China's Property Boom Goes Bust

A Hong Kong court on Monday ordered Evergrande Group to liquidate its assets, spelling the end to a two-year saga that made Evergrande the poster company for China's real estate crisis.

The news sent the company's stock plunging by over 20 percent in Hong Kong that morning before it was suspended from trading.

Evergrande is the world's most indebted property developer, with liabilities in excess of $300 billion. When the overleveraged firm was unable to pay interest on these debts in 2021, it sent the country's housing market into a liquidity crisis and prompted a strong regulatory reaction from Beijing. Some analysts have called it China's "Lehman Brothers moment" in a nod to the U.S. financial crisis of 2008.

"It is time for the court to say enough is enough," Hong Kong Justice Linda Chan said Monday after the company's lawyers made a last-ditch effort for a restructuring deal.

"Evergrande continues to be a symbol of a deeply troubled real estate sector, and therefore of an economy that's lost its way," economist George Magnus, an associate at the University of Oxford China Centre, told Newsweek Tuesday.

After two years, Monday's ruling is "unlikely to have any systemic implications for financial markets or the economy. There simply is little significant private exposure left to the company," Magnus said.

However, it now remains to be seen whether legal authorities in mainland China will stand by their Hong Kong counterpart's decision and "make good on foreign creditors." Magnus called this "unlikely."

China will "probably try to keep the company in zombie mode until it can be quietly absorbed into something else," he said.

Newsweek reached out to the China Securities Regulatory Commission via email for comment.

The world's most indebted property developer filed for bankruptcy in the United States in mid-August. In yet another setback for the company, the next month Evergrande announced its chairman, Xia Haijun, had been placed under police control at an undisclosed location for his involvement in "crimes."

In reaction to the bursting property bubble, Beijing in late 2020 introduced "three red lines" to curb risky speculation and lending, though this was followed by a sharp drop in home prices.

This was a blow to many Chinese. As much as 70 percent of household wealth in the country was tied up in real estate as of 2020.

"The most important driver behind China's boom-bust has been a weakening in the fundamentals in housing demand for the longer term, Guonan Ma, a senior fellow at the Asia Society Policy Institute, previously told Newsweek.

Among these fundamentals are slowing productivity, diminishing returns on overly ambitious investments, an aging workforce, and a spike in the average household debt-to-income ratio, he said.