Developments in the Chinese Stock Market
BY: Andrew Andrade
A Hong Kong court on January 29, 2024, ordered Evergrande Group, one of the largest Chinese real estate companies, to liquidate. This order is the result of a series of bankruptcy filings by the former real estate giant. Evergrande had been one of the world’s most valuable real estate brands between 2016 and 2022, topping the list in 2018. The company then filed Chapter 15 bankruptcy in August of 2023 in the Southern District of New York in an attempt to restructure its foreign debt, a sum of around $25.4 billion. Foreign debt was not the company’s only issue as Evergrande’s total liabilities amassed to over $335 billion, ten times its total revenue. Although it seems abrupt, there were warning signs of Evergrande’s eventual demise. Between 2020 and 2021 their assets to debt ratio changed from $333 billion in assets and $282 billion in debt to a staggering $326 billion in assets and $400 billion in debt. This divide widened in 2023, where their liabilities were above their asset value by roughly $90 billion. This steady plunge in assets and increase in liabilities followed the trend that had been occurring in the Chinese real estate market.
The Chinese economy has been hampered by their real estate sector for years. A boom in housing prices between the 2000s and 2010s caused a shift from government-controlled housing to a more privatized housing market. This shift caused housing, land, and vacancy rates to skyrocket. In turn, these large real estate companies, like Evergrande, who had acquired large swaths of real estate to create apartment buildings and other housing projects found themselves in a conundrum. These large real estate companies were unable to fill their buildings and therefore they had no way to pay their debts. This has caused an ever-increasing bubble in the Chinese economy, not unlike the housing bubble in the U.S. in the late 2000s.
So how has this liquidation order affected the Chinese stock market and investor faith in the Chinese economy? Although this is a very recent decision, Asian markets reacted to the order almost immediately. The same day as the order, shares of Evergrande plunged over 20% causing a stop in trading of the company’s shares for the day. The next day Asian markets generally fell, showing a further repudiation of the Asian (and mainly Chinese) markets by investors. Hong Kong’s Hang Seng index fell 2.4% and China’s CSI 300 fell nearly 1.8%. China’s economy has already had a torrid time as of late. Evergrande’s liquidation is just another blow for the world’s second largest economy. This decision highlights just how dire the situation is, as there are still major questions about China’s real estate issues and their effects on China’s total GDP and stock markets. The most pressing of these questions is now, “how much worse can it get?”
Key Sources:
Zongyuan Zoe Lie, Does Evergrande’s Collapse Threaten China’s Economy?, Council on Foreign Relations, Feb. 13, 2024.
Kanis Leung & Zen Soo, China Evergrande has been Ordered to Liquidate. The Real Estate Giant Owes over $300 Billion, Associated Press, Jan. 29, 2024.
Clare Jim & Xie Yu, China Evergrande Ordered to Liquidate in Landmark Moment for Crisis-Hit Sector, Reuters, Jan. 29, 2024.
Lim Hui Jie & Shreyashi Sanyal, Hong Kong, China Markets Slide in the Wake of Evergrande Liquidation Order, Consumer News and Business Channel, Jan. 30, 2024.