“I firmly believe that with the efforts and hard work of all of you Evergrande will emerge from its darkest moment,” wrote Xu Jiayin, president of the real estate giant in a letter addressed to his employees this week.
The optimism expressed by Xu in the letter is far from the vision that international creditors and analysts have about the crisis facing the most indebted real estate company in the world.
A giant on the brink of collapse that has shaken the stock markets and has set off alarms about a possible “contagion effect” of the crisis to the rest of the Chinese economy and the international financial system.
Evergrande, which handles 1. 300 real estate developments in 300 cities of the country, has its creditors in suspense -in and outside of China-, to your suppliers, to its employees and to the thousands of families who invested their savings in the purchase of houses and now fear being ruined.
With a debt estimated at About US $ 549. 000 million, equivalent to 2% of the country’s GDP, investors wonder if the Xi Jinping government will implement a bailout, drop it, or design some formula for some of those affected receive part of the money invested in the firm.
The most dramatic have described the eventual collapse of the firm as the “China Lehman Brothers moment” , referring to the resounding collapse of the US bank that triggered the financial crisis of 1996, although the consensus among many experts is that an “orderly” bankruptcy would occur.
“The functions Aryans of the Chinese government have been busy intervening and actively working on a feasible restructuring plan, ”Zhiwu Chen, director of the Asia Global Institute (AGI) and senior lecturer at the University of Hong Kong, tells BBC Mundo.
The visible face of the debacle is Xu Jiayin, also known as Hui Ka Yan in Cantonese.
What is the story of the president of Evergrande and what does he represent in the context of the expansion of the Chinese economy and the debt boom?
Xu Jiayin, “the king of debts ”
The so-called“ king of debts ”, who became one of the richest men in China, fits perfectly in one of those stories of self-improvement, promoted by the government, much like that of other billionaires such as, for example, the founder of Alibaba, Jack Ma (who fell suddenly from grace late last year).
And Xu’s loyalty to the government has been untouchable. Before reaching the current critical situation, the billionaire used to attribute his success to education and the Communist Party.
“Without the resumption of the national university entrance exam, I would still be in the field. Without a state scholarship from 14 yuan, couldn’t go to college. Without the reform and opening up of the country, Evergrande would not be what it is today ”, he said in a speech collected by the Agency France – Press e .
“Everything about Evergrande is given by the Party, the State and society.”
This man of 62 years has been characterized by local media as a billionaire with a taste for luxury brands, yachts, expensive clothing and an excellent relationship with the Communist Party that would have allowed it to rise amid the real estate boom.
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His links with the political and economic elite, which helped him build his empire, would now be hurting him within the framework of the restrictions that the Chinese government has imposed on large companies and the gigantic fortunes of billionaires.
“Although the Communist Party controls everything in China as required by the Constitution, trade agreements to practical level are made based on connections or relationships ”, explains Zhiwu Chen.
“Even strict regulations and rules can be exceeded if you have the right connections. That is why Evergrande was able to borrow at such a gigantic level, despite all the strict regulations ”, points out the researcher.
From rural poverty to becoming a real estate tycoon
Born into rural poverty and turned into a real estate mogul, Xu’s fortune has grown as fast as China’s economic expansion over the past two decades.
Originally from a town in the central province of Henan, his father was a warehouse worker and a veteran of the Chinese Civil War. His mother died when he was eight months old.
Raised by his grandparents, Xu recounted in a speech by 2017 who during his childhood fed mainly on sweet potato ( sweet potato) and bread.
“At that time , my greatest desire was to get out of the field , find a job and be able to eat better ”, said the businessman on that occasion.
In his youth, Xu worked at a steel company in southern China where he rose through the ranks and ended up as general manager of the plant.
On 1992 quit his job and moved to Shenzhen – the neighboring fishing village of Hong Kong that eventually became the so-called “Chinese Silicon Valley” – to try his luck as a seller in u n steel conglomerate and little by little he developed his career in a state company.
It was the same year that Deng Xiaoping (promoter of the pro-market reforms that made him receive the nickname of “ Architect of Modern China ”) visited Shenzhen, promoting the entrepreneurial spirit in what would be the first city with a special economic zone in the country.
It was like in 1996, Xu founded Evergrande in Shenzhen , a company dedicated to massive construction of homes.
From then on the growth of its real estate seemed unstoppable.
