#todayinsight: Evergrande’s Endgame: Liquidation Order and the Shaking Foundations of China’s Property Market!

One of the largest Chinese property developers (Evergrande), should go through liquidation. A court in Hong Kong has recently ordered so. The judge ruled out that the firm is unable to pay up its tremendous debt. The firm has over $300 billion liabilities. That is a world record for property developers. Recently the firm and its creditors negotiated to restructure the debt scheme, but it was unsuccessful. The proposal offered by the firm not only did not restore confidence among creditors, but also ignited an ugly battle between them. At one point the bond holders asked the chairman of the company to pay $ 2 billion out of his pocket. Mr.Hua was later detained by the government. His whereabouts are still unknown.
Hong Kong has its own legal distinction, that is apart from China. The Hong Kong law is mostly based on common law. Common law relies mostly on markets and high protection of ownership rights. That is why this court has ordered that the company should be liquidated and its assets to be distributed among its bondholders, creditors and shareholders, based on tranches of priority.
However, most of the company’s assets are located in mainland China, not Hong Hong. The government is against any action that evokes shock in the economy and gives a sense of the government losing control of the economy’s state of affairs.
Anyway, the chineses home buyers have already delayed purchases, the annual sales of property has come down about 6.6 percent. That is already making a country where the people have stored most of their wealth on property, nervous! A full liquidation of Evergrande’s assets would send a shock across the Chinese economy. The developer has already sold many houses to people, they have not built yet. Their compensation is a complicated and cumbersome procedure.
The most important insight is that property construction, which was once the propulsion engine of Chinese economic growth, is about to turn off.
#globaleconomy #globaltrade
Source: Economist