Amidst the escalating real estate crisis in China, Evergrande, a prominent player in the property sector, has sought bankruptcy protection in the United States aimed to safeguard its assets within the US while engaging in negotiations for an agreement with its creditors.
China Evergrande Group, dealing with significant debts since 2021, formally lodged a Chapter 15 bankruptcy protection petition in a New York court on Thursday. Evergrande’s default will have global financial impacts, creating turmoil. This situation also reflects challenges in China’s property market, raising concerns about the stability of the second-largest world economy.
Evergrande files for bankruptcy in US
The Chapter 15 filing mentions ongoing restructuring in Hong Kong and the Cayman Islands, involving Evergrande and its subsidiaries Scenery Journey and affiliate Tianji Holdings also filing for Chapter 15 protection.
Complex international debt-restructuring endeavors often necessitate a Chapter 15 filing as part of the finalization process. A similar scenario unfolded last year when Beijing-based developer Modern Land China Co. pursued a Chapter 15 bankruptcy petition following a US$250 million bond repayment filing and a subsequent offshore debt restructuring agreement.
Evergrande’s journey toward offshore debt restructuring has been in progress for several months. Despite revealing in April that it lacked the necessary level of creditor support for plan implementation, the company secured court approval in July to conduct votes on the proposed deal, with meetings slated for later this month.
Amid concerns that issues within China’s property sector could ripple through the broader economy due to slowing growth, Evergrande’s filing arrives at a critical juncture. Since the onset of the sector’s debt crisis in mid-2021, companies constituting 40% of Chinese home sales have faced defaults. The financial health of Country Garden, the largest privately-run developer in China, has also triggered investor apprehension following missed interest payments earlier this month.
Evergrande, carrying liabilities amounting to US$330 billion, experienced a pivotal default in late 2021 that sparked a series of defaults among other developers, leading to numerous incomplete homes across China. Last month’s revelation of a combined US$81 billion loss for 2021 and 2022 further heightened investor concerns about the feasibility of the debt restructuring plan proposed by Evergrande in March.
This strategic move not only shields its assets within the United States from creditors but also facilitates ongoing efforts toward restructuring deals in other jurisdictions.
Worrying economic situation in China
China’s economy is encountering fresh challenges, attributed to weakened domestic demand and a challenging global economic climate. Optimism from vague plans to stimulate the economy has faded as troubling economic indicators persist.
“A lot of companies now feel China isn’t the market of the future,” Dexter Roberts, author of “The Myth of Chinese Capitalism” and a senior fellow at the Atlantic Council said.
Falling consumer and business prices, disappointing retail sales, industrial production, and declining real estate investment led to a 9% drop in Chinese stocks traded in Hong Kong this month. Nomura analysts caution about a potential downward spiral and advocate for Beijing to support major developers and institutions while boosting aggregate demand.
The People’s Bank of China cut interest rates, but critics deem bolder measures necessary. Unemployment among youth further added to concerns.
Deflation, debt, and housing woes
China is grappling with worrisome economic challenges, as consumer prices saw a 0.3% annual drop in July, marking the first such decline in two years. This deflationary trend, which raises the real value of debt, poses a significant risk for China’s debt-laden economy.
With total debt estimated at around 282% of annual economic output, concerns are growing about the trajectory of growth. JPMorgan analysts caution that without addressing housing market issues, financial imbalances, and aging demographics, China could face a “Japanification” scenario akin to the 1990s.
“Before the pandemic, China was growing at about 6%, and now it’s struggling to recover,” David Dollar, a senior fellow at the Brookings Institute’s China Center, told Insider.
“Consumption really didn’t hold up coming out of the lockdown. The main components of GDP on the demand side — consumption, investment, net exports — they all have serious problems right now.”
The property market, comprising about a fifth of the economy, is a critical factor, with plummeting values affecting consumption.
Country Garden Holdings, once China’s top developer, missed significant bond coupon payments and expects substantial H1 losses. Similarly, Evergrande, which faced a massive debt default last year, reported a staggering $81 billion loss over two years. Real estate, constituting a fifth of China’s economy, is hampered by substantial debt and sluggish homebuyer demand. June saw a 19.2% YoY drop in home transaction volumes across 330 cities, with values down 23.4%, according to Beike Research Institute.