In the mid-1990s, Hui Ka Yan utilized a seemingly foolproof formula. Borrow money, buy land, pre-sell homes, then use the proceeds for loan repayments and future projects. As Chinese home prices skyrocketed, this strategy metamorphosed Hui, once an ordinary steel worker from a remote village, into China’s wealthiest individual. His enterprise, China Evergrande Group, burgeoned into a monumental real-estate juggernaut.
However, over-reliance on debt saw Evergrande turning to unconventional fund-generation strategies. By 2016, certain Evergrande arms reportedly prodded employees to invest large portions of their salaries into the company’s wealth-management products. Such unique tactics only hinted at deeper underlying issues that would soon surface.
Reuters’ detailed investigation, drawing from over 20 anonymous sources with inside knowledge, delves into Evergrande’s practices leading up to its precarious position in 2021, overwhelmed by immense debt. Efforts to contact Hui and Evergrande for comments remained unanswered.
Hui, charismatic yet demanding, possessed an array of attractive personal assistants, with many reportedly chosen for their appearance. The trajectory of Evergrande not only provides an intimate glimpse into the operations of a Chinese property behemoth but also reflects the larger narrative of China’s property market. Once a robust pillar for the world’s second-largest economySector Regulations, it now threatens its stability.
Since mid-2021, companies responsible for 40% of Chinese home sales have defaulted. Abandoned homes, unpaid suppliers, and countless citizens fearing loss of their investments paint a grim picture. According to Anne Stevenson-Yang of J Capital Research, Evergrande homes were primarily speculative investments. As public trust wanes, developers like Country Garden find themselves missing bond payments, further unsettling the property market.
Evergrande’s financial health continues to deteriorate, despite its efforts at debt restructuring. A recent loss of 33 billion yuan ($4.53 billion) was reported, with the company’s shares plummeting, erasing billions in market value. For Hui, this represents a severe blow to his fortune, with the company’s assets being sold to mitigate debt. To further compound the problem, Evergrande disclosed potential legal liabilities totaling approximately 535 billion yuan ($73.40 billion) as of June.
The destabilization of the property market poses critical challenges for China’s leadership, especially with an already weakened economic outlook. Concerns about broader economic implications loom large internationally. Yet, China’s government remains tight-lipped, offering no comment on the situation.
Hui’s story begins in Henan province, raised by his grandmother. Founding Evergrande in 1996, he capitalized on China’s rapid urbanization, as it transitioned from state-provided housing. As local governments became incentivized to support housing projects, Hui quickly seized the opportunity. Within a decade, Evergrande had operations in over 20 cities, culminating in a successful stock listing in Hong Kong in 2009. By 2013, Hui’s influence extended into politics and sports, with significant acquisitions and collaborations with fellow tycoons.
Yet, underneath the success was an autocratic leadership style. Hui’s involvement spanned from land acquisition decisions to advertising slogan creation. Strict workplace norms were enforced, with noncompliance leading to penalties. Employees were drawn to Evergrande’s above-average compensation, with some earning hefty bonuses.
2016 marked Evergrande’s ascension as China’s top developer. However, its aggressive expansion demanded innovative financing methods. Employees were coerced into buying the group’s financial products, linking bonuses with investment quotas. This unusual practice, aimed at reflecting a robust financial stance, raised eyebrows. As of 2022, significant unpaid principal and interest remained on such products.
While property developers commonly fund projects through wealth-management products, making employee bonuses contingent upon such purchases is rare. Such practices give a short-lived, artificial boost to profitability.
In summary, Evergrande’s tale serves as a cautionary narrative. From Hui’s meteoric rise to Evergrande’s precarious status, China’s property sector reveals its vulnerabilities. The coming years will determine if the sector, and giants like Evergrande, can navigate the challenges and regain public trust.
Hui, the prominent figure behind Evergrande, had been adding significant debt to the company’s books. This increasing debt was alarming, especially against the backdrop of the Chinese government’s growing unease over excessive borrowing in the property sector.
