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18 SAY YOU SAW IT IN SUBURBAN October 19, 2021 - November 22, 2021
MAINE
Why did China even allow
Evergrande to last this long?
By Shuli Ren
BLOOMBERG OPINION
Many comparisons have been made
lately between the collapse of Lehman
Brothers Holdings Inc. and the
apocalypse at China Evergrande
Group, the world’s most indebted real
estate developer. But they are nowhere
close. Lehman was a top-tier
investment bank that went from good
to bad during the 2007 subprime
mortgage crisis. On the other hand,
Evergrande — a well-known presence
in Hong Kong’s capital markets
for years — has always been bad.
For almost a decade, critics have
been calling Evergrande out, questioning
the asset quality of its unsold
properties and asking if its auditors
were asleep. All those warnings fell
on deaf ears — and the developer-turned-conglomerate
went on living
out its nine lives. On Thursday,
however, Beijing finally told local governments
to prepare for Evergrande’s
potential demise, the Wall Street
Journal reported. The unanswered
question is why the People’s Republic
of China and its often merciless regulators
allowed it to go on for so long.
Evergrande’s liquidity crisis came
about because all of its working capital
is tied to its inventory, which is
largely composed of $202 billion in
unfinished housing projects. When
unpaid suppliers and employees —
who had also been asked to purchase
wealth management products sold
by the company — came knocking on
its door, all Evergrande could offer
in terms of repayment was unsold
apartments, store fronts and empty
parking lots. Some properties were
offered to creditors at a discount
of as much as 52 percent, giving a
sense of their true market value. It
should not be a surprise: There were
warnings of “dead assets” from GMT
Research five years ago.
Perhaps investors chose to look on
the bright side because the authorities
were on Evergrande’s side. In
2016, Hong Kong’s Securities and
Futures Commission — which regulates
the city’s financial markets —
declared that U.S.-based short-seller
Citron Research and its founder
Andrew Left were culpable of market
misconduct because of their
negative assessment of Evergrande.
“Left used sensationalist language
in his report that Evergrande was
insolvent and engaged in accounting
fraud,” the commission said. Left responded,
saying, “This court’s opinion
simply stifles negative commentary.”
Evergrande is among the most
often shorted stocks on the Hong
Kong bourse.
Short sellers now may be feeling
vindicated. But if anything, the Hong
Kong SFC’s 2016 decision could have
simply emboldened Evergrande.
Founder Hui Ka Yan has relied on
PHOTO | TRIBUNE NEWS SERVICE
A housing complex by Chinese property developer Evergrande
in Huaian in China’s eastern Jiangsu province.
powerful tycoon friends in the financial
center and, over the years,
they have short squeezed naysayers,
helped Hui raise billions of dollars
in equity financing, and even solidified
his control of a regional Chinese
bank, which happens to be listed in
Hong Kong. Owning a bank can be
very useful for a developer whose balance
sheet is stretched to the limit.
All the SFC did was issue “high
shareholding concentration” statements,
twice, in 2015 and 2020, both
for what was then Evergrande’s
health division, warning that the
stock was closely held by a small
group of investors. That unit was
renamed China Evergrande New
Energy Vehicle Group Ltd. and, as of
early August 2020, 94.8 percent of it
was owned by Hui and 18 shareholders
— including his tycoon friends.
Its shares have been more volatile
than Bitcoin.