Evergrande used retail financial investments to plug funding gaps

Executives at crisis-hit Chinese property developer Evergrande have admitted that billions of dollars raised by selling wealth management products to retail investors were used to plug funding gaps and even to pay back other wealth management investors.

Evergrande financial advisers marketed the products widely, including to homeowners in its apartment blocks, while its managers pushed subordinates to invest. The developer’s suppliers sometimes received them in lieu of cash payment.

One executive suggested the products were too high risk for ordinary retail investors and should not have been offered to them.

Safe and stable returns “backed by Evergrande” were at the heart of the sales pitch. Executives at the company said 80,000 investors own Rmb40bn ($6.2bn) in outstanding Evergrande wealth management products.

The Hong Kong-listed company is one of the biggest real estate developers in China and the most indebted in the world. It was worth as much as HK$320bn ($41bn) last year but its market value has plunged to $3.7bn as it verges on defaulting on its offshore bonds and creditors scramble for repayment.

The company’s problems have spooked global markets, with Wall Street recording its worst one-day loss in four months on Monday while Asian shares fell again on Tuesday, led by Japan. Evergrande’s shares fell as much as 7 per cent, bringing its losses for the year to about 85 per cent.

Thousands of retail investors are owed money by the group alongside banks, suppliers and foreign investors, and fear they will not be repaid if the property 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, the wife of founder Hui Ka Yan, had bought $3m of the company’s investment products in a show of support.

“My parents put the bulk of their savings, which is Rmb200,000 and not a lot by Evergrande’s standard, into its [wealth management products],” said the daughter of one investor who asked to be identified by her surname Xu. 

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

This week, Xu was one of hundreds of people who travelled to Evergrande’s Shenzhen headquarters in hopes of recovering their investment. 

Though the Rmb40bn of wealth management products is dwarfed by the developer’s total Rmb2tn ($310bn) of liabilities, protests by retail investors at Evergrande offices and developments across China have brought them to the front of the repayment queue, according to one of the company’s executives. 

One investor named Rosy Chen and her husband, an Evergrande employee, invested Rmb100,000 this year in a product with an advertised 11.5 per cent annual return on the urging of one of his superiors. The cash went to “supplement” the working capital of a company called Hubei Gangdun Materials, according to the investment contract. 

The contract showed an Evergrande subsidiary underwrote the product, while a separate Evergrande subsidiary guaranteed it would reimburse Chen if Hubei Gangdun defaulted. 

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

Contracts and bank deposit statements seen by the Financial Times for a handful of the wealth management products showed investors’ money flowed to small firms in Hubei province and the coastal city of Qingdao. Business records showed that many, such as Hubei Gangdun, had recently changed owners and executives. None of the companies answered repeated phone calls or messages requesting comment.

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

While the money from retail investors may in years past have gone to its suppliers, Evergrande executives in Shenzhen receiving retail investors said this was no longer the case. 

Asked about Hubei Gangdun, an executive of Evergrande’s wealth management division said that it was just a shell company.

“Proceeds from the WMPs have been used to bridge various funding gaps faced by the parent company,” the executive said. “There is no need to thoroughly examine where the money actually went.

“Some WMP proceeds were used to repay previous products but sales plummeted, making it difficult for the business model to continue,” he admitted.

“Many people . . . might be arrested for financial fraud if investors don’t get paid off,” he said. “Our products were not for everyone. But our grassroots salespeople didn’t consider this when making their sales pitches and they targeted everyone in order to meet their own sales targets.”

The developer said this week that six senior executives would face “severe punishment” for securing early redemptions on investment products after retail investors were told that they would not be repaid on time.

Whether Evergrande included the Rmb40bn of WMPs among the liabilities on its balance sheet remains unclear.

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

Nigel Stevenson of GMT Research agreed it was unclear how Evergrande accounted for the WMPs. “Once the lid is lifted on its financials, it’s possible more horrors will be discovered,” he said.

Evergrande has offered the retail investors deferred repayment, swaps for future apartments or parking spots or to clear outstanding debt owed to the company for prior apartment purchases instead of immediate cash repayment.

An investor surnamed Hou from central Anhui province who invested Rmb100,000 said he was watching the situation closely. He doubted if Evergrande could “really deliver these future apartments” that investors have been offered instead of repayment, and said he would not invest any more money to buy one.

Still, he has not given up hope. “Perhaps Evergrande will survive!” he said.

Evergrande did not respond to a request for comment.

By Sun Yu in Shenzhen, Ryan McMorrow and Sherry Fei Ju in Beijing