IT’S A FREE-FOR-ALL – Chinese Cities Are Taking Possession of Evergrande Properties After Giant Debtor Fails to Pay Its Debt

The Evergrande crisis in China has reached new heights.  The company was unable to meet obligations so Chinese cities are taking over the company’s possessions this week.  It’s a free-for-all. 

US News and World Report shared hours ago:

The city of Chengdu has taken back two plots of land from China Evergrande Group the latest move by authorities to seize assets from the cash-strapped property developer.

The land planning authority in the southwestern city said it was taking control of the plots, totalling over 300,000 square meters, as Evergrande had not developed them after holding them for over a decade.

The notices on the two plots, posted by the authority on Dec. 17, followed the same move by the Haikou city authority early last week, taking back a plot without compensation in the country’s island province of Hainan.

The Chinese government is calling the shots at Evergrande after the real estate giant missed payments on two overseas bonds, triggering a restructuring to deal with its more than $300 billion in liabilities.

The authorities are scrutinising the assets of Evergrande and its wealthy chairman Hui Ka Yan but expect no fire sale for now, two sources with direct knowledge of the matter told Reuters last week.

China bankruptcy law is relatively new and per Jiawei Wang, partner at Roedl & Partner:

In China, bankruptcy procedures are mainly regulated by the Enterprise Bankruptcy Law, which came into force on June 1st, 2007. As in Germany, bankruptcy procedures in China are filed with the competent court (People’s Court). In practice, the investor may encounter problems. Bankruptcy procedures in China differ greatly from procedures in Germany. The main difference between the two bankruptcy systems is that the concept of delaying bankruptcy does not yet exist in mainland China in a form comparable to that in Germany. The Chinese Enterprise Bankruptcy Law does not set a fixed deadline for when a company must file for bankruptcy. From a German perspective, bankruptcy petitions are often filed too late in China. This is the legal ground on which Evergrande currently still rests.

Moreover, it should not be overlooked that, in its current form, Evergrande’s influence extends beyond China’s borders. The Evergrande Group is listed on the Hong Kong Stock Exchange and registered in the Cayman Islands. In this case, the company must comply with the laws of the Cayman Islands, as well as the listing rules of the Hong Kong Stock Exchange. In this regard, it cannot be ruled out that a mandatory measure, such as delisting, may occur earlier than the bankruptcy filing in China.

What does Evergrande’s liquidity crisis mean for foreign creditors? Unlike Chinese creditors, foreign creditors are mostly institutional investors. Chinese bankruptcy law certainly does not exclude foreign creditors. To this end, the principle of equality applies: neither disadvantage nor advantage. Preference over Chinese creditors or consumers would be an illusion. On the other hand, nerve-racking creditor meetings are likely. It remains interesting to see, if and how Evergrande – and also the state – will overcome the crisis. “Too big to fail” does not exist in the Middle Kingdom.

Chinese localities with massive amounts of off-balance sheet debt are happy to take over Evergrande property.  This helps their balance sheet.  But the long-term effect is that foreigners will lose their investment in Evergrande and won’t be so eager to invest in the communist nation again.  This seems to the be pattern with foreign investments in China.

We are now seeing that cities are just taking Evergrande’s property.  Good luck to foreign investors in ever seeing any of their portion of the $300 billion in debt owed by Evergrande.

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Thanks for sharing!