Evergrande Liquidation – Disaster or Opportunity?
- By FXT
- February 05, 2024
- FXT Analysis
The elephant in the room has finally been put to bed. With no more cards up their sleeve, Evergrande is set for liquidation and the property giant will wind up operations, liquidators looking to claw back $300 billion in debt.
The waves of distress this will have on the wider market is yet to be determined, while the shares of Evergrande are all but wiped out.
This could mean imports to China may have a heavy slowdown, as related parties to Evergrande projects and developments stop.
Weaker commodity demand coupled with panic selling and uncertainty may bring about troubling times for global indices and turbulent fluctuations in currency markets.
What happens now?
Liquidators will be aiming to get as much money back for lenders as possible, so as to reduce the impairment of the lender’s balance sheet through bad debts.
They have a few options, including selling the properties in groups to large investors, or selling projects separately, seeking high net worth individuals and seeking retail investors to take on the projects and potentially buy the assets at a fraction of the price.
While this is not good news for the banks and lenders to Evergrande, it could mean an opportunity for those with the cash and resilience to ride out the property market in China.
Toll on Human Resources
Human resources used to develop projects are vast, from building contractors, engineers, lawyers and project managers, a huge array of participants have touch points and earnings from Evergrande projects.
With these projects on hold or awaiting alternate direction and ownership, these jobs could be lost or heavily reduced, meaning the ripple effect of the Evergrande liquidation will feed into the things these contractors and employees purchase, along with the job market being flooded with recently unemployed workers.
Due to the size of the company and the struggles it has had, it isn’t something that can be easily sold off, hence the long period of kicking the can down the road in a hope of finding a real solution.
Impact on Natural Resources
Commodities will also feel the bite, with lowered demand crunching into the prices, countries with economies largely dependent on resource exports such as Australia and Canada may also struggle.
Building supplies and the products used to make them will likely fall in demand, at least until the projects are resolved.
A Big Job
With over 1,300 projects in over 280 cities in China, the liquidators have a massive job. Selling a project can be a challenge at the best of times, but 1300 of them? That’s going to take a massive cleanup crew or take a long time to find alternate owners of the assets. That is, if there is a market willing to buy projects in the China property market.
Eventually there will come a point where investors or another large developer will reach an agreement to buy projects from liquidators, but the fraction at which they buy them will be an important factor.
There are likely many developers watching the Evergrande story very closely, waiting for their opportunity to strike a deal.
With uncertainty, often comes volatility and often a decrease in value on businesses, flowing into the index markets. See the Hang Seng and how it has been falling for some time now and watch if the market has even further to fall. The HK50 is sitting close to the lowest point in a long time, aside from the lows found late 2022.
The uncertainty around the property market, jobs and economy will likely have a big impact in China and the rest of the world. If investors are ready to swoop in and buy up the projects from Evergrande’s liquidators, that could be a very different story.
New Investors, New Rules
Let’s say investors soak up the projects, they may not be subject to as much scrutiny as Evergrande, and perhaps may be able to move on projects faster or on a more innovative level. They may have more focus on their project due to the smaller scale and while this could lead to a lower inflation of commodities, wages and contractors, it could also be beneficial to the economy overall.