HONG KONG (Reuters) – A Hong Kong court on Monday ordered China Evergrande, the world’s most indebted developer, to be liquidated.
The move could send shockwaves through already fragile Chinese capital and property markets. Such a process could be complicated, with potential political considerations, given the many authorities involved.
WHAT HAPPENS AFTER THE COURT ORDERS EVERGRANDE LIQUIDATED?
Once a liquidation order is issued, a provisional liquidatorand then an official liquidator will be appointed to takecontrol and prepare to sell the developer’s assets to repay itsdebts.
The liquidators could propose a new debt restructuring planto offshore creditors holding $23 billion of debt in Evergrandeif they determine the company had enough assets or if a whiteknight investor appeared. They would also investigate thecompany’s affairs and could refer any suspected misconduct bydirectors to Hong Kong prosecutors.
Evergrande could appeal a liquidation order, but theliquidation process would proceed pending appeal.
Shares in Evergrande and its listed subsidiaries were suspended from trading after the liquidation order. Listing rules require a company to demonstrate a business structure with sufficient operations and asset values.
HOW MUCH DEBT MIGHT CREDITORS RECOVER AND WHAT ARE THE MAINCHALLENGES?
Evergrande cited a Deloitte analysis during a Hong Kongcourt hearing in July that estimated a recovery rate of 3.4% ifthe developer were liquidated.
However, after Evergrande said in September its flagshipunit and its chairman Hui Ka Yan were being investigated by theauthorities for unspecified crimes, creditors nowexpect a recovery rate of less than 3%.
Evergrande’s dollar bonds were bid at around one cent on thedollar on Friday.
Most of Evergrande’s assets have been sold or seized bycreditors, leaving its two units listed in Hong Kong -Evergrande Property Services Group and Evergrande NewEnergy Vehicle Group. Their combined marketcapitalisation had dropped to $973 million as of Friday.
A liquidator could sell Evergrande’s holdings in the twounits although it might be difficult to find buyers.
After a liquidation, the liquidator could take control ofEvergrande’s subsidiaries across mainland China by replacingtheir legal representatives one by one, a process that couldtake months or years.
Insolvency experts said it would be a challenge for theliquidator to change the representatives as Guangzhou, whereEvergrande is based, is not one of the three Chinese cities thatmutually recognise liquidation orders with Hong Kong.
Even if a liquidator were to take possession of the unitsthat have onshore projects, many of these have already beentaken over by creditors, frozen by courts, have little valueleft or are even in negative equity because of falling propertyprices.
HOW SIGNIFICANT WOULD LIQUIDATION BE FOR CHINA’S PROPERTYMARKET?
While a winding-up of the developer with $240 billion ofassets would send shockwaves through already fragile capitalmarkets, experts said it would not offer a blueprint on howliquidation might unfold for other embattled developers.
Given the sheer size of Evergrande’s projects and debt, theprocess would involve many authorities and politicalconsiderations.
Completing ongoing home construction projects will be a toppriority for the company, the sector and the government.
(Reporting by Clare Jim in Hong Kong and Scott Murdoch in Sydney; additional reporting by Kane Wu; Editing by Lincoln Feast)
The dangerous bubble which for years has been brewing in China’s housing market is bursting, changing the country’s economy in a way that’s still hard to predict, even for economists.
The property sector has almost single-handedly driven the country’s explosive growth in the past few decades, but as the mess created by years of risky investments unravels, only the tight control of the Chinese Communist Party (CCP) has prevented an absolute, overnight catastrophe.
Yet, despite the efforts of the CCP, China’s housing crisis is far from over. Earlier this month, Country Garden—China’s biggest private property developer—narrowly avoided defaulting on its huge debt. Among an ongoing downturn of the once thriving property sector, the entire Chinese economy is struggling, causing global concerns.
The dangerous bubble which for years has been brewing in China’s housing market is bursting, changing the country’s economy in a way that’s still hard to predict, even for economists. Getty/Newsweek
According to data, China’s property sector is the single largest asset class in the world, as Adem Tumerkan, editor at Speculators Anonymous, told Newsweek. “It’s estimated to be worth over $60 trillion—far more than China’s bond and equity markets combined,” he said.
“When I was still at UBS a few years ago, we used to call it the most important sector in the world,” economist George Magnus, once chief economist of UBS and now an associate at the China Centre at the University of Oxford in the U.K., told Newsweek. “Most people kind of accept that even allowing for a bit of double counting and dubious inclusions, it’s probably about a quarter of [China’s] GDP.”
