Evergrande Liquidation's 'Snowball Effect': What's Next For China's Troubled Real Estate Sector?

A Hong Kong court handed down a liquidation order against China Evergrande Group on Monday, initiating the dissolution of what was once China’s biggest real estate developer.

This move signals a critical turning point for the debt-laden giant, sparking spillover concerns across the financial community.

Evergrande’s shares took an immediate hit following the court’s ruling, plummeting 21% to just 16 cents in Hong Kong dollars before a suspension in trading. This significant drop in share price is a far cry from its 2017 peak market value of HK $414 billion, now dwindled to merely HK $2.15 billion.

Evergrande CEO Shawn Siu said “the company has made all efforts possible and is sorry about the winding-up order." He maintained a commitment to clients and the company's continuity, emphasizing, "The company will ensure home deliveries and steadily promote normal operation of the group." Siu also confirmed plans to work alongside the appointed liquidator in managing the fallout.

Alvarez & Marsal Inc. stepped in as the appointed overseer, a firm recognized for handling Lehman Brothers‘ restructuring.

Evergrande’s Fallout: Assessing The Economic Impact

The decision, while not unforeseen, sends a chilling message to the markets and the property sector in China, which is already navigating turbulence.

According to Andreas Steno Larsen, an independent macro economist, the court ruling on Evergrande was largely anticipated given the company’s well-documented financial woes.

“This ruling doesn't come as a surprise to the markets,” Larsen said, adding that the government’s reluctance to intervene in the company's $300-billion debt crisis has been mirrored in Evergrande's declining share price. He anticipates Beijing will likely introduce additional policy measures and economic incentives to alleviate market instability.

Bloomberg reported the negative news is expected to impact the already shaky confidence of Chinese homebuyers, who are increasingly hesitant to invest in new homes from private developers due to fears of incompletion.

Gary Ng, a senior economist at Natixis SA, highlighted the broader implications of the liquidation, noting its likely psychological impact.

“The macroeconomic impact should be limited as the liquidation itself is unlikely to exert more pressure on the battered property sector,” Ng explained, but cautioned, “It will worsen sentiment as investors will be worried about a snowball effect on other pending cases.”

Crispus Nyaga, a financial analyst from Invezz, weighed in on the discussion with a forward-looking view, specifically addressing the situation of another troubled property developer, Country Garden. He stated that “Country Garden is in a similar situation that Evergrande was in before its collapse,” indicating that due to its heavy debt and poor ratings from credit agencies, it's likely that Country Garden might also face liquidation in the coming months.

Market Reactions

The fallout from the Evergrande liquidation hasn’t triggered substantially negative reactions across Chinese-related assets so far, suggesting that investors might have already factored in the potential consequences.

Hong Kong’s Hang Seng Index, often a barometer for investor sentiment toward Chinese offshore entities and tracked by the iShares MSCI Hong Kong Index Fund EWH, closed 0.8% higher on Monday.

Conversely, mainland Chinese shares experienced a slight dip, with the Shanghai Shenzhen CSI 300 Index falling by 0.9%. This modest drop may reflect more localized concerns about the impact of Evergrande’s liquidation on the domestic market, albeit without widespread panic.

As for Chinese companies listed in New York, the premarket trading session paints a mixed picture. E-commerce titan Alibaba Group Holdings Ltd. BABA edged up by 0.7%, while the retailer giant PDD Holdings Inc. PDD saw a sharper decline of 3.3%.

Other major firms like JD.com, Inc. JD, electric vehicle maker NIO Inc. NIO, and tech giant Baidu Inc. BIDU remained mostly flat.

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