Real estate crisis in China: Is the Evergrande liquidation just the beginning?

For many experts it was only a matter of time, and now it was completed: The China Evergrande Group will be liquidated - the largest real estate developer in China and the world's most indebted real estate company should be history.

Real estate crisis in China: Is the Evergrande liquidation just the beginning?

For many experts it was only a matter of time, and now it was completed: The China Evergrande Group will be liquidated - the largest real estate developer in China and the world's most indebted real estate company should be history. A court in Hong Kong ordered this on Monday, ending a tug-of-war that had lasted more than two years over the company, which is more than $300 billion in debt. “Enough is enough,” said Judge Linda Chan. The real estate company has not managed to present a concrete restructuring plan in a year and a half.

It is the next chapter in the Chinese real estate crisis and a further setback for the country's already weak economy. The country's stock exchanges have been going downwards for months, and support purchases ordered by the Chinese government have hardly changed anything. The Evergrande share price plummeted following the verdict on Monday and trading was suspended on the Hong Kong stock exchange.

Many observers are now asking themselves: Will Evergrande stay, or will the company drag other real estate developers down with it? In any case, analysts expect that the Evergrande dissolution will have an impact on other construction companies and the generally ailing markets in China.

On Monday it initially seemed as if the market did not believe in a domino effect. Although Evergrande shares slipped, the Shanghai stock exchange only lost just under one percent at the start of the week, just like the index of the most important companies in Shanghai and Shenzhen. Investors appear to have priced in the ruling. Evergrande has been considered a shaky candidate for years due to its billions in debt abroad. So the markets had enough time to prepare for this scenario.

"The market had expected this because Evergrande cannot issue new bonds to extend its existing debt," analyst Willer Chen from investment firm Forsyth Barr told Capital. "Evergrande can only rely on a debt-to-equity swap of three listed companies - which is not attractive for foreign creditors." Now all three stock corporations are suspended from trading and the “Evergrande saga” is over for the time being.

Evergrande has over $300 billion in debt, more than any other real estate company in the world. The assets amount to $240 billion and are now to be liquidated.

Just a few years ago, the Chinese real estate developer was considered one of the largest in the world. But at the end of 2021, Evergrande became a symbol of the debt crisis in the Chinese real estate sector. At that time, the group defaulted on its foreign debts and filed for bankruptcy. Specifically, it was about $23 billion that the company had borrowed on international markets and was unable to repay. For two years, Evergrande struggled with an influential group of creditors abroad to restructure its debt, including several hedge funds - but in vain.

In September, investigations against Evergrande founder Hui Ka Yan became known, whereupon the creditors' committee rejected the original debt restructuring plan and new restructuring plans several times.

Christian Henke, analyst at the online broker IG, believes it is possible that other companies from the construction sector will now find themselves in a similarly difficult situation as Evergrande - and thus further fuel the real estate crisis in China. Other listed construction companies such as China State Construction and Country Garden also have debts of well over $250 billion. “With the bankruptcy of the real estate group, a lot of trust among international investors was lost,” says Henke. “Now it’s time to get this back.”

According to analyst Chen, whether other real estate companies are threatened with liquidation now depends primarily on the implementation and outcome of the Evergrande dissolution. "The liquidation of Evergrande could be an example for those developers who are in the process of restructuring," he says. The result will have an impact on the creditors' future decisions: If the restructuring rate in the event of a liquidation is higher, they would be more likely to want to pursue this. Conversely, it might make more sense to support a restructuring plan.

For now, the government in Beijing has announced that it will support the weak stock market with around 300 billion US dollars. The market is becoming an increasingly incalculable risk, especially for foreign investors. Real estate traditionally plays a major role in China; it makes up the most important part of the population's wealth. The market has been in a downward trend for some time now: construction activity in China has recently fallen massively compared to its peak in 2020. In 2022, residential construction in terms of area was 40 percent lower than in the previous year and in 2023 it was again more than 20 percent lower, according to the Chinese statistics office.

Already at the beginning of 2021, US economists pointed to signs of a bubble forming in the Chinese real estate market. Investors are now particularly concerned that the real estate crisis could spread to the banking sector and its outstanding loans.

This article first appeared in the business magazine "Capital", which, like stern, is part of RTL Deutschland.

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