Months after China Evergrande ran out of cash and defaulted in 2021, investors around the world scooped up the property developer’s discounted i.o.u.’s, betting that the Chinese government would eventually step in to bail it out.
On Monday it became clear just how misguided that bet was. After two years in limbo, and with over $300 billion in debt, Evergrande was ordered by a judge in Hong Kong to liquidate, a move that will set off a race by lawyers to try to find and grab anything belonging to Evergrande that can be sold.
In a small courtroom on the 12th floor of Hong Kong’s High Court building, Evergrande’s lawyers pushed for a last-minute deal. They argued that a liquidation would hurt Evergrande’s business and not help creditors get their money back. They wanted more time to try to make a deal with Evergrande’s creditors.
But after 40 minutes of debate, Linda Chan, the bankruptcy judge presiding over the case, made her decision to issue an order telling Evergrande to wind up its operations, citing the company’s inability to bring a concrete proposal to the court for one and a half years.
“I think it would be a situation where the court would say enough is enough,” Ms. Chan said.
The order means that Evergrande, which has been limping along for two years, unable to pay its debts or function normally but still in operation, will now likely face a protracted period dismantling a massive business with projects that span hundreds of cities and unrelated businesses like an electric vehicle company.
The order sent shock waves through the company’s publicly listed shares in Hong Kong, pushing the stock price down more than 20 percent before trading was halted. The court decision is likely to reverberate through China’s beleaguered property sector and financial markets that are already skittish about China’s economy.
There isn’t a lot left in Evergrande’s empire that still has value. And any assets that are valuable may be off limits because property in China has become intertwined with politics.
Evergrande, as well as other developers, overbuilt and overpromised, taking money for apartments that had not been finished and leaving hundreds of thousands of home buyers waiting on their units. Dozens of these companies have defaulted, leaving the government frantically trying to force them to finish the apartments, putting contractors and builders in a tough spot because they have not been paid for years.
What happens next in the unwinding of Evergrande will test the belief long held by foreign investors that China will treat them fairly. The outcome could help spur or further tamp down the flow of money into Chinese markets when global confidence in China is already shaken.
“People will be watching closely to see whether creditor rights are being respected,” said Dan Anderson, a partner and restructuring specialist at the law firm Freshfields Bruckhaus Deringer. “Whether they are respected will have long-term implications for investment into China.”
China needs investments from foreign investors now more than ever in its recent history.
Financial markets in mainland China and Hong Kong — a city that has for years been an entry point for foreign investment — have received such a blow that officials are scrambling to find policy measures like a stock market rescue fund to shore up confidence. On Sunday, they moved to stop short selling, a practice that allows investors to bet against a stock.
China’s housing market shows little signs of returning to the boom days, in part because Beijing wants to redirect economic growth from construction and investment.
Rising diplomatic tensions between the United States and China, which have led to large outflows of foreign money from China, are not helping.
Investors are looking to the resolution of the Evergrande case to see how China will handle disputes over its deadbeat companies, of which there are dozens in the property sector alone.
Specifically, they will want to see whether the people given the task of carrying out the liquidation will be recognized by a court in mainland China, something that historically has not happened.
Under an agreement signed in 2021 between Hong Kong and Beijing, a mainland Chinese court would recognize the Hong Kong court-appointed liquidator to allow creditors to take control of Evergrande assets in mainland China. But so far only one of five such requests to local Chinese courts has been granted.
Monday’s decision had already been delayed multiple times over nearly two years as creditors and other parties agreed to adjourn to give the company more time to reach an agreement with creditors on how much they might be paid.
As recently as last summer, Evergrande’s management team and some of its offshore creditors that had lent the company money in U.S. dollars in Hong Kong seemed to be closing in on a deal. The talks hit the brakes in September when several high-level executives were arrested and, eventually, the founder and chairman, Hui Ka Yan, was detained by the police.
The court’s decision on Monday was “a big bang,” Mr. Anderson said, that will “lead to something of a whimper as liquidators chase assets.”
Speaking to reporters outside the courtroom on Monday, a lawyer representing the main group of creditors said they were not surprised by Ms. Chan’s ruling.
“We’ve been ready, willing and able for the entire process to reach a deal with the company,” said Fergus Saurin, a partner from Kirkland & Ellis, which is advising the creditors. “There has been a history of last-minute engagement, which has gone nowhere, and in the circumstances, the company only has itself to blame for being wound up.”