Initially, Hui Ka Yan adhered to a straightforward strategy. He would secure loans to acquire land, sell properties on the land before their construction, and utilize the proceeds to repay creditors and finance the next real estate venture.
Over a span of twenty years, commencing in the mid-1990s, this approach proved immensely profitable due to the surging home prices in China. This transformation elevated Hui from being a former steel industry worker hailing from a rural village to the wealthiest individual in China. Additionally, it propelled his company, China Evergrande Group (3333.HK), into becoming an extensive real estate dominion.
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Nevertheless, as Evergrande became increasingly burdened by debt, the company turned to progressively unconventional methods to generate funds.
By 2016, at least one subsidiary of Evergrande was urging its staff to invest in financial products offered by the group's wealth-management unit, which in turn supported property development. This insight was shared by a former employee and was corroborated by a company document assessed by [source]. According to the former employee, certain individuals were requested to allocate up to fifty percent of their salaries toward purchasing such products.
Engaging employees for financial contributions was merely one among several unconventional methodologies that the company employed before finding itself on the precipice of a chaotic collapse in 2021, weighed down by a staggering burden of hundreds of billions of dollars in debt. This narrative depicting the ascent and downfall of both Hui and Evergrande draws from conversations with over 20 individuals who have had affiliations with the magnate or his enterprise. All participants shared their insights on the condition of anonymity.
Evergrande clarified that Hui was not available for an interview. Neither the founder nor the corporation responded to written inquiries for commentary, including queries regarding the encouragement of employees to invest in financial products, Hui's managerial approach, the company's operational methodologies, and the challenges it confronted.
Hui emerged as an enterprising businessman who exhibited a combination of exacting expectations toward his staff, persuasive charm with creditors, and sporadic moments of self-indulgence. He maintained a cadre of female personal assistants, and it has been asserted by four former employees and an individual familiar with the company that a portion of these assistants were hired predominantly for their appearance.
The narrative of Evergrande also exposes the internal mechanisms of a prominent Chinese real estate behemoth, spanning from the exuberant era of soaring property values to the rapid deterioration of the company when angered retail investors besieged its premises. This trajectory of the company also mirrors the trajectory of China's broader real estate market, a pivotal catalyst for the growth of the world's second-largest economy, which has now transformed into a weight dragging down that very economy.
As per analyst approximations, companies constituting 40% of Chinese housing transactions have defaulted since the middle of 2021. Unfinished residences stand abandoned, suppliers remain unpaid, and a portion of the millions of Chinese individuals who invested their savings in real estate-linked wealth management products confront the possibility of not recouping their investments.
Anne Stevenson-Yang, the managing principal at J Capital Research in the United States, a firm that conducts research and takes short positions in investments (betting on the decline of stock value), noted that Evergrande's properties were marketed more as speculative investments rather than dwellings. These properties were purchased with the expectation of value appreciation, and thus the confidence in this speculative venture could only persist as long as people continued to make these purchases.
Confidence among the public is waning. The Chinese property market experienced renewed turmoil in recent weeks with the emergence of payment defaults on two U.S. dollar bonds and an attempt to delay repayment on a domestic onshore bond by another prominent developer named Country Garden (2007.HK).
Evergrande's challenges remain unabated. The beleaguered developer has presented a proposed restructuring plan for its offshore debt and has recently sought approval for this plan from a U.S. court. According to Evergrande, the proposed restructuring scheme aims to alleviate its offshore debt burden and facilitate the resumption of the company's operations.
On Sunday, Evergrande disclosed losses amounting to 33 billion yuan ($4.53 billion) for the first half of the year, a significant contrast from the 66.4 billion yuan loss incurred during the same period in the previous year. Upon the resumption of trading following a 17-month suspension, Evergrande's shares plummeted by 79% on Monday, resulting in the eradication of $2.2 billion from the company's market valuation.
The decline of the company has resulted in the depletion of tens of billions of dollars from 64-year-old Hui's personal net worth, compelling the hurried liquidation of corporate assets to facilitate debt repayment. The company is also grappling with a barrage of legal challenges: Evergrande reported the existence of over 2,200 lawsuits amounting to approximately 535 billion yuan ($73.40 billion) in potential liabilities as of June.
