Evergrande founder Hui Ka Yan is in the centre of China’s real estate storm

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On July 1, as the Chinese Communist Party celebrated its centenary with a grand parade in the capital, Beijing, Hui Ka Yan watched from a position of honour atop the Gate of Heavenly Peace, overlooking Tiananmen Square.

Dressed in a blue blazer, his receding hair dyed the pitch black of China’s elite, Mr. Hui’s prominent presence at the celebration was seen by many observers as a vote of confidence in him and his company, the real estate developer Evergrande. For years, Evergrande had faced questions about its ever-growing pile of debt, which reached US$300-billion this year, but which it had always been able to refinance, shrugging off the barbs of short-sellers and other critics.

In part, this appeared to be due to Mr. Hui’s impeccable political connections. A member of the standing committee of the Chinese People’s Consultative Conference, Mr. Hui was a common sight at official forums and the yearly Two Sessions meeting of China’s rubber-stamp parliament. While known for his extravagant wealth – Mr. Hui has twice topped lists of China’s richest people – he was also lauded in state media for his charity work, speaking of the importance of alleviating poverty and reducing inequality long before Chinese President Xi Jinping launched his “common prosperity” drive this year.

This month, Mr. Hui’s ability to steamroll through seemingly any crisis appeared to come to an end. Markets worldwide plunged on news Evergrande would likely miss several coming interest payments on onshore and overseas bonds, with a further US$37.3-billion coming due within a year. Cassandras warned of a potential “Lehman Moment,” akin to how the collapse of Lehman Brothers presaged the 2008 financial crash in the United States, and pointed to widespread exposure to Evergrande in the Chinese real estate market and banking system.

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While it has so far avoided default, Evergrande has hired financial advisers to assess a restructuring, and authorities in Beijing have signalled no intention to bail out the company, including reportedly telling local governments to prepare for its collapse. From being lauded as a visionary entrepreneur and committed anti-poverty campaigner, Mr. Hui now faces the wrath of Chinese regulators, in a system in which high fliers who return to earth tend to crash down hard.

Hui Ka Yan – also known as Xu Jiayin – was born in Henan, a province in central China, in 1958. The country was just entering the Great Leap Forward, Mao Zedong’s campaign to jump-start industrialization, which ended in disaster, leading to a famine that caused the deaths of an estimated 20 million people.

“I know poverty very well,” Mr. Hui said in a 2018 speech. When he was a little over a year old, his mother fell ill, and with no money to see a doctor, soon passed away, “leaving me half an orphan.” His father, a veteran of the war against Japan turned agricultural worker, was often absent, and Mr. Hui was largely raised by his grandparents.

“In school, all I ate was sweet potato and steamed bread,” he said. “The desks were made of mud tables. When it rained heavily outside, the water would drip on us.”

After graduating high school, Mr. Hui struggled to find work, unable even to find a job “moving bricks for 10

an a month” – less than a dollar. It was 1976, and China had just reopened its universities following Mao’s death and the end of the Cultural Revolution, during which millions of young people were “sent down” to the countryside to learn from the peasants. Mr. Hui threw himself into his studies and was able to pass the college entrance exam.

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Following university, Mr. Hui worked in a steel factory, but the days of the “iron rice bowl” jobs were over, as paramount leader Deng Xiaoping launched China’s reform and opening, encouraging markets and liberalizing parts of the country’s economy. Though he was successful at the factory, and was promoted multiple times, Mr. Hui was entranced by the potential opportunities of the New China and soon quit and moved to the southern city of Shenzhen, the flagship of Mr. Deng’s reform campaign, on the border with Hong Kong. In 1996, he founded Evergrande, with just eight employees squeezed into tiny offices in the nearby city of Guangzhou.

Since the founding of the People’s Republic, property had been tied to employment, with people living in worker dorms and collectives. But in the 1990s, China was beginning to experiment with private home ownership, and Mr. Hui’s new company surfed the growing wave of urbanization, as millions of workers migrated from the interior of China to coastal cities.

