As Evergrande grew increasingly laden with debt, the company resorted to ever more unorthodox strategies to generate funds
In the beginning, Hui Ka Yan followed a simple formula. Borrow to buy land. Sell homes on the site before they are built. Use the cash to pay lenders and finance the next real estate project.
Evergrande said Mr. Hui wasn’t available for an interview. Neither the founder nor the company responded to written requests for comment, including about whether employees were encouraged to purchase financial products, Mr. Hui’s management style, the company’s business practices and the challenges it faces.
Evergrande’s properties were “sold as a speculative investment, not sold as a place to live,” said Anne Stevenson-Yang, managing principal at J Capital Research in the United States, which produces research and takes short investment positions, or bets on a stock’s decline. People purchase them because they think the value will appreciate “so obviously the confidence game will only work as long as people keep buying.
For 64-year-old Mr. Hui, the company’s decline has destroyed tens of billions of dollars of his personal net worth and necessitated the frenzied sale of corporate assets to help repay debt. The company faces a legal onslaught, too: Evergrande said there were more than 2,200 lawsuits totalling roughly 535 billion yuan in potential liability as of June.
He founded Evergrande in 1996, as China was dismantling its system of state-provided housing and urbanizing fast. About a third of Chinese lived in cities then. Now, about two-thirds do. When in Hong Kong, he mixed with the city’s property tycoons, playing cards and cutting investment deals with them, according to three people with knowledge of the meetings. Mr. Hui ate at Hong Kong’s elite members-only Dynasty Club, dining on Chinese delicacies such as bird’s nest soup and shark fin soup, the person familiar with the company said.
In 2016, with China’s property prices on a tear, Evergrande overtook its main rival to become the country’s No. 1 developer by sales. The company’s land reserves reached 312 million square metres, double just two years earlier. Management did cut some bonuses as a result, said the former employee, who had worked at HengTen. The person familiar with the company, who spoke of Mr. Hui’s dining habits in Hong Kong, said targets for purchasing financial products were widespread at Evergrande and also said staff would be penalized for not meeting their quotas.
Evergrande Wealth, a unit of Evergrande Group’s Evergrande Financial Holding Group, didn’t respond to requests for comment. China’s banking regulator also didn’t respond to requests for comment. Mr. Hui, who had already expanded into other businesses ranging from plastic surgery to life insurance, continued to invest in new ventures. By 2019, he was making a foray into electric cars.In early 2020, Mr. Hui publicly reiterated a pledge to “significantly lower” his company’s debt. But keeping Evergrande afloat was about to get a lot more difficult.
One place the company sought funds from was so-called trust firms, as Reuters reported in 2020. Dubbed “shadow banks,” because they operate outside many of the rules that govern commercial banks, trust firms were keen to capitalize on the needs of an industry eager for credit. And they could charge far higher interest rates than the closely regulated banks.
Last year, three senior executives stepped down after an initial probe said they were involved in diverting the loans.Neither Mr. Hui nor the company responded to questions about whether Evergrande used special-purpose vehicles to purchase and resell bonds or on the loan diversions. The company has said it was in talks with the property-services subsidiary about a repayment schedule and has adopted measures to address potential internal control weaknesses.
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