The saga of Evergrande, the large Chinese property development group that sank under a weight of debt and adverse financial conditions, is one of the stories that has set alarm bells ringing about the state of the world's second-largest economy.

The following commentary on the liquidation of Chinese real estate group Evergrande comes from Robin Harris (pictured below), Asia-Pacific head at Ocorian, a provider of financial and corporate administration services and regulatory solutions to financial institutions, asset managers, corporates and high net worth individuals. Evergrande’s difficulties are part of a wider set of pressures on the Chinese economy, often centred on its debt levels and the policy changes under the current regime in Beijing. The world’s second-largest economy is slowing, and the problems of its financial markets have become important talking points for wealth managers. 

The editors at this news service are pleased to share this content; the usual disclaimers apply. Email tom.burroughes@wealthbriefing.com

Robin Harris

The saga of the collapse of the Chinese property market began a new chapter last week after a Hong Kong judge ordered Evergrande – the poster child of the market malaise – into liquidation. 

It seems that Judge Linda Chan has had enough, having seen pledge after pledge to restructure the property developer fail to result in meaningful change. A multitude of creditors are seeking much more than change, with tens of billions of dollars invested in the firm by overseas companies alone.

But Hong Kong and China have different legal systems, so what does Judge Chan’s order mean in practice?

Firstly, it only applies to Evergrande’s Hong Kong entity. With the vast majority of the developer’s projects being based in mainland China, the scope of any liquidation which does materialise in Hong Kong will be limited to a small proportion of Evergrande’s assets and liabilities.

But the order is not without teeth. Liquidators have been appointed by the court and they will have a legal right to access books and records, shedding some light on the extent of the liabilities that lie at Evergrande’s door. And because the Hong Kong entity of Evergrande has been, to all intents and purposes, an offshore financing mechanism, it should become apparent how much foreign investment has been funnelled into the company, and how many creditors are queuing up for a payout.

A 2021 agreement between China and Hong Kong allows for mutual recognition of insolvency orders, but the FT notes that this “requires Hong Kong liquidators to apply for approval to one of three pilot courts” in China, and there is little precedent for orders being replicated (1) . 

With courts in mainland China unlikely to recognise the offshore liquidator, those appointed in Hong Kong by Judge Chan therefore have an unenviable task and may face difficulty in taking control of Chinese subsidiaries. Without being able to seize assets and negotiate with creditors in the most significant portion of Evergrande’s business, liquidation becomes extremely complex and, perhaps, ultimately ineffective. 

Even the simplest liquidation cases require intricate understanding of jurisdictional laws and an entity’s operations; something as complex as Evergrande – even if just its Hong Kong entity is under the microscope – will take a long time to unravel and assess; creditors won’t be holding their breath.

At the same time, Evergrande has pledged to keep building in China to fulfil its obligations to the millions who have purchased homes through the developer that are yet to be finished.

With sagas being a long series of events, it remains to be seen whether the Hong Kong liquidation order is the beginning of the end of this particular tale, or just the end of the beginning.

1,  https://www.ft.com/content/70ab51be-82c4-4f48-ae9a-96bba06eb4ae