A Shenzhen court on Thursday found Hui guilty of eight offences, including fundraising fraud, misuse of corporate funds, illegally taking public deposits, loan-related offences, securities fraud and bribery. His personal assets were confiscated. Evergrande and its main mainland property subsidiary, Hengda Real Estate, were fined a combined 15.82 billion yuan (USD 2.35 billion).

The verdict marks the end of a significant chapter in the rise and fall of a company that epitomised China’s debt-fuelled property boom and the risks associated with a growth model reliant on ever-increasing borrowing.

Hui, 67, pleaded guilty in April during a two-day trial. The charges related to conduct between 2016 and 2021, when the company was rapidly expanding and increasingly dependent on debt and advance payments from homebuyers. The court said Hui and Evergrande had inflated assets, concealed liabilities and engaged in large-scale financial fraud.

Evergrande was founded in 1996 and grew from a property developer in Shenzhen into a sprawling conglomerate with interests ranging from real estate and electric vehicles to football and consumer businesses. At its peak, it had annual property sales of about USD 100 billion, and Hui’s personal fortune reached roughly USD 45.3 billion in 2017, according to Reuters.

The company’s spectacular expansion Borrowing fuelled the company’s spectacular expansion. by borrowing.

Evergrande raised money from banks, bond investors and homebuyers and used the proceeds to finance a constant pipeline of new developments. The model thrived as property prices soared, credit flowed freely, and buyers consistently paid deposits for unfinished homes.

It became increasingly fragile when China’s authorities began tightening controls on developers’ leverage.

The government’s “three red lines” policy, introduced in 2020, sought to curb excessive borrowing by imposing limits on developers’ debt and liquidity. The change exposed weaknesses across the property industry, with Evergrande among the companies most heavily affected.

By 2021, Evergrande had defaulted on its debts. Its liabilities exceeded USD 300 billion, making it one of the largest corporate debt failures in history. The collapse triggered a wider property crisis, leaving unfinished homes, angry homebuyers and losses for suppliers, banks and investors.

The consequences extended well beyond Evergrande.

China’s property industry had been a critical pillar of economic growth, accounting for a substantial share of economic activity through construction, materials, household wealth and related services. The sector’s prolonged downturn has weighed on consumer confidence, local-government finances and investment.

The legal proceedings against Hui therefore carry significance beyond the fate of one businessman.

Chinese authorities have increasingly sought to signal that corporate executives cannot treat aggressive borrowing and financial manipulation as simply another form of entrepreneurial risk.

The court said the fraud caused “extremely severe” social harm, while prosecutors argued that the scale of the misconduct warranted a particularly severe punishment. More than 50 other people connected with Evergrande were also sentenced, with prison terms ranging from less than two years to 18 years.

The case also highlights the distinction between Evergrande’s financial collapse and its continuing liquidation.

A criminal conviction does not resolve the enormous claims against the company. In January 2024, a Hong Kong court ordered Evergrande into liquidation after the company failed to restructure its offshore debt. The process of recovering assets and distributing proceeds to creditors remains complicated and protracted.

Hui’s fall is particularly striking because of how closely his career tracked China’s economic transformation.

He rose from rural Henan, trained as a steel technician and moved into property during the country’s extraordinary urbanisation boom. Evergrande’s low-cost housing strategy helped make him a billionaire and turned the company into a national powerhouse.

At its height, however, the business had become too dependent on leverage.

The company’s collapse demonstrated how quickly an asset-price boom can turn into a balance-sheet crisis when credit conditions change.

For China’s property market, the verdict is unlikely to provide an immediate solution. Analysts said the trial itself was not expected to change market conditions materially, while the sector remains under pressure from weak demand, falling property values and unfinished developments.

But the symbolism is powerful. Hui built an empire on the assumption that China’s property boom could continue indefinitely. His life sentence represents the state’s answer to that era.

The message is that the age of growth at almost any cost, financed by increasingly aggressive borrowing, is over.

For investors, the more important question is whether China can replace that old property-driven model with one based on more sustainable sources of growth.

Evergrande’s collapse may have ended one property empire. The economic consequences of the model that created it are still unfolding.

The post Evergrande founder jailed for life as China draws a line under its property bust appeared first on International Finance.

The property giant defaulted on its debts in 2021 and triggered a crisis in China. The business, since 2022, has been facing regulatory suspensions in the share market.

In August 2023, Evergande’s shares plunged by almost 80% when trading resumed after a suspension of over a year and a half. In fact, Evergrande’s stocks have fallen by almost 99% since July 2020, so the latest trading jump has come as a respite for the beleaguered property giant.

