Evergrande, what can happen to the markets in the event of bankruptcy of the real estate giant

China Evergrande, the world’s most indebted Chinese real estate developer, is carrying out its offshore debt restructuring process (which does not involve bankruptcy filing). What could be the consequences for the economy

China Evergrande, the most indebted Chinese real estate developer in the world and who has become the symbol of the crisis of the sector in the Dragon, is moving forward with its offshore debt restructuring as planned. The motion (ex Chapter 15 filed in Manhattan, in New York, ed), the company clarifies, “is a normal offshore debt restructuring procedure and does not involve filing for bankruptcy”. In a communication (‘clarification announcement’) sent by Evergrande to the Hong Kong Stock Exchange, it is explained that since bonds denominated in US dollars are governed by New York law, “the company has filed an appeal with the United States Court pursuant to of Chapter 15 of the United States Bankruptcy Code for the Recognition of Outline Arrangements in Offshore Debt Restructuring for Hong Kong and the British Virgin Islands”. And “holders of the Company’s securities and potential investors in the Company are reminded to exercise caution when dealing with the Company’s securities.” Evergrande shares are suspended from trading on the Hong Kong Stock Exchange as of March 2022, following the worsening of the financial crisis generated by the collapse of liquidity and the burden of more than $300 billion in debt. But what could be the consequences of a possible bankruptcy?

The turning point from the crisis

Evergrande’s initiative in the US represents a turning point in the two-year crisis of the Chinese giant, the first major real estate developer to declare financial problems under the weight of debts of over 300 billion dollars. It remains to be understood, with regard to the chapter 15 protection procedure, how much the matter will weigh or be conditioned by the bad relations between Washington and Beijing and, above all, how much it will weigh on the Chinese economy in decided trouble and grappling with heavy financial turbulence with risks increasing contagion.

What is happening to the Chinese real estate market

The fear is that Evergrande’s crisis could extend to the banking sector which collects money from savers and invests it in various sectors including the real estate sector. According to media reports, dozens of savers have already complained to the Beijing authorities after the coupons and maturing bonds of various companies of the Zhongrong International Trust, held by the Zhongzhi Enterprise Group, were not reimbursed on 8 August. an asset management conglomerate with $137 billion in assets. Troubles in China’s real estate sector followed as Country Garden, the leading real estate developer, defaulted on $22.5 million in bond coupons. Real estate market data for July, according to China’s National Bureau of Statistics, showed a 2.5 percent drop in house prices from June. The Chinese central bank intervened last Tuesday by cutting the cost of money, but without any positive effects.

The possible consequences

The difficulties of the Chinese real estate sector are slowing down the economic recovery of the whole country, with growth forecasts for 2023 which are now below 5%. “Although the contagion on the credit market – JP Morgan analysts wrote – could be limited when compared with the default of Evergrande in 2021, this could become a source of significant downside for China’s growth forecasts for the second half of 2023 and of 2024”. In practice, a possible collapse of Evergrande could have significant consequences with a “domino effect” on the economy of the whole of China.