Hui Ka Yan, founder of China Evergrande Group, had once amassed a fortune of $42.5 billion, placing him at the top of the wealth rankings for all of Asia. But 73% of that immense fortune has now evaporated, and the tycoon will almost certainly lose even more as anxious creditors, suppliers and homebuyers besiege Evergrande’s offices.
The real estate developer has racked up a staggering $305 billion in total liabilities, against cash and cash equivalents of $13.4 billion, leaving many to wonder how any company could take on such a massive amount of debt, and yet that’s not all of it. Evergrande has not only borrowed from banks, trust firms and bondholders, but also from its employees and wider society.
The company has as much as $6.2 billion in off-balance sheet debt, according to estimates from local financial journal Caixin, which includes so-called wealth management products sold to retail investors. One of whom is Liz, a 35-year-old employee of a local government branch in the eastern Jiangsu province.
“Evergrande is a Fortune Global 500 company, right?” she said, referring to the publication’s ranking of the world’s biggest companies. “And I have a friend who worked at Evergrande and invested 500,000 yuan [$77,000] of her own money. She told me this wouldn’t have problems.”
Liz, who asked to be identified only by her English name, said she had purchased 350,000 yuan worth of Evergrande’s wealth management products over the past year, which promised an annualized return of 7.5%, according to screenshots she provided.
Evergrande had told her that part of the proceeds would be used to fund its expansion into building electric vehicles, a business that is now also on the brink of collapse. The company’s EV unit had recently warned of a “serious shortage of funds” and said it had suspended paying “some of its operating expenses,” according to a filing to the stock exchange. Liz said that she had successfully redeemed 100,000 yuan in principal and interest payments towards the end of last year. But for the rest due next January, she worries she may never get it back.
Financial regulators in Shenzhen are now investigating Evergrande’s wealth management unit, according to a Reuters report that cites a letter sent to investors. But a person who picked up a call at the city’s financial regulation bureau this afternoon said she isn’t aware of the matter, and she didn’t know which government department will deal with the Evergrande problem. “We are waiting for further notice,” she said.
Evergrande’s potential collapse is reverberating throughout the global financial market. Investors are not only exiting Evergrande but also dumping property-related shares in Hong Kong as they worry about contagion, especially for an economy that depends on real estate for at least a quarter of GDP.
Whether Hui, whose current fortune of $11.5 billion is based mostly on the $8 billion in dividends he received from Evergrande since its IPO in 2009, will be held personally culpable for the huge losses incurred is likely to depend on his performance in cleaning up the mess, says Joseph Fan, a professor of finance at the Chinese University of Hong Kong.
The Hong Kong-listed company has been a prolific issuer of dollar-denominated notes offshore, but foreign investors and creditors are unlikely to be Hui’s highest priority. Evergrande hasn’t made any public announcements as to whether it would pay the $83.5 million dollar-bond interest due last week, a silence that sent more jitters through the markets.
Foreign creditors are bracing for a haircut, which Nomura analyst Iris Chen estimates could be as much as 75%. Evergrande has a 30-day grace period before it officially defaults on the dollar bonds.
The embattled Hui probably has to answer to his 1.5 million homebuyers first, the people who handed over deposits or the full payments for homes still under construction across China. Disgruntled buyers in Guangzhou have organized protests to demand Evergrande restart construction of a project there that was halted in May, and unconfirmed footage of similar demonstrations have sprung up across Chinese social media.
For a leadership vowing to reduce society’s income inequality and achieve “common prosperity,” Chinese officials must be seen to be protecting the interests of ordinary citizens. A direct bailout of Evergrande would contradict President Xi Jinping’s goal of tightening funding and disciplining the real estate sector, which for years had borrowed heavily to expand, contributing to a rapid build-up of leverage in the national economy, where the official debt-to-GDP ratio has soared by almost 45% over the past five years. Authorities also want to reinforce the idea that no single company, even if it is a systematically important developer like Evergrande, is too big to fail.
Analysts say the government may ask local state-owned enterprises (SOEs) to help in completing the unfinished properties, or banks may extend loans and renegotiate deadlines with Evergrande as part of its restructuring. Regulators have reportedly tightened oversight of the company’s bank accounts to ensure that funds left are first used for building apartments, not repaying creditors. Zhu Ning, professor of finance and deputy dean at Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, says the government may officially announce a solution “very soon,” perhaps right after the National Day holiday week in October.
