The saga of China’s second-largest development firm has escalated from a financial crisis to a potentially criminal one with the investigation and detention of Evergrande chairman and founder, Hui Ka Yan.
The company resumed trading on Tuesday after it was suspended last week in the wake of media reports of Hui’s apprehension. But analysts say signs point to a potential liquidation of the company, which could have drastic ramifications for China’s economy too.
“The Chinese government clearly intended its actions regarding Evergrande to be helpful to the real estate market, as it wants to stabilise it, not weaken it further,” said professor Steve Tsang, director of the Soas China Institute. “But the arrest of Hui almost certainly will make the situation worse for Evergrande and with this worse for the real estate market.”
Since regulations were tightened in 2020, companies responsible for about 40% of Chinese home sales have defaulted, and another major firm, Country Garden, has also battled to avoid missing massive debt repayments, raising the prospect of the risk of contagion.
“Country Garden is as big a problem” as Evergrande in terms of the health of China’s real estate and commercial sectors, said Alicia Garcia-Herrero, chief economist for Asia Pacific at French investment bank Natixis.
“If it takes too long to restructure Evergrande the chances of Country Garden having to go through the same are really high.”
Evergrande’s fate may become more apparent at a hearing in a Hong Kong court, scheduled for 30 October, according to Bloomberg.
The rise and fall
Hong Kong-based Hui, whose name is Xu Jiayin in Mandarin, was raised by his grandmother in central Henan. He founded Evergrande in Guangzhou in 1996, taking on massive debt to rapidly expand the company, with thousands of developments across China, and take it public in 2009. As of June it owned land reserves of 190 square kilometres.
Hui was at one time China’s third-richest man. His personal fortune peaked at more than US$36bn in 2019, according to Forbes, before plunging to an estimated $3.2bn by early 2023.
The trouble began in 2021. Amid Chinese government concerns about high debt levels in the property industry, a regulatory crackdown meant Evergrande found itself unable to make interest repayments on more than US$300bn in debt, sending China’s housing development sector into a liquidity crisis.
In August, Evergrande filed for bankruptcy in the US, to protect its US assets as it attempts to restructure its finances.
Last month Hengda Real Estate, Evergrande’s primary unit in mainland China, missed principal and interest payments on a 4bn yuan bond.
In September several employees of Evergrande’s wealth management unit were also arrested in Shenzhen, on unspecified charges.
Last week, Evergrande said Hui had been put under investigation in September for suspected “illegal crimes”. Bloomberg later reported he was under police control at a “designated” location, suspected of transferring assets offshore. It wasn’t clear if Hui was being held in “residential detention at a designated location” – China’s system of secret detention which allows people to be held for up to six months without charge or access to lawyers and family.
Two former executives were also reportedly detained last month, according to the financial news outlet Caixin. Former chief financial officer Pan Darong and former chief executive Xia Haijun had resigned last year after a scandal over 13.4bn yuan (£1.5bn) of deposits being used as security for third-party loans.
A ‘pyramid scheme’
Analysts like Anne Stevenson-Yang, founder of J Capital research, say China’s governance system was partly why it got so bad.
Yang said Evergrande had been a “runaway company” that authorities had failed to bring under control as it expanded across multiple industries and regions “as ways for the developer to suck in capital”.
“The government rules by direct interference in the affairs of companies and individuals, and that’s very, very human and time intensive,” Yang said. “A regulatory system that’s more effective would operate according to rule of law, but China doesn’t want to do that.”
Garcia-Herrero pushed back on speculation that the arrests of Hui and others were an attempt at scapegoating. “That would have been the case if they had fallen much earlier. I think the reality is that they were probably given an opportunity to restructure, or to sell the assets. They have had many attempts, neither of the two happened.”
The crisis threatened – and continues to threaten – to cause huge harm to China’s economy. The property sector contributes as much as 30% of China’s GDP.
At least 100,000 buyers of undelivered apartments have already been affected since Evergrande’s woes escalated in 2021, and a full collapse will mean an inability to maintain and complete units that are already occupied, Yang said.
“This is part of the pyramid scheme that Evergrande has been for 15 years,” she said.
The collapse of Evergrande would hit not just those who bought apartments, but investors in the company’s myriad other arms, and those working in downstream industries.
“There’s a whole lot of entrainment with property – steel, cement, glass, whitegoods, elevators, people buying cars because they bought an apartment in a remote area,” said Yang. “[Next will be] a reduction in tax revenues locally, a reduction in employment – construction and sales offices are two keys, also banks and financial institutions – and a general gear down in activity ...
“It’s erroneous to say Covid crashed the economy so that means it can recover. Overinvestment crashed the economy and property is the number one culprit for that.”
Additional research by Chi-hui Lin
