Chinese property developer Evergrande ordered to be wound up by Hong Kong court

After failing to come to a restructuring agreement with creditors, real estate developer China Evergrande Group was forced to liquidate on Monday by a Hong Kong court. According to Judge Linda Chan, Evergrande’s insolvency and the “lack of progress on the part of the company putting forward a viable restructuring proposal” justified the court’s decision for Evergrande to wind up its operations. Even as officials work to stop a selloff in the Chinese stock market, the liquidation order is expected to have an effect on China’s financial system. The property industry has been experiencing a decline in confidence due to developers’ inability to fulfil their commitments after the industry clamped down on excessive borrowing. Evergrande’s insolvency is expected to contribute to this decline. Evergrande was granted a temporary reprieve in December after stating that it was working to “refine” a fresh debt restructuring plan for more than $300 billion in obligations. Fergus Saurin, a lawyer for an ad hoc group of creditors, said Monday that he was not shocked by the verdict. “The company has failed to engage with us. There has been a history of last-minute engagement which has gone nowhere,” he said. Saurin said that his team had been working in good faith in the entire process and that Evergrande “only has itself to blame for being wound up.” The judge is expected to provide more reasons for the liquidation order during a separate court session Monday afternoon. Evergrande, the world’s most indebted property developer, is one of many property firms that ran into trouble when Chinese regulators cracked down on excessive borrowing in the real estate sector. The company first defaulted on its financial obligations in 2021, just over a year after Beijing clamped down on lending to property developers in an effort to cool a property bubble. It’s unclear how the liquidation order will affect Evergrande’s vast operations in the Chinese mainland. As a former British colony, Hong Kong operates under a legal system that is separate, though increasingly influence by, communist-ruled China’s. In some cases, mainland courts have recognized bankruptcy rulings in Hong Kong but analysts say Evergrande’s is something of a test case. Real estate drove China’s economic boom, but developers borrowed heavily as they turned cities into forests of apartment and office towers. That has helped to push total corporate, government and household debt to the equivalent of more than 300% of annual economic output, unusually high for a middle-income country. Others developers including Country Garden, China’s largest real estate developer, have also run into trouble, their predicaments rippling through financial systems in and outside China. Evergrande’s Hong Kong-listed shares plunged nearly 21% before they were suspended from trading on Monday. The benchmark Hang Seng index rose 1% after the ruling, while other property companies’ shares advanced. Country Garden gained 2.9% and Sunac China Holdings jumped 4%. The fallout from the property crisis has also affected China’s shadow banking industry — institutions that provide financial services similar to banks but operate outside of banking regulations, such as Zhongzhi Enterprise Group. Zhongzhi, which lent heavily to developers, said it was insolvent.