Hui Ka Yan has had one of the most amazing careers in modern Chinese history, and his life is the stuff of legends. The huge boom in China’s real estate market has burst, though, and the good times are gone.
Hui, a former worker in the steel industry who hails from a small town, rose to become the wealthiest man in China by amassing a massive real estate empire.
Borrowing money to purchase property, selling houses there before construction began, and using the proceeds to pay back his loan providers and fund future real estate ventures was his first strategy.
Beginning in the mid-1990s and continuing for the next two decades as property prices in China skyrocketed, this strategy generated massive profits. This resulted in massive wealth and power for Hui. Evergrande’s debt caused the corporation to pursue more creative means of generating revenue as it struggled to keep up.
China’s manufacturing has declined for five consecutive months. services have also decreased.
exploiting workers for financial gain
According to a former employee and one corporate document, at least one Evergrande subsidiary encouraged certain personnel to acquire financial products from the group’s wealth-management section in 2016, which helped finance property development. The ex-worker said that some employees were pressured into spending as much as half their paychecks on these items.
Before its catastrophic collapse in 2021 under the weight of hundreds of billions of dollars in debt, the corporation engaged in a variety of strange tactics, including hitting up staff for funding.
This narrative of the growth and collapse of Hui and Evergrande is based on interviews with more than 20 persons who have worked with the entrepreneur or at his firm. All participants agreed to speak anonymously for this article.
Hui was reportedly unavailable for an interview, according Evergrande. Hui’s managerial style, the firm’s business methods, and the issues it confronts were all topics that were brought up in written requests for comment, but neither the founder nor the company answered.
aggressive, domineering, and magnetic
Hui was a self-absorbed businessman who could be demanding of his employees and creditors alike. According to four former workers and a source acquainted with the firm, at least some of his female personal aides were recruited purely for their appearance.
From the euphoria of skyrocketing real estate prices to the company’s abrupt collapse when enraged retail investors stormed its headquarters, Evergrande’s narrative uncovers the inner workings of a Chinese property titan. The rise and fall of the corporation mirrors that of China’s property market more broadly, which was once an engine for the world’s second-largest economy’s expansion but is now dragging it down.
Analyst projections indicate that by the middle of 2021, 40 percent of Chinese house sales had been lost to defaulting businesses. There are several incomplete houses. The company hasn’t paid its suppliers. Some of the millions of Chinese who have invested in property-linked wealth management products may never see their cash again.
Property owned by Evergrande was “sold as a speculative investment, not sold as a place to live,” according to Anne Stevenson-Yang, managing principle at J Capital Research in the United States. J Capital Research publishes research and engages in short investment positions, or bets on a stock’s collapse. The reason why buyers invest in them is the expectation of future price growth, “so obviously the confidence game will only work as long as people keep buying.”
The public’s trust is evaporating. Another prominent Chinese developer, dubbed Country Garden, recently sent shockwaves across the Chinese real estate market when it skipped payments on two US dollar loans and tried to postpone repayment on a private onshore bond.
The issues at Evergrande aren’t going away. Recently, the troubled developer petitioned a US court to approve its proposed conditions for restructuring its offshore debt. According to Evergrande, their planned restructuring plan would enable them pay off their offshore debts and go back into business.
On Sunday, Evergrande said that its losses for the first half of the year were 33 billion yuan ($4.53 billion), down from a loss of 66.4 billion yuan in the same time last year. After a 17-month trading halt, Evergrande’s stock dropped 79% on its first day back, wiping away $2.2 billion in market value.
The group is being sued 2,200 times.
Due to the downfall of the firm, Hui, 64, has lost billions of dollars in personal wealth and has been forced to sell off company assets quickly to pay off debt. Evergrande said in June that the business was facing more than 2,200 lawsuits with a total potential liability of over 535 billion yuan ($73.40 billion).
With the Chinese economy already suffering from lower local and international demand, the property sector’s rising debt issue presents a big challenge for President Xi Jinping and his policymakers. The growth rate of China’s economic production in the second quarter was quite low.
Markets throughout the world are feeling the effects of worry that the country’s financial system and economy would be impacted by the pandemic.
The Chinese government’s public relations office, the State Council Information Office, will not comment on the real estate market or the future of Evergrande. Both the housing ministry and the finance ministry ignored our requests for comment.
Grandmother raised, landowner
According to his biography, Hui was reared by his grandmother in a small town in Henan province. In 1996, when China was rapidly urbanizing and destroying its state-provided housing system, he launched Evergrande. The urban population of China was around 35% at the time. Currently, almost 66 per cent do.
