In January, more than 100 financial sleuths were dispatched to the Guangzhou headquarters of China Evergrande Group, a real estate giant that defaulted on $300 billion in debt a year ago. Its longtime auditor has just resigned, and a nation of homebuyers has directed its fury at Evergrande.
Police stood guard outside the building for protesters, and a new group of inspectors was allowed to enter. After six months on the job, auditors reported that Evergrande had lost $81 billion in the previous two years, far more than expected.
But they still had questions. Some of the records they requested from Evergrande were incomplete. Numbers were missing. Significant accounting errors or misstatements were not identified. How did things go so wrong at Evergrande – once one of China’s most successful companies?
China’s housing boom was the world’s biggest, and Evergrande’s rise was driven by the extravagant expansion, the system that fueled it, and the foreign investors who poured money into it. When China’s housing bubble burst, no other company stepped in in such spectacular fashion.
In 2021, Evergrande’s failure was increasingly blamed on a political directive from Beijing to cool the market by limiting property developers’ access to credit, depriving the debt-ridden company of cash to fund its operations.
But interviews with people close to Evergrande and a reconstruction of publicly available documents offer an alternative explanation: Questionable accounting and poor corporate oversight, leading to issues like the missing $2 billion, had already led the company to disaster.
The scale of Evergrande’s rise was staggering. For three decades, it wielded power in Beijing and cities and towns thousands of miles away. The success made its founder and chairman, Hui Ka Yan, one of the world’s richest men and enriched an entire ecosystem — from local governments that sold land to Wall Street banks that charged fees to raise money.
The breadth of Evergrande’s stumbles is mind-numbing. The company promised hundreds of thousands of homebuyers apartments that it never built. It took billions of dollars from families and employees, some of which disappeared. It took labor from construction workers, painters and real estate agents without compensation, with unpaid bills that reached $140 billion.
Today Evergrande is in default, unable to pay its debts but not officially closed. Its stock trades for one share. On Monday, a legal effort to force its liquidation was prolonged: a The judge adjourned the hearing In a lawsuit to formally dissolve the sprawling company to pay back some of the investors who lost money.
Evergrande officials and its representatives did not respond to several requests for interviews or comment.
A housing boom that was overpriced, overbuilt and overleveraged.
China’s housing boom began when Mr. Hui started Evergrande in 1996 in the city of Shenzhen, a special economic zone where the Chinese Communist Party was experimenting with capitalism.
Evergrande expanded beyond Shenzhen as China underwent massive urbanization, and was the center of the world’s largest movement of people from the countryside to the cities. Mr. Hui has associated himself with the families of some of China’s top officials. He is Wen Jiahong, The brother In 2002, China’s then Vice Premier Wen Jiabao joined Evergrande’s board of directors.
By the time Evergrande launched its public stock offering in Hong Kong in 2009, it was already facing questions about its reckless expansion. Foreign investors, including many American private equity funds, hedge funds and Wall Street banks shoveled A few years ago there was pied up money, and debt in real estate companies. Mr. Hui had hoped to raise $1.5 billion, but the company ended up taking $722 million from its share listing.
Around the world, a global financial crisis was reverberating, starting with a plunge in housing prices in the United States. But in China, after a brief and steep recession, the government pumped $500 billion into building roads and railways, boosting growth and allowing China to emerge from the crisis before other countries. By listing its shares in Hong Kong, Evergrande had access to money outside China to buy land in China. Dozens of other developers were doing the same. Three of them — Kaisa Group, Yuzhou Properties and Fantasia Holdings — raised money in the same week as Evergrande They all have defaults.
By 2010, The market was showing signs of overheating. Home prices are rising faster than average household incomes. Economists soon warned that China’s housing market was overpriced, oversupplied and its developers oversold.
Chinese homebuyers continue to flock to construction projects anyway. As cities fill up with new apartment blocks, developers look further afield to satellite towns and more rural areas.
Prospective buyers were led through showrooms and model apartments and then given a paper to sign. For a third of the price of an apartment, and sometimes more, they bought a promise, an apartment not yet built. For families with little room to accumulate wealth, it was hard to imagine that a bet on real estate could go wrong.
