Evergrande's Liquidation: Implications Unfolded

In a dramatic turn of events, the fate of China Evergrande Group, once a titan in the real estate sector, has reached a critical and definitive point. Following seven extensions of bankruptcy proceedings, the Hong Kong High Court officially pronounced a winding-up order against the company on January 29. This is a shocking development for many expressed by the dismay of homeowners who have been entangled in the aftermath of Evergrande's financial downfall. For the public and stakeholders, this announcement marks the end of a tumultuous year-long saga, leaving many wondering about the implications to follow.

The winding-up process in Hong Kong is equivalent to what is commonly referred to as bankruptcy in mainland China. The criteria for declaring bankruptcy are strict; a company must prove itself insolvent, and by all accounts, Evergrande qualifies. With liabilities exceeding a staggering 2 trillion yuan (over $300 billion), it was only a matter of time before creditors tired of waiting. In June 2022, creditors began to step forward, leading to escalating tensions that resulted in this recent court decision.

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Among the first creditors to take action was an entity known as Jiasen Global, which is registered in Samoa and controlled by the Chan family from Hong Kong. The Chan family invested 750 million yuan in Evergrande's automotive venture in 2021. However, their investment quickly turned sour as Evergrande's financial troubles surfaced. As it stands, their total claim, including interest, is now more than 800 million yuan. The heir to the Chan family fortune, Lian Haomin, has publicly lamented the disastrous decision to trust Evergrande, effectively labeling it a costly lesson.

While 800 million yuan is indeed a significant sum, the Chan family has considerable wealth, making this potentially less impactful compared to the vast repercussions of Evergrande's decision to file for bankruptcy. The Chan family may not be particularly fazed, given their stature in Hong Kong's elite circles; Lian Haomin's father is known as the “King of Gambling on the High Seas,” whose assets include the famous luxury cruise ship, the Neptune. However, for the family, the outlook on recovering their investment hinges heavily on the unfolding bankruptcy process.

In Hong Kong, the legal system is taken very seriously. When a creditor files for winding up, the court has to intervene. In this case, it attempted to negotiate with Jiasen Global and asked them to hold off on proceeding with the winding-up order, hoping to seek an alternative resolution. Evergrande Group endeavored to stave off bankruptcy by asserting that it was engaged in debt restructuring negotiations in overseas courts, including in the United States. It is noteworthy that the court granted Evergrande several extensions while considering these claims. Yet, by January 2024, the court felt it could no longer justify postponing the inevitable.

With the winding-up order granted, Evergrande is now instructed to halt all projects and operations, signaling the end of an era. The implications of this development are broad and multifaceted. The immediate impact can be expected to fall most heavily on Evergrande’s suppliers, the financial institutions that lent money to it, and the countless homeowners who have purchased Evergrande properties, now in limbo.

The slow pace of debt restructuring at Evergrande was partially attributable to Chairman Xu Jiayin’s reluctance to liquidate assets, leading to an inability to offload properties acquired at high costs. In contrast to other developers like Wang Jianlin of Dalian Wanda, who readily discounted assets for returns, Xu held onto properties out of sentiment and a reluctance to realize losses, only to see the value of these assets continue to plummet.

Now, in light of bankruptcy proceedings, Xu has no choice but to face the liquidation of assets. This means that Evergrande’s creditors may at least see some recovery of their debts, although speculation remains on how much, whether it’s 10%, 1%, or even less. The uncertainty around recoveries leads us to advise stakeholders against harboring high hopes; disappointment could run deep should no viable compensation materialize.

Once all assets are disposed of, Evergrande will likely become a shell of its former self, leading to its eventual dissolution. For creditors, this is bleak news; even if they are owed substantial sums, once the liquidation process concludes, there is no recourse. The company will be erased from existence, and overlooked debts could very well dissipate into nothingness.

On another front, the ripple effects of this bankruptcy can be expected to extend across other companies within the Evergrande network. While the winding-up order pertains to the publicly listed China Evergrande Group in Hong Kong, its myriad affiliated businesses—such as Evergrande Auto and Evergrande Property—will soon find themselves in a precarious position. These firms, which may have up to now enjoyed relative independence, will undergo significant changes in ownership as parts of the liquidation process unfold.

The implications for the Xu family are no less significant. Ironically, Xu Jiayin may be the one individual who stands to benefit from the collapse of the Evergrande empire. In the event of the company’s bankruptcy, the responsibility of shareholders is limited to their contributions, meaning Xu’s 3.9 billion yuan in registered capital will not be enough to offset the massive debts. In essence, he could potentially escape personal liability and may eventually rise again in new ventures, distancing himself from the tarnished Evergrande name.

The overall fallout of this bankruptcy will send shockwaves throughout the real estate industry, igniting fears among other developers. For instance, Sunac is also facing potential bankruptcy applications; will it too fall victim to financial torments like Evergrande? Meanwhile, Country Garden finds itself in somewhat better financial standing but is still burdened by untenable debts. With such instability prevalent among real estate players, any potential collapse looms like a dark cloud, threatening to expose the cracks within the sector even further.

As this saga unfolds, the true victims remain the homebuyers and creditors who anxiously await their fates. The situation has fueled angst within the real estate market, echoing the stark warnings for other cash-strapped developers: proactive measures are not only advisable, they are urgent. Falling under the shadow of Evergrande should serve as a wake-up call for those still clinging to the hope of recovery. The critical take here is that the era of rapid, unchecked growth in real estate is over; the shift will likely prompt an industry-wide reevaluation of practices.