Editorial | Cross-border tool for insolvencies faces test with China’s Evergrande
- Under pilot scheme, Hong Kong liquidator can work with Shanghai, Shenzhen and Xiamen courts, potentially allowing international creditors access to some mainland China assets
The recent High Court order to liquidate indebted developer China Evergrande Group provides an important litmus test for a fledgling measure handling insolvencies between courts in mainland China and in Hong Kong. The measure is critical for a key reason: Evergrande amassed billions of US dollars by selling bonds, mainly to international investors keen to cash in on the once booming Chinese property market.
With Evergrande’s failed bid to stave off liquidation, those international investors are now creditors lining up to recoup some of their losses.
The catch is that Evergrande’s assets to back this debt are overwhelmingly domestic projects denominated in yuan, and hitherto would be considered to be far out of reach of international creditors. Enter the Mutual Recognition of and Assistance to Insolvency Proceedings signed between mainland China and Hong Kong in May 2021, which allows for bankruptcies or liquidations on either side to be recognised across the border.
Court-appointed liquidators in Hong Kong can work with courts in Shanghai, Shenzhen and Xiamen under a pilot scheme to enforce the ruling. In essence, some mainland China assets of the once high-flying developer will be accessible to Evergrande’s liquidator in Hong Kong.
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Only a few of Evergrande’s 1,200 nationwide projects are located in the three cities, and there may be little to go around after onshore investors pick through the developer’s carcass, but the precedent bodes well for other liquidation cases. Up to now, all of the cases that have been handled through the mutual recognition mechanism have been comparatively minuscule.