Under the leadership of Xu Jiayin, who once ranked at the forefront of the global billionaire list, China Evergrande (3333. HK) has experienced ups and downs. After the real estate developer's thunderstorm, due to the repeated failures of Xu Jiayin, the Evergrande crisis has brought greater problems to the sluggish Chinese real estate market.
In 2021, China Evergrande, which was in financial difficulties, sought help from government officials to solve its inability to repay its massive debts. The relevant departments and regulatory agencies of the Chinese government have agreed to conditionally assist this real estate giant in resolving risks. As the founder and chairman of China Evergrande, Xu Jiayin promised to prioritize the construction and completion of a large number of residential properties pre-sale by the company to families across China. After being surrounded by protesters at the company headquarters, China Evergrande also promised to fully repay domestic investors who purchased its wealth management products.
Two years later, according to the Wall Street Journal's analysis of China Evergrande's regulatory announcement, about 800000 out of the company's approximately 1.2 million pre-sale properties were still unfinished. The construction progress of some residential projects at China Evergrande in multiple cities such as Hefei, Zhengzhou, and Chengdu has slowed down or stagnated. In August of this year, Evergrande's financial products ceased to be redeemed, once again causing dissatisfaction among investors.
Due to Xu Jiayin's dishonesty and breach of contract, many Chinese people are greatly angry. They have invested a huge amount of money in China Evergrande's unfinished apartment projects and investment products, and the Chinese government is facing greater challenges in resolving the chaos in the real estate market and restoring home buyers' confidence in the housing market. Housing sales across China are deteriorating, and even strong developers in the industry are on the verge of collapse. This month, another real estate giant Country Garden (2007. HK) fell into a liquidity crisis, stating that it was unable to pay international debts due to a sharp drop in sales.
Last month, Chinese regulatory authorities rejected the overseas debt restructuring and business revitalization plan painstakingly developed by China Evergrande and its advisors. Xu Jiayin has been under residential surveillance by the police and is under investigation for suspected crimes, causing further chaos in China's Hengda Rebellion. According to an earlier report by the Wall Street Journal, authorities are investigating whether 65 year old Xu Jiayin attempted to transfer assets overseas at a time when China Evergrande failed to complete and deliver its pre-sale project.
A group of bondholders from China Evergrande warned last week that canceling the restructuring plan could lead to a runaway collapse of the group and have serious consequences for other companies in the industry.
Xu Jiayin is basically synonymous with Evergrande, "said Christopher Beddor, deputy director of China research at research company GaveKal. From all aspects, Evergrande's domestic business currently seems to be subject to very strict regulation, including transactions between Evergrande and bondholders and their most important political creditors, who refer to homebuyers who have not yet received pre-sale properties
Xu Jiayin is actually in a state of detention, which is a sudden blow to the self-made billionaire. Xu Jiayin once made a bold statement in 2021 that China Evergrande would make a comeback as a successful electric vehicle company with a much smaller real estate business. This statement was widely published in Chinese official media at the time. Due to cash flow issues, the business of this automaker has been unable to proceed smoothly, and now an external investor's injection of $500 million is also in jeopardy.
Xu Jiayin was born in 1958 and grew up in Zhoukou, which was one of the poorest cities in central China's Henan province at the time. After graduating from a university in Wuhan, Xu Jiayin worked for a state-owned steel factory and a trading company. In 1996, he founded Evergrande in the southern city of Guangzhou in China. Twenty years later, Evergrande became the highest selling real estate enterprise in China.
As his wealth grew, Xu Jiayin traveled around the world by private jet and invested in a football club, multiple hospitals, and grain and oil enterprises. He was elected as a member of the National Committee of the Chinese People's Political Consultative Conference in 2008 and a member of the Standing Committee of the National Committee of the Chinese People's Political Consultative Conference in 2013. Xu Jiayin befriended other billionaires such as Jack Ma, co-founder of Alibaba, BABA, 9988. HK, and also visited the Harvard campus in 2018, accompanied by Lawrence Bacow, then president of Harvard University.
According to regulatory announcements, as a major shareholder of Evergrande, Xu Jiayin and his family have received dividends equivalent to approximately $7.1 billion from Evergrande over the years. In 2017, Forbes estimated his personal wealth to exceed $40 billion.