This is a huge slice of GDP when compared with other large economies. Not only this sector is massively important for China, but it’s also closely tied to the personal finances and savings of Chinese households, as “Chinese people don’t really invest in equities or financial assets,” Magnus said, and the property sector has become “a form of saving for the urban middle class.”
About 70 percent of household wealth in China is tied to the real estate sector, “a massive amount,” according to Tumerkan. “It really emphasizes how dangerous falling home prices can be on household balance sheets and confidence,” he said.
And prices have been falling for a while now, despite the CCP’s efforts to introduce policy stimulus measures. According to the latest data reported by Bloomberg, new-home prices in 70 Chinese cities tumbled by 0.3 percent in September compared to the previous month, when they had fallen by 0.29 percent. It was the steepest month-on-month decline since October 2022.
The slump in home sales and property investment is dragging down China’s entire economic outlook. But how did the country get to this point?
How Did China Get Into This Mess?
In the 1990s, China made its first moves to turn what used to be a housing welfare system—where the only way you could get housing was if you were a party member or if you did something that was beneficial to the CCP—into “a genuine property market as we would know it,” Magnus said.
That led China’s property market to expand very rapidly starting from the 2000s onward, partially driven by the growing urban population and the government’s support.
“In the very early years it was commercially viable,” Magnus said. “But then a few years ago people started talking about ghost cities, and those were the very first observations that a lot of unnecessary building was going on or that construction was going faster than the capacity of the economy to absorb it.”
To support the sector, the government regularly intervened in the 2000s and 2010s when the economy “was weak or going towards a down cycle,” Magnus explained, “but when the economy was strong, they never came in to quieten things down.”
This type of intervention, which never dampened the sector but only boosted during hard times, led to widespread optimism among builders, local authorities and investors in China believing prices would only go up, an idea which Magnus described as “a fantasy.”
Households were asked to invest in the building of their homes as well as new properties for other people, in what Magnus called “sort of a Ponzi scheme.” In 2019 and 2020, he said, 90 percent of properties sold in China were sold on this presale model, allowing developers to borrow a lot of money from Chinese households.
This aerial photo taken on March 31, 2023 shows deserted villas in a suburb of Shenyang in China’s northeastern Liaoning province. JADE GAO/AFP via Getty Images
Reality came crashing down on the property’s sector “fantasy” when the Chinese government realized that some of the country’s biggest developers, like Evergrande and Country Garden, were growing huge debts and fueling an asset bubble by promoting a risky type of investment based on the “presale model.”
In the fall of 2020, the Chinese government cracked down on this kind of investments, putting restrictions on the amount of debt developers could collect. Banks went even further, cutting off financing for developers.
“It was the thing that burst the bubble, because that’s when people realized that the model of the property developers was broken,” Magnus said.
“Then developers started to run into financial difficulties,” he added. “They couldn’t complete or even start some of the properties. Last year, there were hundreds of thousands of mortgage owners who refused to pay their mortgages because they had no confidence that the properties that they’d bought would ever get built.
“And so the government was quite concerned about this, as you can imagine, because the real thing you really don’t want to do is to anger the middle class when it comes to housing.”
Evergrande—then China’s second-biggest developer and now the poster child of the property crisis—defaulted on its massive debt in 2021 and filed for bankruptcy protection in the U.S. in August this year. Country Garden currently has $11 billion in debt and $6 billion in onshore loans and is raising fears among analysts that it might default soon.
What Does This Mean For the Country?
Magnus thinks that the bursting of China’s housing bubble will likely represent a crisis in China, sinking consumers’ confidence and negatively affecting employment.
Especially in smaller cities, where most of the oversupply currently is and where most of the price depreciation is taking place, Chinese banks—or some banks, at least—may have big problems because of non-performing loans, Magnus told Newsweek, the longer this crisis goes on.
The Chinese government has taken a lot of measures in August and September to try to stabilize things in the country’s property sector, “and today we had economic data out for the third quarter, which were, if you believe the numbers, a little bit better,” Magnus said.
“Sales value and sales volumes have kind of picked themselves up a little bit off the bottom, but construction is still deep in the mud,” he added. “The medium-term trend, I think, in the market is not good.”
