China’s largest property developer, Evergrande Group, has seen its shares plummet in recent months after it was revealed that the company may have been falsifying its financial statements. This is not an isolated incident; China’s housing market downturn coupled with a credit crunch for developers like Evergrande are bringing down many of China’s most prominent real estate companies. The Chinese government has attempted to mitigate this crisis by injecting money into these failing developers and extending loans, but this situation will ultimately be resolved through the free market rather than state intervention.
Evergrande Group is a Chinese real estate company that is headquartered in the southern city of Guangzhou. The company claims to be “the largest real estate enterprise in Mainland China”, with 210 real estate developments, over 200 directly owned shopping centers, and 180 department stores nationwide. Evergrande has been listed on the Hong Kong Stock Exchange since 1997 and became a Fortune Global 500 company in 2011. The company has over 70,000 employees and has boosted the Chinese economy by producing $45 billion USD worth of real estate projects since 2010.
Evergrande’s past success is arguably due to its chairman, Xu Jiayin. Mr. Xu is ranked as China’s 29th richest individual, with a net worth of ~$4 billion USD. Mr. Xu is the founder and CEO of Evergrande Group, as well as being the chairman of China’s second-largest football club, Guangzhou Evergrande FC. The clubs annual revenue has grown from $1 million USD in 1996 to ~$100 million USD this year, making Guangzhou Evergrande FC the best-supported football club in Asia.
Evergrande’s success is also attributed to its majority shareholder (and chairman’s wife), Hui Ka Yan. Ms. Hui was made chairwoman of Evergrande Group after it became listed on the Hong Kong Stock Exchange in 1997, and she started her career as Mr. Xu’s secretary before becoming his business partner. Ms. Hui is the first mainland Chinese woman to be listed as a Fortune Global 500 company, and she was also ranked by Forbes as China’s 2nd most powerful woman in 2012.
Evergrande’s financial troubles began in 2011 when it became apparent that the company had been falsifying its financial information in order to maintain high-performance results necessary to remain listed on the Hong Kong Stock Exchange. The allegations were brought forward by Mr. Xu’s ex-mistress, who claimed that Evergrande was using construction equipment owned by Evergrande subsidiary, Hengda Group, for non-construction purposes (i.e. private use by Ms. Hui and her family).
The ex-mistress provided evidence to support these claims, including data from Global Positioning System devices that indicated the usage of over 60 construction vehicles for non-construction purposes and photos and videos showing luxury cars parked in front of residential buildings that were built by Evergrande’s construction subsidiary. This led to an official investigation of the company, and in April 2012 Mr. Xu admitted that his company had been falsifying its financial reports since 2007 due to management misconduct.