A significant development occurred on Monday: a court in Hong Kong ruled that the massive property company China Evergrande Group must go through liquidation.
This decision will majorly affect China's already struggling financial markets as government officials rush to manage an intensifying economic crisis.
Justice Linda Chan made the call to liquidate the world's most heavily indebted developer, China Evergrande, which has accumulated over $300 billion in debt. This decision came after the company failed to present a solid restructuring plan despite having several months and numerous court hearings to do so.
China Evergrande Faces Liquidation: A Complex Journey Begins
In a decisive move, Chan declared, "It is time for the court to say enough is enough." She plans to provide a detailed explanation of her decision later on Monday.
China Evergrande Group, the company at the center of this ruling, has not yet commented on the court's decision, as noted by Reuters.
This ruling marks the beginning of what is anticipated to be a lengthy and intricate liquidation process, fraught with political implications due to the involvement of numerous authorities. The focus for offshore investors now shifts to how Chinese authorities will handle foreign creditors in case of a company's collapse.
Gary Ng, a senior economist at Natixis, commented, "This is not the end but the start of a drawn-out liquidation process, which will further complicate Evergrande's day-to-day operations."
He highlighted the uncertainty surrounding the seizure of Evergrande's assets, primarily located in mainland China, and the ambiguity in the repayment priority of offshore bondholders, warning that the situation could be even more dire for shareholders.
Before the hearing, Evergrande's stock prices fell sharply, dropping by as much as 20%. Following the court's verdict, trading was suspended for China Evergrande and its subsidiaries, China Evergrande New Energy Vehicle Group and Evergrande Property Services.
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Evergrande Shares Tumble, Trading Halted
Evergrande's stock value experienced a sharp drop of 20.87%, reaching HK$0.16 in Hong Kong immediately following the announcement of the court's decision. This led to a trading halt at 10:19 am. Additionally, trading of the company's electric vehicle subsidiary was also suspended.
A lawyer representing a group of creditors expressed dissatisfaction after the court session, stating that Evergrande had been uncooperative. "There has been a pattern of last-minute, ineffective discussions," said Fergus Saurin, the representing lawyer. "The company's actions have led to this liquidation."
Justice Chan is set to provide detailed reasons for the liquidation order later in the day and will oversee the appointment of a liquidator.
The downfall of Evergrande, which missed its first debt payment in 2021 and filed for bankruptcy in the United States this year, has been under scrutiny. The company was once a cornerstone of China's economic growth.
The headline "Debt deemed 'risk' to China's financial system" underlines the issue. China's construction and property sector, which once represented about a quarter of its GDP, has been impacted significantly.
Chinese President Xi Jinping identified the debts of Evergrande and similar property companies as a serious threat to the nation's financial stability and economic well-being. Since 2020, the government has increasingly restricted developers' access to credit, leading to a series of defaults.
As of the end of June, Evergrande reported its debts to be around $328 billion.
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