China’s property market is now heading towards an inevitable shrinkage, Magnus said, “which is going to go on for quite some time.”
A worker walks past a housing complex under construction by Chinese property developer Evergrande in Wuhan, in China’s central Hubei province on September 28, 2023. China’s real estate industry grew at lightning speed from the late ’90s, but entered a slump during the years of the pandemic. STR/AFP via Getty Images
What Will Be the Impact on the Rest of the World?
The consequences on the global economy are even more uncertain.
“China is the second largest economy in the world. So if the bubble further deflates, it’s hard to see it not having ripple effects globally,” Tumerkan told Newsweek.
“China made up much of global growth post-2008, creating a locomotive effect. But now as China is dealing with an inevitable slow down, this raises concerns for the global economy,” he continued.
“For starters, if Chinese demand is weak, they will turn to exports for growth while having less imports. But I don’t believe foreign countries will be ecstatic about Chinese imports crowding out their own manufacturing. Thus trade tensions could rise.
“Country Garden and Evergrande together carry roughly $500 billion in liabilities—billions. This is more than many countries’ entire public debt. Someone, somewhere, will be forced to absorb those losses. Which could lead to further black swan events,” Tumerkan said.
Scott Kenney, senior adviser and Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies (CSIS) in Washington, D.C., thinks that the impact on the global economy would be limited.
“The consequences for the rest of the world are somewhat ameliorated by the fact that China has a closed capital account and that most of the real estate investment is through Chinese entities, not foreign entities,” he told Newsweek. “Despite how huge China’s real estate sector is, it’s having a much more limited effect on the rest of the world’s economy.”
The fundamental questions, Kenney said, are how China decides to manage its “bad debt”—whether it does so in a way that’s well-balanced or in a way that creates more problems—and how can the country find new drivers of growth to replace real estate.
“That’s why they’re investing so much in high tech and hope that electric vehicles, green tech, A.I., Telecom, commercial aircraft, and semiconductors will spur a new generation of growth that isn’t based on infrastructure development,” said Kenney.
“All of that translates more likely into slower growth over the next decade, whether the Chinese want it or not. Not only is the economic challenge difficult, but the political economy of China and the views of its leadership create huge obstacles to them pursuing this transition in a measured, successful way that generates domestic and international confidence.”
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Wu Yajun (left), cofounder-chair of Longfor Group Holdings, and Yang Huiyan, co-chair of Country Garden.
Courtesy of Longfor; courtesy of Yang Huiyan
Two of China’s richest female real estate tycoons—billionaires Wu Yajun and Yang Huiyan—saw their net worth gain a combined $3.6 billion in just a few hours, after the country’s regulators took a surprising turn and unveiled a comprehensive package of measures aimed at supporting the ailing property industry.
To ensure the “stable and healthy development” of the real estate market, authorities including the country’s central bank, the People’s Bank of China, as well as the China Banking and Insurance Regulatory Commission (CBIRC), issued on Friday a 16-point document that included steps to boost lending and liquidity, according to multiple media reports.
Screenshots of the document are also available online, showing that regulators encouraged banks to meet the “reasonable” financing needs of developers with sound corporate governance, allow extension of debt repayments by up to one year, and treat private and state-owned real estate companies on an equal footing.
“We view this as the most crucial pivot since Beijing significantly tightened financing of the property sector,” Nomura economists led by Lu Ting wrote in a research note on Monday. “Thus, those cash-strapped developers (especially private ones), construction companies, mortgage borrowers and other related stakeholders can now breathe a sigh of relief.”
Shares of several major real estate companies soared in response, with billionaire Yang Huiyan’s Hong Kong-listed Country Garden jumping 40.6% as of Monday noon, and fellow billionaire Wu Yajun’s Longfor Group, also listed in Hong Kong, surging 22.8%. Yang’s subsequent $2.4 billion increase in wealth and Wu’s $1.2 billion placed the two moguls among the five biggest gainers on the Forbes Real-Time Billionaires List for the same day.
To be sure, Yang’s Country Garden and Wu’s Longfor Group have also been battered by China’s crackdown on once skyrocketing housing prices and aggressive corporate borrowing, although the firms are considered to be of stronger financial health than defaulted developers such as Shimao Group, Sunac China Holdings and China Evergrande Group.
Country Garden, for example, saw its net profit plunge 96% to $612 million in the first half of this year. China’s property sales have declined for a 14th consecutive month in September, as homebuyer confidence slump amid the unrelenting crackdown.
