1. What does it mean that a court in Hong Kong has ordered the Chinese property company Evergrande into liquidation?
A liquidation means that the company’s finances are taken over by an appointed liquidator who tries to sell the company’s assets and use the money to pay debts. In Evergrande’s case, it is about a huge debt burden. The company is the world’s most indebted real estate company and owes lenders over SEK 3,000 billion.
The ruling in Hong Kong came after Evergrande failed to convince international lenders of a plan on how to restructure the loans.
Evergrande shook financial markets worldwide already in 2021 when the company suspended payments on international loans. Since then, the entire Chinese real estate market has fallen into crisis. The sector is bathed in debt, millions of constructions have been paused and prices are falling.
2. The verdict was handed down in Hong Kong, what does it mean for Mainland China where Evergrande has its headquarters and most of its assets and liabilities?
It remains to be seen. Although Hong Kong belongs to China, the legal system there is different from the mainland.
Admittedly, there is an agreement that courts in China will be able to recognize a liquidator appointed in Hong Kong. But so far, Chinese courts have only approved such a request five times.
As for Evergrande, the Communist Party has an interest in keeping the company alive. Evergrande has tens of thousands of customers who bought properties on prospectus and are waiting for the construction of what they paid for to be completed. Angry buyers have already protested that they will neither get their money back nor the flats they bought. The Communist Party wants to avoid that kind of dissatisfaction.
Therefore, the liquidator will probably be forced to start by taking over Evergrande’s assets outside of China.
3. What does the real estate market mean for the Chinese economy?
Very. The real estate market skyrocketed with the help of cheap loans and now accounts for a quarter of the Chinese economy. The companies borrowed, sold and built in an eternal spiral. But now the bubble is bursting. It started when the government considered that the companies’ indebtedness was unsustainable. Stricter rules were introduced to reduce over-leveraging. It coincided with the economic downturn of the pandemic and put the companies in a vicious circle. To reduce their debts, they sold properties at a discounted price. The equation did not add up and now they have problems paying the interest on the debts.
Properties have also been regarded as a safe form of savings. But now prices are falling and hundreds of thousands have bought apartments that are waiting to be built. The crisis also affects suppliers of cement, architects and construction workers.
At the same time, the Chinese financial market is shaky and distressed real estate companies add to the uncertainty.
On Monday, trading in Evergrande’s stock was halted on the Hong Kong stock exchange after an initial run of more than 20 percent.
4. Why should anyone in Sweden care about a Chinese property company?
For several reasons. Here is a direct Swedish connection. Evergrande owns the Swedish electric car company Nevs. A possession that proved fatal for Nevs. In March last year, the company gave notice to 320 out of 340 employees and put the business on hold because Evergrande could not afford to continue the business. Recently, parts of Nev’s project were sold, but Evergrande is not completely gone as an owner.
But a real estate crisis in the world’s second largest economy also affects on a larger scale. China has previously been driving global growth. A slower development there can also lead to a worse economy globally and in Sweden.