The escalating debt crisis in the Chinese property sector presents a substantial obstacle for President Xi Jinping and his team of policymakers, particularly since the nation's economy is already contending with weakened domestic and international demand. China's economic expansion exhibited feeble growth in the second quarter.
Concerns regarding the potential contagion effect extending to the nation's financial sector and the broader economy are casting a shadow over global markets.
China's State Council Information Office, responsible for addressing media inquiries on behalf of the government, refrained from commenting on the property market and Evergrande's future. Requests for comments from the housing authority and the finance ministry remained unanswered.
LAYING THE GROUNDWORK
Hui Ka Yan's upbringing took place under the guidance of his grandmother in a rural village within Henan province, as per his biography.
In 1996, amidst China's rapid urbanization and the dismantling of the state-provided housing system, Hui embarked on the establishment of Evergrande. Back then, roughly one-third of China's population resided in urban areas. Today, this proportion has escalated to about two-thirds.
The impetus for housing development from companies like Evergrande was augmented by local authorities. During the mid-1990s, Beijing witnessed a notable increase in the proportion of taxes directed to the central government. Consequently, local administrations saw a decline in their share of funds without a proportional reduction in their obligations to deliver essential services. To address this shortfall, local governments began selling land to developers to bolster their revenue streams.
Hui astutely seized upon this burgeoning demand. He procured the land for his inaugural development venture in 1996 for a sum of 5 million yuan, acquiring more than half of the amount through borrowing, as delineated in his biography. Subsequently, he managed to vend the inaugural complex in the subsequent year for 80 million yuan, as disclosed on Evergrande's official website.
Progressing into 2009, Evergrande's reach had expanded to encompass more than 20 cities, as per the company's records.
In 2009, with the listing of Evergrande's stock on the Hong Kong stock exchange, a sum equivalent to $729 million was raised. This strategic move elevated Hui's net worth to a figure in the billions, considering his ownership of roughly two-thirds of the company at that juncture.
By the time 2013 arrived, Hui's stature had reached its zenith. He secured a position as a member of the esteemed standing committee of the Chinese People's Political Consultative Conference, one of China's most distinguished political entities. During the same year, Guangzhou Evergrande, the soccer team over which the company had attained control three years earlier, clinched victory in the premier Asian soccer club competition.
During his stays in Hong Kong, Hui interacted with the city's property magnates, engaging in card games and striking investment agreements with them, as attested by three individuals privy to these meetings. Hui was known to dine at Hong Kong's exclusive Dynasty Club, indulging in delicacies such as bird's nest soup and shark fin soup, as disclosed by the source familiar with the company.
During the prosperous years, when hosting business associates at a clubhouse situated within Evergrande's Guangzhou premises, Hui engaged in an unusual practice at least twice. On these occasions, he tossed cash for entertainment purposes and observed as his female assistants gathered the currency notes from the ground, as recounted by an individual who was previously employed by him.
In response to inquiries concerning the founder's lifestyle posed by ICCBizNews, both Hui and Evergrande refrained from providing any responses.
‘CENTRALIZED CONTROL AT ALL LEVELS’
Even amidst Evergrande's expansion, Hui maintained his engagement across all echelons of the company.
A former employee who operated within one of Evergrande's regional offices revealed that Hui personally sanctioned all land acquisitions. Additionally, Hui played an active role in formulating advertising slogans, a detail affirmed by two individuals interviewed by ICCBizNews. Notably attentive to nuances, Hui displayed a keen interest in fonts and their sizes, according to the account of an individual who had worked closely with him. Moreover, Hui purportedly instructed the staff to impose fines on employees for minor transgressions, a practice confirmed by both the aforementioned former employee and an individual well-acquainted with the company. Infractions included matters as seemingly trivial as inappropriate attire.
"One former employee noted, "Every directive stemmed from Hui. No one dared to question his decisions."
This prevailing corporate ethos is encapsulated in a video portraying Hui participating in a company basketball match. Although the authenticity of this footage could not be independently validated by ICCBizNews, it depicted Hui repeatedly making successful shots while encountering minimal opposition from opposing players.
