Hong Kong Court Orders Evergrande Liquidation

It's unclear how creditors will access assets that are held in mainland China.

What will the knock-on implications of Evergrande's liquidation be?

Evergrande, the beleaguered Chinese property developer, has been ordered into liquidation by a Hong Kong court. Evergrande says that the ruling does not apply to its mainland Chinese operations. However, it is a major step that will have significant implications for the company, and more broadly for the Chinese economy.

Evergrande has a staggering $300+ billion in debts and, two years after defaulting on its bond payments, has failed to come up with a viable restructuring plan. Its shares were suspended after plummeting 20% in Asian trading hours.

Evergrande shares hit a high of $32 in 2017. Since then, they are down 99.5%. It is not even clear how the liquidation will work, since the majority of the company's assets are held in mainland China, and there is doubt that creditors will be able to seize those.

The episode raises serious questions about the health of the Chinese economy and property market. China's economy has been largely propped up by its real estate market in recent years, and a number of shadow banks have struggled as the sector has taken a downturn.

Chinese Shadow Bank Investigated For Criminal Activity
Following the collapse of Evergrande, another huge shadow bank is experiencing serious solvency problems.

Stimulus

China's economy has slowed since the state took measures to address its serious debt problems. Total corporate, government and household debt add up to around three times GDP. The authorities have cracked down on companies' ability to borrow, but this has had the effect of decelerating growth.

China has been introducing measures to stimulate the economy, though there are concerns these are not targeted or effective enough. From next week, the People’s Bank of China will allow banks to hold smaller cash reserves, enabling more lending. The PBoC and the National Financial Regulatory Administration are also publishing measures to encourage banks to lend to qualified developers.


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