Fri. Feb 23rd, 2024

    Beijing is unlikely to rescue Evergrande’s offshore creditors because it could make things worse at home

    A man walks past an Evergrande Group residential complex called Evergrande Palace in Beijing on January 29, 2024.

    A Hong Kong court ordered the liquidation of China Evergrande on Monday.Beijing is unlikely to ensure that overseas investors get their money back, analysts say.The Hong Kong court order may not be enforced in China, where domestic interests rule.

    On Monday, Chinese real-estate giant Evergrande was ordered by a Hong Kong court to liquidate after two years in a debt crisis.

    The court has appointed Alvarez and Marsal as liquidator to manage the company, Evergrande said in a filing to the Hong Kong Stock Exchange. Alvarez and Marsal will now take control of Evergrande’s assets and prepare to sell them in order to repay the real-estate developer’s debts, which total $300 billion.

    However, Beijing is unlikely to ensure that overseas investors get their money back, say analysts.

    That’s because while Beijing wants to restore foreign investor confidence in China, authorities are probably not keen to start inflating the country’s debt-fuelled property bubble again.

    “The Chinese leadership faces a delicate tradeoff between attracting foreign investment by maintaining credibility with investors versus holding the real-estate sector on a leash,” Emil Møller, the head of research at Steno Research, an independent Denmark-based research company, wrote in a report on January 30.

    After all, China was trying to cool its red hot real-estate market when it introduced the “three red lines” policy in August 2020 that regulated debt ratios for property developers. The policy worked — but it sent Evergrande, alongside others in the industry, into a debt spiral.

    So, protecting Evergrande’s offshore investors probably isn’t in Beijing’s favor, because it could spur further speculation in the market, Møller added.

    Besides, there’s likely little to recover from the debt-laden company, experts told Business Insider.

    Evergrande’s assets are mostly in China, where domestic interests rule

    Restoring foreign investor confidence is probably not as important to Beijing as ensuring that money goes back to homebuyers and investors in China, say analysts.

    After all, Evergrande was a top developer in China. It has more than 1,300 projects to its name and projects in 280 cities across China. It has built property for over 12 million homeowners, its website states.

    That means there are many people in China who have paid for Evergrande homes, many of which have not been completed. In September 2021 — around the time Evergrande’s debt crisis went public — about 1.3 million to 1.5 million individuals had already made payments for unfinished homes via pre-sales, according to Swiss private bank Lombard Odier.

    That presents a social and political problem for Chinese leader Xi Jinping’s regime, which prizes political power over the economy.

    “The wind-up of a major property developer like Evergrande could complicate the Chinese government’s efforts to support the property sector and ensure the timely delivery of pre-sold homes,” wrote Fern Wang, a senior researcher at KT Capital Group in Hong Kong, in a note published on the Smartkarma platform.

    “In such a situation, the PRC court may potentially reject the judgment on the grounds of potential harm to public interest,” Wang added, referring to the People’s Republic of China.

    Furthermore, mainland China runs on a different legal system from Hong Kong, so whether Chinese authorities will comply with the order also remains to be seen. Offshore creditors are owed $25 billion, the Hong Kong court document showed, per CNN.

    Hao Hong, the partner and chief economist at Grow Investment in Hong Kong, said it’s unlikely for shareholders of Hong Kong-listed China Evergrande Group to get anything out of the company’s wind-up process, per Reuters. This is because liquidators appointed by Hong Kong’s courts are unlikely to have much power over Evergrande’s mainland assets, Hong added.

    On Monday, Evergrande CEO Siu Shawn told 21st Century Business Herald, a Chinese media outlet, that Hong Kong’s liquidation order doesn’t affect Evergrande’s domestic and overseas subsidiaries that are “separate legal entities.” They include Hengda Real Estate Group — Evergrande’s primary real-estate development business in mainland China.

    He also said Evergrande would ensure the delivery of homes in China.

    Hong Kong’s court order for Evergrande’s liquidation comes at a tricky time for Beijing, as China’s economy faces significant headwinds from a property crisis, deflationary pressure, and a demographic crisis.

    Market sentiment over China’s economy is so bad that the country’s stock markets sold down massively last week as investors made a dash for the exit door.

    Trading in Hong Kong-listed Evergrande shares has been halted.

    Read the original article on Business Insider


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