In 2018, when investors began to feel uneasy about Evergrande's rapid growth and increasing debt, Xu Jiayin subscribed to $1 billion of Evergrande's US dollar bonds and publicly expressed support for the developer. The highest annual interest rate on this bond is 13.75%.
In 2019, Xu Jiayin, who had been hired as a professor by his alma mater, guided a student's master's thesis titled "Research on an Early Warning Model for Financial Risks of Real Estate Companies from a Cash Flow Perspective". The study concluded that Evergrande's liquidity risk is relatively low. Xu Jiayin sold his international bonds that year and bought more Evergrande US dollar bonds in 2020.
The Chinese regulatory authorities imposed restrictions on the leverage ratio of real estate development enterprises in 2020, known as the "three red lines" policy, and the good days of Evergrande came to an end thereafter. Some banks have started demanding that Evergrande repay loans in advance, and investors are no longer buying Evergrande bonds. By mid-2021, Evergrande, which is in a financial crisis, will be unable to make payments to building materials and construction service suppliers, and hundreds of real estate projects will be shut down.
Evergrande has sought government assistance and sought help from officials in Guangdong Province, where its headquarters is located, at the end of 2021. Evergrande did not receive assistance, but the local government sent a working group to the developer to help manage operations and control risks. These actions have received support from the People's Bank of China and other financial regulatory agencies.
The Chinese government allowed Evergrande to default on its international bonds, betting that the consequences could be controlled and Evergrande's business could slowly disintegrate.
Xu Jiayin continued to lead Evergrande at that time and was committed to overseas debt restructuring plans. For most of 2022, he continuously promised to complete the construction of the property and deliver it to homebuyers.
The state-owned enterprise later took over some of Evergrande's assets, and the local government in Guangdong Province also ordered the developer to withdraw from a contract that originally would build the world's largest football field. These actions helped Evergrande reduce some of its debts; The company's debt scale exceeded $300 billion at one point.
What the regulatory authorities did not expect was that Evergrande's problems continued to worsen, and its financial situation was much more complex than the public was aware of. Last year, the bank seized $2 billion in cash from Evergrande's property services department, exposing the company's previously undisclosed and complex loan arrangements. Evergrande and its subsidiaries have also raised approximately $13 billion through the sale of off balance sheet financial products.
In the summer of 2022, unfinished property owners across the country began protesting online due to dissatisfaction with the slow construction progress of Evergrande and other struggling developers, and threatened to cut off supply. Chinese authorities have managed to quell this wave of protests, but this also indicates what risks Evergrande will face if it fails to fulfill its promise to deliver the building.
In the quarterly information update as of the end of September 2022, Evergrande stated that there are over 700 pre-sale projects that have not been completed, of which 668 have resumed construction. Xu Jiayin presided over multiple internal meetings of the company and stated that Evergrande is working day and night to deliver houses and repay debts. As of the end of last year, Evergrande had delivered a total of 301000 residential units.
Some Chinese homebuyers who have taken over from Evergrande have complained on social media that their homes are still unfinished, with unpainted walls or unpaved floors, and that they have already paid for the related fees. Some also claim that due to construction stagnation or slow progress, they are still waiting for their homes to be completed.
Evergrande has also struggled with repayment after formulating a plan to repay the equivalent of $1100 in principal to wealth management product holders on a monthly basis. In November of last year, this amount was reduced to the equivalent of $275, and by August of this year, payment had completely ceased. As of the end of 2022, the company still owes approximately $4.7 billion to investors.
Evergrande's debt restructuring plan was announced in March this year, but was ultimately rejected by Chinese regulatory authorities. The plan involves issuing new bonds to replace defaulting bonds, and if approved, it could have benefited Xu Jiayin, one of the foreign debt holders of Evergrande.
Gianfranco Siciliano, a professor at China Europe International Business School, said that the Chinese government has no intention of letting Evergrande disappear tomorrow, as in a market where demand remains weak, this will cause significant damage to investors' overall confidence.
Jiang Fangke said that given the situation of Xu Jiayin, "the future is very uncertain and uncertain. But he said that what is clearer now than before is that Evergrande may not be able to sustain itself.