China Evergrande Liquidation: How the Mighty Fall
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China Evergrande Liquidation: How the Mighty Fall

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The liquidation of China Evergrande could further weaken the already fragile Chinese property and financial markets.

A Hong Kong court has ordered the liquidation of China Evergrande Group (HK:6666) (OTC:EGNRQ), which was once one of the largest names in China’s property development landscape. The order comes after last-ditch efforts by Evergrande’s creditors to chalk out a deal failed to bear fruit.

Evergrande defaulted on its dollar bonds over two years ago and sought yet another adjournment. However, a lawyer representing creditors noted that the company “had not negotiated in good faith,” according to the Wall Street Journal.

The liquidation, though widely anticipated and awaited, could send ripples through the already weak Chinese economy and property market. BlackRock (NYSE:BLK), the biggest asset manager globally, is already seeking a discounted sale of its office towers in Shanghai.

Evergrande stopped making payments on its nearly $300 billion in liabilities over two years ago. Now, creditors will gain control over Evergrande’s parent and liquidate its businesses to make good on its debt commitments. Evergrande’s Hong Kong-listed shares have tanked by nearly 98% over the past three years. The company’s market capitalization now stands at a mere HK$4.32 billion. The liquidation is expected to only impact Evergrande’s parent company and not its subsidiaries.

Is China in Financial Trouble?

In the aftermath of Evergrande’s default, over 50 property developers in China defaulted on their debt. Real estate, once a key growth engine for the Chinese economy, is now proving to be a heavy drag. A large number of Chinese homebuyers still await possession of their dream homes even after making payments on their mortgages. Further, falling birth rates, a contracting population, and elevated youth unemployment in the country have contributed to new home sales declining by 6% last year.

For global investors, this liquidation will also prove to be a case study of whether court actions from other jurisdictions lead to desired results in China. Investors have largely pulled out of China over the past few years amid its trade war with the U.S. Top Chinese stocks, including Alibaba (NYSE:BABA), Baidu (NASDAQ:BIDU), and NIO (NYSE:NIO), have been in focus over the past week as China began taking steps to prop up its financial markets. The country is slashing cash reserve ratios for banks, looking at rescue packages, and curbing short-selling in stocks.

What Is the Best China Stock to Buy?

Over the past year, the Shanghai Composite Index has dropped by 11%, and names such as Alibaba and Baidu have dropped by 32% and 22%, respectively. In the meantime, the TipRanks Comparison Tool indicates a hefty upside of over 71% in JD (NASDAQ:JD). Still, it could be a while before these gains materialize.

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