What does Evergrande’s collapse mean for global business?

A Hong Kong court on Monday ordered the liquidation of Evergrande, the heavily indebted Chinese real estate giant. The decision comes two years after the company went bankrupt, sparking a financial crisis and adding to the challenges facing the world’s second-largest economy. More than 1.5 million property buyers have prepaid a total of $90 billion for properties that have not been built.

The company’s dissolution raises questions about fairness for overseas creditors — which could have broader implications for foreign businesses operating in China.

How did Evergrande fall?

The company was once considered too big to fail, racking up debt to expand during a property boom that made the real estate sector a key driver of China’s economic growth. But as the economy slowed, real estate sales plummeted and Chinese regulators began cracking down on excessive leverage and speculation. Evergrande has struggled to refinance its debts, which had ballooned to more than $300 billion, and has repeatedly sought more time to reach a deal with creditors.

The judge presiding over Evergrande’s bankruptcy case has now asked for time after two years of talks. Evergrande’s Hong Kong-listed shares, which continued to trade despite bankruptcy proceedings, fell more than 20 percent before the trading halt, valuing the developer at just $275 million.

Creditors may not get their money back. There are no signs that China’s property prices will recover anytime soon, or that consumers will start buying as they once did. New home sales fell 6 percent last year, to a level last seen in 2016.

The proceedings will test protection measures for overseas investors. A Hong Kong judge has appointed Western restructuring firm Alvarez & Marsal to liquidate Evergrande. However, most of the company’s assets are located in mainland China, where liquidators appointed by Hong Kong courts have historically not been able to take control of assets.

Evergrande’s fate has wider implications for international business in China. Foreign investors have siphoned billions from the country as President Xi Jinping tightens control over the economy, even as officials publicly assure China is open for business.

However, Evergrande can become the “Lehman of China”, as just as the bankruptcy of Lehman Brothers in 2008 caused a crisis in the American – and global – economy, so the collapse of Evergrande can drag the second largest economy into chaos. of the planet. However, the experts of the financial research company China Beige Book, report that “the contagion of the crisis is almost impossible”. This is because, as they explain, Beijing maintains strict control over the wider financial system, but will also take over the unfinished and prepaid projects of the failed company itself.

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