The Evergrande Liquidation: A Moment of Truth for China's Overseas Investor Protections

On January 29, a Hong Kong court ordered China Evergrande Group into liquidation after two years of failed attempts to reach a restructuring agreement with global creditors.   The move to liquidate puts China's bankruptcy system into uncharted territory:  per its most recent disclosures, Evergrande is carrying over $300 billion in liabilities to both domestic and foreign creditors, while over 90% of its assets are located in mainland China.  The willingness of PRC courts to accept the orders of a Hong Kong-based liquidator in a case of the scale and visibility of Evergrande has never been tested, and foreign creditors may well find themselves at the back of the line when their interests are weighed against domestic economic and political considerations.  Should China's courts resist winding up orders from the Hong Kong liquidators, the only recourse may be to seek asset recovery from what remains of the company's network of overseas holdings. 

Since Evergrande led the way two years ago, over 50 Chinese property developers have defaulted on their borrowings. With the domestic real estate market not showing signs of recovery, similar liquidation cases are likely in the pipeline.  The viability of mainland Chinese companies fueling growth via foreign capital markets and foreign direct investment, already under strain with the delisting of companies like Luckin Coffee, will be stress-tested in an unprecedented way by Evergrande's unwinding.