The Liquidation of China Evergrande: Understanding the Implications
As recent events unfold, it is crucial to analyze the order of liquidation by a Hong Kong court on China Evergrande and its implications for the Chinese economy and real estate sector. While it is easy to overstate or understate the importance of these events, a comprehensive understanding is necessary.
The Liquidation Order
A Hong Kong court has ordered the liquidation of China Evergrande, a Hong Kong-listed real estate-focused firm that is part of the Evergrande Group conglomerate based in China. However, it is important to note that the liquidation order does not apply to the larger Evergrande Group or its other listed entities. Since China Evergrande is only responsible for about one-third of Evergrande Group assets, the impact of its liquidation on the larger conglomerate remains uncertain.
Legal Implications
There is little evidence to suggest that mainland Chinese courts will recognize judicial decisions from a Hong Kong court. An agreement between China and Hong Kong excludes cross-border judicial decisions on corporate insolvency. While some cities like Shenzhen and Shanghai have agreements with Hong Kong to accept judicial decisions, the practical acceptance of such decisions remains limited. Therefore, the outcome of the liquidation order remains unclear.
The Plaintiff and Motives
Interestingly, international media has overlooked the identity of the plaintiff who requested the winding up of Evergrande. Chinese media reports suggest that a 30-year-old Guangdong native, who studied in California and resides in Hong Kong, is the primary litigant. However, it remains unclear how this individual could be at the center of the case and who they represent.
Implications for China’s Economy and Real Estate Sector
The primary concern is the impact of Evergrande’s liquidation on a heavily indebted China and the real estate sector as a whole. Beijing has implemented policies to support the real estate sector, including funding for real estate firms and relaxed loan and ownership restrictions. Therefore, it is unlikely that China will swiftly act upon a Hong Kong court order.
Asset Disposal and Political Favoritism
If Evergrande disposes of assets to satisfy the liquidation order, it is likely that the disposal is aimed at politically favored firms or individuals. Evergrande was known for overpaying for prime locations in major cities. Without political support on the mainland to liquidate assets to politically favored parties, any action is expected to be slow or potentially unrecognized.
Evergrande as a Blueprint
Many struggling real estate development firms look to Evergrande as a blueprint for navigating financial difficulties. However, it is important to note that Evergrande stopped paying its debts over two years ago and has significant financial liabilities. While Chinese accounting and reporting standards may affect the accuracy of financial reports, they highlight the challenges faced by Evergrande and the broader real estate market. Other firms cannot replicate Evergrande’s approach due to falling transaction volumes and prices.
The Reality of Liquidation and Asset Sales
Despite the headlines surrounding liquidation and asset sales, there is no strong evidence or legal precedent for a Hong Kong court to enforce mainland sales in a case of this magnitude. The most likely scenario is protracted proceedings that occur outside the public eye, with some asset disposals to state-owned developers. However, significant changes in the short term are unlikely.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
