Evergrande Goes into Liquidation: A Turning Point for China's Property Debacle

In a significant development that serves as a stark indicator of China’s profound property sector turmoil, the prestigious China Evergrande Group has been formally subjected to a liquidation order by a Hong Kong court. This development not only underscores the severity of the ongoing real estate crisis in the country but also augurs a challenging period ahead in managing the colossal fallout from one of the most indebted entities in the sector, which bears liabilities reaching a staggering 2.39 trillion yuan ($333 billion).

The pronouncement made in the Hong Kong High Court on Monday marks an end to the company’s independent operations, transitioning control to provisional liquidators. This move came as Evergrande’s endeavors to reach a settlement with its creditors foundered, despite protracted negotiations spanning several years. Hui Ka Yan, the company’s founder and Chairman, who was placed under police supervision on suspicion of criminal activities last September, now sees his corporate empire facing one of its darkest hours.

Evergrande’s cataclysmic decline from the zenith of China's property market to its nadir, with a market valuation plummeting to just HK$2.15 billion ($275 million) following a bruising 21% share price fall, is emblematic of the structural issues plaguing the sector. It's a sentiment reflected in the stark devaluation of Evergrande’s dollar notes, which, according to Bloomberg data, were trading at a mere 1.5 cents on the dollar.

The liquidation order, deemed a "milestone for the restructuring of China's property sector" by Homin Lee, a macro strategist at Lombard Odier Singapore, also throws into sharp relief the looming battle between offshore and onshore stakeholders. This dichotomy is pivotal not only for investors but for the broader Chinese economy, which has felt the adverse effects through hampered growth and deteriorated consumer confidence.

Despite this court order heralding the dissolution of Evergrande, Judge Linda Chan has indicated that the path remains open for the company to propose a scheme of arrangement that could potentially stave off the finality of a wind-up. The legal proceedings are set to continue, with Judge Chan presiding over a hearing to discuss a potential regulating order which would govern the winding-up process and could involve nominating a liquidator.

The story of Evergrande’s downfall includes several botched attempts at restructuring, the latest of which aimed to issue new term sheets by March following the presentation of their last plan in January. However, this too did not forestall the liquidation fate, leaving their ambitious restructuring ambitions hanging in uncertainty as the process grinds on.

Navigating the liquidation will be fraught with complexity, particularly when considering the operational structure of Evergrande’s projects, predominantly run by localized units. The challenge for any offshore liquidator will be formidable in asserting control over these entities, particularly as business functions like construction, housing delivery, and various other mainland China operations continue irrespective of the offshore turmoil.

The real estate sector continues to languish under the weight of sinking prices and languid demand despite the Chinese government implementing measures to revitalize it. As Evergrande’s case number HCCW 220/2022 proceeds through the courts, the property market watches anxiously, knowing that the outcomes will resonate far beyond the fate of this one fallen giant.