Chinese real estate giant Evergrande files for bankruptcy. The risk of contagion is shaking the markets

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By John

China Evergrandethe most indebted Chinese real estate developer in the world and who has become the symbol of the crisis in the sector in the Dragon, filed for bankruptcy and sought protection from creditors in a court in Manhattan. The company has invoked chapter 15 of the US bankruptcy codewhich protects non-US companies undergoing restructuring from creditors hoping to sue them or freeze their US assets.

Evergrande seeks recognition of ongoing restructuring talks in Hong Kong, the Cayman Islands and the British Virgin Islands. The instance of him comes among the crescents fears that problems in China’s real estate sector could spread to other parts of the country’s economy while GDP growth slows down. Since the industry’s debt crisis began in mid-2021, companies accounting for 40% of Chinese home sales have gone bankrupt. The health of Country Garden, China’s largest private property developer, is also worrying investors after the company failed to pay some interest this month. Evergrande recently had $330 billion of liabilities.

Evergrande’s initiative on protected bankruptcy in the US (ex chapter 15) represents a turning point in the two-year crisis of the Chinese giant, the first major real estate developer to declare financial problems under the weight of debts of over 300 billion dollars. The move, involving offshore charges of $31.7 billion in bonds, guarantees and repurchase obligations, came as a bit of a surprise as the group announced on Wednesday it was postponing its meeting of creditors on offshore debt restructuring, from 23 to 28 August next. An adjustment to the plan that appeared technical, to allow details to be refined ahead of negotiations and to give creditors “time to consider” the latest proposed sale of new shares in Hong Kong-listed electric vehicle subsidiary China Evergrande New Energy Vehicle Group (-8% in Hong Kong), to NWTN (Zhejiang) Automobile, a mobility products company based in Dubai and listed on the Nasdaq, founded by Chinese entrepreneur Alan Nan Wu.

Under the proposal, NWTN will acquire a 27.5% equity interest (at a 63% unit discount to the stock values ​​in the deal signed on Monday) of Evergrande’s EV unit for nearly $500 million ($3.88 billion Hk dollars) to “support the recovery and business growth” of Evergrande. The group, which ended up in the tightening of bank loans decided by the communist leadership about 2 years ago to bring down the surge in systemic debt, also fell the tile of the 63% subsidiary Hengda Real Estate, its core real estate business: the company ended in the crosshairs of the China Securities Regulatory Commission (the supervisory and regulatory authority on securities) for suspected manipulation of financial data, according to local media. While not listed, Hengda continued to issue bonds and raise finance despite the holding company’s difficulties. It remains to be understood, regarding the procedure of chapter 15 protection, how much the affair will weigh or be conditioned by the bad relations between Washington and Beijing and, above all, how much it will weigh on the Chinese economy in decided trouble and grappling with heavy financial turbulence with growing risks of contagion.