Evergrande liquidation may force Beijing's hand, Plus Hong Kong leaders propose new security law-- China Boss News 2.02.24
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What happened
A Hong Kong judge ordered China Evergrande to liquidate after the troubled property developer failed to come up with a viable restructuring plan.
The company has been fighting liquidation proceedings for months, and a legal order during its last hearing in December was postponed by the same judge to give managers more time.
On Monday, however, it seems that High Court Judge Linda Chan’s patience ran out.
"It is time for the court to say enough is enough," she said.
DW reporters said China Evergrande’s liquidation is “widely seen” as a test case “of whether a liquidation order issued in Hong Kong would be recognized in mainland China,” something that should occur as Beijing promised, but hasn’t “due to [Mainland] China’s opaque legal system.”
If Beijing does permit the liquidation of Evergrande’s assets in China - and it may to warn against speculation - a more serious issue is the impact that a further loss of confidence could have on China’s fragile economy.
In a chilling reminder that the optics of failing property giants are significant, Reuters staff noted that Evergrande’s 2021 debt default “sent [China’s] struggling property sector into a tailspin.”
“Beijing is grappling with an underperforming economy, its worst property market in nine years and a stock market wallowing near five-year lows, so any fresh jolt to investor confidence could further undermine policymakers' efforts to rejuvenate growth,” they said.
Why it matters
Too little, too late
Evergrande’s downfall - and China’s property sector meltdown, generally - is a tale of gargantuan disproportions.
For more than 20 years the Chinese government, both central and local, threw the full force of its weight behind infrastructure development as a way of boosting GDP statistics. The low-hanging fruit of economic growth was harvested by everyone, but none more so than the state.
This is something that is rarely acknowledged by many China analysts who seem predisposed to think of the Chinese property market as a private endeavor.
That's really ridiculous when you think about it, because China, even today, still doesn't have private land ownership. Property buyers are given a 99-year lease instead - something that is incredibly telling, in terms of the power that is distributed - or, rather, undistributed - over arable and habitable land. It’s also key to understanding who's responsible when things go south.
But some folks do get Beijing’s pivotal role in China’s debt spiral.
In December, New York Times’ Claire Fu and Daisuke Wakabayashi called out the trinity of actors that landed the nation in “a full-blown crisis.”
“The nexus of government, financial institutions and companies supercharged China’s property sector for years, clearing the way for the nonstop building that propelled real estate to become the biggest sector of the economy. But the ties that once juiced growth are now deepening the downturn as problems spread across the economy,” they said.
China’s local governments used land development as a source of revenue because Beijing impoverished them and forbid them from incurring deficits with its Budget Law in 1994.
But “China’s unprecedented credit expansion” really took off during “[t]he 2008 post-crisis stimulus effort led by local government investment” - on Beijing’s orders - according to CSIS’s Logan Wright in his Timeline of China's Deleveraging Campaign.
“Thousands of local government financing vehicles (LGFVs) were established and eventually became the key clients for shadow banks. The post-crisis stimulus effort triggered surging property prices and rising government debt, causing regulators to respond by trying to limit banks’ lending to these two sectors,” Wright said.
But it also didn’t take very long for Xi Jinping, himself, to become China’s biggest hypocrite after proclaiming in 2017 that “Houses are for living in, not for speculation.”
Last year, I wrote about how Xi added a lot more heft to China’s gray debt rhino when, in 2022, he ordered local governments to prop up the sinking real estate sector only a few weeks before clenching a third term at the 20th Party Congress. Apparently, “houses” in China can also be used as a “politically acceptable bailout,” as well as “for living in.”
Canary in a coal mine?
Now that Evergrande’s failure is official, we wait for the fallout.
Contagion is the biggest concern.
“Two fifths of banking system assets in China were directly or indirectly associated with the property sector by the end of 2020,” according to David Robinson at The Banker, who cited a Citigroup report.
Robinson also referenced a 2021 S&P Global brief that noted Evergrande’s insolvency alone “would not destabilize the Chinese banking system,” but “followed by the defaults of a few more highly leveraged major developers,” might present “a challenging situation.”
Unfortunately, to this China watcher - a former insolvency practioner who has followed China’s economic pressures for years - Evergrande has always looked like the proverbial “canary in a coal mine.”
In the Times this week, Daisuke Wakabayashi and Claire Fu also said “[t]he forced liquidation of China Evergrande epitomizes the sector’s struggles,” where “sales” across the country “are down” and “millions” of pre-paid homes have not been delivered.
Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis, also warned that China’s property market has “a long way to go” before it “touch[es] bottom.”
But Beijing knows the risks, and it may not honor Hong Kong’s liquidation order.
That would trigger creditor protection concerns that could cause investors - who are already fleeing Chinese markets in droves - to leave even faster.
So there are no great options for Beijing to take that might mitigate the impact of China’s sinking property Titanics on the greater economy. Any move it makes is, more or less, a stopgap. Not a solution.
Larry Hu, chief China economist for Macquarie Group, wrote a bleak research note cited by the Times which said China’s “property slump was ‘self-fulfilling,’ because the debt woes of property developers kept buyers away and pressured home sales, while the dearth of new business only deepened the financial problems of those firms.”
“The key thing to watch in 2024 is if and when the central government would step in and take the main responsibility to stop the contagion,” Hu said.
And so, ever at Beijing’s mercy, China and her investors must wait.
This Week’s China News
The Big Story in China Business
HONG KONG’S NEW SECURITY LAW WORRIES BUSINESSES: The Hong Kong government earlier this week released the details of a proposed new security law that it said would “close ‘loopholes’” not covered by legislation already imposed by Beijing, Nikki Asia reported.
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