China Evergrande Soared on the Property Boom. Here’s Why It Crashed.

In January, more than 100 financial sleuths were dispatched to the Guangzhou headquarters of China Evergrande Group, a real estate giant that had defaulted a year earlier under $300 billion of debt. Its longtime auditor had just resigned, and a nation of home buyers had directed its ire at Evergrande.

Police on watch for protesters stood guard outside the building, and the new team of auditors were issued permits to get in. After six months of work, the auditors reported that Evergrande had lost $81 billion over the prior two years, vastly more than expected.

But they still had questions. Some records they had requested from Evergrande were incomplete. Numbers were missing. Important accounting errors or misstatements may have gone undetected. How had things at Evergrande — once one of China’s most successful companies — gone so wrong?

China’s housing boom was the biggest the world has seen, and Evergrande’s rise was powered by rapacious expansion, the system that stoked it and foreign investors who threw money at it. When China’s housing bubble burst, no other company imploded in as spectacular a fashion.

In 2021, the blame for Evergrande’s failure was placed squarely on a political directive from Beijing to cool the market by restricting access to loans by property developers, depriving the debt-saddled company of cash to fund its operations.

But interviews with people close to Evergrande and a reconstruction of publicly available documents offer an alternate explanation: Questionable accounting and poor corporate oversight, leading to problems like the disappearance of $2 billion, had already sent the company careening toward catastrophe.

The scale of Evergrande’s rise was staggering. For three decades, it wielded power in Beijing and in cities and towns thousands of miles away. The success turned its founder and chairman, Hui Ka Yan, into one of the world’s wealthiest people and enriched an entire ecosystem — from the local governments that sold it land to the Wall Street banks that charged it fees to raise money.

The breadth of Evergrande’s stumbles was mind-numbing. The company promised hundreds of thousands of home buyers apartments that it never built. It took in billions of dollars from families and employees, some of which has vanished. It took labor from construction workers, painters and real estate agents without compensation, unpaid bills that have snowballed into $140 billion.

Today Evergrande remains in default, unable to pay its debts but not officially defunct. Its stock trades for pennies a share. On Monday, a legal attempt to force its liquidation was prolonged: A judge adjourned a hearing in a lawsuit seeking to formally dismantle the sprawling company to pay back some of the investors who lost money.

Evergrande officials and its representatives did not respond to several requests for interviews or comment.

A housing boom that was overpriced, overbuilt and overleveraged.

China’s housing boom began around the time that Mr. Hui started Evergrande in 1996 in the city of Shenzhen, a special economic zone where the Chinese Communist Party was experimenting with capitalism.

Evergrande expanded beyond Shenzhen as China underwent massive urbanization, and it was central to the world’s largest movement of people from the countryside to cities. Mr. Hui ingratiated himself with the families of some of China’s most senior officials. He put Wen Jiahong, the brother of China’s then vice premier, Wen Jiabao, on Evergrande’s board of directors in 2002.

By the time Evergrande started selling stock to the public in Hong Kong in 2009, it had already faced questions about its voracious expansion. Foreign investors, many of them American private equity funds, hedge funds and Wall Street banks, had shoveled money into real estate companies a few years earlier, and the debt was piling up. Mr. Hui had hoped to raise $1.5 billion, but the company ended up with $722 million from listing its shares.

Around the world, a global financial crisis was reverberating, one that started with a plunge in housing prices in the United States. But in China, after a short and steep downturn, the government pumped $500 billion into building roads and railways, juicing growth and allowing China to emerge from the crisis before other countries. By listing its shares in Hong Kong, Evergrande had access to money outside China to buy land in China. Dozens of other developers were doing the same thing. Three of them — Kaisa Group, Yuzhou Properties and Fantasia Holdings — raised money over the same few weeks as Evergrande. They have all since defaulted.

By 2010, the market was showing signs of overheating. Housing prices were rising faster than the average household income. Soon economists were warning that China’s housing market was overpriced, supply was overbuilt and its developers were overleveraged.

Chinese home buyers continued to flock to construction projects anyway. As cities filled up with new apartment blocks, developers looked farther afield to satellite towns and more rural areas.

Prospective buyers were led through showrooms and model apartments and then handed a piece of paper to sign. For a third of the price of an apartment, and sometimes even more, they bought a promise, an apartment not yet built. For households with few places to store their wealth, it was difficult to imagine how a bet on real estate could go wrong.

