A Hong Kong judge has ordered the world’s most indebted property developer into liquidation in a decision that experts believe will have a wider “snowball effect” on the wider economy. China Evergrande Group, which has liabilities of about $300 billion, was unable to convince the court it had a sufficient restructuring plan to get rid of debt after an 18-month hearing, despite seven extensions.
The company still has the opportunity to appeal, but Judge Linda Chan said “it is time for the court to say enough is enough” in her ruling earlier today. The initial liquidation petition was filed by a Top Shine 2022 investor who accused the developer of failing to honor an agreement to purchase shares it had purchased in the subsidiary.
The liquidation of the Chinese real estate giant may have a “snowball effect” on the market
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Evergrande’s Hong Kong-listed shares fell by a fifth before trading was halted on Monday morning.
As a result, the company’s market cap currently stands at less than $300 million with its shares down 99 percent from their 2020 highs.
Liquidations usually give companies the opportunity to sell their assets and pay off part of their debts. However, the process for Evergrande is expected to take longer.
The company confirms that only its operations in Hong Kong are affected by the ruling, as the region has a separate legal system from mainland China.
However, the Chinese government has become more influential over Hong Kong’s legal system in recent years with analysts unsure how to implement the ruling amid the Chinese Communist Party’s debt campaign.
Nearly $6 trillion has been wiped out of China and Hong Kong stocks since their last peak three years ago.
Currently, the total debt of households, governments and businesses is equivalent to more than 300 percent of annual economic output.
Many sectors of the Chinese economy, including real estate, which accounts for a quarter of GDP, are suffering from the resulting economic slowdown.
The Chinese market has declined as the Communist Party has been forced to take action
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“It is not the end, but the beginning of a lengthy liquidation process, which will make Evergrande’s day-to-day operations more difficult,” said Gary Ng, chief economist at Natixis.
“Since most of Evergrande’s assets are in mainland China, there are uncertainties about how creditors will seize assets and the rank of repayment to overseas bondholders, and the situation could be worse for shareholders. Investors will be concerned about whether there will be a snowball effect on Other developers because the queue for filtering is long.
The majority of Evergrande’s creditors are local, with many external creditors having already written off or written down the value of their holdings. However, the way external investors will be treated in the liquidation process will be under close scrutiny.
Evergrande CEO Shawn Siu told Chinese news outlet 21Jingji that the company feels “deeply sorry” for the judge’s order.
He said: “The group’s domestic and overseas units are independent legal entities. If affected, we will still make every effort to ensure the smooth progress of risk resolution and asset disposal, and we will still make every effort to advance all work fairly and in accordance with the law.”