Hong Kong court approves dissolution of China’s Hengda Group
A rehabilitation plan cannot be submitted for a year after the legal case has been heard.
Chinese courts are likely to oppose the sale process
HUNDA stock plunges 20%, and trading has ended
Hong Kong ELS repayment amount in the first half of the year: won 10 trillion
Authorities are considering stopping bank ELS sales
Yonhap AP News” style=”padding: 0px; margin: 0px”>
▲ Hungda Group (Evergrande).
AP Yonhap News
As the Hong Kong court issues a liquidation order for Hengda (Evergrande), ‘the epicenter of China’s real estate crisis’ on the 29th, attention is focused on the impact it will have on our economy. If the Chinese and Hong Kong stock markets are shocked again during the liquidation of Hongda, the ‘most indebted real estate company in the world’ with a debt of more than 440 trillion won, the main domestic investors are tied to equity Hong Kong’s underlying equity-linked index. securities (ELS) falling There are concerns that losses could increase further.
On this day, the South China Morning Post (SCMP) reported, “The Hong Kong High Court approved a creditors’ petition to liquidate Hongda.” Judge Linda Chan said, “The hearing (liquidation suit) has been going on for over a year, but Hungda has still not been able to come up with a concrete restructuring proposal,” adding, “The time has come to say , ‘Enough is enough.’ “It is appropriate to issue a liquidation order,” he said.
Originally, the Hong Kong court was supposed to make a final judgment on Hengda on October 30 last year, but the hearing was postponed until December 4 after Hengda made an urgent motion saying, “We will present a rehabilitation plan that will satisfy everyone. ” After that, the court adjourned the hearing again, believing that the situation needed to be resolved by allowing Henda and creditors to negotiate further. However, the court ultimately decided that Hungda had not made sincere self-rescue efforts and decided to dissolve him on this day. Alvarez & Marsal (A&M), a global management consultancy, was then appointed as a provisional liquidator tasked with converting Henda’s assets into cash and returning them to creditors.
Hong Kong courts can manage Hongda’s mainland assets under the China-Hong Kong Recognition Agreement. However, it is difficult to expect that the local Chinese courts will accept the Hong Kong court order meekly and help sell Hengda. SCMP analyzed that “since Hengda’s assets are located in mainland China, the Hong Kong court order faced the problem of exceeding its jurisdiction.”
As many of those who invested in Hengda through Hong Kong were foreigners, the Hong Kong court order to liquidate Hengda can be interpreted as ‘an attempt to take national wealth to another country.’ If the Chinese court does not cooperate, it may become difficult to liquidate assets in China, making resolution of the situation difficult.
“The market will be watching to see what the provisional liquidator can do (for foreign creditors),” Lance Zhang of law firm Ashurst LLP told SCMP. “(The mayor) will watch to see if the order will be recognized,” he said.
Hengda was China’s leading real estate group, but ran into a liquidity crisis due to astronomical debt and declared default at the end of 2021. Hengda Group’s total debt is $327 billion (about 443 trillion won), which exceeds its assets by $240 billion (about 321 trillion won). In the process of liquidating Hungda, more than 100 trillion won Korean currency has no choice but to be written off as losses, so it is expected that there will be serial bankruptcies in the financial sector. Chinese President Xi Jinping’s ability to stabilize the real estate market and stimulate the economy, which wants an ‘orderly restructuring’, has been put to the test.
On this day, Hengda’s stock price plunged more than 20% in the Hong Kong stock market and trading was suspended, but the Hang Seng Index was not significantly affected. This is interpreted to be because Hungda’s bankruptcy had been predicted for a long time and had already been reflected in the stock market. However, if the hidden insolvency of China’s real estate market comes to the surface with the Hong Kong court order to liquidate Hengda and hit the Hong Kong stock market again, the damage to domestic ELS is expected to increase further.
According to the banking industry, the maturity loss of ELS linked to the Hong Kong H Index sold by four banks, including KB Kookmin, Shinhan, Hana, and NH Nonghyup, was calculated at 312.1 billion won on the 26th. The loss rate at fixed maturity reaches 53%. Recently, the stock market in the Greater China region has rebounded slightly due to the stock market stimulus measures introduced one after another by the Chinese authorities, but if it starts to decline again due to the shock of the Chinese real estate market, the ELS loss. on the domestic Hong Kong H Index will increase rapidly.
ELS, which is based on the H index which tracks Chinese companies listed on the Hong Kong stock exchange, incurs a loss if the H index falls below 70% of the value at the time of subscription when ended three years later. The H index, which surpassed the 12,000 mark in February 2021, is currently moving at the 5,400 mark, which is half of the level. In the first half of this year, the ELS maturity repayment amount linked to the domestic Hong Kong H Index is more than 10 trillion won. If the H index fails to rebound, the loss is expected to reach 5 to 6 trillion won.
Meanwhile, following the announcement by the financial authorities that they are considering stopping the sale of banks’ ELS, commercial banks also started to stop sales. The Chairman of the Financial Services Commission, Kim Joo-hyun, said at the general meeting of the National Assembly’s Political Affairs Committee that day, “I personally sympathize with the suspension of ELS sales by banks in relation to this incident,” and added , “Once there are results when the inspection of the Financial Supervisory Service comes out, we will consider improving related systems.” Lee Bok-hyeon, head of the Financial Supervisory Service, said, “We will consider whether selling through any window is in accordance with a safeguard substance users.”
Immediately following the financial leaders’ comments, Hana Bank temporarily suspended sales of ELS. This is in line with the recommendation of the bank’s non-deposit product committee due to the decline in the H index, and the explanation is that a decision will be made whether to resume sales after considering the future situation.
Reporters Ryu Ji-young and Kim So-ra
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