Residents walk past a Evergrande commercial complex with a shuttered Evergrande auto showroom in Beijing. AP

A Hong Kong judge, Linda Cha, had on Monday ordered the liquidation of China’s giant real estate developer Evergrande which had defaulted in paying back the debt of $320 billion to the offshore creditors in 2021 and since then had not managed to restructure the debt.

Lawyers for the company argued that the firm was in the process of working out a plan to restructure the debt and give back to the creditors the value of their investment. The liquidation order has two aspects. First, doubts have been raised whether the Chinese government would allow the order of a Hong Kong court to stand because highly placed party officials are involved in the company, and there is also the issue that China follows the “One State, Two Systems” policy with regard to Hong Kong. Hong Kong courts follow the British colonial law system, which is different from that of mainland China.

Secondly, the liquidation order cannot be implemented immediately. It will take months and even years to execute the liquidation order. There is also the fact that the offshore investors in Evergrande are curious to know whether China will honour the debt commitments owed to foreigners. The doubts being raised about Evergrande repaying the debt are exaggerated.

The Chinese government has allowed the market system to operate for more than 40 years now, and Beijing has not intervened in stemming market fluctuations. The Chinese Communist Party government has been playing the capitalist game according to the market rules. There are charges that Chinese government manipulates the value of its currency, and it is pegged at a lower level. But this is a practice that is followed by many governments in developing countries. But as to the valuation of the Chinese companies, most of whom are in the private sector, they have followed the market sentiment.

It is true that in the last few years that the Chinese government has come down heavily against business tycoons and owners of companies for tax evasion and foul play. As a matter of fact, Evergrande and its chairman, Hui K Yan, are facing investigation.

The complication is that most of the assets of Evergrande are in mainland China, and whether it would be possible for foreign creditors to seize the properties on the mainland. According to Gary Ng of Natixis Bank, “As most Evergrande’s assets are in mainland China, there are uncertainties about how the creditors can seize the assets and the repayment rank of offshore bondholders, and the situation can be even worse for shareholders.” The process is going to be a painful one, and even prolonged and complicated.China’s economic growth has been sputtering ever since the end of the Covid-19 pandemic, and the second largest economy in the world has not been able to regain its pre-pandemic pace. The signs became visible with the slowing down in the construction sector, and the collapse of Evergrande has only confirmed it.

The liquidation of Evergrande will increase the woes of the real estate sector in the country, and it is sure to dampen further the prospects of China’s economic growth. But it would be an exaggeration to say that China’s economy cannot recover from this blow in the real estate sector. China is over a $17 trillion economy, and a $320 billion default of Evergrande cannot impact it beyond a point.

China is sure to recover its pace of growth sooner than later because there is enough resilience in it. It is not a monolithic economy where one part fails and the whole edifice will come crashing down. China is a diversified market economy and it can face a storm and survive it.