But things did go wrong. Over the last decade, the authorities have tried to rein in lending, but real estate companies found ways around each restriction, sometimes cutting corners on apartments, other times moving debts off their balance sheets. Eventually, a policy in 2020 that made it harder to borrow started to tip developers over the precipice.

Estimates range over how many apartments remain empty. He Keng, a former deputy head of China’s statistics bureau, recently quipped about an estimate that the number of vacant homes was not enough for three billion people. “That estimate might be a bit much,” he said in a video published by China News Media. “But 1.4 billion people probably can’t fill them.”

‘The biggest bubble in history.’

For months in 2021, Evergrande kept global markets on edge as it approached default, testing a belief that some Chinese companies were too big for the authorities to let them fail. Foreign investors continued to buy the bonds of real estate developers even after one of the biggest beneficiaries of the housing boom, the real estate mogul Wang Jianlin, warned that China’s housing market was “the biggest bubble in history.”

On Dec. 9, three days after Evergrande missed a deadline to pay interest on some bonds, a credit ratings agency declared the company to be in default. That set in motion a struggle among investors, home buyers, suppliers and banks over how to get what they were owed.

Evergrande’s collapse was just one domino in a falling line. Since then, 46 other developers have defaulted, leaving a landscape of boarded-up construction sites, angry home buyers and unpaid builders. Worried about social unrest, the authorities have quietly pushed for the companies to continue building apartments. Evergrande built 300,000 apartments in 2022 while the company talked to its creditors about repaying them.

But years of poor corporate governance and bad behavior at Evergrande were spilling into the public as it became harder to get financing.

Three months after its default, Evergrande said $2 billion had been seized by banks. An internal investigation later revealed that top executives had engineered a plan in late 2020 to get around borrowing restrictions by arranging for third parties to take out loans using Evergrande subsidiaries as collateral.
The investigation concluded that the plan breached the company’s disclosure and compliance obligations.

Nevertheless, some employees said that “it was not their place to question a matter that was known to and driven by senior executives,” according to the investigation.

Top executives, including the chief financial officer and chief executive officer, resigned. “The behavior of certain then directors fell below the standards expected by the company,” according to the internal report, which was signed by Mr. Hui, the founder.

This January, Evergrande’s longtime auditor, PricewaterhouseCoopers, resigned and said it couldn’t complete its work. Hong Kong’s Accounting and Financial Reporting Council had already announced two reviews of Evergrande’s books. A little known accounting firm, Prism Hong Kong and Shanghai, was brought in to do the work.

Prism said in July that Evergrande had lost a combined $81 billion in 2021 and 2022. That compared with what the company said in 2020 was a profit of $1 billion. There were clues in the new audit that Evergrande had been treating money it had received for apartments as revenue even though at times it had not yet built those apartments.

After the new audit, Evergrande agreed to change how it would recognize revenue in its accounts by requiring documentation that an apartment had first been built.

Evergrande’s wealth management arm, which had pitched short-term and high-interest products to home buyers and employees when money was tight, told investors in August that it wouldn’t be able to make payments.

Within weeks, the police detained staff at the wealth management unit. The Chinese media reported that the company’s former chief executive, its chief financial officer and the former chairman of Evergrande’s life insurance unit had also been detained.

Behind the scenes, the company’s management team in Hong Kong was making progress toward a restructuring deal with foreign creditors and private lenders. Then, on Sept. 24, Evergrande said it had to reassess and scrapped the deal. A few days later, it disclosed that Mr. Hui had been arrested.

Chinese social media lit up with comments about how Mr. Hui had become “an enemy of the Chinese people.” People turned their anger to foreign investors and a move by the company to file for bankruptcy protection. Celebrity entrepreneurs piled on about foreigners getting a piece of the remaining company that belonged to to home buyers.

According to company filings, Mr. Hui had paid himself and his wife more than $7 billion in dividends since taking the company public in 2009. He has told people for at least two years that he and his wife were divorced, according to two people with direct interactions with the company who were not allowed to speak to the media. Filings in August indicate that he and his wife were no longer married. Assets that have been transferred to his former wife will be in dispute.

Two years after it defaulted, it is still uncertain how the company will be wound down, how much money will be left and who will get it.