Once upon a time, the China Evergrande Group, the most indebted real estate developer in the world, constructed an empire that was considered to be too large to fail. It is no longer the case.
On Monday, a court in Hong Kong issued an order that the company, which had previously been the largest builder in the country in terms of sales, be liquidated. The impact will be felt by a far wider audience than only Evergrande’s creditors.
Before trading was halted on Monday morning, shares of Evergrande that were listed in Hong Kong experienced a decline of five percent. Evergrande’s current market worth is less than $300 million, which is a negligible amount when compared to the company’s liabilities, which total $330 billion. From their all-time high in 2020, shares have dropped by a staggering 99 percent.
When a developer goes through a liquidation, they typically have the option to sell their assets and pay off a portion of their debts. On the other hand, the process of winding up Evergrande ought to be drawn out so that there is little property for liquidators to seize.
There has already been a significant amount of Evergrande’s assets sold. Due to the fact that property values have continued to fall over the course of the past two years, there is not much value left in the few properties that are still available for sale.
The value of Evergrande’s other two mentioned units has likewise decreased. Since 2021, the value of these units has decreased by more than 90 percent.
Creditors had modest expectations, anticipating a recovery rate of less than three percent even before the liquidation order was issued.
Even more concerning is the possibility that the deconstruction of Evergrande will have a negative impact on housing prices in China. Approximately one and a half million homeowners have already paid the developer for unfinished homes, which is comparable to an initial value of approximately ninety billion dollars.
To this day, Beijing has exerted pressure on state-owned banks to provide low-interest loans to a long list of developers who are experiencing difficulties. Additionally, trillions of dollars have been put aside by the government to assist developers in continuing their construction projects.
In addition, the breakup of Evergrande serves as a model for other friends who are having difficulty. As evidenced by the rollercoaster ride that is the share prices of local developers, investors have been clinging to the expectation that they will receive a rescue for years.
Following each speculative report in the local media that a government bailout is imminent, stock values have skyrocketed, only to plummet a few days later.
There is a possibility that Evergrande does not constitute an urgent threat to the financial system of China just on its own. However, it appears that the consequences for China’s shadow banking system, which consists of non-bank financial firms that lend money to businesses with a higher risk, will be rather severe.
Earlier this month, Zhongzhi, which is one of the largest, submitted a petition for bankruptcy. The impending upheaval across the Chinese asset markets should be assumed to continue as smaller counterparts follow suit, and investors should prepare themselves accordingly.