Such was the success that in 2008, the firm was listed on the Hong Kong Stock Exchange and in 2017 The real estate mogul became the richest man in China, according to Forbes.
In Along the way, Xu expanded his investments to very diverse sectors. He bought a soccer team (Guangzhou Evergrande) and made investments in electric vehicles, tourism, bottled water and other industries.
Despite having amassed a fortune of more than US $ 43. 000 million, his current wealth is around US $ 10. 700 million according to Forbes estimates, although according to the Billionaires Index of Bloomberg , does not exceed US $ 7. 300 million (with figures updated to 22 September).
In the same way that the country went from being a rural and impoverished society to transform into today’s gigantic economy, Xu went from humble beginnings to a position of success that allowed him to rise to the top, before the insolvency of his firm came to light.
“Crazy New Rich”
According to Chang Che , Business editor of SupChina, a medium specialized in analyzing the events that occur in China for the West, the businessman led a rather exuberant lifestyle.
In the annual parliamentary session in China of 2012, known as the “two sessions,” writes Che, the businessman “wore a black suit with a belt with gold buckles from the French luxury brand Hermès, the most expensive belt for the communist gathering largest in the world. ”
With that appearance he earned the nickname of “ h brother of c inturon ”.
At that time, explains Che, the magnate “was the model of the new rich crazy people from China ”, who flew in their private jets or bought yachts valued in millions of dollars.
“ If Xu’s rise from rural poverty to real estate mogul owes a lot to the Communist Party, then its downfall has its roots in the radical change of the Party: a reprimand to the capitalists, the wealthy class and Party officials who helped the developers prosper, ”he points out in his analysis.
And “if the anti-corruption campaign attacked the unwritten rules of Chinese real estate, Xi Jinping’s fledgling ‘ common prosperity ‘ campaign has as objective t to transform the country’s financial system, which facilitated the emergence of real estate magnates like Xu ”, he points out.
From his point of In view, the businessman represents the excesses of an economic system that “worked for the political and economic elites in the past,” but which has changed under Xi’s plans.
The debts of Evergrande were not a secret
The debts of the giant were not a secret, although the magnitude they reached in recent months revealed the real possibility of their collapse .
Several years ago the company was known for issuing extremely profitable bonds with which it financed its explosive growth.
Already in 2017 had earned the nickname of being the “world’s most indebted real estate agency” in circles of investors.
Despite the high level of risk, the enormous debt was not considered at that time a red light that could jeopardize its commercial viability.
However, things took a turn when in the middle of last year the Xi Jinping government announced measures to control the indebtedness of real estate companies .
Evergrande reacted by arguing that it had liquidity problems and could therefore have r difficulties in meeting their commitments.
The frantic race to reduce indebtedness
Thus, the serious problems solvency of the real estate were publicly exposed and began a frantic race to reduce its indebtedness.
The firm devised a plan in order to cut its debt in half by 2023. It put deeply discounted properties up for sale and divested parts of its auto and tech businesses.
Plan did not pay off the expected results and the company continued to fall into a hole ever deeper.
Its bonds fell in value, credit ratings continued to sink and stocks plummeted.
Like a snowball, the bad news affected expectations for investors, the risk rating was falling lower and lower and there were more and more creditors demanding their money.
Thus, in August of this year, the company reported a spectacular decrease in its net profits and warned that some of its real estate projects could be at risk.
In recent weeks the firm has warned that there are no guarantees that it can c Meet all of your financial obligations in your current situation.
“A campaign to reduce financial risks”
Trey McArver, co-founder of the analysis firm Trivium China and editor of China Politics Weekly, suggests that Xu Jiayin is a symbol of the new restrictions that the Chinese government has imposed on business giants in different economic sectors.
However, for the analyst, the Evergrande crisis “has not been caused by the ‘common prosperity’ initiative and, fundamentally, is not really related to it”.
The potential collapse of the real estate “is really the result of the broader financial risk reduction campaign that has been underway since 2017 ″, he tells BBC Mundo.
Regulators, he argues, may even end up “framing the problem as one of common prosperity,” but in practice, the backdrop is to reduce risks.
In this context, there may be “more pressure to sanction any shady dealings by Xu and other Evergrande executives,” McArver says.
For now, while the government determines who will “pay” the costs of the Evergrande crisis, he adds, it is more likely “that they will be wealthy shareholders “, Instead of the people who bought houses.
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