Troubled real estate developer China Evergrande could go into liquidation as early as Monday as a Hong Kong court hears a liquidation petition from foreign creditors against the company.
The legal proceedings are initiated by Samoa-registered company Top Shine, an investor in one of Evergrande's subsidiaries.
Portal news agency reported this week that a group of offshore bondholders also plans to join the petition to liquidate the company's assets.
A crackdown by China on two decades of real estate speculation three years ago deepened the housing crisis and left Evergrande owing $300 billion (277 billion euros).
Months later, the company defaulted on its offshore debt obligations and a proposal to restructure its debt was rejected by creditors last month.
The liquidation hearing was postponed until January after Evergrande's lawyers argued that none of its creditors were seeking the liquidation of the company, which has $240 billion in assets.
However, the judge warned that the final hearing would be the last before a decision is made on granting the liquidation order in the absence of a “concrete” restructuring plan.
In a sign that liquidation is imminent, Bloomberg News reported this week that the court will seek a possible regulatory order on Monday.
Legal experts are unsure whether a judgment made in Hong Kong will be recognized in mainland China. Image: Vernon Yuen/picture Alliance / AP
What would happen if Evergrande was liquidated?
First, the case is seen as a test of whether a liquidation order issued in Hong Kong will be recognized in mainland China.
Hong Kong's common law system, which remained in place after the former British colony was returned to China in 1997, is favored by foreign creditors when it comes to collecting debts on the mainland.
Beijing agreed two years ago to recognize Hong Kong bankruptcy orders in the Chinese cities of Shenzhen, Shanghai and Xiamen.
But in practice, China's opaque legal system made it difficult to enforce liquidation orders.
Mainland courts have so far only recognized such an order and have discretion to decide whether recognition is warranted.
If the order is approved by a Chinese court, Evergrande would end up in the hands of insolvency administrators who would then try to sell its assets to pay its creditors.
The liquidators could propose a new debt restructuring plan to the offshore creditors if they determine that the company has enough assets.
They would also investigate the company's affairs and refer any suspicions of wrongdoing to prosecutors in Hong Kong.
Several other Chinese developers face liquidation orders in Hong Kong courts in the coming months.
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What impact would that have on the Chinese economy?
Evergrande's liquidation would be a major setback for the world's second-largest economy, which is already struggling to recover from a draconian zero-COVID policy that kept much of the country in lockdown during the pandemic.
China's real estate sector has been a key growth driver over the past two decades, helping Beijing's leadership achieve double-digit economic growth at times.
By comparison, China's economy grew just 5.3% last year, due in part to weaker exports and domestic demand, high youth unemployment and the deepening housing crisis.
However, in recent years several other real estate developers have filed for bankruptcy, while spending by construction firms has fallen by 10% annually for two years in a row.
Last year, sales of new homes by the top 100 real estate firms fell by more than a third to 451.3 billion yuan ($64 billion, 59 billion euros).
The country's local governments, which rely on selling land as real estate to supplement their budgets, are also heavily indebted and have had to cut spending.
Much of the $300 billion owed by Evergrande was deposits paid by ordinary Chinese citizens for newly built apartments.
It is unclear whether they will have priority over foreign creditors in a liquidation.
Most economists already predict that China will grow more slowly in 2024. A worsening housing crisis could further weaken demand and rattle the country's financial system.
Last month, Oxford Economics estimated it would take four to six years to complete all unfinished residential properties.
Fortunes were won and now lost in betting on the future value of Chinese real estate. Image: picture Alliance / CFOTO
Why is China's real estate sector in trouble?
China is a nation of homeowners. About 80% of households own their own home and more than 20% of urban households own multiple properties.
Over the past two decades, Chinese consumers invested their savings in real estate, helping developers' profits soar.
The speculation drove real estate prices to unaffordable heights. By 2021, the average new urban housing unit will cost nearly ten times the average salary.
Many economists say the massive housing bubble was allowed to fester for too long before Beijing took action.
In August 2020, in the midst of the pandemic, Chinese President Xi Jinping announced new limits on the amount of debt developers like Evergrande could accumulate.
Xi's so-called three red lines meant that companies had to ensure that their liabilities did not exceed 70% of assets, that net debt remained below 100% of equity and that financial reserves remained at 100% of short-term debt.
The new restrictions highlighted the extent of what was described as a vast Ponzi scheme that Evergrande had been running. The company has been using deposits for future real estate developments to finance current construction projects for years.
Edited by: Kristie Pladson