Evergrande used retail financial investments to fill funding gaps

Crisis-hit Chinese real estate developer Evergrande has used billions of dollars raised selling wealth management products to retail investors to fill funding gaps and even to reimburse other wealth management investors, executives say of the company in Shenzhen.

Evergrande’s financial advisers marketed the products widely, including to owners of its buildings, while its executives persuaded their subordinates to invest, executives of Evergrande’s wealth management division said.

One executive suggested the products were too risky for ordinary retail investors and should not have been offered to them. Executives were speaking at a meeting, which the Financial Times witnessed, with angry investors who came to the company’s headquarters in Shenzhen to try to get their money back.

Safe and stable returns “backed by Evergrande” were at the heart of the sales pitch. Company executives said 80,000 investors hold 40 billion Rmb ($ 6.2 billion) in outstanding Evergrande wealth management products.

The Hong Kong-listed group is one of the largest real estate developers in China and the most indebted in the world. It was worth as much as HK $ 320 billion ($ 41 billion) last year, but its market value has plunged to $ 3.7 billion as it is on the verge of defaulting on its offshore bonds. and that creditors are scrambling for repayment.

The company’s troubles spooked global markets on Monday, with Hong Kong’s Hang Seng Index closing at its lowest level since last October and Wall Street recording its worst one-day loss in four months. Evergrande shares fell as much as 7 percent on Tuesday, bringing its losses for the year to around 85 percent.

But stocks were broadly more stable on Tuesday, with the Hang Seng closing up 0.5% and the European Stoxx 600 index up 1% in afternoon trading. Mainland Chinese markets remained closed for a national holiday.

Evergrande owes thousands of retail investors, alongside banks, suppliers and foreign investors, and fear they will not be paid back if the real estate group collapses. Other Chinese developers have also sold wealth management products, including Baoneng, Country Garden, Sunac, and Kaisa.

Evergrande revealed last week that Ding Yumei, wife of founder Hui Ka Yan, had purchased $ 3 million in the company’s investment products as a sign of support.

“My parents put most of their savings, which is 200,000 Rmb and not much by Evergrande’s standard, into their [wealth management products]said the daughter of an investor who asked to be identified by her surname Xu.

She said an Evergrande financial adviser stationed in a company-built apartment tower in central China persuaded her mother to invest. “They wouldn’t have trusted Evergrande’s wealth products if they hadn’t bought the developer’s apartment,” she said. “All they wanted was to ease the financial pressure of purchasing expensive cancer drugs. [for Xu’s mother], nothing else.”

Last week, Xu was among hundreds of people who visited Evergrande’s headquarters in Shenzhen in the hope of recouping their investment.

Although the Rmb 40 billion in wealth management products is eclipsed by the developer’s total Rmb2tn in liabilities, protests from retail investors in Evergrande offices and developments across China have made the resolution of their problems a top priority for the group, according to one of the company’s executives.

Hundreds of homebuyers, retail investors and entrepreneurs from Evergrande converged on the real estate group’s headquarters in Shenzhen last week to demand a refund © Noel Celis / AFP / Getty

An investor named Rosy Chen and her husband, an employee of Evergrande, invested 100,000 Rmb this year in a product with an announced annual return of 11.5% at the request of one of his superiors. The money went to “supplement” the working capital of a company called Hubei Gangdun Materials, according to the investment contract.

The contract showed that a subsidiary of Evergrande subscribed for the product, while a separate subsidiary of Evergrande guaranteed that it would reimburse Chen if Hubei Gangdun defaulted.

“At first we waited, but when we saw that we were among the only families in the whole [Evergrande] division not to buy, we decided to invest too, ”Chen said. “We thought Evergrande wouldn’t cheat on its own employees.”

Contracts and bank deposit statements viewed by the FT for a handful of wealth management products showed investor money flowing to small businesses in Hubei Province and the coastal city of Qingdao. Business records have shown that many, like Hubei Gangdun, have recently changed ownership and management. None of the companies responded to repeated phone calls or messages asking for comment.

In an interview with local media, an Evergrande financial advisor said the products were a kind of “supply chain finance”.

While retail investor money may have gone to its suppliers in the past, Evergrande executives in Shenzhen have said this is no longer the case.

When asked about Hubei Gangdun, one of the executives of Evergrande’s wealth management division said it was only a shell company. “WMP revenues have been used to fill various funding gaps facing the parent company,” said the executive. “You don’t have to take a hard look at where the money actually went.

“Some of WMP’s revenue was used to reimburse previous products, but sales fell, making it difficult to continue with the business model,” he admitted.

“A lot of people… Could be arrested for financial fraud if investors don’t get paid,” he said. “Our products weren’t for everyone. But our local vendors don’t have them. considered during their sales pitches and they targeted everyone in order to achieve their own sales goals.

The developer said this week that six senior executives would face “severe penalties” for obtaining prepayments on investment products after retail investors were told they would not be reimbursed on time.

It is not known whether Evergrande included WMP’s Rmb 40 billion as a liability on its balance sheet.

“We expect some of it to be included in total liabilities. . . however, there was no detailed disclosure in its financial statements, so it is difficult to verify, ”said Cedric Lai, senior credit analyst at Moody’s Investors Service.

Nigel Stevenson of GMT Research agreed that it was not clear how Evergrande accounted for WMPs. “Once the lid is lifted on his finances, it is possible that other horrors will be uncovered,” he said.

Evergrande offered retail investors deferred repayment, swaps for future apartments or parking spaces or to pay off outstanding debt owed to the company for previous apartment purchases instead of immediate cash repayment.

An investor surnamed Hou from central Anhui province who invested Rmb 100,000 said he was monitoring the situation closely. He doubted Evergrande could “really deliver those future apartments” that were offered to investors instead of the redemption, and said he would not invest any more money to buy one.

Yet he did not give up hope. “Maybe Evergrande will survive!” ” he said.

Evergrande did not respond to a request for comment.

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