FOR THOSE EMBRACING HUI'S METHODOLOGY, A TANGIBLE BENEFIT EMERGED: GENEROUS REMUNERATION. According to data sourced from the employment website Maimai.cn, the average monthly salary at Evergrande stood at 15,666 yuan ($2,149.38) in 2018. This figure marked approximately three times the average monthly salary within the real estate sector, as validated by official data.
Certain individuals within Evergrande's capital department experienced sizeable windfalls in the form of bonuses for successfully securing loans from financial institutions or alternative lenders. As outlined by a former employee and an individual well-acquainted with the company, teams would collectively garner a percentage of the borrowed sum, which could amount to as much as 1%. Subsequently, these bonuses were distributed amongst the members of the respective teams, as disclosed by the former employee.
OBJECTIVES SET FOR EMPLOYEE PARTICIPATION IN FINANCIAL PRODUCTS
During 2016, as China's property prices soared, Evergrande outpaced its primary competitor, securing the coveted position of being the nation's leading developer by sales. The company's land holdings swelled to encompass 312 million square meters, doubling the extent recorded just two years prior.
In 2017, Evergrande's stock price surged beyond HK$30, exceeding its initial public offering price of 2009 by more than sevenfold. During this period, Hui's wealth reached a zenith, as he ascended to the position of Asia's wealthiest individual, boasting an estimated fortune amounting to tens of billions of dollars according to Forbes magazine.
While Evergrande was aggressively acquiring land, it actively explored avenues to support its financial endeavors. Within its former internet subsidiary, HengTen Networks, the company took a measure that involved motivating certain employees to delve into their personal funds and invest in the wealth management products offered by the group.
In a document dated May 2016, examined by ICCBizNews, over a dozen individuals were enumerated as individuals who had not attained their stipulated quotas for procuring Evergrande's financial products. A handwritten annotation on the document characterized this situation as "serious" and indicated that bonuses would be curtailed if the identified individuals failed to meet their quotas.
As recounted by a former employee acquainted with HengTen, the management indeed curtailed some bonuses in response to these circumstances. Moreover, the individual who had provided insights into Hui's dining preferences in Hong Kong, and was knowledgeable about the company's dynamics, conveyed that the practice of setting targets for the acquisition of financial products was widespread across Evergrande. This source also confirmed that employees would face penalties for failing to meet their specified quotas.
As per a recent filing on the stock exchange, Evergrande indicated that it had garnered approximately 92.1 billion yuan ($12.64 billion) through the sale of wealth management products over a span of time. Additionally, by the close of 2022, there remained an outstanding sum of roughly 34 billion yuan ($4.66 billion), encompassing unpaid principal and interest on these aforementioned products.
While Chinese developers often resort to selling wealth management products to secure funds for real estate ventures, linking employee bonuses to the acquisition of such products is an atypical practice, as confirmed by two experts within the industry.
Kelly Richmond Pope, a forensic accountant and professor at DePaul University in Chicago, remarked, "It might create the illusion of greater profitability, but it's essentially an artificially inflated enhancement."
Despite attempts to solicit comments, Evergrande Wealth, a subdivision of Evergrande Financial Holding Group under the Evergrande Group umbrella, refrained from responding. Similarly, requests for comments directed to China's banking regulator went unanswered.
Concurrently, Hui was progressively accumulating debt within the company. It was during this period that the government initiated open expressions of concern about the magnitude of borrowing within the real estate sector.
In response to inquiries posed by investors and journalists over the years regarding his ventures characterized by substantial leverage, Hui consistently maintained that Evergrande's robust turnover and asset valuation were ample to offset its indebtedness.
Furthermore, Hui would publicly acknowledge the leadership of the ruling Communist Party. In a 2018 address during the China Charity Awards, he remarked, "Without the favorable policies of the country's reform and opening-up, Evergrande would not have achieved its current standing."
Even as Hui had already diversified into other sectors encompassing plastic surgery and life insurance, he persisted in his pursuit of novel enterprises. By 2019, he had ventured into the domain of electric cars.
DECEASED KOI FISH
During the initial months of 2020, Hui reaffirmed his commitment in a public statement to "substantially reduce" the debt load of his company. However, sustaining the stability of Evergrande was about to become a significantly more arduous endeavor.
