Global Investors Burned as China’s Evergrande Crashes

Global investors who bought the heavily discounted IOUs from China Evergrande, hoping for a bailout from the Chinese government, have been left in the lurch. The beleaguered property developer, over $300 billion in debt, was directed to liquidate by a Hong Kong court. This was a severe setback for the investors who were holding on for a rescue deal.

Evergrande’s lawyers campaigned for more time to negotiate with creditors, but the judge, acknowledging the company’s inability to present a solid proposal in one and a half years, issued a liquidation order. For two years, Evergrande barely managed to stay afloat under its enormous debt. Now, the company faces a long and complex process of disassembling its wide-ranging business, including property projects across hundreds of cities and unrelated enterprises like an electric vehicle company.

Instantly, Evergrande’s stock price plummeted over 20% before trading was halted, sending shockwaves through the company’s publicly listed shares in Hong Kong. This adversarial court decision will inevitably reverberate through China’s already distressed real estate sector and jittery financial markets.

Evergrande’s remaining valuable assets are few and may be deemed off-limits due to the political implications tied to property in China. The company and other developers indulged in overbuilding and under-delivering, taking money for uncompleted apartments and leaving countless home buyers in a quandary. This led to a series of default cases and caused the government to pressure these companies to complete the projects, leaving contractors unpaid for years.

The implications of Evergrande’s liquidation on foreign investors, who believe they’ll be treated fairly by China, will be closely scrutinized. It will largely determine the future flow of international investment into Chinese markets, which is already on shaky ground.

Foreign investors now more than ever are needed by China. The recent downfall of financial markets in mainland China and Hong Kong has forced officials to scramble for policies to instill confidence.

The resolution of Evergrande’s case is eyed by investors keen to understand China’s approach to its failing companies. The key question remains whether the court-appointed liquidators will be accepted by a mainland Chinese court, a historical rarity. Only time will tell if the harsh blow dealt by the court’s decision will lead to a whimper as liquidators chase assets.