Much of this was fuelled by debt, with many real estate developers taking on huge amounts of leverage to build tower blocks quickly, often to very poor standards and, as prices went up, increasingly with an eye to speculators rather than homeowners. This growing bubble became characterized by so-called “ghost cities” – vast developments built in rural China that struggled to convince anyone to occupy them. But empty apartments were also a common sight even in major cities, as speculators and easy borrowing drove home prices ever higher.

When Evergrande listed on the Hong Kong Stock Exchange in 2009, its shares boomed, but it soon became a poster child for what many saw as the increasingly risky Chinese real estate market.

In 2012, short-seller Andrew Left published one of the most pointed criticisms of Evergrande, saying the company was effectively insolvent and accusing it of “accounting shenanigans” and defrauding investors.

“Evergrande is over-leveraged and the company has no margin for error,” Mr. Left wrote in the report.

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While the company’s share price dropped 20 per cent as a result of Mr. Left’s claims, it was him, not Evergrande, who was dragged before regulators. In 2016, a Hong Kong tribunal found him guilty of market misconduct and banned him from trading in the territory for five years.

Mr. Left, whose ban ends next month, told CNBC this week that “everything I discussed from leverage to corporate governance turned out to be true, and instead of considering my report [regulators] forced me to spend millions defending myself.”

For many observers, it seemed Evergrande’s ever-growing debt pile and overseas critics simply did not matter. The company continued to start new projects across China, and Mr. Hui grew wealthier and wealthier, becoming in 2017 the country’s richest man.

His new fortune enabled a lifestyle that would have seemed impossible to even the richest Chinese in 1958, let alone poor peasants like Mr. Hui’s family. He bought property around the world, travelled in a private plane, and opened a bank account in the British Virgin Islands, a notorious tax haven. In Red Roulette: An Insider’s Story of Wealth, Power, Corruption, and Vengeance in Today’s China, author Desmond Shum describes going shopping with Mr. Hui for a US$100-million pleasure yacht in southern France.

“[Mr. Hui] envisioned a floating palace to wine and dine officials off China’s coast, away from the prying eyes of China’s anti-corruption cops and its nascent paparazzi,” Mr. Shum writes, adding of the price tag that “dropping this type of money among these jet-setters had become, if not routine, at least not totally out of the ordinary.”

Throughout his rise, Mr. Hui also gave large amounts of money to charity, topping several annual lists as the country’s most generous benefactor, and he invested in anti-poverty work, first in his native Henan and then nationwide. In speeches, he urged other entrepreneurs to give back, earning him laudatory coverage in Chinese media.

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In his public appearances, Mr. Hui was also careful to pay homage to the Communist Party, without which, he said, his success would not have been possible.

Had the Party not reopened the universities, “I would not have been able to leave the countryside,” he said in 2018. “Without the 14 yuan per month [government] bursary, I would not have been able to finish university. And without the country’s wise policy of ‘reform and opening up,’ there would be no Evergrande today. Therefore, everything the company and I have was given by the Party, the state and the society.”

Mr. Hui’s political adeptness went beyond flowery speeches, and he cultivated close ties first with officials in Guangdong province, where Evergrande was headquartered, and later in Beijing and throughout China, enabling the company to achieve a level of nationwide success that other companies have not.

“If you look at a lot of other real estate developers, even the big ones, they tend to be a lot more geographically focused,” said David Yu, a cross-border finance and investing expert at NYU Shanghai. “And that’s because to grow you have to have good relationships with the local government to win the land, to win approvals and all the other steps.”

According to Cercius Group, a Montreal-based intelligence firm that specializes in Chinese politics, Mr. Hui developed close ties to Zeng Qinghong, a one-time vice-president of China and close ally of Jiang Zemin, president from 1993 to 2003, during whose tenure the country’s real estate market really took off. Other reports have linked him to the family of Wen Jiabao, who served as China’s premier from 2003 to 2013.