But the views on resolving Evergrande’s debt pile are still decidedly mixed. Zhou Chuanyi, a credit analyst at Singapore-based Lucror Analytics, sees unwillingness by SOEs to step in and rescue Evergrande’s projects which are still under construction. This is partly due to the low quality of assets that Evergrande has left on its books now. At least half of its projects are located in third or fourth-tier Chinese cities, or relatively remote areas where the potential payouts are far from guaranteed. What’s more, a series of recent measures to cool the housing market is blocking gains in new home prices.
“Not a lot of people would want houses or land in third or fourth-tier places,” Zhou says. “It is impossible for a state-owned company to take over Evergrande’s unfinished properties as a whole, but SOEs may take over some projects.”
Hui, who also goes by the name Xu Jiayin, has been riding the country’s real estate boom for decades. Born into a poor family in 1958 in central Henan province, his mother died before he was even a year old. He was raised by his grandmother. His biography, published by Taihai Publishing House in 2017, said that he helped his family sell vinegar and wood in a village market as a child, and he often had to eat red potatoes and steamed buns because they were the only food available to the young Hui at the time.
He graduated in 1982 from Wuhan Iron and Steel University, as it was known then, and found work at a local steel factory before deciding in 1992 to go to Shenzhen, the southern Chinese city on the border with Hong Kong. Hui worked for a trade company for five years, but eventually found his calling in real estate.
Hui founded Evergrande in 1997 in Guangzhou. From there, the company expanded rapidly. The government’s 4-trillion yuan stimulus package, designed to spur internal demand in the wake of the 2008-09 financial crisis, made funding abundant. Real estate developers were often able to borrow at low costs, building apartments and fueling a sharp rise in land prices. Hui, analysts say, was probably the most aggressive of them all, tapping every funding channel at hand, ranging from bonds and bank loans to issuing wealth management products through third parties such as trust firms.
The tycoon could be driven by the belief that real estate prices would keep going higher in China, and he could always make enough money to repay the interest, says Lucror Analytics’s Zhou. He became China–as well as Asia’s—richest person in 2017, worth $42.5 billion, as Evergrande shares surged in Hong Kong, which was driven partly by generous dividend payouts after the company went public in 2009.
Hui himself pocketed a total of $8 billion in cash dividend payouts from the 10.2 billion shares owned, an amount that still makes him wealthier than most Chinese billionaires even if Evergrande collapses today, according to Forbes estimates. The embattled tycoon also expanded Evergrande Group into professional football, solar panels, mineral water, electric cars and theme parks over the years, though Evergrande is widely expected to sell interests in some of its listed units to cover debt repayments.
Hui also attracted a number of doubters as his debts grew. Short sellers who have been targeting Evergrande ran the risk of getting squeezed out of their positions because so few of its shares are actually held by outside investors. Hui’s stake in Evergrande rose to almost 80% this year and another 9% was controlled by his longtime business associate Joseph Lau and Lau’s wife Chan Hoi Wan. Whenever short sellers have ramped up their bearish bets on Evergrande, Hui’s rich friends have frequently stepped in to buy more shares or assets from his various business units.
Hong Kong’s market regulator even stepped in once to help Evergrande. Citron Research called the company out as being insolvent and issuing fraudulent information in a 2012 report, but Hong Kong’s Market Misconduct Tribunal decided its assertions were false and misleading in 2016, and Citron founder Andrew Left was subsequently banned from trading in Hong Kong markets. But Left now says he feels vindicated in an email to Forbes Asia.
The tycoon, in the meantime, had continued to skillfully avert other problems, including persuading strategic investors to waive a $13 billion repayment just last year. Moreover, Hui’s connections aren’t limited to the business arena, he also holds a seat on China’s top political advisory, the Committee of the Chinese People’s Political Consultative Conference. Hui, in fact, was seen posing cheerfully in Beijing’s Tiananmen Square when the party celebrated its centenary in July this year, although his trip to the capital apparently wasn’t enough to save the company.
“From a strategic standpoint, he misjudged the government’s restrictions on the real estate sector,” says Shanghai Jiaotong University’s Zhu. “His past experience and success have also made him aggressive, and the entire company was just betting on a continuous rise in housing prices.”
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