A Hong Kong court decision to allow an insolvency petition against one of China’s biggest property developers has underlined how bad the situation in mainland China’s economy has become. 

The decision

The hearing in Hong Kong approved an insolvency petition against China Evergrande Group (中国恒大集团) (“Evergrande”) presented by Top Shine Global Company, Limited, a creditor of Evergrande’s Fangchebao (房車寶集團) unit, on 29 Monday 2024.  Liquidators will reportedly now take control of the Hong Kong entities.

Evergrande had sought to delay the insolvency, and to restructure about USD23 billion in offshore debt (comprising USD17 billion in bonds, the rest in other forms of debt).  However, negotiations with external creditors foundered in September 2023, and the court has lost patience. 

Enforcement issues in China

Enforcement is not going to be straightforward, though.  Most of Evergrande’s business  is in the People’s Republic of China (“PRC”), meaning the insolvency may act as a test case for the reach of Hong Kong’s courts in the mainland.  Prior insolvency rulings were much smaller, and, even so, have proven challenging to enforce on the mainland. 

Key next steps, then, will include applications to PRC courts for recognition of the liquidator, under cooperation mechanisms put in place in 2021.  The Chinese courts may yet choose to install local liquidators, not least as Beijing will want to see completion of existing building projects; an estimated 1.5 million people have bought as yet unfinished properties from Evergrande.

Additional concerns relate to the implications for the broader economy. This decision could further undermine already weak share and bond prices, and could affect China’s shadow banking system, through related groups such as Zhongzhi Enterprise Group (中植企业集团) (“ZEG”), a trust company that itself recently fell insolvent.  The government will prioritise social stability over bondholder interests.

Outside China

Enforcement outside China poses additional problems.  After all, much debt issued by Chinese companies has a “suboptimal” structure, with corporate vehicles in offshore jurisdictions such as the British Virgin or Cayman Islands issuing bonds payable by a mere contractual right to onshore revenues. 

Such structures are inherently frail, subject to approvals for outflows of funds from Chinese authorities, and may even operate in a “grey area” in Chinese law.  The formal process, then, may prove slow and complex, and is unlikely to satisfy creditors. 

Weakening confidence

The truth is, then, that the insolvency of Evergrande is unlikely to prompt radical change, and hence improvements, in the PRC economy.  As such, investor confidence in China is unlikely to improve in the near term, notwithstanding some government support for the sector.