It was in the interest of local governments to encourage private corporations like Evergrande to build new residential areas. In the mid-1990s, Beijing considerably boosted the proportion of tax revenue retained by the central government. Although local governments witnessed a decrease in their allocation, they were not relieved of any additional service provision responsibilities. Local governments have been selling off parcels of land to developers as a means of replenishing their finances.
Hui responded to this need. According to his biography, in 1996 he spent 5 million yuan (almost half of which he borrowed) for the land for his first development project. According to Evergrande’s website, he made 80 million yuan from the sale of the first complex the following year.
Evergrande claims it has grown to over 20 cities by 2009. Hui raised the equivalent of $729 million in 2009 when it floated Evergrande shares in Hong Kong. Hui, who controlled around two-thirds of the firm before the acquisition, became a billionaire as a result of the transaction.
Hui has hit his stride by 2013. One of China’s highest-ranking political organizations, the Chinese People’s Political Consultative Conference, elected him to its standing committee. In that year, the company’s Guangzhou Evergrande soccer team, which it had acquired three years before, triumphed in Asia’s premier club league.
According to three persons familiar with the gatherings, he played cards and struck business agreements with Hong Kong’s property tycoons while he was there. The insider stated that Hui dined on Chinese specialties including bird’s nest soup and shark fin soup at Hong Kong’s exclusive Dynasty Club.
A former employee claims that on at least two instances during the boom years, Hui flung cash for amusement while entertaining businessmen in a clubhouse at Evergrande’s Guangzhou headquarters and watched as his female subordinates picked up the bills off the floor.
When asked about the founder’s personal life, Hui and Evergrande remained silent.
A top-down approach was taken to everything.
Despite Evergrande’s growth, Hui maintained his involvement at every level of the company. A former employee from one of Evergrande’s regional offices said that he would provide final approval on any property purchases made by the company.
Two sources claim that Hui was involved in the creation of advertising catchphrases. A former employee claims that he is quite picky when it comes to typefaces and font sizes. According to a former employee and an insider acquainted with the firm, Hui instructed management to punish workers for offenses as small as inappropriate attire.
Everything was directed from up above. Apparently, “no one questioned what Hui said,” as one former worker put it.
In April of 2020, a video of Hui participating in an intramural basketball game was posted online, reflecting the company’s culture. Hui has been taking many shots with little resistance from the other team.
Hui’s followers were rewarded handsomely for embracing his management style. According to the employment statistics website Maimai.cn, the average monthly wage at Evergrande in 2018 was 15,666 yuan ($2,149.38). Compared to the monthly average for the real estate industry, it was more than three times as high.
A former employee and a source acquainted with the firm have claimed that certain staff in Evergrande’s capital department received hefty incentives of up to 1% of the amount borrowed for arranging loans from banks or other lenders. According to the former worker, the incentives were subsequently distributed among the staff.
2017 – The wealthiest guy in Asia
In 2016, with China’s real estate prices soaring, Evergrande surpassed its biggest competitor to become the country’s leading developer in terms of sales. In only two years, the firm was able to increase the amount of land it had in reserve to 312 million square meters.
More than seven times since its IPO in 2009, Evergrande’s share price in 2017 exceeded HK$30. According to Forbes, Hui amassed a fortune in the tens of billions of dollars, making him the wealthiest person in Asia.
Evergrande’s land buying spree necessitated creative financing strategies. HengTen Networks, the company’s former internet division, pushed some workers to use their own money to invest in the division’s wealth-management products.
The document from May 2016 names over a dozen persons who are known to have fallen short on their required purchases of Evergrande financial goods. The situation is described as “serious” in a handwritten comment on the paper, which also warns that incentives would be withheld from more than a dozen employees who fail to fulfill their targets.
According to the ex-HengTen worker, the company did reduce certain incentives as a consequence. The insider who discussed Hui’s Hong Kong eating habits also said that Evergrande has a policy of punishing employees who fail to fulfill their financial product sales objectives.
Over $12 billion was generated through financial planning tools.
Evergrande said in a recent SEC filing that it has generated about $92.1 billion yuan ($12.64 billion) through the sale of wealth management products over time, with approximately $4.66 billion in unpaid principle and interest on such products due by the end of 2022.
While it is typical practice for Chinese developers to offer wealth-management products to finance real estate developments, it is rare practice, according to two experts in the field.
