Evergrande is the teetering domino that can topple its real estate peers

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The world’s most indebted property developer, China Evergrande Group, built an empire once deemed too big to fail. No longer. On Monday, a Hong Kong court ordered the company, once the country’s largest builder by sales, to be liquidated. The effect will spread far beyond Evergrande’s creditors. 

Hong Kong-listed shares of Evergrande fell a fifth before trading was halted on Monday morning. Evergrande now has a market value of less than $300mn, which pales in comparison with its $330bn of liabilities. Shares are down 99 per cent from a 2020 high.

Normally, a liquidation offers the opportunity to sell the developer’s assets and repay part of its debts. But for Evergrande, the winding-up process should be drawn out leaving little for liquidators to seize.

Most of Evergrande’s assets have already been sold. Property prices have continued to slide in the past two years, which means not much value is left in what little remains to sell. The value in Evergrande’s other two listed units is also depressed, down more than 90 per cent since 2021.

Creditors had low expectations, expecting a recovery rate of less than 3 per cent even before the liquidation order.

Worse, property prices in China could take yet another hit from the deconstruction of Evergrande. An estimated 1.5mn homebuyers have already paid the developer — equivalent to an original value of about $90bn — for unfinished homes. Until now, Beijing has pushed state-owned banks to offer cheap loans to a long list of struggling developers. The government has also set aside billions of dollars to help developers continue with construction. 

The sheer number of Evergrande homes that require aid for completion may simply push other developers to the back of the queue for any government support. As the number of delayed, pre-sold homes surge, homebuyer sentiment and demand can only suffer.

Moreover, Evergrande’s break-up sets a precedent for struggling peers. Investors have clung to hopes of a bailout for years, as the rollercoaster ride in local developers’ share prices reveals. Stock prices have surged following each speculative local media report of a looming government bailout, only to crash days later.

Evergrande on its own may not pose an immediate systemic threat to China’s financial system. But the repercussions for China’s shadow banking system — non-bank financial institutions that lend to higher-risk industries — does look serious. Zhongzhi, one of the biggest, filed for bankruptcy earlier this month. As smaller peers follow suit, investors should assume the looming fallout throughout Chinese asset markets will persist.