China Evergrande has been put out of its misery. Now the money chase is on

The long overdue formal demise of China Evergrande is going to provide new and deeper insights into Beijing’s management of the massive and continuing property crisis that has destabilised its economy.

On Monday, Hong Kong’s High Court finally, after the best part of two years of continuously adjourned hearings, ordered the wind-up of the group notorious for being the world’s most indebted property company, appointing provisional liquidators to begin dissolving the sprawling group after it failed, again, to come up with a restructuring plan.

Chinese President Xi Jinping. His country’s authorities now have some awkward decisions to make.Credit: AP

“It’s time for the court to say enough is enough,” Justice Linda Chan, who has presided over an action that had previously been adjourned seven times, said in her ruling.

Given that Evergrande first defaulted on its debts in 2021 but has struggled to come up with a restructuring plan acceptable to its creditors and mainland authorities, that’s a reasonable (if somewhat belated) conclusion, albeit one that could be subject to appeal.

Whether putting what has been a zombie company under will do anything for the creditors owed about $US328 billion ($496 billion) – and the offshore bondholders owed more than $US20 billion in particular – is uncertain, with the few cents in the dollar that might be available heavily dependent on how the authorities in Beijing respond to the decision.

The critical question for offshore creditors is whether the liquidators will be allowed access to Evergrande’s largely mainland assets, which include about 1200 property developments in various stages of completion.

There is provision within what is known as the Mainland-Hong Kong Co-operation Mechanism for decisions made in Hong Kong’s courts to be recognised by the major mainland courts, but only a handful of minor precedents where that recognition has been granted.

Without it – and the liquidators will have to ask the Hong Kong court to issue letters of request to courts in Shanghai, Shenzhen and Xiamen that invoke the mechanism – the liquidators and offshore creditors won’t be able to access the bulk of Evergrande’s $US250 billion or so of assets.

To date, the approach adopted by the authorities in response to the implosion of their property sector and defaults on their debts by developers that have accounted for more than 40 per cent of China’s home sales has been to try to generally leave them to determine their own fates while providing some limited liquidity support to the better-managed developers.

Beijing’s priority appears to have been to complete the vast number of unfinished apartment projects and pay domestic contractors and suppliers what they are owed.

Given that most of the apartments have been pre-sold to buyers – the developers have banked the cash before starting construction – that means the flow of whatever cash the developers can generate is in one direction – away from their creditors and into construction that (because much of it has been pre-sold) devours rather than generates cash.

If Beijing were to maintain those priorities in Evergrande’s case, there would be no co-operation from the mainland courts and Evergrande’s offshore creditors would only have access to the group’s modest offshore assets. They’d be fortunate to eventually get a couple of cents back in each dollar of their exposures.

It wouldn’t come as a shock to the foreign creditors if Beijing prioritises onshore creditors, particularly home buyers, over them, which is probably why they were prepared to at least contemplate the restructuring Evergrande put forward last year.

That involved Evergrande issuing new long-term securities to offshore bondholders that they could convert into equity and/or debt in the group’s Hong Kong-listed property services and electric vehicle subsidiaries.

China Evergrande has announced that founder and chairperson Hui Ka Yan is under investigation over suspected “illegal crimes”.Credit: Bloomberg

That plan, which might have preserved the hope of some modest eventual recovery of value, or at least have avoided the immediate crystallisation of near-total losses, blew up when China’s securities regulator rejected Evergrande’s application to issue the new securities after the company’s founder and chief executive, Hui Ka Yan, was arrested over “suspicion of illegal crimes.”

It won’t be just Evergrande’s foreign creditors watching how Beijing responds to the liquidation.

Foreign debt providers have already learned one harsh lesson from China’s property market meltdown.

The assumption before the property dominoes started toppling was that Beijing wouldn’t allow a systemically important company (Evergrande was once the largest property developer by sales) to fail, let alone the larger part a sector that generated about a quarter of the country’s GDP. Nearly 70 per cent of China’s former top 50 developers have defaulted on interest or principal payments.

The authorities have, however, largely left the defaulting developers to devise their own responses to their predicaments, with their interventions largely aimed at efforts to support the demand side of the market and some limited liquidity provision via state-owned banks and a special fund they set up for those developers whose perceived challenges are liquidity rather than solvency-related.

Now the investors holding tens of billions of dollars in property companies that do look hopelessly insolvent will be watching the response to Evergrande’s liquidation to see whether they will have any recourse to mainland assets to salvage at least some of the value of their exposures.

The one factor that might help Evergrande’s foreign bondholders and their peers is that China has been experiencing an exodus of foreign investors which, for the first time in more than a decade, led to a fall in foreign direct investment last year. That has prompted a significant effort by the senior economic policy leadership in Beijing to try to encourage more foreign investment.

Those investors have been unsettled by the continuing decline of the property sector, where sales activity is at its lowest level since 2016, and the $9 trillion or so shrinking of the market capitalisation of China’s stock exchanges over the past three years.

Abrupt and unexpected changes in government policies – some of them, like a re-writing of espionage laws, directly inimical to foreign investors and others that have ravaged technology stocks and China’s once-thriving ride-sharing and online education sectors – have provided unpleasant surprises for foreign investors and made China’s own private sector more cautious.

Beijing’s priority appears to be completing the vast number of unfinished apartment projects and paying domestic contractors and suppliers what they are owed.Credit: Getty

More broadly, the slowing of China’s growth rate after a weak emergence from the pandemic, weak consumption levels, over-capacity in China’s factories and the emergence of longer term structural challenges previously disguised by excessive property and infrastructure investment have discouraged foreign investment.

If Beijing were to shut out the Evergrande liquidators and prevent them from accessing assets on the mainland in order to preference domestic creditors, it would add to the range of deterrents for prospective offshore investors, which is why the authorities, when they respond to the liquidation, will be confronted by a set of important and less-than-straightforward policy issues and some difficult choices.

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