Special Report-Inside the downfall of embattled property developer China Evergrande
SHANGHAI/HONG KONG - In the beginning, Hui Ka Yan followed a simple formula. Borrow to buy land. Sell homes on the site before they are built. Use the cash to pay lenders and finance the next real estate project.
Evergrande said Hui wasn’t available for an interview. Neither the founder nor the company responded to written requests for comment, including about whether employees were encouraged to purchase financial products, Hui’s management style, the company’s business practices and the challenges it faces.
Evergrande’s properties were “sold as a speculative investment, not sold as a place to live,” said Anne Stevenson-Yang, managing principal at J Capital Research in the United States, which produces research and takes short investment positions, or bets on a stock’s decline. People purchase them because they think the value will appreciate “so obviously the confidence game will only work as long as people keep buying.
For 64-year-old Hui, the company’s decline has destroyed tens of billions of dollars of his personal net worth and necessitated the frenzied sale of corporate assets to help repay debt. The company faces a legal onslaught, too: Evergrande said there were more than 2,200 lawsuits totaling roughly 535 billion yuan in potential liability as of June.
He founded Evergrande in 1996, as China was dismantling its system of state-provided housing and urbanizing fast. About a third of Chinese lived in cities then. Now, about two-thirds do. When in Hong Kong, he mixed with the city’s property tycoons, playing cards and cutting investment deals with them, according to three people with knowledge of the meetings. Hui ate at Hong Kong’s elite members-only Dynasty Club, dining on Chinese delicacies such as bird’s nest soup and shark fin soup, said the person familiar with the company.
Evergrande’s share price in 2017 topped HK$30, more than seven times its 2009 initial public offering price. Hui became Asia’s richest man, with an estimated fortune of tens of billions of dollars at the time, according to Forbes magazine. In a recent stock-exchange filing, Evergrande said it had raised about 92.1 billion yuan from the sale of wealth management products over time, and that as of the end of 2022 there was about 34 billion yuan unpaid principal and interest on such products.
All the while, Hui was loading up the company with debt. It was around this time that the government began to publicly express concern about the scale of borrowing in the property sector. Beijing now implemented strict new regulations aimed at restricting the financing of highly-leveraged developers. By 2021, Chinese property sales were starting to decline, and the government crackdown led to a series of defaults by developers, with many going out of business.
As the general credit crunch intensified in 2020 and 2021, Evergrande had difficulty selling its local yuan bonds, amid concerns about their creditworthiness. The company used its own funds to buy the bonds through special purpose vehicles, said a former employee of Evergrande’s finance team and a person familiar with the company’s financing arrangements.
By 2021, Evergrande’s total liabilities had reached $300 billion. The cash-strapped company struggled to pay suppliers and complete homes. Its property revenues plunged.
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