China faces another litmus test on Monday as Evergrande Group tries to avoid liquidation in a Hong Kong court hearing.
Eight weeks after the debt-laden real estate developer won a surprise reprieve in a long-running lawsuit, Evergrande has made little progress in reaching a restructuring agreement with its creditors.
A liquidation order for Evergrande, which has debts of about $327 billion, would likely have ripples through China's financial system at a time when policymakers are trying to stem a stock market crash.
It will also further erode confidence in the housing industry, which continues to be in recession and is a drag on the world's second-largest economy.
China has announced new measures to shore up its struggling real estate sector, including creating a list of construction companies eligible for financial aid. However, even more than two years after defaulting, there is little evidence that Evergrande has benefited.
If a last-minute agreement cannot be reached with bondholders, Evergrande's fate could depend on the parties seeking a winding-up order from the court.
The December hearing was postponed after the original petitioner, Intershore Consult (Samoa) Ltd. Top Shine Global Limited, decided not to seek immediate liquidation. A group of major bondholders plans to join the petition, Reuters reported on January 24, citing people familiar with the matter.
Lawyers for a special bondholder group, which claims it owns more than $6 billion of the construction company's roughly $19 billion in offshore bonds, will “likely” intervene if the original claimant vacates. Bloomberg reported that.
Any change in the position of groups that have traditionally opposed liquidation will make it more difficult for Evergrande to convince the court that it is making progress with its creditors toward a concrete debt restructuring plan. .
The symbol of China's real estate debt crisis is trying to salvage the project after the process has been derailed by repeated setbacks in recent months.