Evergrande, the giant Chinese real estate company, was ordered to liquidate on Monday. This order by a court in Hong Kong, means that the administrator will now move in and start selling the company’s assets and then pay back its creditors.
Evergrande will be liquidatedEvergrande’s collapse is one of the biggest meltdowns in history because of how big the company was. It had over $300 billion in liabilities, equivalent to half of Lehman Brothers when it collapsed during the Global Financial Crisis (GFC) in 2009.
A lot has been written about Evergrande’s collapse. However, few analysts have written about how this meltdown will impact Chinese stocks in the long term. As I wrote on Monday, the immediate impact is that it could lead to the collapse of Country Garden, one of the biggest companies in the country.
The biggest implication for Evergrande’s meltdown will be seen when the administrator, Alvarez & Marsal, will achieve. In this case, the company, which is headquartered in New York, will need to sell Evergrande’s assets.
The challenge is that most of these assets, including unfinished projects, are in mainland China. Therefore, most investors will watch whether authorities in China will allow the restructuring specialist to auction Evergrande’s assets. The other risk is how Beijing will prioritize payments to creditors. As such, there is an elevated risk that foreign investors in Evergrande will not get their money back.
China’s largest developer headed into liquidation with ($333 billion in debt)…Evergrande’s $17 billion in USD bonds trading below a penny.:equity was halted at 16c. Total system wipeout as its CEO is also under police control. China’s so-called ‘miracle’ was just a mirage.#China pic.twitter.com/nqtJaipqjS
— 🇺🇸 Kyle Bass 🇹🇼 (@Jkylebass) January 29, 2024Implications of Evergrande’s meltdownThe implication of all this will be severe because of how intertwined the Chinese economy is to other countries. Following China’s entry into the World Trade Organization (WTO), many foreign investors poured money to the country.
They invested across all sectors, including real estate, manufacturing, technology, and other industries. For example, most well-known Chinese companies count Western investors as their backers. BYD’s core investor is Warren Buffett while Bytedance is mostly owned by American investors like KKR and Carlyle Group.
Western investors also hold huge stakes in companies like PDD Holdings, Tencent, and Alibaba. Investment giants like Blackstone, Blackrock, and Bridgewater Associates have vast investments in China.
Therefore, if China blocks foreign investors’ access to their money, it could lead to more outflows and weak inflows in the country. These investors will worry that their investments will also be at risk in case of a default. Data published last week showed that over $68.7 billion of corporate and household funds left China, the first outflow in five years.
All this explains why Chinese stocks have tumbled in the past few months. The Hang Seng, Shanghai Composite, and China A50 are all in the red even as their global counterparts hover at their highest level on record.
There are other implications for Evergrande’s collapse. The first is that many of its suppliers will now need to write off, at least temporarily, their bills with the company. Also, banks will need to adjust their provisions.
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