergrande’s default not only signaled financial instability but also plunged China’s housing market into a severe crisis. This crisis affected other developers and significantly impacted Chinese households, who largely depend on housing as their primary wealth store. With Evergrande’s financial situation worsening, investors have little hope of substantial recovery.

The upcoming court decision in Hong Kong holds significant implications, not just for Evergrande but for the broader economic landscape. The case involves numerous stakeholders, including homebuyers who prepaid for their homes, employees and contractors who have not been paid, and Chinese banks and investors who extended loans to the company. The proceedings, led by Judge Linda Chan, have been ongoing for over a year, with little progress made towards a resolution.

There remains a slim possibility that Evergrande could avoid liquidation if last-minute negotiations lead to a new restructuring deal acceptable to creditors. However, this outcome seems increasingly unlikely. A group of creditors recently expressed support for Evergrande’s onshore company, Hengda, and opposed bankruptcy, highlighting the negative impact a prolonged bankruptcy process would have on all stakeholders.

The Harder They Fall

China’s property market, already in a downward spiral, faces additional stress from Evergrande’s potential liquidation. Despite government efforts to stabilize the market, including easing home-buying requirements and lowering interest rates, these measures have had limited success. The situation worsened when Evergrande’s founder, Hui Ka Yan, was detained, disrupting negotiations for a repayment plan with offshore creditors.

If liquidation proceeds, it would be a complex and lengthy process due to Evergrande’s intricate business structure, involving multiple listed companies and thousands of subsidiaries. The liquidation would also be a critical test for the Chinese Communist Party’s approach to foreign creditors of Chinese property companies. Under a 2021 agreement, a mainland Chinese court might recognize the liquidator, allowing foreign creditors to access Evergrande’s mainland assets.

Evergrande’s potential liquidation represents a significant moment in China’s corporate history. It highlights the challenges faced by the Chinese property market and the government’s efforts to stabilize it. The outcome of the Hong Kong court’s decision will not only determine Evergrande’s fate but also set a precedent for the treatment of foreign creditors in China’s corporate bankruptcies.