A Hong Kong court has ordered the liquidation of Evergrande Group, unleashing reverberations throughout the Chinese economy.
The decision has far-reaching implications, not only for China’s beleaguered property sector but also for the broader economy, as highlighted by the Reserve Bank of Australia’s concerns about the impact on Chinese demand for Australian goods and services.
The announcement of Evergrande’s liquidation sent shockwaves through financial markets, with shares in the company trading in Hong Kong plummeting by a staggering 21 percent.
Widely anticipated
This decline was widely anticipated but still served as a stark reminder of the turmoil that has engulfed Chinese and Hong Kong equities, erasing trillions of dollars in value since their peak in 2021.
Analysts have expressed skepticism about the prospects of offshore creditors recovering a significant portion of their investments in the troubled property giant.
Uncertainty surrounds the unfolding of the liquidation order, particularly concerning Evergrande’s numerous projects in China, which are primarily operated by local developers answerable to government authorities.
These local entities may be hesitant to cooperate with foreign creditors, given the potential political ramifications. Most of Evergrande’s assets are concentrated in mainland China.
Global financial stability
The turbulence in the Chinese property sector has been a source of concern for global financial stability.
The Reserve Bank of Australia, in its October Financial Stability Assessment, emphasized the property sector’s significance in the Chinese economy and its potential to exacerbate macro-financial imbalances through ties to local government financing, shadow banking activities, and banks.
Evergrande, once China’s largest property developer, initially defaulted on bond repayments in December 2021, accumulating a staggering debt exceeding $300 billion.
The treatment of international creditors during the liquidation process will be closely monitored by foreign investors who are growing increasingly wary of China’s business climate.
Foreign capital
The Chinese government, led by Xi Jinping, has expressed its desire to attract more foreign capital after years of regulatory uncertainty.
While iron prices remain robust due to stockpiling by Chinese steel mills ahead of the Lunar New Year holidays, mining companies are closely watching for any signs that Evergrande’s liquidation may dampen demand for steel.
Billions of dollars worth of unfinished construction projects hang in the balance, which could affect steel consumption.
