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How The Failure Of Evergrande Foreshadowed China's Real Estate Crisis

How The Failure Of Evergrande Foreshadowed China's Real Estate Crisis
Hui Ka Yan first followed a straightforward formula. Take out a loan to purchase land. Before they are built, sell houses there. Utilise the funds to settle creditors and finance your subsequent real estate venture.
Beginning in the middle of the 1990s, this strategy proved incredibly profitable as Chinese property prices rose. It made Hui, a former worker in the steel sector from a remote town, the richest man in China. It also helped his business, China Evergrande Group(3333.HK), grow into a major real estate empire.
But as Evergrande's debt load increased, the business had to turn to ever-more unconventional methods of raising money.
According to a former employee and a corporate document accessed by the media, by 2016, at least one Evergrande subsidiary was enticing some employees to purchase financial products from the group's wealth-management branch, which assisted in funding real estate development. Some workers, according to the former employee, were reportedly asked to spend up to half of their wages on such items.
The media reported that the corporation engaged in a number of strange practises, including hitting up staff for money, before it was on the verge of a dramatic collapse in 2021 due to the weight of hundreds of billions of dollars in debt.
This story of Hui and Evergrande's rise and demise is based on interviews with more than 20 persons who have worked for or with the entrepreneur. They all spoke under the guise of anonymity.
Hui wasn't available for an interview, according to Evergrande. In response to written inquiries for comment on a variety of topics, including whether or not employees were pressured to buy financial products, Hui's management style, the company's business practises, and the difficulties it faced, neither the founder nor the company provided a response.
Hui was a driven businessman who could be stern with his employees, charming with creditors, and even indulgent. According to four former employees and a person with knowledge of the business, he had a team of female personal assistants, and at least some of them were chosen mainly for their appearance.
The tale of Evergrande also sheds light on the inner workings of a Chinese real estate tycoon, from the euphoric days of skyrocketing real estate prices to the abrupt demise of the business after irate retail investors stormed its headquarters. The company's trajectory also follows the fortunes of China's larger property industry, which was once a major engine of economic growth in the second-largest economy in the world but is now a drag on it.
According to expert estimates, companies responsible for 40% of Chinese home sales have defaulted since mid-2021.
Unfinished homes have been built. Paying suppliers is a problem. And some of the millions of Chinese individuals who invest their savings in wealth management products tied to real estate run the risk of losing their money.
According to Anne Stevenson-Yang, managing principal of J Capital Research in the United States, which conducts research and places short investment positions, or bets on a stock's decline, Evergrande's properties were "sold as a speculative investment, not sold as a place to live," People buy them because they believe the value will increase, "so obviously the confidence game will only work as long as people keep buying."
The public's trust is eroding. China's real estate market experienced another shock recently when Country Garden(2007.HK), another significant developer, skipped payments on two US dollar bonds and attempted to postpone repayment on a private onshore loan.
Evergrande's issues are not getting better. The troubled developer recently applied for a U.S. court's approval of the restructuring arrangements it offered for its offshore debt. Evergrande claims that its suggested restructuring strategy will reduce its offshore debts and assist the business in starting up again.
Evergrande announced losses of 33 billion yuan ($4.53 billion) for the first half of the year on Sunday, down from a loss of 66.4 billion yuan in the corresponding time last year.
After a 17-month suspension of trade, Evergrande's shares dropped 79% on Monday, erasing $2.2 billion from the company's market worth.
The company's downfall has caused Hui, 64, to lose tens of billions of dollars in personal net worth and forced him to sell off corporate assets quickly in order to pay off debt. Evergrande reported that as of June, there were more than 2,200 cases with a combined potential liability of almost 535 billion yuan ($73.40 billion).
As the country's economy already struggles due to decreased local and international demand, the rising debt issue in the Chinese real estate sector presents a serious challenge for President Xi Jinping and his policymakers. In the second quarter, China's economic output expanded at a sluggish rate.
Global markets are being affected by concern over the contagion extending to the nation's financial industry and the larger economy.
On behalf of the government, the State Council Information Office of China declined to respond to questions about the real estate market and the future of Evergrande. Requests for feedback from the housing authority and the finance ministry were ignored.

Christopher J. Mitchell

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