Whenever questioned about his debt-laden projects, Hui would assure investors and journalists alike that the firm’s high revenue and substantial asset value could effortlessly handle its debts. In a bid to emphasize his allegiance, Hui would often sing praises to the Communist Party, crediting them for Evergrande’s success. As he noted in a 2018 address, Evergrande’s achievements were largely due to China’s liberal policies and reforms.
Hui’s entrepreneurial spirit saw him diversify into various sectors, from healthcare aesthetics to insurance. By 2019, the businessman ventured into the electric car market.
However, in 2020, a turning point approached. Hui publicly committed to a substantial reduction in the company’s debt. Yet, circumstances were about to make this task increasingly challenging.
The Chinese government was tightening its belt, introducing stringent financing regulations particularly for over-leveraged developers. By 2021, the property market in China began showing signs of weariness. A subsequent crackdown resulted in multiple developers defaulting and numerous companies shutting down.
In an internal meeting in 2020, Hui shared a peculiar anecdote, mentioning the death of his Japanese koi carp. An insider claimed Hui viewed this as an omen of impending misfortune.
The cautionary stance adopted by banks towards property developers, including Evergrande, meant that the company had to resort to alternative, and often more expensive, funding sources. One such avenue was through trust firms, informally termed “shadow banks” due to their operations outside the typical banking regulations. These trusts were more than willing to support industries in dire need of credit, even if it meant charging exorbitant interest rates.
This credit tightening environment in 2020 and 2021 made it challenging for Evergrande to offload its local yuan bonds, especially given growing skepticism about their credibility. According to insiders, Evergrande started using its capital to purchase these bonds via special purpose vehicles. These entities then resold the bonds at elevated yields, aligning with the associated risks. The internal interest rates sometimes soared to 18%, significantly above the 6% market rate, effectively devouring the company’s profits.
Evergrande’s financial strategies also came under scrutiny when it was revealed that loans intended for its property-services unit, a publicly-listed entity, were redirected for the company’s operational expenses. This was brought to light when banks confiscated a whopping 13.4 billion yuan ($1.84 billion) from the unit’s deposits in 2021. Subsequently, three top executives resigned, following preliminary findings linking them to the misappropriation of these funds.
Analysts like Stevenson-Yang of J Capital Research commented on Evergrande’s unorthodox business approach, terming it as having a “cowboy mentality.”
Evergrande’s reluctance to respond to queries regarding their use of special purpose vehicles or loan diversions raised eyebrows. However, they did communicate their ongoing negotiations with the property-services subsidiary over a repayment timeline and acknowledged the need for enhanced internal controls.
By the close of 2021, Evergrande’s liabilities had skyrocketed to $300 billion. With dwindling cash reserves, the firm grappled with paying its suppliers and finalizing housing projects. Their revenue took a significant hit.
The company’s challenges were further highlighted when they defaulted on their commitments to retail investors, triggering nationwide protests. A particularly notable incident occurred in September 2021, where about a hundred irate investors stormed Evergrande’s Shenzhen office, demanding their money.
Hui, despite the unfolding chaos, remained optimistic, assuring staff that brighter days were ahead for Evergrande. Yet, the company posted a cumulative loss of $81 billion for both 2021 and 2022. Evergrande’s shares in Hong Kong were eventually suspended from trading, and Hui’s personal net worth plummeted, with current valuations at just a fraction of its $36 billion peak in 2019, as per Forbes.
Currently, Evergrande is in the throes of obtaining necessary permissions for its offshore debt restructuring strategy. Creditors will soon convene to decide on a recovery plan, which may enable them to recover roughly 25% of their dues.
In a letter to his staff early this year, Hui termed 2023 as pivotal, vowing to honor commitments to both creditors and projects. However, the year commenced on a bleak note for him when a luxurious Hong Kong property, seized by creditors, was listed for sale, valued at a staggering $112 million.