Adding to China’s economic troubles, property giant Evergrande is ordered to liquidate

As if the Chinese economy didn’t have enough to contend with: Slowing growth, falling prices, tanking stock markets, a shrinking workforce and fleeing foreign investors.

A Hong Kong court added another cause for concern Monday: It ordered the liquidation of China Evergrande Group, the world’s most indebted property developer with more than $300 billion in liabilities and hundreds of unfinished apartment complexes across the country.

It is unclear whether Chinese authorities will recognize the Hong Kong court’s ruling and allow international creditors to seize the company’s assets. But the decision will fuel fears about the state of China’s property market - which makes up about one-fifth of the economy - and could ripple through the world’s second largest economy, already flailing.

“Nobody believes the economic situation is going to get any better,” said Alicia García Herrero, chief Asia-Pacific economist at investment bank Natixis, after Evergrande’s share price slumped 20 percent on the Hong Kong Stock Exchange before trading was suspended.

Once China’s largest seller of real estate, Evergrande has been trying to avoid formal bankruptcy since 2021, when it defaulted on $330 billion in debt and sent shock waves through global markets. The company was seeking more time to come up with a restructuring plan, but after 18 months without progress, Justice Linda Chan said Monday that “enough is enough” and ordered it to liquidate.

Evergrande’s chief executive, Xiao En, told Chinese media Monday that the company would try to continue normal operations and safeguard “the legitimate rights and interests of creditors both at home and abroad.”

“Today’s decision by the Court is contrary to our original intention,” he told the 21st Century Business Herald, a Chinese financial publication. “We can only say that we have done our best and that we regret it very much.”

Beneath Evergrande’s bankruptcy is a wider fear that the Chinese economy may be sinking into a prolonged and steep slowdown that could hamper its - and the global economy’s - recovery from the worst days of the coronavirus pandemic.

Recent news has not been positive.

China recorded a gross domestic product growth of only 5.2 percent last year - the slowest in three decades, excluding the three initial pandemic years - and its stock market has been performing particularly badly.

China’s financial authorities have been scrambling to stop a nosedive in Chinese and Hong Kong stocks - they’ve lost about 10 percent in value this year alone amid an exodus of foreign investors - but the piecemeal support measures have done little to restore faith.

International investors, suffering whiplash from strict “zero covid” policies and politically motivated crackdowns on tech giants once considered the future of the Chinese economic miracle, continue to pull money out of Chinese companies.

There are few reasons to be optimistic: China’s population shrank in 2023 for the second consecutive year despite official efforts to encourage more children. Even with a shrinking workforce, young people entering the job market are struggling to find well-paying and fulfilling work. Some prefer to check out and “lie flat” or become “full-time children” instead.

And on top of that, people are not spending like they use to, causing prices to drop and meaning China is one of the few countries in the world that is flirting with deflation.

At the center of the economic malaise is the embattled real estate sector - and the flailing behemoth that is Evergrande.

Starting in the 1990s, China’s huge property developers had easy access to bank loans and could aggressively expand using a borrow-to-build model that took advantage of surging demand for homes and local government reliance on land sales for income.

But a shift in government policy in 2020 turned off funding flows to developers that for decades had taken out huge loans to rapidly expand, using new projects to keep borrow and building.

Evergrande was left on the verge of collapse, in a crisis that many saw as marking the end for China’s housing boom. It also fueled concerns that foreign creditors would be shortchanged in Beijing’s efforts to contain the crisis.

To avoid the effects of the company’s more than $300 billion pile of debt rippling through the economy, Chinese authorities opted for what analysts called a “controlled demolition” - essentially managing the corporation through a gradual collapse without worsening a slump in the sector that could slow the tepid pandemic recovery.

At the same time, some key company leaders disappeared.

Evergrande’s billionaire chairman, Xu Jiayin - who is also known by the Cantonese pronunciation of his name, Hui Ka Yan - was detained in September on “suspicion of illegal crimes” and has not been heard from since.

Other sitting and former executives of China Evergrande Group and its subsidiaries were also reportedly being investigated by Chinese authorities for potentially breaking rules over the use of bank deposits.

The company has continued to limp on, posing a continual headache for policymakers trying to restore confidence in the real estate sector.

The top priority for the government has been completing the forests of unfinished apartment complexes across the country and placating tens of thousands of angry homeowners who paid upfront.

But smaller contractors have collapsed as China’s property market has come under increasing strain, and home buyers and banks alike increasingly fear that developers won’t be able to finish half-done projects, let alone return to the go-go days when they would break ground on a new project weekly.

For two and a half years, property has been a “serious and persistent drag” on the economy despite “the burst of enthusiasm and positive animal spirits after the reopening from covid restrictions,” Andrew Batson, director of China research for economic consultancy Gavekal, wrote in a recent note.

Monday’s ruling raises questions about how far Chinese authorities are willing to go to protect the interests of international creditors.

In 2021, some jurisdictions in China agreed to recognize liquidation rulings from Hong Kong, but each case required a separate application, and the deal has been applied only five times.

If creditors outside the country are unable to recoup some of their losses, it would be another blow to confidence in China’s business environment. Foreign direct investment in China’s economy fell by 8 percent last year, the first decline since 2012.

“Evergrande shows to foreign investors how risky it is to invest in Chinese entities in Hong Kong,” García Herrero said. “It was clear before, but with the liquidation that does not allow any access to assets, it will be even more crystal clear.”

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Vic Chiang in Taipei, Taiwan, and Lyric Li in Seoul contributed to this report.