Why We Are Talking About Evergrande?

Evergrande, once China’s top-selling property developer, has been struggling under the weight of over USD 300 billion worth of debt. In September 2023, Evergrande’s flagship Chinese business Hengda Real Estate was unable to sell its new debt due to the regulatory heat. The company’s plan to renegotiate agreements with its bondholders is facing headwinds too.

Evergrande had to file for bankruptcy protection for its United States-based assets.

Evergrande is also facing an October 30 court hearing in Hong Kong on a winding-up petition which could result in the venture going into liquidation.

Meanwhile, another Chinese property giant Country Garden secured an extension to a key debt payment deadline in September 2023.

The Crisis Is Affecting The Broader Economy Too

The housing sector crisis is also affecting China’s banking system, which holds four-fifths of the country’s financial assets including most of the bonds.

As per a New York Times report, during the last winter, China’s central bank, the People’s Bank of China, conducted a stress test on the balance sheets of the country’s 20 largest commercial banks, amid the real estate bloodbath. Although the banks were found to be resilient against the crisis, still they required additional capital to meet the international standards for keeping the money in reserve.

China is now reportedly looking to spread out the cost of handling real estate losses, which will allow the banks to use potential future profits on other loans to offset losses on loans to property developers.

Nearly half of real estate-related lending in China now consists of residential mortgages, which are ‘nonexistent’ as homeowners pay them on time. Banks charge interest rates on these loans to keep their revenue flow steady. The Xi Jinping government is now urging the banks to help the debt-ridden households by reducing interest rates on mortgages, but the lenders are in no mood to do that.

However, these banks have also been financing the local governments’ infrastructure push. The financed capital is used to buy land at local governments’ auctions and currently, the property industry biggies like Evergrande and Country Garden have been registering financial bloodbath, while waiting for state-level bail-out assistance.

Data provided by property agents and private agencies and accessed by Fortune magazine show that existing home prices have been falling at least 15% in prime neighbourhoods in Shanghai and Shenzhen, as well as in over half of China’s tier-2 and tier-3 cities.

Cities which were considered resilient against a housing downturn are now facing a property price slump, according to a July report by property research institute Leyoujia.

According to Standard and Poor’s, over 50 Chinese real estate developers have failed to make payments in the last three years. The crisis has also affected the country’s small and medium enterprises dealing in furnishing, tiling, and painting among others feeling the pinch. The oversupply of homes has impacted the demand for cement and steel as well.

As per the government data, by the end of August 2023, the combined floor area of unsold homes stood at 648 million square metres (7 billion square feet). As per a Reuters’ calculation, this estimate was equal to 7.2 million homes, based on the average home size of 90 square metres.

As per the S&P, project delays and empty homes have resulted in the material suppliers not getting their full contract payments.

As per the independent reports, consumer confidence is eroding rapidly, amid China’s faltering post-COVID recovery, as families now prefer tightening their spending patterns. Also, Beijing’s move of halting publication of key economic data including unemployment statistics has now prompted companies (including property giants) to recalculate their business plans.

In 2020, as COVID hampered economic activities in China, the Xi Jinping government announced the “three red lines” policy, where the property developers were asked to follow three fixed ratios (liability less than 70%, debt-to-equity ratio lesser than 100% and more than one cash-to-short-term debt ratio) to get access to more credit. In short, having enough cash to support businesses was put as a condition for the property giants to access government credit.

Over half of China’s top developers failed to meet the requirements and now they can’t borrow money from domestic banks too. In fact, foreign banks having huge exposure to the Chinese real estate sector have tightened their lending too.

Now, the urban population growth rate in China too has fallen. From 4.1% in 1996, it fell to 2.1% in 2020. The ratio of the older population is rising as well.

The government has introduced two relief measures since November 2022, but none of them have worked so far.

According to government data, China’s GDP growth slid to 0.8% in the three months ending in June 2023, down from 2.2% in January-March. The unemployment rate, as per reports, among urban workers aged 16 to 24, spiked to a record 21.3% in June 2023.

As per He Keng, a former deputy head of the statistics bureau, the number of vacant homes in China is so big that even 1.4 billion people won’t be able to fill these spaces. The real estate developers now don’t have capital access to complete their projects, nor can they clear their debt obligations.

The Road Ahead

Real estate sales in China increased in September 2023. Just a month back, new property sales by China’s 100 largest developers grew 17.9% from August to 404.3 billion yuan (USD 55.4 billion), following two straight month-on-month declines.

