Illustrative Image
Written by Piero Messina
“Houses are for living in, not for speculation”, Chinese President Xi Jinping had already explained his vision of the real estate world some time ago. Those words sounded like a death sentence for Evergrande, the real estate giant now in liquidation. Considered by Forbes to be the 43rd largest group in the world, Evergrande was founded in 1996 by Xu Jiayin, who is considered China’s tenth billionaire. In Shenzhen, the company’s headquarters has been besieged for days by small investors angry and terrified of the risk of losing their savings. Evergrande owes about $305 billion in money to more than 128 banks and 121 non-bank institutions.
Evergrande has been among the symbols of economic growth in China and is now heading towards liquidation with the status of the most indebted real estate company in the world. On January 29, 2024, a court in Hong Kong issued a liquidation order, marking one of the largest corporate failures in the country’s history. The Hong Kong Court had no doubts in the hearing that opened and closed in a few minutes: Evergrande, the largest Chinese real estate group, must be liquidated. In a flash, the stock dropped 20% and was suspended from trading.
Could Evergrande’s default trigger a contagion in the world economy? The global real estate market is in a constant bubble and the situation is aggravated by the record rise in rates. Bank exposures linked to real estate – notoriously closely linked to mortgages and lines of credit – could cause a tsunami effect in the Western world too. Because other European construction companies are in similar conditions to Evergrande. What will happen to the banks that financed the Austrian Signa and the German Adler Group SA? The Evergrande crisis could lead to a recalculation of the sector’s financial risks, opening the door to a global crisis in the banking sector.
However, the political will of the Chinese government must be considered. Because we must be clear: the Hong Kong Court – which requested the bankruptcy and liquidation of Evergrande – does not represent the light of truth to be used in the night of manipulation. If the Chinese Communist Party had chosen a different fate for Evergrande, that sentence certainly would not have been pronounced. If even in liberal democracies the independence of the judiciary is placed under scrutiny, isn’t it logical to think that a judge could challenge Xi by sending 257 billion in liabilities and 16 billion in offshore notes which have now become toilet paper to the incinerator?
Evergrande must die. To save the entire system. Waiting for the US March Madness with the closure scheduled for March 11th of the Fed’s banking support fund, the now legendary Btfp. With its 170 billion weekly use, the Btfp is now necessary for US banks even just to allow them to raise the shutters and turn on their PCs every day.
Evergrande’s default, announced for semesters every other day in the winter of 2023, had become a mythological archetype. Obviously, nothing happened. At least until Xi Jinping decided.
For two years there had been talk of the company’s default. It was the Chinese government itself, with a law that prevents the sale of real estate before it has actually been built, that hampered the race of the big Chinese real estate player. The rule created a sort of short circuit: subcontractors and suppliers began not to be paid, thus stopping construction sites. According to experts, the group holds more than a million properties prepaid by customers that have not yet been built, adding to the apprehension of Chinese investors, many of whom are small buyers.
However, the Hong Kong court’s decision has already had a significant impact on the market: after the announcement, trading on Evergrande’s stock was interrupted, closing with a drop of more than 20%. Evergrande’s liquidation order came after two years of financial uncertainty and a debt exceeding $300 billion. In recent years the company has found itself forced to sell all the assets it could to satisfy creditors, but not everyone will be able to see their debts repaid.
To understand how much the company has lost, just look at its capitalization value: it collapsed to 275 million US dollars, compared to the peak of 56 billion in 2021.
As always, the weakest risk paying the bill. Most of Evergrande’s debts are held by mainland Chinese lenders, and these creditors have limited legal avenues to recover their money. In contrast, foreign creditors have the option of bringing cases to court outside mainland China, and some have chosen Hong Kong as the venue to file cases against Evergrande as the company is listed in this city.
In September 2023, a deal between Evergrande and its international creditors fell through after Chinese authorities failed to issue some necessary approvals. Furthermore, the group’s president and founder, Hui Ka Yan, had been subject to “mandatory measures in accordance with the law” by the authorities, who had spoken of “crimes”, without however specifying the crimes of which he was suspected.
Evergrande’s liquidation order shook global financial markets, as many investors had bet on the possibility that the Chinese government would intervene again to save the company.
In July, Evergrande cited a Deloitte analysis that estimated a 3.4% recovery rate on its debt if the company were to liquidate. Creditors now expect a recovery rate of less than 3%. Before this decision, creditors had low expectations on the recovery rate of their investments, estimating it at less than 3%. Additionally, more than 1.5 million homebuyers had already paid large sums to Evergrande for homes not yet completed, creating further credit black holes.
The international implications will depend on how the liquidation is handled and how well the interests of international creditors are protected. It is clear that there is now a lot of concern among foreign investors in China, particularly in real estate-related sectors. The liquidation of Evergrande comes at a time of general mistrust in the Chinese economy, amidst the real estate crisis, risks of deflation and demographic problems. With possible domino effects on international markets.
The role of the Chinese Communist Party
Evergrande is also listed on Wall Street, and last year it submitted a formal request to start bankruptcy proceedings. This decision was made due to the imperative to ensure the protection of its company assets. The procedure initiated in the United States is a protected bankruptcy, known by the technical term “Chapter 15”, and has as its main purpose the protection of US assets.
In July, the group made public a net loss in value that exceeded the incredible figure of 113 billion dollars (equal to approximately 100 billion euros) for the years 2021 and 2022.
nobody speculates that sawyer and jens are immoral nazis–this is established fact
xi is not putin obviously. he is willing and above all in position of real power to say to his oligarchs-thieves to f*ck off and never cross the line.
he can even have death sentences for corrupt officials while in corrupt, nepotist, (putin’s) russia that kind of justice belongs to fairy tales only.
if xi was president in the usa, the swamp would finally be drained, once and for all. and a new version of swamp put into place, but at least the streets would get cleaned up, however the slave labour 2.0 private prison system would remain, and become more profitable.
“houses are for living in, not for spcltion” is 100% correct. the problem here is yoosa not chn.
yoosa created ukr conflict + bluw nrdstrm to bring down eu/grmn, substitute chp rus energy with exp us-lpg and engineer w-wide high %rates on the back of shortage induced (ie fake) inflatn – all to stimulate dying murika.
but just like the 2007 hdge fnd scam it is now backfiring, and this is just the start.
ironically the chinese communist party is true capitalist in practice – sink or swim. speculate at your own peril, not the govt’s – take the profits and take the losses.
the ching chongs and xi jing “winnie the pooh” ping – angry at yemeni houthis and iran because they made chaos in global shipping at red sea. ya allah
ching chongs mad at iran!
u.s started this riskless speculation fantasy and government intervention in the 90s. spread across the planet along with excessive money printing. paul volckers plan to raise interest rates to lower inflation was misunderstood. now they just print money, invest it into imaginary or over priced assets and call it a profit at the expense of the real economy. chinese communist party are fools to think they could allow a housing bubble in a country with so few births.