Embattled developer China Evergrande Group (3333.HK) has filed for protection from creditors in a U.S. bankruptcy court as part of its debt restructuring process, as anxiety grows over China’s worsening property crisis and a weakening economy.

The company sought protection under Chapter 15 of the U.S. bankruptcy code, which shields non-U.S. companies that are undergoing restructurings from creditors that hope to sue them or tie up assets in the United States.

The filing is procedural in nature, but the world’s most indebted property developer with more than $300 billion in liabilities has to do it as part of a restructuring process under U.S. law, two people familiar with the matter said.

The developer’s offshore debt restructuring involves a total of $31.7 billion, which include bonds, collaterals and repurchase obligations

The sources declined to be named due to the sensitivity of the matter.

Evergrande declined to comment.

Once China’s top-selling developer, Evergrande has become the poster child of the country’s unprecedented debt crisis in the property sector, which accounts for roughly a quarter of the economy, after slipping into a liquidity crisis in mid-2021.

A string of Chinese property developers have defaulted on their offshore debt obligations since then, leaving unfinished homes, plunging sales and shattering investor confidence in a blow to the world’s second-largest economy.

The property sector crisis has also fanned financial contagion risk, which could have a destabilising impact on an economy already weakened by tepid domestic consumption, faltering factory activity, rising unemployment and weak overseas demand.

A major Chinese asset manager missed repayment obligations on some investment products and warned of a liquidity crisis, while Country Garden (2007.HK), the country’s largest private developer, has become the latest to flag a stifling liquidity crunch.

All of this comes at a time when property investment, home sales and new construction have contracted for more than a year.

Morgan Stanley this week followed some of the major global brokerages to cut China’s growth forecast for this year. It now sees China’s gross domestic product (GDP) growing 4.7% this year, down from an earlier forecast of 5%.

Debt restructuring

Evergrande announced an offshore debt restructuring plan in March, expecting it to facilitate a gradual resumption of operations and generation of cash flow. It is now gathering creditor support to complete the process.

Evergrande’s creditors will vote later this month on its restructuring proposal, with possible approval by Hong Kong and British Virgin Islands courts in the first week of September.

An affiliate of the developer, Tianji Holdings, also sought Chapter 15 protection on Thursday in Manhattan bankruptcy court.

In a filing in the Manhattan bankruptcy court, Evergrande said that it was seeking recognition of restructuring talks underway in Hong Kong, the Cayman Islands and the British Virgin Islands.

The company proposed scheduling a Chapter 15 recognition hearing for Sept. 20.

In June last year, another Chinese developer, Modern Land (China) Co. Ltd (1107.HK), which missed payments on its offshore bonds that were due in Oct, 2021, had filed a petition for recognition under Chapter 15 of the bankruptcy code in New York.

Trading in China Evergrande shares has been suspended since March 2022. Shares of Evergrande Services (6666.HK) plunged more than 12%, while China Evergrande New Energy Vehicle Group (0708.HK) dropped 8% on Friday.