Evergrande’s ascent and descent- Unravelling China’s real estate crisis

Evergrande’s ascent and descent: Unravelling China’s real estate crisis

By AR Alok

“In the annals of Chinese real estate, Evergrande Real Estate Group Ltd emerges as a testament to entrepreneurial vision and rapid growth. Established in 1996 during a period of extensive urbanisation in China, the company’s journey began in Guangzhou province, not far from bustling Hong Kong. Founded by the enterprising businessman Hui Ka Yan, also known as Xu Jiayin, Evergrande initially bore the name Hengda. However, Evergrande is no ordinary real estate company; it operates as a holding company with diverse subsidiaries engaged in various property-related sectors, including development, investment, management, and construction within China. What truly sets Evergrande apart is its global reach. Besides its operations in China, the company expanded its footprint beyond national borders, incorporating in the Cayman Islands, a British Overseas Territory. Headquartered in the prestigious Houhai Financial Centre in Shenzhen’s Nanshan district, Evergrande boasts a modern base that mirrors its commitment to innovation.

Meteoric Rise of Real Estate Giant

After graduating in 1982, Xu Jiayin spent nearly a decade as a steel technician, indirectly gaining insights into the real estate sector by monitoring steel demand for construction. In a pivotal career shift, he became a salesman for a property developer, sowing the seeds for Evergrande. The catalyst for his entrepreneurial journey was the surging demand in real estate driven by China’s growing population and the cultural imperative of owning a home before starting a family. Evergrande’s unique success lay in its bold business model, featuring substantial borrowing and the innovative strategy of aggressively selling apartments before construction completion, often referred to as “Ghost selling.” This approach allowed the company to accumulate ample funds for its projects. Once finished, these properties were sold at significant profit margins, capitalising on robust housing demand among young Chinese citizens.

In 2009, Evergrande underwent a transformational moment by going public on the Hong Kong Stock Exchange (HSEK), raising a staggering $722 million USD in capital. Xu Jiayin’s path to this milestone was paved with support from like-minded business tycoons he had met through his association with the Hong Kong Business Club. The camaraderie formed during friendly card games of Big Two (Diai Di) at the Big D Club led to valuable business connections. These connections played a pivotal role in raising funds from the stock market, propelling Evergrande’s rapid growth.

Evergrande’s Political Ties- China’s complex landscape

In the epic tale of Evergrande Real Estate Group Ltd’s meteoric ascent, political alliances have emerged as a pivotal driving force, catapulting the company to unprecedented heights. What commenced in the vibrant ambiance of the Big D Club has evolved into strategic partnerships with influential political figures.

Thriving in China’s intricate business landscape necessitates adeptly navigating the complex web of political connections. As the business scale expands, the demand for substantial political support grows in tandem. Herein, the influential Zeng faction enters the scene, a formidable political entity that has exerted substantial influence within China’s political realm. Notable figures within this faction, including Zeng Qinghuai, who previously headed Hong Kong, and Zeng Qinghong, the overseer of Hong Kong’s political machinery until 2017, have played instrumental roles in shaping Xu Jiayin’s business empire. The extensive control exercised by the Zeng family over various government domains, spanning law enforcement to administrative functions, provided Evergrande with the crucial support it needed to flourish in a fiercely competitive landscape.

Furthermore, Xu Jiayin’s personal political affiliations have proven integral to Evergrande’s prosperity. As a dedicated Communist Party member for over three decades, his steadfast commitment to the party’s principles and values has been unwavering. His active role as a member of the Chinese People’s Political Consultative Conference, an exclusive assembly comprising government officials and business leaders, further cemented his standing at the intersection of politics and business.

