China Evergrande Ordered to Liquidate After Racking up $300 Billion in Debt

A Hong Kong court on Monday ordered the gigantic China Evergrande Group to liquidate, a long-feared but perhaps inevitable step that brings China’s troubled property market one step closer to a dangerous crisis.

Hong Kong Justice Linda Chan noted in her ruling that Evergrande has over $300 billion in liabilities and has been unable to come up with a realistic plan for restructuring after two years of effort.

A good deal of that mountain of liabilities consists of property development that will never be completed and unfinished apartments no one can live in. Evergrande has dozens of subsidiary companies and owns property in hundreds of cities, but most analysts believe its combined assets are no longer worth as much as its liabilities.

“It is time for the court to say enough is enough,” Chan said.

The court appointed a bankruptcy firm called Alvarez & Marsal to begin disposing of Evergrande’s assets to return some value to its investors and creditors.

Alvarez & Marsal managing director Tiffany Wong said her company’s goal was to “see as much of the business retained, restructured, or remain operational.”

“It is important to emphasize that the winding up order has been made to the parent company only. It does not have a direct impact on the operations of its subsidiaries, most pertinently the subsidiaries operating in the mainland [China],” she noted.

“Our intention is to work with existing management to address the interests at stake and achieve a resolution that minimizes further disruption for all stakeholder,” Wong said.

Wong’s reassuring statement seemed intended to calm jittery Evergrande executives and encourage them to work with the bankruptcy firm. If Evergrande does not cooperate fully with the Hong Kong court order, the case could be picked up by a court in China – a step that could either affirm the longstanding practice of China recognizing Hong Kong court decisions or nullify Justice Chan’s ruling, if the Chinese government decides not to let foreign creditors devour Evergrande’s assets.

Fergus Saurin, partner at a law firm called Kirkland and Ellis that represents a group of Evergrande’s creditors, said his clients were “not surprised by the outcome,” because Evergrande has a history of “failing to engage with us.”

“There has been a history of last-minute engagement which has gone nowhere. And in the circumstances, the company only has itself to blame for being wound up,” Saurin said.

Evergrande chief executive Shaw Siu made a statement on Monday that called the Hong Kong court’s decision “regrettable” and implied he expects mainland Chinese officials will disregard it.

If Evergrande executives do not cooperate, Alvarez & Marsal could attempt to replace them – but given the titanic scale of the real estate company and its large number of subsidiaries, it would be necessary for hundreds of national and local Chinese Communist Party officials to sign off on such a replacement plan.

The Chinese government might be reluctant to use its authoritarian power to hold Evergrande together. For one thing, blocking Alvarez & Marsal’s liquidation plans would nullify the Hong Kong court ruling, dealing another massive blow to Hong Kong’s status as the “front lobby” of China Incorporated, a jurisdiction where foreign businessmen can feel more comfortable.

The outside world is anxiously waiting to discover how China will handle the collapse of a politically connected corporation, especially when its downfall could trigger panic in the Chinese real estate sector, with dire implications for the shaky national economy.

“Other Chinese companies with assets in China, including the developers Logan Group and Kaisa Group, are also facing winding-up demands in Hong Kong courts, and more are expected in the coming months,” Nikkei Asia noted.

Shares of China Evergrande plunged over 20 percent in early trading on Monday before trading was halted. Shares of other distressed Chinese property developers rose, however, including the massive Country Garden Holdings, which could be a sign of investor optimism that China will begin the painful process of cleaning up its Evergrande mess and shoring up the rest of the real estate sector.