In January, more than 100 financial detectives were dispatched to the Guangzhou headquarters of China Evergrande Group, a real estate giant that had defaulted a year earlier with $300 billion in debt. Its longtime auditor had just resigned, and a nation of homebuyers had turned its ire on Evergrande.
Police, alert for protesters, stood guard outside the building and the new team of inspectors were given permission to enter. After six months of work, auditors reported that Evergrande had lost $81 billion over the past two years, far more than expected.
But they still had questions. Some documents requested by Evergrande were incomplete. Numbers were missing. It may be that important accounting errors or incorrect information went undetected. How could things go so wrong for Evergrande – once one of China’s most successful companies?
China’s real estate boom was the strongest the world has ever seen, and Evergrande’s rise was fueled by its predatory expansion, the system that fueled it and foreign investors who threw money at it. When the real estate bubble burst in China, no other company imploded in such a spectacular way.
In 2021, blame for Evergrande’s failure was clearly attributed to a policy directive from Beijing to cool the market by restricting real estate developers’ access to credit and depriving the indebted 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, which led to problems such as the disappearance of $2 billion, had already driven the company to disaster.
The scale of Evergrande’s rise has been breathtaking. For three decades it wielded power in Beijing and in cities and towns thousands of miles away. The success made its founder and chairman, Hui Ka Yan, one of the richest people in the world and enriched an entire ecosystem – from the local governments that sold him land to the Wall Street banks that charged him fees for raising money calculated.
The extent of Evergrande’s stumble was astounding. The company promised homes to hundreds of thousands of homebuyers that it never built. It has taken billions of dollars from families and employees, some of whom have disappeared. It has taken labor from construction workers, painters and real estate agents without compensation, unpaid bills that total $140 billion.
Today, Evergrande remains insolvent, unable to pay off its debts, but is not officially dissolved. The stock trades for a few cents per share. On Monday, a legal attempt to force liquidation was extended: A judge postponed a hearing in a lawsuit aimed at formally winding up the sprawling company to repay some of the investors who lost money.
Evergrande officials and its representatives did not respond to multiple requests for interviews or comment.
A real estate boom that was overpriced, overbuilt and over-indebted.
China’s real estate boom began around the time Mr. Hui founded 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 experienced massive urbanization and was central to the world’s largest migration of people from rural areas to cities. Mr. Hui has endeared himself to the families of some of China’s top officials. In 2002, he appointed Wen Jiahong, the brother of China’s then Vice Prime Minister Wen Jiabao, to the board of Evergrande.
When Evergrande began selling shares to the public in Hong Kong in 2009, the company was already facing questions about its voracious expansion. Foreign investors, many of them American private equity funds, hedge funds and Wall Street banks, had poured money into real estate companies several years earlier, and the debts were piling up. Mr. Hui had hoped to raise $1.5 billion, but the listing of its shares ultimately left the company with $722 million.
There was a global financial crisis all over the world, which began with a collapse in real estate prices in the United States. But in China, after a short and sharp downturn, the government pumped $500 billion into building roads and railways to boost growth and allow China to emerge from the crisis ahead of 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 did the same. Three of them – Kaisa Group, Yuzhou Properties and Fantasia Holdings – raised money in the same weeks as Evergrande. Since then they have all become insolvent.
In 2010 the market showed signs of overheating. Real estate prices rose faster than average household income. Economists soon warned that China’s real estate market was overpriced, supply was overbuilt and developers were over-indebted.
Chinese home buyers continued to flock to construction projects anyway. As cities filled with new apartment blocks, developers looked further into satellite towns and more rural areas.
Prospective buyers were guided through showrooms and model apartments and were then given a piece of paper to sign. For a third of the price of the apartment, sometimes even more, they bought a promised apartment that had not yet been built. For households with few options for storing their assets, it was hard to imagine how a bet on real estate could go wrong.
But something went wrong. Over the last decade, authorities have tried to curb lending, but real estate companies have found ways to get around every restriction, sometimes cutting corners on housing and sometimes removing debt from their balance sheets. Finally, a policy in 2020 that made borrowing more difficult began to rattle developers.
