After nearly two years of false starts, last-ditch proposals and pleas for more time, China Evergrande, a massive property company, has been ordered to dismantle itself. It’s a big moment. Evergrande’s collapse in 2021 sent China’s housing market into a tailspin. The worries in real estate, where most households put their savings, helped tip the economy into a downturn.
The scale of Evergrande’s empire is enormous: Its developments cover hundreds of cities. It controls dozens of business and is more than $300 billion in debt — a sum far greater than most believe its assets are worth. The company’s liquidation puts it in the same universe as Lehman Brothers, the U.S. bank that filed for bankruptcy in 2008 with $600 billion in debt.
The Evergrande bankruptcy will play out in Hong Kong and China. Courts in those two jurisdictions may determine the winners and losers among the company’s creditors. Ultimately, government officials in Beijing could get involved. The process will last years and is sure to be complicated.
What’s the latest?
A Hong Kong judge, Linda Chan, on Monday ordered Evergrande’s liquidation and appointed Alvarez & Marsal, a firm that specializes in bankruptcy cases, to manage the unwinding. The firm’s role will be to help creditors — particularly overseas investors who made loans to Evergrande — get some of their money back. Speaking to reporters outside the Hong Kong’s High Court, executives from Alvarez & Marsal said they will meet with the company to determine the next steps.
“Our priority is to see as much of the business retained, restructured or remain operational,” said Tiffany Wong, a managing director at the restructuring firm. She added that it would work with Evergrande’s executives to get creditors their money in a way that “minimizes disruption.”
Alvarez & Marsal will need the cooperation of Evergrande’s executives to figure out what assets remain and how to distribute them to creditors. If that doesn’t go smoothly, the firm can take its case to a mainland China court.
Hong Kong has long had a semiautonomous status within China that distinguishes it from the rest of the country. By mutual agreement between Hong Kong and Beijing, courts in mainland China can recognize rulings by Hong Kong judges. In this case, recognition from a mainland court could in effect allow Evergrande’s foreign creditors to make a claim over the company’s assets.
Who’s in charge of Evergrande now?
The easy answer is Alvarez & Marsal, which will replace the board of directors of China Evergrande Group, the parent company that oversees the core property development business and many other entities, including one that develops electric vehicles.
There’s another answer: The Chinese government looms over the entire process. Generally, Beijing has control over foreign investors within China. If the Chinese authorities don’t want Evergrande’s creditors to try to claim assets in China, the courts can block the creditors.
Alvarez & Marsal could try to physically take over Evergrande’s Chinese subsidiaries by replacing their legal representatives. But Evergrande has hundreds of subsidiaries and the local authorities of those units, or even employees of the subsidiaries, could try to block any takeovers.
What is Beijing’s stake in the fate of Evergrande?
China’s government plays a major role in all aspects of the economy, but especially in the real estate sector. What has become a deep and alarming slowdown in home sales began when Beijing restricted an industry borrowing binge. The government wanted to take the heat out of the property boom.
This led to the culling of dozens of private real estate developers. Many defaulted on their debts — Evergrande was the biggest by far. Along the way, developers desperate for cash started to make perilous decisions, like selling apartments before they were built. Now, hundreds of thousands of home buyers have paid for apartments that have not been completed from companies that no longer exist. Beijing needs someone to foot the bill.
Evergrande is one company. Why does this matter for a country the size of China?
It matters because Evergrande’s liquidation will be a litmus test for foreign investors in Chinese companies that have run into trouble. It’s also a trial of China’s legal system and its willingness to accept the rule of law in Hong Kong. For years, China has benefited from Hong Kong’s status as a global financial capital, and the predictability of its legal system helped establish that.
Restructuring deals and liquidations involving Chinese property companies are relatively new. They involve some of the world’s biggest investors, including firms that manage the pension funds of American workers. There are dozens of cases like Evergrande’s winding through courts in Hong Kong.
“Its crisis is symptomatic of property companies and the property market generally,” said David Goodman, director of the China Studies Center at the University of Sydney. “We should care because the Chinese economy is at the heart of the world economy and even small economic shocks can destabilize it.”