But things went wrong. Over the past decade, authorities have tried to rein in lending, but real estate companies have found ways around each restriction, sometimes cutting corners on apartments, other times removing loans from their balance sheets. Finally, in 2020 a policy that made it harder to borrow started to tip over developers’ progress.
Estimates range on how many apartments will be vacant. He Keng, former deputy head of China’s Bureau of Statistics, Recently mocked About an estimate that the number of empty houses was not enough for three billion people. “That estimate may be a bit high,” he said in a video released by China News Media. “But 1.4 billion people probably can’t meet them.”
‘The biggest bubble in history.’
For months in 2021, Evergrande kept global markets on edge as it approached default, testing a belief that some Chinese companies were too big So that the authorities allow them to fail. Foreign investors continue to buy real estate developers’ bonds, even as one of the biggest beneficiaries of the housing boom, real estate mogul Wang Jianlin, to warn That China’s housing market was “the biggest bubble in history.”
On December 9, three days after Evergrande missed interest payment deadlines on some bonds, a credit rating agency declared the company default. The speed at which set a the struggle Investors, homebuyers, suppliers and banks to get how they were owed.
Evergrande’s downfall was just one domino in a falling line. Since then, 46 developers have defaulted, a landscape of boarded-up construction sites, angry home buyers and unpaid builders. Worried about social unrest, the authorities have quietly pressured companies to continue building apartments. Evergrande had built 300,000 apartments in 2022 after the company talked to its lenders about repaying them.
But years of poor corporate governance and bad behavior at Evergrande spilled over into the public eye as it became harder to get financing.
Three months after its default, Evergrande said $2 billion was seized by banks. An internal investigation followed published Those top executives had developed a plan to get around the borrowing limits by the end of 2020 by arranging loans for third parties using Evergrande’s subsidiaries as collateral.
The investigation concluded that the plan violated the company’s disclosure and compliance obligations.
Even so, some employees said it was “not their place to question matters known and manipulated by their superiors,” according to the investigation.
Top executives, including the chief financial officer and chief executive officer, resigned. According to the internal report signed by founder Mr. Hui, “the behavior of certain managers at the time fell below the company’s expected standards.”
This January, Evergrande’s longtime auditor, PricewaterhouseCoopers, resigned and said it could not complete its work. Hong Kong’s Accounting and Financial Reporting Council has already announced two reviews of Evergrande’s books. A little-known accounting firm, Prism Hong Kong and Shanghai, was brought in to do the job.
Prism said in July that Evergrande lost a combined $81 billion in 2021 and 2022. That’s up from $1 billion in profits in 2020, compared to what the company said it would be. The new audit found clues that Evergrande treated the money it received for apartments as revenue even though at times it had not yet built those apartments.
Evergrande after new audit agreed To change how it recognizes revenue in its account through documentation that an apartment is first created.
which was the wealth management arm of Evergrande to pitch Short-term and high-interest products were available to home buyers and employees when money was tight, to say Investors will not be able to make payments in the month of August.
Within weeks, the police detained staff of the asset management unit. Chinese media reported that the company’s former chief executive, its chief financial officer and the former chairman of Evergrande’s life insurance unit were also detained.
Behind the scenes, the company’s management team in Hong Kong was making progress toward a restructuring deal with foreign lenders and private lenders. Then, on September 24, Evergrande said it had to reevaluate and cancel the deal. A few days later, it was revealed that Mr. Hui had been arrested.
Chinese social media lit up with comments about how Mr Hui had become an “enemy of the Chinese people”. People turned their anger into a move by foreign investors and companies File for bankruptcy Protection. Celebrity entrepreneurs foreign homebuyers get a share of the rest of the company.
Mr. Hui has paid more than $7 billion in dividends to himself and his wife since taking the company public in 2009, according to company filings. He has told people for at least two years that he and his wife are divorced, according to two people with direct interaction with the company who were not authorized to speak to the media. The August filing indicated that he and his wife were no longer married. The property transferred to his ex-wife will be disputed.
Two years after it defaulted, it is still uncertain how the company will fare, how much money will be left and who will get it.
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