Evergrande struggles offer glimpse into China’s new financial future
HONG KONG – Xu Jiayin was China’s richest man, a symbol of the country’s economic boom that helped transform poor villages into urbanized metropolises for the burgeoning middle class. As his company, China Evergrande Group, grew into one of the country’s largest real estate developers, he racked up the traps of the elite, with trips to Paris to taste rare French wines, a million dollar yacht , private jets and access to some of the most powerful people in Beijing.
“Everything I have and everything the Evergrande Group has achieved has been endowed by the party, the state and the whole of society,” Xu said in a 2018 speech thanking the Chinese Communist Party. for its success.
China is threatening to take it all away.
The debt that fueled the country’s rapid growth for decades is now jeopardizing the economy – and the government is changing the rules. Beijing has signaled that it will no longer tolerate the borrowing strategy to fuel the business expansion that has turned Mr. Xu and his company into a real estate powerhouse, pushing Evergrande to the brink of the precipice.
Last week, the company, which has over $ 300 billion in unpaid bills, missed a key payment to foreign investors. This left the world in panic over whether China was facing its own so-called Lehman moment, a reference to the collapse of the Lehman Brothers investment bank in 2008 that led to the global financial crisis.
The Evergrande struggles exposed the flaws in China’s financial system – unrestricted borrowing, expansion, and corruption. The corporate crisis is testing the resolve of China’s leadership reform efforts as they chart a new course for the country’s economy.
If they save Evergrande, they risk sending the message that some companies are still too big to fail. If they don’t, up to 1.6 million homebuyers are waiting for unfinished apartments and hundreds of small businesses, creditors and banks stand to lose their money.
“This is the beginning of the end of the Chinese growth model as we know it,” said Leland Miller, CEO of consulting firm China Beige Book. “The term ‘paradigm shift’ is always overused, so people tend to ignore it. But that’s a good way to describe what’s going on right now.
Mr. Xu and his company mirrored China’s own economic rise from an agrarian economy to an economy that embraced capitalism.
Mr. Xu was raised by his grandparents in Henan Province, a rural corner of central China. His mother died of a treatable illness when he was a baby; his family was too poor to pay for medical care. As a young boy, he lived under a thatched roof that could not keep the wind or the rain from entering. He ate sweet potato flour and studied on a clay desk.
“At the time, I was eager to be helped by others and was eager to find a job, leave the countryside forever, and eat wheat flour,” Mr. Xu said in his speech. 2018 speech, accepting an award for his charitable donations.
He went to college and then spent a decade working in a steel mill. He founded Evergrande in 1996 in Shenzhen, a special economic zone where Chinese leader Deng Xiaoping launched the country’s experiment with capitalism. As China urbanized, Evergrande expanded beyond Shenzhen, across the country.
Evergrande attracted new home buyers by selling them more than the tiny apartment they would get in a huge complex with dozens of identical towers. New Evergrande customers are embracing the lifestyle associated with names like Cloud Lake Royal Garden and Riverside Mansion.
Mr. Xu has grown Evergrande from a small company with less than a dozen employees to that of China’s most prolific developer through a combination of rampant borrowing and elite political connections. The company often invested heavily in projects in provincial capitals, where officials with ambition to become Politburo members were measured by their ability to create economic growth.
In the beginning, Mr. Xu cultivated relationships with the family members of some of China’s top officials. In 2002, among the company directors listed in Evergrande’s annual report was Wen Jiahong, the brother of Chinese Vice Premier Wen Jiabao, who oversaw the country’s banks as head of the Central Financial Labor Commission. .
Wen Jiabao became Chinese premier the following year. Not only was his brother a director of Evergrande, but he also once controlled the second-largest stake in the fast-growing company, according to corporate documents reviewed by the New York Times.
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In 2008, Mr. Xu joined an elite group of political advisers known as the Chinese People’s Political Consultative Conference.
“It could not have grown so big without the collaboration of the biggest banks in the country,” Victor Shih, professor of political science at the University of California at San Diego, said of Xu. “It suggests the potential help of senior officials with a lot of influence.”
