Shortly after a black swan mysteriously appeared in the center of Beijing’s Tiananmen Square on Sept. 5, China encountered a huge “black swan” event: property giant Evergrande warned that it could default on its $305 billion of debts.
Since Sept. 10, dozens of protestors have been gathering outside Evergrande’s headquarters in Shenzhen, Guangdong Province, to demand their money back. Protests have also erupted at Evergrande’s offices in other provinces, including Sichuan, Anhui, Jiangsu, and Jiangxi. The majority of these protestors are investors who have put their money into Evergrande’s various wealth management products.
As the second-largest real estate developer in China, Evergrande has over 1,300 projects in more than 280 cities across China, and is therefore considered “too big to fall.”
Employees’ Performance Rating Tied to Investment
A woman surnamed Cui, who was among the protesters in Shenzhen, told The Epoch Times that angry investors crowded the lobby of Evergrande’s Shenzhen building on Sept. 12, and argued with Du Liang, identified by staff as general manager and legal representative of Evergrande’s wealth management division. The protestors stayed inside the building day and night, blocking Du from leaving. However, on the second day, an ambulance came in the morning to escort him away.
Buyers of the troubled wealth management products are mostly Evergrande’s own employees and property owners, according to Chinese news portal Sohu.
A woman surnamed Zhang, whose husband is one of the employees and investors told The Epoch Times on Sept. 10 that these wealth management products involve huge sums of money and a large number of investors.
“All investors we personally know of have put at least 600,000 yuan (approx. $93,000 ) into these wealth management products. It’s just as scary as that!” Zhang said.
She estimated that among the Evergrande investors, there were 80,000 to 100,000 who are company employees, together with their friends and relatives whom they brought along.
Zhang further revealed that starting from the beginning of this year, all branches of Evergrande demanded its employees purchase investment products from Evergrande Wealth Management, with a minimum of 100,000 yuan (approx. $16,000), and everyone was encouraged to refer additional investors. Evergrande promised that it would “guarantee the safety of these investment products.”
Those employees who refused to invest would have a low-performance rating.
“In the end, almost all employees purchased these products, bringing along their family members. Evergrande’s salespersons also persuaded their previous clients (property buyers) to invest. I know of a few individuals who even invested more than 1 million yuan ($154,650),” Zhang said.
Mr. Li is one of Evergrande’s property owners who became an investor as a result of this referral campaign. He told The Epoch Times that the property managers (Evergrande employees) advocated Evergrande Wealth Management’s products to residents last year. Li initially wanted to invest 300,000 yuan, but was told that the one-million-yuan investment had the highest yield. He then pooled money from his parents and his wife’s savings, to purchase the one-million-yuan investment product, which was to mature in October this year. When Li learned that Evergrande would default on debts, he was so overwhelmed and stunned that he ran into a wall while driving. “I don’t dare to share the news with my family yet,” Li said.
Evergrande Wealth is a division of Evergrande Group offering asset management products of the company.
On Sept. 18, Evergrande Group announced on its official website that six executives had redeemed some of the company’s investment products in advance between May 1 and Sept. 7, and demanded them to return all the funds redeemed within a specific time frame. However, the announcement did not give any details about the “specific time frame.”
In particular, on the evening of Sept. 12, Du, the general manager and legal representative of Evergrande Wealth, personally admitted to angry victims that he did redeem products on May 31, ahead of the maturation date, due to a family emergency.
The Rise and Fall of Evergrande: Aggressive Leverage
How did Evergrande become the world’s most indebted real estate developer? Since its founding 24 years ago, the company has grown explosively by means of excess leverage.
Back in 1997, China’s real estate sector was hit hard by the Asian financial crisis. Xu Jiayin, founder and chairman of Evergrande Group, spotted an opportunity in Guangzhou when a 110,000-square-meter land parcel in a less desirable area was listed for sale at a low price. Xu just started to step into the real estate industry, approached the seller, saying that he would pay full price on the condition of installment payment. After several negotiations, the seller finally agreed that Xu could make a down payment of 5 million yuan (approx. $625,000 at the time).
Still, Xu could not afford the 5-million-yuan down payment. He then persuaded a bank to lend him 6 million yuan by presenting the outlook of the development project. He used 5 million yuan for the land purchase and the remaining 1 million for the land development.
His team built small-sized units and adopted the model of quick construction and quick sales, which turned out to be extremely successful. In the first phase of development, total sales reached 80 million yuan (approx. $10 million at the time).
Evergrande has since adopted a rapid expansion strategy, and become a bellwether for China’s highly leveraged property sector, as well as the most indebted developer in the world.
In September last year, in order to curb excess leverage in the real estate sector, Chinese regulators introduced the so-called “three red lines,” a trio of debt metrics that developers have to meet if they want to borrow more. Evergrande failed all three lines, and banks decided not to renew loans to the company.
At present, the company’s $300 billion in total liabilities equal two percent of China’s 2020 GDP.