JPMorgan in September 2023 also revised its estimate for China’s 2023 GDP growth projection from 4.8% to 5%. There is hope that maybe the world’s largest economy is finally showing signs of a rebound as the manufacturing sector returns to profits in August, as it surged 17.2% from the corresponding period in 2022.

In August 2023, Beijing allowed China’s largest cities to reduce minimum down payments for homebuyers and encourage banks to lower rates on existing mortgages. And now property sales have witnessed an uptick.

Will the ‘Housing Sector Bloodbath’ end at last? Let’s wait for the answers.

The post IF Insights: Will China’s ‘Housing Bloodbath’ end finally? appeared first on International Finance.

Similar threats have been made — and in some cases carried out — across 328 property developments in nearly 100 cities. Some of the messages have appeared briefly on Chinese social media platforms before being scrubbed by censors. But their echoes remain — the letters have been preserved on a crowdsourced website titled WeNeedHome — as does the fury. The mortgage boycotts are posing a fresh challenge for the government in a country where widespread dissent is uncommon and other economic troubles loom large.

What prompted people to speak out?

The short answer is that construction has stalled at apartment complexes across the country — apartments that have eaten up many people’s life savings. The long answer traces to deep-seated problems in China’s real estate sector that have been brewing for decades and laid bare over the past two years.

China’s property boom has been a huge driver of the country’s economic growth — the sector is responsible for around one-quarter of GDP. But now a pair of factors has brought developers to their knees: China’s economic headwinds — due primarily to its strict ‘zero-COVID’ policy that has locked down entire cities — and a government effort to rein in the real estate industry’s soaring debt.

“We are in the midst of a slow-motion crisis. I would view the property sector’s distress as absolutely central to China’s current economic slowdown,” Logan Wright, a partner at Rhodium Group who leads the firm’s China markets research said.

Roots of the crisis

Logan Wright says that the ‘slow-motion crisis’ has many roots. To some extent, it was planned: The government explicitly wanted to cool down the red-hot property sector. For years, apartment buildings shot up across China as people moved from the countryside to cities and developers had easy access to credit. But it soon became clear that real estate investors — not actual home buyers — were the ones driving up demand in a speculative frenzy that left vast expanses of apartments empty. Property prices soared, and home ownership became increasingly unaffordable for China’s middle class. At the same time, another problem was brewing: The developers who were benefiting from those high prices amassed a mountain of debt to keep building at a breakneck pace.

“They have taken on too many loans to build too many buildings that no one really wants to live in,” Jeremy Wallace, an associate professor at Cornell University who has studied urbanization in China said.

In recent years, government officials have begun to see the underbelly of risk in that property-fueled economic growth model. President Xi Jinping has taken to repeating the exhortation that ‘houses are built to be inhabited, not for speculation.

In August 2020, the Chinese government decided to intervene to deflate the housing bubble before it burst. The housing ministry and the People’s Bank of China announced a ‘three red lines’ policy, laying out three benchmarks to evaluate the level of debt developers had taken on. If regulators found that a developer had exceeded any of the benchmarks, they would place limits on the developer’s ability to borrow further.

It turned out that many of China’s biggest developers had blown past the thresholds — and all of them now had to start re-balancing their lopsided balance sheets. That left these companies short on cash needed to complete the apartments they would promise to people all over the country. The early seeds of the boycott movement were planted.

“It is no surprise if you have this extensive distress that you are seeing within the property sector, that eventually, this issue would have come to a head,” Jeremy Wallace said.

Real estate bombshell

In the wake of the ‘three red lines’ policy, China appeared to come close to its own Lehman Brothers moment last year. As in a moment when one company’s troubles nearly cratered the country’s economy. Evergrande is the poster child for China’s real estate craze. It is a privately owned company that became China’s largest real estate developer, and as it grew, it took on an enormous amount of debt: more than $300 billion as of last year.

Even before the three red lines policy, Evergrande was facing pressure as China’s economic growth slowed, cooling demand for the company’s often lavish properties. But the new policy pushed it over the edge. Because it could no longer borrow as easily under the new government rules, Evergrande had to begin rapidly selling off pieces of its diverse business empire. But it still couldn’t keep up with its debt payment schedule. In December 2021, Evergrande failed to make payments to international bondholders, thereby officially crossing over into default territory.