According to the memoir of Desmond Shum, a well-connected businessman, Mr. Xu was also a power broker who dated elite Communist Party families. In his book “Red Roulette”, published this month, Mr. Shum recounts a European wine tasting and shopping session in 2011 that Mr. Xu attended, with the daughter of the fourth Communist Party official at the time, Jia Qinglin and her investor husband.
The party flew to Europe aboard a private jet, with the men playing a popular Chinese card game called “fight the owner.” At the Pavillon Ledoyen, a Parisian restaurant, the party spent over $ 100,000 on a wine tour, tasting magnums of Chateau Lafite wines, starting with a 1900 vintage and ending with a 1990. On a trip down the river French Riviera, Mr. Xu considered buying a $ 100 million yacht owned by a Hong Kong tycoon, Shum wrote.
To boost Evergrande’s growth, Mr. Xu often borrowed twice on every piece of land he developed – first from the bank, then from homebuyers who were sometimes willing to pay 100% of the value of their future. house before its construction.
As Evergrande and its competitors grew, real estate grew to account for up to a third of China’s economic growth. Evergrande has built over a thousand developments in hundreds of cities and created over 3.3 million jobs per year.
“Xu Jiayin represents a very important aspect of China’s economic reform,” Shih said. “He used his intelligence and daring to grow his business in a very, very aggressive, often dangerously, financial accounting perspective. “
With access to cheap money and unbridled ambition, Mr. Xu expanded into areas in which Evergrande had no experience or expertise, including bottled water, electric cars, pig breeding and professional sports.
Mr. Xu bought two private jets and used them to bring his football team, now called the Guangzhou Football Club, to the games. His electric vehicle company had a bold vision to become bigger and more powerful than Tesla; so far it has delayed mass production.
When the Chinese economy began to cool, the damage caused by Evergrande’s voracious appetite for debt became impossible to ignore. There are nearly 800 unfinished Evergrande projects in more than 200 cities across China. Employees, contractors and homebuyers staged protests to demand their money. Many fear they will become unwitting victims of China’s debt reform campaign.
Yong Jushang, a contractor from Changsha in central China, has still not been paid for the $ 460,000 in materials and work he provided for an Evergrande project that ended in May. Desperate not to lose his workers and business partners, he threatened to block roads around the development this month until the money is paid.
“It’s not a small amount for us,” Mr. Yong said. “It could bankrupt us.”
Mr. Yong and others like him are at the heart of regulators’ biggest challenge facing Evergrande. If Beijing tries to make Evergrande an example by letting it collapse, the wealth of millions of people could disappear with Mr. Xu’s empire.
“It’s crazy if they do, too bad if they don’t,” said Michael Pettis, professor of finance at Peking University. “Beijing should have acted 10 years ago. They are now stepping in to try to reform real estate because the prices are way too high. The longer they wait, the more expensive it becomes to repair the model.
In August, Evergrande executives were summoned by regulators, who warned them to keep the company’s debt under control. Amid fears that an Evergrande disappearance could spread through the Chinese economy, Beijing triggered a flood of capital into China’s banking system last week, a move that was seen as an attempt to calm nervousness. of the market.
“It’s a much bigger problem than Evergrande itself,” said Logan Wright, China research director at consultancy firm Rhodium Group. “Beijing has waged an important fight against real estate speculation, so you don’t want to be seen as a setback against this fight. You don’t want to back down as it will hurt your credibility.
Mr. Xu has stayed out of the spotlight most of the time, his evolution from poverty stricken boy to property tycoon no longer useful for the national narrative.
His company tried to sell some of its assets to raise new funds, but had little success. Homebuyers recently took to the streets and complained online about construction delays. The central bank has put Evergrande on notice.
And China’s increasingly nationalist commentators are calling for the company’s demise. Indebted corporate giants like Evergrande have been given the freedom to “open their bloody mouths and devour the riches of our country and our people until they are too big to fall,” Li Guangman, a retired newspaper editor whose recent views have come under fire. platform by the state’s official media, wrote in an essay.
Without proper intervention, Li argued, “China’s economy and society will rest on the crater of the volcano where anything can ignite at any time.”
Michael Forsythe reported from New York. Matt phillips contributed to New York reporting.