How Evergrande’s Chief Tried to Turn Things Around—and Failed
After seeking government help, the property developer made promises to Chinese citizens that it didn’t keep
Hui Ka Yan, once one of the world’s richest men, led China Evergrande EGRNQ 0.00%increase; green up pointing triangle through its rise and fall. His failures in the aftermath made the property developer’s collapse a bigger problem for the country’s slumping housing market.
In 2021, when Evergrande slid into financial distress, the real estate giant turned to government officials for help resolving a mountain of debt that it couldn’t repay. Chinese authorities and regulators agreed to help defuse the developer’s risks—with conditions. Hui, Evergrande’s founder and chairman, pledged to give priority to the construction and completion of numerous homes that the company had presold to households across the country. Evergrande also promised to fully repay domestic investors who had purchased its wealth-management products following protests at its headquarters.
Two years later, around 800,000 of Evergrande’s roughly 1.2 million presold housing units remain unfinished, according to a Wall Street Journal analysis of the company’s regulatory filings. Construction at some of Evergrande’s residential projects in Hefei, Zhengzhou, Chengdu and other cities has slowed or stalled. Money stopped flowing to the holders of Evergrande’s wealth products in August, causing investors to cry foul again.
Hui’s broken promises have angered Chinese citizens who sank billions of dollars into its uncompleted apartments and investment products—adding to Beijing’s challenges of unwinding a broader property mess and restoring home buyers’ confidence in the housing market. Continuously declining nationwide home sales have shaken even the sector’s stronger developers. This month, another property giant, Country Garden, succumbed to a liquidity crisis and said it can’t pay off its international debt after its sales plunged.
Chinese regulators last month blocked an offshore debt restructuring and business-turnaround plan that Evergrande and its advisers had painstakingly put together. Hui has been placed under police surveillance and is being investigated for possible crimes, throwing the developer further into disarray. Authorities are probing whether the 65-year-old attempted to transfer assets overseas when Evergrande failed to complete and deliver its presold projects, The Wall Street Journal reported earlier.
A group of Evergrande’s bondholders warned this week that the cancellation of its restructuring plan could lead to “an uncontrollable collapse of the group,” with serious ramifications for other companies in the sector.
“Hui is essentially synonymous with the firm,” said Christopher Beddor, deputy China research director at Gavekal, a research firm. “Evergrande’s operations onshore by all accounts appear to be very heavily regulated at this point, including its dealings with bondholders and its most politically important creditors—which are the home buyers who have not received the pre-sold units.”
The effective detention of Hui was a sudden comedown for a rags-to-riches billionaire who had boldly declared in 2021 that Evergrande would stage a comeback as a successful electric-vehicle company with a much smaller property business—comments that were widely published in Chinese state media. The automaker has been unable to get its business off the ground because of cash-flow problems, and now a $500 million capital injection by an external investor is also in jeopardy.
Hui was born in 1958 and grew up in Zhoukou, one of the poorest cities in China’s central Henan province. After graduating from a university in Wuhan, he worked at a state-owned steel factory and a trading firm before starting Evergrande in 1996 in Guangzhou, in the country’s south. Two decades later, the company became the largest Chinese developer by sales.
As his wealth grew, Hui traversed the world in private jets and invested in a soccer club, hospitals, and grain and oil businesses. He became a member of China’s top political advisory body in 2008 and joined an elite standing committee in 2013. Hui rubbed shoulders with other billionaires including Alibaba co-founder Jack Ma, and toured the campus of Harvard University in 2018 with the school’s then-president, Lawrence Bacow.
As Evergrande’s majority shareholder, Hui and his family collected the equivalent of around $7.1 billion in stock dividends from the company over the years, according to regulatory filings. His personal wealth was valued at more than $40 billion by Forbes in 2017.
When investors started becoming nervous about Evergrande’s breakneck growth and its growing liabilities in 2018, Hui made a public show of support for the developer by investing $1 billion in its U.S. dollar bonds that paid up to 13.75% in annual interest.
In 2019, Hui, who had been named a professor at his alma mater, advised on a master’s degree dissertation by a student titled “Research on an Early Warning Model for Financial Risks of Real Estate Companies from a Cash Flow Perspective.” The study concluded that Evergrande had low liquidity risk. Hui sold his international-bond holdings that year and bought more Evergrande dollar bonds in 2020.
The party stopped for Evergrande after Chinese regulators imposed curbs on property developers’ leverage in 2020 in a policy widely known as the “three red lines.” Some banks started to demand early loan repayments, and investors stopped buying its bonds. By mid-2021, Evergrande’s cash crunch had made it unable to pay suppliers of building materials and construction services, and work stopped at hundreds of its property projects.
Evergrande sought government help and in late 2021 turned to officials in Guangdong, the southern Chinese province where it is based, for assistance. It didn’t get a bailout, but the local government dispatched a working group to the developer to help manage its risks and operations. Those actions received support from China’s central bank and other financial regulators.
Chinese authorities let Evergrande default on its international bonds, betting that the fallout could be contained and that its business could be slowly dismantled.
Hui continued to lead the developer and worked on its offshore-debt restructuring plan. He made constant promises through much of 2022 to complete the construction of homes and deliver them to buyers.
State-owned enterprises took on some of Evergrande’s assets and a local government in its home province let the developer back out of a big contract to build what would have been the world’s largest soccer stadium. Those actions helped shave off some of Evergrande’s liabilities, which topped the equivalent of $300 billion.
What regulators didn’t foresee was how Evergrande’s problems would continue to mount and how its finances were far more tangled than was publicly known. Banks last year seized $2 billion in cash at Evergrande’s property-services unit, revealing convoluted lending arrangements that the company hadn’t disclosed previously. Evergrande and its subsidiaries had also raised around $13 billion by selling wealth-management products that weren’t recorded on its balance sheet.
In the summer of 2022, groups of home buyers around the country who were frustrated at the slow progress of construction at apartments purchased from Evergrande and other troubled developers began protesting online and threatened to walk away from their mortgages. Chinese authorities managed to quell the discontent but it showed what was at stake if Evergrande didn’t fulfill its promise to finish homes.
In quarterly updates that ran through September 2022, Evergrande said it had over 700 pre-sold but unfinished projects, of which 668 had resumed construction. Hui oversaw numerous internal company meetings and said Evergrande was working round the clock to deliver homes and pay off its debts. By the end of last year, the company said it delivered a total of 301,000 apartments.
Some Chinese citizens who took ownership of their homes from Evergrande complained on social media that their apartments were still unfinished, and lacked painted walls or flooring that they had paid for. Others said they are still waiting for their units to be completed, as construction has ground to a halt or made slow progress.
Evergrande also struggled to repay holders of its wealth-management products after coming up with a plan to pay them the equivalent of $1,100 a month. That amount was cut to $275 last November before the payments were stopped entirely in August. It still owed investors the equivalent of $4.7 billion as of the end of 2022.
The company’s debt restructuring plan, which was unveiled in March but ultimately blocked by Chinese regulators, involved swapping its defaulted bonds with new securities, which would also have benefited Hui as one of the company’s offshore creditors.
“The government doesn’t have an incentive to make Evergrande disappear tomorrow, because it will be a huge loss for the confidence of investors overall in a market where the demand is still weak,” said Gianfranco Siciliano, a professor at China Europe International Business School.
“The future is very blurred, very uncertain,” given what happened to Hui, he said. But it is clearer now than “before that the company is probably not going to survive.”