Evergrande’s fall immediately set off concerns that China’s whole real estate sector would collapse. But instead, Evergrande’s troubles and China’s response have been a part of that slow-motion crisis. The government decided to intervene and has worked with Evergrande to develop a plan to restore the company to solvency. For now, a full collapse has been averted, but Evergrande’s path forward remains uncertain. It recently missed a July deadline to release a plan for restructuring its debts.

Meanwhile, the same story has played out for other large developers in China. The new rules have hit their ability to borrow from banks, and Evergrande’s high-profile struggles have made it harder for all these companies to access capital from foreign markets.

Experts say that some of this fallout from the red line policy was inevitable, but it was made worse because of a “perfect storm” of other economic factors.

“I think they were trying to do something that was very difficult — to deflate something in its real estate sector that looked very bubble-ish. To do this in 2020, 2021, it seemed reasonable that maybe they would be able to pull it off, but with zero-COVID really destroying other economic activity, it’s really made things a lot more difficult,” said Jeremy Wallace.

Summer wave of mortgage protests

The downfall of Evergrande and other behemoth developers leads back to all those angry mortgage holders. Evergrande is now the target of the largest number of mortgage boycotts. According to WeNeedHome, of the 328 developments where homeowners are threatening to withhold their mortgage payments, 52 are Evergrande properties.

Government policy certainly contributed to the problems, but they are magnified by China’s unusual, and problematic, property sales model. China’s real estate developers typically use a “presales” tactic in which buyers — or the banks that hold their mortgages — must pay in full for homes that have yet to be built. So even before many Chinese people move into their apartments, they are already making mortgage payments.

That model worked well enough while developers were able to build at a rapid pace and hand over apartments, but the recent setbacks have thrown wrenches into that process. In the past, developers were able to illegally tap into the cash they collected from presales to build other projects in their portfolios. But with zero-COVID hitting the economy, people have been less willing to buy apartments, so these sales have fallen. That in turn has left developers short on cash for construction.

Meanwhile, the three red lines policy has prevented the developers from borrowing more to compensate. All this has produced a vicious cycle, as Michael Pettis, a professor of finance at Peking University, wrote in a recent blog. The news about the liquidity crisis has also scared people off from buying presale apartments because they fear developers won’t be able to complete them. That, in turn, cuts further into developers’ cash.

“What you’re seeing is the unwinding of confidence that developers are still going to have sufficient resources to complete houses out there. It’s a significant change in credit conditions more broadly for developers,” said Logan Wright.

With no money in hand, developers started to push the pause button on their construction projects, leaving hundreds of thousands of people paying mortgages with no idea when they will actually move into their apartments. That’s why so many mortgage holders have banded together and threatened to stop paying.

What comes next?

Chinese government officials are working hard to contain the boycotts and keep the property market from going farther off the rails. It’s a delicate balancing act; the government wanted to reduce debt in the sector, but it’s now being forced to intervene to stop the crisis from spreading into other parts of the economy.

So far, authorities have largely allowed the boycotters to pause their payments without penalty. And the government isn’t leaving developers entirely in the lurch. Central government officials are trying to help speed the completion of projects, initially by appointing local governments to oversee the work. Chinese financial outlet Caixin reported that local state-owned companies might even be tasked with purchasing stalled developments and completing them on their own.

But local governments alone can’t fix the problem, in part because they are already highly indebted from implementing the costly zero-COVID policy, and the central government seems to realize as much. Bloomberg reported that the central bank will provide nearly $30 billion in special loans to developers to help them finish the delayed projects.

Even that is likely to be far from sufficient. Given how much revenue the sector is currently losing, the $30 billion “doesn’t seem large enough to help developers significantly at all,” said Logan Wright.

One thing is clear, from Jeremy Wallace’s perspective: Given the political sensitivities, the mortgage boycotters won’t be left to bear the full cost. “It’s a very compelling population. The family that has saved up in order to buy something that they never get because of some billionaire developer — that is a political fight that they will always win. And I think that’s really a dangerous potential problem that the government won’t let or can’t let sit forever,” he ad

Meanwhile, even if the government ultimately manages to get developers to deliver most of the apartments to the boycotters, the broader distress in the property sector still threatens the country. Sales across China’s top hundred property developers dropped by half in the first six months of the year, according to the New York Times. Home prices have also been falling, and more developers are still expected to default this year. In some ways, this is what the government was aiming for, but the real estate sector has plunged too quickly due to zero-COVID. Where will this downward spiral leave China? It is likely to stick to a path of reining in the property sector to a large extent, even if it continues to come at an economic cost.

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