Beijing enacted stringent new regulations with the specific intent of curtailing the financing available to developers operating with high levels of leverage. By the time 2021 arrived, the real estate market in China experienced a decline in property sales, and the government's stringent approach culminated in a string of defaults by developers, leading to the closure of many businesses.
According to the source familiar with the company, during a routine staff meeting in 2020, Hui lamented the demise of certain Japanese koi carp. He characterized these deaths as an ominous indication of misfortune.
As financial institutions and investors adopted a more cautious stance towards lending to real estate developers, Evergrande began to pursue alternative, albeit more costly, avenues for securing funds.
A venue from which the company sought financial assistance was the realm of so-called trust firms, as was previously reported by ICCBizNews in 2020. Referred to as "shadow banks" due to their operation outside the purview of many regulations that govern commercial banks, trust firms were eager to seize the opportunities presented by an industry in pursuit of credit. Moreover, these entities could levy substantially higher interest rates than the meticulously regulated conventional banks.
With the escalation of the overarching credit shortage during the years 2020 and 2021, Evergrande encountered challenges in the sale of its local yuan-denominated bonds. This predicament arose due to concerns regarding the company's creditworthiness. As a response, the company employed its own funds to procure these bonds through specialized vehicles established for this purpose. Insights from a former member of Evergrande's finance team and an individual familiar with the company's financial arrangements indicated that these vehicles subsequently resold the bonds at elevated yields or interest rates. This adjustment aimed to align the interest payments with the level of risk that investors were willing to accept.
In certain instances, the effective interest rate on these bonds could surge to as high as 18%, while the prevailing rate in the open market remained at 6%, as relayed by the aforementioned former finance team member. This individual noted, "The actual cost they were incurring for financing was eroding their profits significantly."
Evergrande also redirected loans that had been secured via its publicly listed property-services unit to meet the operational and financial exigencies of Evergrande itself. This revelation emerged from an inquiry conducted by a committee comprising independent directors within Evergrande. The investigation was prompted when banks took possession of deposits worth 13.4 billion yuan ($1.84 billion) held by the property-services unit in 2021.
In the preceding year, the preliminary investigation led to the departure of three senior executives who were implicated in the diversion of these loans.
Anne Stevenson-Yang from J Capital Research remarked, "Evergrande has a particularly audacious approach."
Neither Hui nor the company responded to inquiries concerning the utilization of special purpose vehicles for the purchase and subsequent resale of bonds, or regarding the redirected loans. However, the company did acknowledge that discussions were ongoing with the property-services subsidiary concerning a repayment arrangement. Additionally, measures have been implemented to rectify potential weaknesses in internal controls.
By the year 2021, Evergrande's accumulated liabilities had surged to an astounding $300 billion. The company, grappling with severe financial constraints, confronted challenges in settling payments to suppliers and in completing construction projects. The revenues generated from its real estate endeavors underwent a significant decline.
Furthermore, Evergrande faltered in honoring its obligations to retail investors who had invested in its financial products, triggering widespread protests throughout the nation. The unrest was particularly pronounced at the company's Shenzhen offices in September 2021, where approximately 100 discontented investors assembled in the lobby, demanding the prompt repayment of their investments.
In the subsequent days, Hui expressed his confidence in a letter addressed to the staff, assuring them that the company would eventually overcome its most trying period.
Nonetheless, Evergrande reported staggering losses amounting to a combined total of $81 billion for the years 2021 and 2022. Trading of Evergrande's shares listed on the Hong Kong stock exchange was halted in March of the previous year. Concurrently, Hui took measures to diminish his stake in the company, resulting in a stark decline in his personal wealth. According to Forbes' estimates, his fortune plummeted to less than a tenth of the peak value of $36 billion it held in 2019.
Evergrande is currently navigating the stages of obtaining consents from creditors and securing legal approvals for its offshore debt restructuring scheme. A creditor assembly is scheduled for late September to deliberate and vote on the proposed plan, potentially enabling them to recover up to a quarter of their outstanding claims.
In a letter distributed to employees in January, Hui characterized 2023 as a pivotal year and vowed to honor repayments to creditors while ensuring the timely completion of projects.
However, the year's outset proved to be less than favorable for him. A mansion in Hong Kong, which creditors had taken possession of, was listed for sale in March. This upscale property was estimated to be valued at approximately $112 million.