Estimates vary as to how many apartments are still empty. He Keng, a former deputy head of China’s statistics bureau, recently joked about an estimate that the number of vacant homes is not enough for three billion people. “This estimate might be a bit high,” he said in a video published by China News Media. “But 1.4 billion people probably can’t fill it.”
“The biggest bubble in history.”
For months in 2021, Evergrande kept global markets on tenterhooks as it teetered on the brink of default, testing the belief that some Chinese companies were too big for authorities to fail. Foreign investors continued to buy bonds from property developers even after one of the property boom’s biggest beneficiaries, real estate mogul Wang Jianlin, warned that China’s property market was “the biggest bubble in history.”
On December 9, three days after Evergrande missed a deadline to pay interest on some bonds, a ratings agency declared the company insolvent. This sparked a battle between investors, home buyers, suppliers and banks over how to access their debt.
Evergrande’s collapse was just one domino in a falling line. Since then, 46 more developers have gone bankrupt, leaving behind a landscape of boarded-up construction sites, angry homebuyers and unpaid builders. Concerned about social unrest, authorities quietly urged companies to continue building housing. Evergrande built 300,000 apartments in 2022 while the company discussed repaying them with its creditors.
But years of poor governance and bad behavior at Evergrande came to light as it became increasingly difficult to obtain financing.
Three months after its default, Evergrande said banks had seized $2 billion. An internal investigation later found that top executives devised a plan in late 2020 to circumvent borrowing restrictions by arranging for third parties to take out loans and use Evergrande subsidiaries as collateral.
The investigation found that the plan violated the company’s disclosure and compliance obligations.
Still, some employees said that “it was not their place to question a matter that was known to and promoted by senior executives,” the investigation says.
Top managers, including the chief financial officer and chief executive officer, resigned. “The conduct of some directors at the time fell short of the standards expected by the company,” said the internal report, signed by Mr. Hui, the founder.
In January this year, PricewaterhouseCoopers, Evergrande’s long-time auditor, resigned, saying he could not complete his work. The Accounting and Financial Reporting Council of Hong Kong had already announced two reviews of Evergrande’s books. A little-known accounting firm, Prism Hong Kong and Shanghai, was hired to do the work.
Prism said in July that Evergrande lost a total of $81 billion in 2021 and 2022. Compared to the company’s 2020 figures, that represented a profit of $1 billion. The new audit found evidence that Evergrande had treated money it received for apartments as income, even though at times the company had not yet built those apartments.
After the new audit, Evergrande agreed to change the way it records revenue in its accounts and require documentation that an apartment was built for the first time.
Evergrande’s asset management arm, which had offered short-term and high-yield products to homebuyers and employees when money was tight, told investors in August that it was unable to make payments.
Within weeks, police arrested employees of the asset management unit. Chinese media reported that the company’s former chief executive, its chief financial officer and the former chief executive of Evergrande’s life insurance division were also arrested.
Behind the scenes, the company’s management team in Hong Kong was making progress toward a restructuring agreement with foreign creditors and private lenders. Then, on September 24, Evergrande said it needed to reevaluate and canceled the deal. A few days later, it was announced that Mr. Hui had been arrested.
Chinese social media is abuzz with comments about Mr. Hui having become “an enemy of the Chinese people.” People directed their anger at foreign investors and the company’s attempt to seek bankruptcy protection. Prominent business owners gossiped about foreigners buying part of the remaining company owned by the homebuyers.
According to company filings, Mr. Hui had paid himself and his wife more than $7 billion in dividends since the company went public in 2009. He has been telling people for at least two years that he and his wife were divorced, according to two people who had direct interactions with the company and were not authorized to speak to the media. The August documents show that he and his wife were no longer married. Assets that were transferred to his ex-wife are controversial.
Two years after bankruptcy, it is still uncertain how the company will be wound up, how much money will be left and who will get it.