Gravity of Evergrande Real Estate Crisis

The second-largest real estate giant, Evergrande, found itself perched precariously on the edge of a severe liquidity crisis. The release of harrowing financial reports unveiled a grim truth—a jaw-dropping accumulated loss of $81 billion for the years 2021 and 2022. This bleak financial performance sent shockwaves through the financial world, illuminating the profound extent of the company’s financial woes. Equally disconcerting is the colossal scale of Evergrande’s liabilities. In 2021 alone, the company’s total liabilities ballooned to a staggering 2.4 trillion yuan or $335 billion USD, marking a 23% surge from the previous year. The indicator of current borrowings, a crucial gauge of the company’s financial strain, tallied up to 587.1 billion yuan at the close of 2022.

Perhaps one of the most telling signs of Evergrande’s financial unravelling is its dwindling cash reserves. The company’s total cash reserves plummeted to a mere 14.3 billion yuan, a stark contrast to the 28.8 billion yuan it held in 2021 and the substantial 180.7 billion yuan in 2020. This precipitous decline in cash reserves underscored the severity of its liquidity crunch. To put the scale of Evergrande’s downfall into perspective, it is worth noting that before the crisis unfolded two years ago, the company boasted a workforce of over 200,000 employees. It consistently generated annual revenues exceeding $110 billion, and its vast portfolio included over 1,300 developments spanning numerous cities. However, the company’s fortunes have taken a severe hit. By the end of last year, Evergrande’s workforce had dwindled by a staggering 17%, reducing its employee count to 102,910. Concurrently, the total value of its assets also plummeted, falling to 1.838 trillion yuan (equivalent to $256 billion USD). These distressing figures have cast a shadow of insolvency over Evergrande, once an industry giant.

Evergrande’s Fate and Its Owner’s Destiny

The recent arrest of Evergrande’s Xu Jiayin has ignited speculation and intrigue, primarily due to his estimated $600 million in overseas wealth. In such cases, substantial wealth often becomes a catalyst for intricate legal and political manoeuvring. While crimes, even economic ones, may carry a maximum life imprisonment penalty, the influence of wealth and political connections can potentially lead to significantly reduced sentences. This disparity in the application of justice is a global concern, exemplified by cases like Jack Ma’s sudden disappearance after his actions drew international attention.

In China’s history, both state-owned enterprises and prominent private companies have operated with a degree of moral hazard, comfortably embracing high leverage and risky investments. They assumed that the government would step in during crises to provide financial rescue, a belief factored into risk assessments by domestic and foreign investors. However, Beijing’s recent allowance of defaults by state-owned entities, like Yongcheng Coal, Huachen Automotive, and Tsinghua Unigroup, marked a notable departure from this practice. The Communist Party of China no longer proactively prevents “debt bombs” from detonating, reserving intervention for economically vital enterprises, as seen with Huarong Asset Management.

Yet, the case of Evergrande stands apart. The Chinese Communist Party has not displayed the same urgency to bail out the company, refraining from categorising it as “too big to fail.” This approach has left what appears to be a ticking time bomb, with the party seemingly willing to let events unfold without immediate intervention.

China’s stance on Evergrande Amidst Crisis

Amid China’s 2021 objectives emphasising deleveraging and de-risking, the chances of a rescue for the “world’s most indebted property developer,” Evergrande, are dwindling. What was once synonymous with corporate extravagance and aggressive credit leveraging during heightened middle-aged population demand has now transformed into an emblem of a shifting landscape. The CCP’s “three red lines” policy, with a focus on debt-to-equity, debt-to-cash, and debt-to-assets ratios, clearly signals the Party’s determination to rein in excessive indebtedness within the real estate sector. This strategic alignment underscores President Xi Jinping’s unwillingness to resolve the looming real estate crisis.

In this nuanced landscape, myriad voices express their perspectives, with the true extent of Beijing’s commitment to de-risking remaining uncertain. Regardless of one’s viewpoint, prudence should be the guiding principle for investors. In the unfortunate scenario of a default, Beijing has left no room for ambiguity—bondholders will find themselves at the lowest rung of the ladder concerning potential bailout considerations.

The author is PhD Candidate in Chinese Studies with a specialization in Political Economy at the School of International Relations, Jawaharlal Nehru University, New Delhi.

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