Shen Meng, managing director at Beijing-based boutique investment bank Chanson & Co., cautions that the 16-point plan by no means amounts to a sector-wide bailout. “The policies are aimed at preventing mass-scale defaults and systematic financial risks when many developers face maturing debt payments next year,” he says. “Another focus of these policies is ensuring the delivery of pre-sold but stalled construction projects.”
China’s developers collectively have at least a combined $55 billion in bonds due over the next two years, but face weaker sales and limited refinancing options, Moody’s Investors Service wrote in an October 27 research note. Companies running out of money have suspended construction of pre-sold housing projects, causing rare public protests and mortgage boycotts across the country.
But as authorities refrain from bailing out more firms, beleaguered real estate companies, such as Evergrande, are unlikely to have a reversal of fortunes, according to Shen. The company’s troubled billionaire founder Hui Ka Yan has come to symbolize tycoons who have borrowed across the board to fund their expansion. Hui, once Asia’s richest person, now only has a net worth of $2.9 billion, down from a peak of $42.5 billion in 2017, as the company struggles to restructure its north of $300 billion in total liabilities.
Hui Ka Yan, a member of the CPPCC National Committee and chairman of Evergrande Group, attends a press conference at the fifth session of the 12th CPPCC National Committee on March 9, 2017 in Beijing, China. (Photo by VCG/VCG via Getty Images)
VCG via Getty Images
Once China’s richest person, Hui falls out of the top 100 for the first time in 14 years.
Hui Ka Yan, the founder of real estate firm China Evergrande Group, has lost nearly all of his once massive fortune. Worth $42.5 billion and ranked the richest person in Asia at his peak in 2017, his wealth has been drastically diminished as debt woes plague the embattled developer. Yet as pressure mounts for the former tycoon to find a concrete way to repay his firm’s debts, analysts say he will certainly lose a lot more.
The 64-year-old, who dropped out of the 2022 ranks of China’s top 100 richest for the first time since his 2007 debut, now has an estimated net worth of $2.9 billion, an amount that is based entirely on the dividends he’s received over the years, though some of it has since been plowed into mansions, jets and a yacht. The number excludes Hui’s 60% stake in Evergrande, whose shares were suspended from trading in March, and still can’t meet the criteria for a resumption. Even before the suspension, the firm had lost about 95% of its peak value.
But even his personal assets are not safe from the firm’s creditors. Hui was forced to use $1 billion of his own cash to pay down Evergrande debt late last year earlier this year, and he sold earlier this year two luxury apartments at a discount–one in the city of Shenzhen and one in Guangzhou–for a combined $50 million (360 million yuan), apparently to help pay off more.
As Evergrande struggles to come up with a plan for restructuring its more than $300 billion in liabilities, which according to one person with knowledge of the matter will probably get delayed again and pushed out into 2023 due to the sheer size and complexity of the matter, more of his remaining trophy assets are likely at risk. Chen Zhiwu, a professor of finance at the University of Hong Kong, says amid China’s drastically changed political environment, the pressure is “really high, if not higher” for Hui to keep paying down corporate liabilities with his own money.
In fact, one of his three homes in Hong Kong’s prestigious The Peak neighborhood was seized by China Construction Bank (Asia) last week in November after Evergrande defaulted on a loan collateralized by the $90 million (estimated market value) property.
“Of course, he would like his personal assets and corporate assets very clearly separated, which officials aren’t willing to accept,” Chen says. “What this means is that when his company debt is in default, some of his personal fortune may have to be used to contribute to the payments to debt holders.”
The facade of 2-8a Rutland Gate, which is thought to be the most expensive home ever marketed in Britain, is recently put on sale by beleaguered billioniare Hui Ka Yan(Photo by Leon Neal/AFP via Getty Images).
AFP via Getty Images
Hui, who according to Evergrandethe company’s website is still a member of the ruling Communist Party, has pledged his two other luxury homes in the same posh Hong Kong locale as collateral for loans from Orix Asia Capital. He is also looking to sell his 45-room Knightsbridge mansion overlooking London’s Hyde Park area, two years after buying it from a Saudi prince for $232 million. And he owns private jets and a $60 million superyacht that he could be forced to sell.
As Evergrande’s revenues have fallen off a cliff (it only recorded $2.5 billion in contracted sales during the first eight months of the year, a plunge of around 96% from the prior year), Hui is unlikely to convince creditors that the company could ever generate enough cash flow for future repayment.