In Red Roulette, Mr. Shum said Mr. Hui was acquainted with Zhang Peili, the premier’s wife, and describes how, following a dinner between Mr. Hui, Ms. Zhang and Whitney Duan, Mr. Shum’s wife, the real estate magnate casually purchased two US$1-million rings at a Beijing jewellery store. Ms. Duan refused a ring, her husband said, and it’s not clear who Mr. Hui eventually gave the rings to.

“In China, there are several ways to get the attention of those in power,” Mr. Shum writes. “[Mr. Hui’s] preferred method was through giving outrageously expensive gifts.”

During this time, Mr. Hui also expanded Evergrande’s footprint beyond property, taking stakes in entertainment ventures, a mineral water brand, electric vehicles and Guangzhou FC, which Mr. Hui’s company co-owns with Alibaba Group Holding Ltd., the e-commerce giant founded by Jack Ma. In a speech earlier this year, Mr. Hui said that the “New Evergrande” had arrived, after the company “completed the transformation from real estate to multi-industry and digital technology.”

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This expansion, as before, was driven by further leveraging the company, with Evergrande accumulating some US$300-billion in debt by the start of this year. As long as Evergrande could continue raising money however, relying on strong relationships with state-owned banks and private funders, as well as overseas bondholders, Mr. Hui could continue to surf – in China at least – on a reputation as a genius entrepreneur, and one who spoke of the need to tackle inequality and give back to the poor.

“Authorities from small, lower-tiered cities would be intoxicated by [Mr.] Hui and his very visible political correctness and connections – welcoming his development projects and proposals with open arms,” market analyst Shuli Ren wrote this week. “Warnings fell on deaf ears – and the developer-turned-conglomerate went on living out its nine lives.”

Some of this public perception played directly into Evergrande’s success, particularly when it came to selling consumer investment products and signing up people for new property developments. In multiple reports this week, retail investors spoke of believing the company simply could not default, owing to its political connections and reputation. This encouraged people to purchase products promising outlandish returns, with the assumption the investments were a safe bet.

Christina Xie, who works in export in bustling Shenzhen, told Reuters she had pumped her life savings into Evergrande investment products.

“I was planning to use it for me and my partner’s old age. I worked day and night saving, now it’s game over,” said Ms. Xie. “Evergrande is one of China’s biggest real estate companies ... my consultant told me the product was guaranteed.”

Mr. Yu, the NYU Shanghai professor, said “China, and Asia in general, are driven by these charismatic, aggressive entrepreneur founders.”

“Evergrande have been very, very successful over a good amount of time, they’re not an overnight success,” he added.

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But Mr. Yu saw in the company’s shift from its core product to other areas a level of hubris that might have led Evergrande to overextend itself, leading to the apparent unravelling this week.

Certainly, for all his political adeptness, Mr. Hui does not seem to have perceived, or believed he could ignore, a shifting regulatory landscape, as Mr. Xi called for an end to real estate speculation and ordered companies to avoid overleveraging.

Last year, the Chinese government introduced three “red lines” for property developers, requiring them to keep debt levels within reasonable bounds. Evergrande was in breach of all three, and soon found itself unable to raise more capital, even at one point reportedly approaching staff to loan the company money.

Two months after Mr. Hui appeared on the Tiananmen rostrum, rubbing shoulders with China’s most powerful people, his company was facing default, lambasted around the world as a potential second Lehman Brothers that could bring down not just the Chinese economy, but also the global one.

“I don’t understand why [Mr. Hui] is still standing,” said Anne Stevenson-Yang, co-founder of J Capital Research and an expert on Chinese companies. Pointing to evidence that some negative stories about Mr. Hui were being censored on the Chinese internet, she said it was unclear why Mr. Hui’s political cache was “so particularly strong.” Despite this, Ms. Stevenson-Yang said, in normal circumstances with a scandal like this, “you would expect him to end up in jail.”

For all the criticism and doomsaying in the past week, however, Mr. Hui has remained bullish, promising in a statement that, sooner rather than later, “Evergrande will emerge from its darkest moments.”

Alexandra Li and Reuters contributed to this report.

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