A Hong Kong court ordered real estate giant Evergrande to liquidate its assets, ending a long legal battle over the fate of what has been described as “the world’s most indebted property developer.” The company filed for bankruptcy in the United States in 2023 after it was found that it was unable to meet its obligations, resulting in it defaulting on its debts. Though Evergrande primarily operated in China, the effect of its liquidation in bankruptcy is likely to reverberate throughout the global economy, and in particular in the real estate sector.
What is Evergrande?
The China Evergrande Group was, at its peak, the second largest real estate developer in China, and the one with the highest recorded amount of debt. During the height of the Chinese real estate bubble, it became responsible for building housing for millions of Chinese people who took out mortgages to buy their properties. However, it faced a number of major problems, resulting in the company ultimately declaring bankruptcy last year.
Why Did Evergrande Go Bankrupt?
There are a number of issues that supposedly contributed to Evergrande’s collapse. Some point to issues with corruption at the company, which led to projects falling behind schedule and buildings being constructed with substandard materials or nonfunctional utilities. However, the apparent trigger for Evergrande’s troubles was a tightening of financial regulations in 2020, which made it much harder for them to acquire financing for new projects. This, in turn, made it much harder for the company to continue construction, ultimately leading to default.
Why is it Being Liquidated?
Evergrande is being ordered to liquidate its assets due to a staggering $300 billion debt that it cannot reasonably hope to pay off. While the company’s CEO and director, Xiao En, has pledged that the company will continue to try completing construction on existing projects, thanks to certain independent subsidiaries not being affected by the liquidation order, it remains unclear if they will be able to fulfill all existing contracts. The liquidation is meant to pay off all of that extant debt, insofar as the company is able to do so with its current assets.
What Are the Potential Effects on the International Market?
While Evergrande primarily operated in China, its failure represents one of the largest commercial failures of a real estate developer in history. However, what makes the case important is that it is not unique: several other major real estate developers are facing similar financial woes, causing uncertainty throughout the Chinese real estate market. Such is the size of the debt involved that even developers outside of China may be affected if more developers go under.
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