“You can look more profitable, but it’s an artificial boost,” said Kelly Richmond Pope, a forensic accountant and lecturer at Chicago’s DePaul University.
Requests for response from Evergrande Wealth, a division of Evergrande Financial Holding Group, went unanswered. The Chinese financial watchdog has similarly ignored repeated demands for comment.
Hui was piling debt upon the firm the whole time. Around this time, government officials started openly voicing their worries about the property industry’s excessive borrowing.
Evergrande’s strong turnover and asset value are adequate to service its obligations, Hui has said to investors and media over the years when asked about his heavily leveraged projects.
He would also openly praise the Communist Party in power. Hui, speaking in 2018 at the China Charity Awards, remarked, “Without the country’s good policy to reform and open up, Evergrande would not have what it has today.”
New endeavors, promises to reduce debt, and a portent of doom
Hui continued to make investments despite his extensive portfolio, which now included fields as diverse as cosmetic surgery and life insurance. In 2019, he made his first venture into the world of electric vehicles.
Hui openly stated his intention to “significantly lower” his company’s debt again at the start of 2020. However, maintaining Evergrande’s viability was going to become far more challenging.
Beijing has recently enacted new laws that seek to limit the funding available to heavily leveraged construction firms. By 2021, Chinese property sales were beginning to decrease, and the government crackdown led to a string of defaults by developers, with many going out of business.
Someone acquainted with the firm said that in 2020, Hui lamented the loss of several of his Japanese koi fish at a monthly meeting with colleagues. According to this source, Hui predicted the fatalities would occur.
As banks and investors grew increasingly wary about financing to property developers, Evergrande sought new – and costlier – sources of capital.
So-called trust companies were one source the corporation looked to get funding. Trust companies saw an opportunity to profit from the requirements of a sector starved for credit and were known as “shadow banks,” since they operate outside many of the restrictions governing conventional banks. They might also set far higher interest rates than the highly regulated banking institutions.
Concerns regarding the quality of Evergrande’s local yuan bonds made it harder for the company to sell them when the global credit crisis worsened in 2020 and 2021. A former member of Evergrande’s finance team and a person acquainted with the business’s financing arrangements said that the corporation utilized its own cash to purchase the bonds via special purpose companies. According to the sources, the bonds were then sold by the vehicles for a greater yield than investors deemed appropriate given the level of risk.
According to the former member of the finance team, the effective interest on these bonds may reach 18% at times, even though it was only 6% on the open market. They were losing money since the true cost of financing was cutting into their earnings.
A committee of independent directors at Evergrande has said that the company redirected loans that had been obtained by its publicly listed property-services business to meet the group’s operational and financial requirements. In 2021, banks seized deposits totaling 13.4 billion yuan ($1.84 billion), prompting the committee to launch an investigation.
Three top executives resigned last year after an early investigation suggested they were complicit in the loan diversion.
“Evergrande has a particularly cowboy mentality,” said Stevenson-Yang of J Capital Research.
When asked if Evergrande utilized SPVs to buy and resell bonds or on the loan diversions, neither Hui nor the business provided a response. The firm has taken action to address apparent internal control shortcomings and is in discussions with its property-services subsidiary over a payback timeline, as reported by the company.
Evergrande’s debts hit $300 billion by 2021. Having trouble paying its suppliers and finishing residences, the firm was pressed for cash. Its income from real estate fell sharply.
Protests broke out all throughout the nation because Evergrande had not paid ordinary investors in its financial products on schedule. One hundred angry investors stormed the company’s Shenzhen headquarters in September 2021, causing chaos as they demanded their money back.
A few days later, Hui reassured employees in a letter that the business will “walk out of its darkest moment.”
However, Evergrande stated a $81 billion deficit for the years 2021 and 2022. Evergrande’s stock in Hong Kong was halted from trading in March of last year. After selling off a portion of his shares, Hui’s personal wealth dropped to $3.6 billion in 2019 from an estimated $36 billion in 2018, according to Forbes.
Evergrande is now trying to get its creditors and the courts to approve a proposal to restructure its offshore debt. The creditors are scheduled to vote on the proposal in late September, and if approved, they may get up to 25% of what is owing to them.
Hui sent a letter to staff in January, calling 2023 a “crucial year” and promising to pay back creditors and complete projects.
But he didn’t have a good start to the year. In March, a home in Hong Kong that had been seized by creditors was put up for auction. It’s worth about $112 million, according to estimates.
The future is uncertain, but given that liabilities reached 2.4 trillion yuan ($335 billion) in 2016, things don’t seem good.