On January 29, a Hong Kong court mandated the liquidation of the prominent real estate entity, China Evergrande Group (3333. HK), starting a development poised to echo across China’s faltering financial markets. The decision comes at a critical juncture, compelling policymakers to take swift action to mitigate the escalating crisis.
Judge Linda Chan has opted for the liquidation of the world’s most indebted developer, burdened with over $300 billion in total liabilities. This decision comes after Evergrande’s persistent failure to present a tangible restructuring plan, even more than two years after defaulting on a bond repayment and amidst multiple court hearings.
Chan expressed that appointing a liquidator would serve all creditors’ best interests, enabling the takeover of a fresh restructuring plan for Evergrande. This move becomes particularly crucial as the company’s chairman, Hui Ka Yan, is under investigation for suspected criminal activities.
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2021 debt default and impact on China’s economy
With $240 billion in assets, Evergrande plunged the struggling property sector into turmoil when it defaulted on its debt in 2021. The recent liquidation ruling is poised to exacerbate the already fragile state of Chinese capital and property markets.
In the event of Evergrande’s collapse, financial institutions and lenders might face pressure to reduce lending. This potential scenario could trigger a credit crunch characterized by companies encountering challenges securing funds at reasonable rates.
A credit crunch poses significant risks to the world’s second-largest economy, as companies struggling to borrow face impediments to growth and, in certain instances, may be unable to sustain operations. Such a situation could also unsettle foreign investors, causing them to perceive China as a less appealing destination for their investments.
Too big to fail?
As the damage done is too extensive to repair, it is unlikely to see Evergrande existing in its current form in the future.
The government might step in to save the real-estate giant, but its impact on the economy and the size of the business will probably be diminished.
It remains to be seen to what extent this collapse will impact China’s industry, economy, and stock market. One thing seems inevitable: the effects will not be good.
