We explain why the judicial liquidation of real estate giant Evergrande is shaking the Chinese economy

The group, whose astronomical debt and setbacks have regularly made headlines for two years, has not been able to present a restructuring plan acceptable to its creditors.

“Enough is enough”, considered the court. A Hong Kong court ordered, Monday, January 29, the judicial liquidation of Evergrande, the fallen real estate giant in China, in turmoil since 2021. Indebted to the tune of 328 billion dollars (more than 300 billion euros), the company is become the emblem of the crisis of this sector in the second largest economy in the world, materialized by unfinished buildings in dozens of cities of the country, while real estate has become the foundation of the growing wealth of a booming middle class .

Three years after the group was declared bankrupt in the United States, Evergrande’s management was unable to present a restructuring plan acceptable to its creditors. Enough to make the Hong Kong courts lose patience, which, when contacted by international donors, ordered the judicial liquidation of the firm. Independent liquidators have been appointed and the company’s stock fell by more than 20% on the Hong Kong Stock Exchange, which suspended trading of the stock. The collapse of this real estate giant, which assures that it wants to continue its activities in China, could have repercussions on the country’s economy. Here’s why.

Because the consequences will not be limited to Hong Kong

Can this court decision, taken in the semi-autonomous Chinese region of Hong Kong, materialize in mainland China, where the group is based? There management of the real estate giant assures that no. In a press release published Monday after the court decision, the general director of Evergrande, Shawn Siu, affirmed that the Hong Kong subsidiary is independent of the group’s activities in China and that thus, it will “every possible effort to safeguard the stability of its national activities and operations.”

But nothing is less certain. For Lance Jiang, restructuring partner at law firm Ashurst, quoted by Bloomberg, “the market will be very attentive to what the appointed liquidators will be able to do and especially to the question of whether they will be recognized by one of the three supreme courts of China.” And for good reason: Hong Kong and mainland China signed an agreement in 2021, allowing reciprocity of legal decisions taken in the territory, particularly concerning commercial matters. “Without this recognition, the liquidators will have little power over the assets held [par Evergrande] in mainland China”, according to the expert.

This judgment launches a long process which should see Evergrande’s assets abroad liquidated and its management replaced. But it is in China that 90% of these assets are located. To try to restart construction sites while hundreds of individuals are still waiting for the apartment they bought to be completed, the Chinese government has put pressure on construction players, explains the New York Times. The search for assets that could be used to repay foreign creditors will be a challenge for the liquidators and could result in the dismantling of the activities of the company which, over the years, has launched into sectors as diverse as amusement parks, electric vehicles or even bottled water.

Because this crisis can have consequences on the confidence of foreign investors

For analysts, the announced dismantling of Evergrande serves as a test of the Chinese authorities’ desire to reassure foreign investors. “People will monitor whether or not the rights of creditors are respected”estimates Dan Anderson, of the firm Freshfields Bruckhaus Deringer, with the Financial Times. “This will have long-term implications for investment in China,” he adds, while Beijing still needs foreign investment, already undermined by diplomatic tensions with Washington.

“I doubt that overseas creditors will receive a substantial recovery amount” of this liquidation, judges Zerlina Zeng, credit analyst at Creditsights Singapore, cited by the Bloomberg agency. If “the macroeconomic impact can be contained”, investors around the world are watching “a snowball effect” likely to permanently undermine their confidence in Beijing, warns Gary Ng, economist at Natixis SA, interviewed by Bloomberg. Because the pronounced liquidation of Evergrande comes in a context that has already been very tense in recent months for the Chinese real estate sector: another local giant, Country Garden, also found itself in default of payment at the end of October, while a third major developer, Sunac, had to reach an agreement for a restructuring of its debt.

Because the Chinese real estate sector has been in difficulty for a long time

Shane Oliver, analyst at the financial services company AMP, quoted by AFP, believes that the Hong Kong court’s decision is “a new stage” in the real estate crisis in China. In a sector that has not been able to get its head above water since 2021, “Evergrande’s liquidation is a sign that China is ready to take radical measures to puncture the real estate bubble”, analyzes another specialist, Andrew Collier, of Orient Capital Research. “It’s a good thing for the economy in the long term. But in the short term, it will be very difficult,” he added on the American channel CNN.

In December, China’s main cities again recorded a month-on-month decline in property prices, according to official figures, despite numerous plans from the authorities to support the sector. Of the 70 cities that make up the official reference indicator, 62 were affected, compared to 33 in January 2023, a sign of the deterioration of the situation. In total, Chinese banks granted nearly 10,000 billion yuan (nearly 1,290 billion euros) in loans to the real estate sector last year, according to recent data provided by the country’s authorities.