Of course, he would like his personal assets and corporate assets very clearly separated, which officials aren’t willing to accept.
Meanwhile, a nationwide mortgage boycott by angry buyers, who paid for their purchases in full but aren’t getting apartment complexes delivered on time after troubled developers such as Evergrande ran out of money, is putting pressure on the government. To quell public protests, which are rare in China, officials have agreed to issue special loans totaling $27.6 billion (200 billion yuan) to help with this type of work. Victor Shih, an associate professor of political economy at the University of California, San Diego, says banks are likely to have been told to lend to the financing arms of local governments, so that they could buy the unfinished projects from distressed real estate firms at a small discount. Evergrande said in September it had resumed working on 95% of its 706 pre-sold but undelivered construction projects.
But aside from protecting the interests of average homebuyers, few expect Beijing to reverse its course and unveil broader sector bailout measures–which are seen as crucial to restoring offshore creditor confidence. Kaven Tsang, a Hong Kong-based senior vice president at Moody’s Investors Service, says the economic pain inflicted by the real estate meltdown–including defaults, falling sales and rapidly slowing growth–are “within the [government’s] tolerance level.”
“The central government has made it clear in the past that they aren’t going to use the property sector to support the economy,” says Tsang. “We haven’t seen any changes so far.”
An Evergrande residential development under construction in Beijing, China. (Photo by Bloomberg)
Ron Thompson, a Hong Kong-based managing director at consulting firm Alvarez & Marsal Asia, says he thinks it would take at least two years for China’s housing demand to stabilize. Moody’s estimated in October that China’s property sales would continue to decline over the next 12 months, after shrinking 21% in August from the prior year, and 15.3% in September. Default risk remains high, given that the country’s developers have at least a combined $55 billion in bonds due over the next two years, but face weaker sales and limited refinancing options.
Amid this environment, bond investors mired in the restructuring of defaulted developers “aren’t expecting 100 cents on the dollar,” and are likely to demand equity and other collaterals to compensate for their rising losses, says Alvarez & Marsal Asia’s Thompson. Those who have lent specifically to Hui are increasingly taking things into their own hands, with more asset seizures and “wind-up” petitions to liquidate assets due to unpaid financial obligations, says Brock Silvers, a Hong Kong-based chief investment officer at Kaiyuan Capital, which invests in distressed assets.
Evergrande is facing a wind-up hearing in Hong Kong on Nov. 28, which was first brought in June by creditor and Samoa-based investment holding Top Shine Global Limited over $110 million in unspecified financial obligations.
Evergrande’s Hong Kong headquarters, which it acquired for $1.6 billion (HK$12.5 billion) in 2015 from Chinese Estates Holdings, controlled by Hui’s billionaire friend Joseph Lau, has also been seized by creditors and recently put on sale. The 26-story China Evergrande Centre located in Wan Chai now has an estimated value of around $1 billion, and the bidding process, concluded in late October reportedly drew interest from billionaire Li Ka-shing’s CK Asset Holdings.
Evergrande’s Hengchi 5 electric vehicle is on display at Hengchi experience center in Shanghai, China. (Photo by Wang Gang/VCG via Getty Images)
VCG via Getty Images
Hui appears to be pinning his last hope on electric cars. The Hong Kong-listed China Evergrande New Energy Vehicle Group , two thirds owned by parent Evergrande and whose trading has also been suspended since March, announced in late October that it had delivered the $24,700 Hengchi 5 electric sports utility vehicle to the first batch of 100 buyers, constituting a “major milestone” for Hengchi Auto. Parent company Evergrande also said in a July filing that it may offer equity interests in its EV unit as part of a “supplemental credit enhancement” package for restructuring offshore debt.
But Shen Meng, managing director at Beijing-based boutique investment bank Chanson & Co., says the EV deliveries offer little comfort to creditors. The beleaguered Hui, who once cherished ambitions to become the Elon Musk of China and propel Evergrande above Tesla, still has a long way to go before establishing Hengchi as a stable brand.
“The deliveries of the first batch doesn’t mean the maturing of Evergrande’s EV business, as it will take quite some effort to start bigger-scale production and delivery to the mass,” says Shen. “The EV unit is unlikely to be seen as a reliable asset, and it won’t help much with the restructuring process.”
