Evergrande Group, once the biggest property developer by sales, was ordered by a Hong Kong court to begin its liquidation process, which may take up to five years to complete.
The Shenzhen-based company had tried to buy time to implement its debt-restructuring plan and deliver more apartments to its customers since Top Shine Global, one of its creditors, filed an insolvency case against it in June 2022. It has successfully postponed its liquidation hearing seven times, but not any more on Monday.
Last June, the company said its liability reached 2.39 trillion yuan (US$333 billion). It proposed to sell its assets, including the controlling stake of its electric vehicle unit, but the attempt was unsuccessful.
On Monday, Hong Kong’s High Court ordered Evergrande to be wound up. Edward Middleton and Tiffany Wong of Alvarez & Marsal Asia Ltd were appointed as liquidators of the company.
“It’s time for the court to say enough is enough,” Justice Linda Chan said in the morning court session on Monday.
Evergrande chief executive Shawn Siu said the company will ensure home building projects will still be delivered despite the liquidation order.
Siu said the ruling will not affect the operations of Evergrande’s onshore and offshore units.
Derek Lai, a seasoned restructuring partner and vice chair of Deloitte China, said the number of liquidation cases in China has increased in recent years while most companies tried to delay their bankruptcy by proposing their debt-restructuring plans.
But he added that it’s not easy to implement these plans as the Chinese economy is still recovering. He said the unwinding of Evergrande will make investors lose confidence in other property developers’ restructuring plans.
Simon Lee, an economist and an honorary fellow at the Asia-Pacific Institute of Business at Chinese University of Hong Kong, said a lot of creditors, including banks, bond investors and suppliers, will have their profitability hurt by Evergrande’s liquidation as they won’t be able to get back a majority of their money.
He said individual investors who bought Evergrande’s shares will lose all their money while some homebuyers may be unable to receive their properties.
Evergrande’s shares fell 20.8% to 16 HK cents (2.05 US cents) on Monday morning before its trading was suspended. Shares of China Evergrande New Energy Vehicle Group dropped 18.2% to 22.9 HK cents while Evergrande Property Services Group’s shares decreased 2.5% to 39 HK cents.
Mat Ng, managing director at Grant Thornton, who has more than 30 years of experience in corporate restructuring, said as most of Evergrande’s assets are based in mainland China, it is difficult to execute the liquidation order across the border.
Besides, he said that Evergrande will have to deal with its onshore creditors before it can calculate its remaining assets and finish the liquidation. He said the whole process could take more than five years.
After the media reported Evergrande’s financial difficulties in the second half of 2021, the Chinese government set up a task force to handle the situation. It required the company’s founder Hui Ka-yan, or Xu Jiayin in Mandarin, to sell his personal assets to repay creditors and continue to deliver apartments to homebuyers.
Also, Evergrande was ordered to sell its assets to maintain its basic operations. After two years, the company failed to push forward its restructuring plan as the valuation of its assets continued to shrink.
Apart from Evergrande, many other Chinese property developers, such as Country Garden and Sunac China, also lacked cash to repay debt and build their properties while their deteriorating reputation scared homebuyers away, resulting in a downward spiral that they could not break.
They filed their bankruptcy protection cases in the United States last year, in case some overseas courts might order them to liquidate their assets.
Louise Loo, lead economist at Oxford Economics, says in a research report on December 6 that real estate developers in China will have to spend at least four to six years to complete their unfinished residential properties.
She says it may even take a decade to complete the residential construction in some provinces such as Jiangxi and Hebei, and more than two decades to complete in poor provinces such as Guizhou.
“The existing excess supply in the market is likely to take at least another four years to unwind, absent a meaningful pickup in demand,” she says, adding that developers’ inventory is far too large for households in China to absorb quickly.
41 property developers
Beijing’s move to suppress home prices in recent years echoed Chinese President Xi Jinping’s call that “houses are for living, not for speculation.”
Some analysts said Beijing now seems to have fine-tuned its policy and admitted that property is not only about housing issue, but it is also an important part of the Chinese economy as it creates demand for cement, steel and glass. They said if property prices continue to slide, it will be very difficult for the government to boost the economy.
Earlier this month, Ping An Bank, a major Chinese lender, put 41 firms on a list of developers eligible for its funding support, Bloomberg reported on January 15, citing people familiar with the situation.
Longfor Group and China Vanke, two financially-healthy property developers, were added to the list while Country Garden and Evergrande were not included.
Chen Wenjing, director of market research at the China Index Research Institute, said Monday there is a lot of room for local governments to ease their property rules, for example, the down payment ratios and mortgage rates in some cities remain high in many cities.
On January 27, the Guangzhou government relaxed its property purchase rules. It said people can now buy as many properties in the city as they want, if they are buying apartments smaller than 120 square meters each.
Besides, it said a property that has been leased out should not be counted into the number of properties a homeowner owns. In the past, a person had to pay more property tax and face a higher mortgage rate and a down payment ratio when buying a second or third property.
Property analysts expect Beijing, Shanghai and Shenzhen to ease their rules soon.
Follow Jeff Pao on Twitter at @jeffpao3