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 following real estate project. Starting in the mid-1990s, this approach was enormously lucrative for two decades as Chinese home prices soared. It transformed Hui, a former steel industry employee from a rural village, into China’s richest man. It turned his company, China Evergrande Group(3333.HK), into a vast real-estate empire.
But by 2018, as he sought to lower his debt, Hui was at odds with China’s regulators. The government was increasingly limiting how much debt developers could take on. The reversal sparked fears of a property crisis and even some comparisons to Lehman Brothers’ collapse in 2008.
As Evergrande’s debt pile swelled, it also owed hundreds of billions to suppliers and contractors, now suffering economic hardship. Sometimes, they have shut down construction sites, blaming lack of payment. The firm’s financial woes have made some home buyers nervous. Still, many others remain optimistic that the developer will be able to secure enough last-minute financing or be granted an extension on outstanding loans to keep its operation going.
Evergrande’s default may end up being like a canary in a coal mine, with ripples felt by millions of homebuyers and suppliers who had bought apartments off-the-plan from the company. It is one of the most critical tests yet for Beijing’s willingness to break up huge corporate conglomerates that have accumulated too much debt and how it will cope with the fallout from their failure.
In an interview at the site of a stalled project in Taicang, Hui acknowledged that his company is “struggling.” He said he believes he can still get the money to stay afloat. He has been a vocal supporter of President Xi Jinping’s policies and has publicly paid tribute to the ruling Communist Party. Montreal-based researchers who study Chinese elite politics say that being invited to the party’s anniversary at Tiananmen Square this year was a sign that Hui is still on leader Xi’s radar, even as he struggles financially.
But if the company is allowed to fail, it will be a stinging reminder of Beijing’s determination not to ease controls on the economy to stimulate growth. The default will also signal that the government is more willing to let companies considered too big fail than in the past, even if that results in painful disruptions and uncertainty for borrowers, suppliers, and investors. And it could set a precedent for China to allow more defaults in the future as it tries to weed out overleveraged corporate giants. Creditors that rank low on the list of creditors for Chinese firms that go bankrupt will likely see their claims wiped out. Those higher-ups will have more chance of getting their money back, but that is far from a guarantee.
