Liquidation of China's Evergrande has 'a lot of similarities' to Lehman Brothers, analyst says
Lehman Brothers' bankruptcy filing was largest in US history
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China’s Evergrande Group, the most heavily indebted real estate developer in the world, sent the Chinese real estate market into a tailspin when it defaulted on its debt in 2021. Now, a Hong Kong court has ordered the company to liquidate — a ruling that could send ripples through China and possibly the rest of the world.
"I don't know if this is Lehman Brothers for China today, but I do know it has a lot of similarities," said Dennis Unkovic, an M&A attorney at Meyer, Unkovic and Scott with experience with China. "If I'm in a U.S. company that is exporting products to China now, it's going to affect me."
The collapse of Lehman Brothers was the largest bankruptcy filing in U.S. history and played a major role in the 2008 global financial crisis.
COURT ORDERS CHINA’S BANKRUPT EVERGRANDE TO LIQUIDATE
The Evergrande Real Estate complex in Yichang, Hubei province, China, on July 24, 2023. (Costfoto/NurPhoto via Getty Images / Getty Images)
Evergrande has over $300 billion in liabilities after borrowing aggressively to build itself into one of China’s largest companies.
According to Hong Kong Justice Linda Chan, it was "time for the court to say enough is enough" and order the company to liquidate, fanning the flames of an underperforming Chinese economy. The economy is still trying to recover from zero-COVID lockdown policies, but is now dealing with a struggling property market, a stock market near five-year lows and a growing youth unemployment rate of 21%.
Unkovic says that the Chinese economy is driven largely in part by its real estate market, which could accelerate a crash.
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"About a third of the Chinese economy is based upon real estate," he said. "In the U.S., it's about 16% or 17%. If a third of my economy is based upon real estate, and real estate is in the tank, I think that's a very serious problem."
China was the world’s fastest-growing economy and a beacon of investment for foreign businesses, and accounts for about 20% of the world’s GDP. But an uncertain economic future could have potential investors looking elsewhere if China does not manage to contain spillover.
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"If you're a foreign company, Japanese, American, are you going to make significant investments into China?" said Unkovic. "I just think it's bad news chasing more bad news."