Steep rise, deep fall: Xu Jiayin, the face of China’s real estate bubble

For many years there was a gold rush atmosphere in the face of skyrocketing real estate prices in China. The face of the boom is Xu Jiayin. The founder of China Evergrande became the richest man in Asia – but now he’s falling deep.

For a long time, Xu Jiayin’s path only knew one direction: up. Growing up in rural China, he became the richest man in the People’s Republic. But now things are going downhill for Xu (who is called Hui Ka Yan in Cantonese). Its real estate developer China Evergrande threatens to collapse under the burden of an estimated $ 300 billion in debt.

China Evergrande , 34

As with many other business tycoons in China, Xu’s curriculum vitae reflects the radical and rapid upheaval in China since the 1980s – from a poor and above all rural society to the second largest economy in the world with considerable political and military weight. His crash illustrates the changes that President Xi Jinping has decreed for the country.

“For the past 30 years, private firms in China have started from scratch,” Xu said at the People’s Congress held in Beijing in 2018 by the Communist Party. “Small became too big, weak became too strong,” he praised the Communist Party. Without them, this ascent would not have been possible. At that time, Xu was the richest man in the country, “Bloomberg” estimated his fortune at $ 43 billion.

Xu was born in the countryside in Henan Province in 1958. His mother died before he was one year old. His father had fought against Japanese occupiers in the 1930s and 1940s. “I only ate sweet potatoes and steamed bread when I was in school,” said Xu. “The sheets, the comforters, my clothes – everything was covered with patches.” His biggest wish was to find a job in town and get better food.

With the end of the Cultural Revolution, Xu left school in 1976 and moved from the country to the city – like hundreds of millions of his compatriots in the past decades. He was struggling to find a job. When the universities reopened, Xu was studying metallurgy in Wuhan. In the 1980s he ran a state steel factory there.

Millions sunk in football

In 1992, Xu moved to Shenzhen, the emerging special economic zone in the neighborhood of Hong Kong. Four years later, he founded the real estate developer China Evergrande in Guangzhou, relying on the country’s rapid urbanization. The company grew rapidly and went public in 2009. Evergrande now operates and develops 1,300 real estate projects across the country, many of them in smaller cities. A total of 200,000 people work for the group. Every year around 3.8 million people are hired for real estate projects. Evergrande financed its rapid expansion with loans and bonds.

In order to keep sales high even in the slowing real estate market, Evergrande invested in new areas – with manageable success. For example, the group is involved in a joint venture for electromobility that has not yet sold an e-car. Evergrande also tried its hand at pig breeding, tourism, mineral water, insurance and oil.

Above all, the purchase of the Guangzhou FC football club is known abroad. After the takeover in 2010, Evergrande pumped hundreds of millions into the club to fund expensive transfers of players and coaches from Europe and South America. In the meantime, the value of the club has been estimated at one billion dollars. Football is the favorite sport of President Xi, who wants China to be world champions. Investments in Chinese associations also make companies known and give them access to local party cadres – and thus access to land and loans from regional banks.

Given the troubles of Evergrande, the golden days are over. According to “Bloomberg” the club lost between $ 155 million and $ 310 million each year. Now the club is struggling to survive, asking for government aid and trying to sell its players.

Xi targets billionaires

Xu’s fall also has to do with President Xi’s change of course. For a long time, China’s leadership had tolerated billions of dollars as an expression of China’s economic power – and seen it as a promise that every Chinese could also get rich. But that has changed – the leadership is taking action against billionaires.

The best known of them is Jack Ma, the founder of the online giant Alibaba. He suddenly disappeared from the scene and gave no sign of life for weeks. After about three months of absence, a short video message was shown again, in which he announced that he would focus more on his charitable activities.

“What Xi Jinping wants is domestic political stability to secure the party’s power and China’s rise to become an economic and technological world power,” says Katja Drinhausen from the Merics Institute in Berlin. “It’s about controlling positions, narratives and behavior in order to prevent social upheaval.” Today, Xi sees China’s future in a resurgence of the party and centralized control over the economy and society. In this way, the state is pushing back into areas from which it had long since withdrawn. Xi also suddenly calls for “general prosperity,” which the super-rich are feeling. To put it into perspective: According to the New York Times, China has more billionaires than the United States. At the same time, 600 million Chinese earn the equivalent of just $ 150 a month – or less. That’s almost half of the population.

Not only Xu’s ambitions, but also his connections to the highest political circles, are likely to have contributed significantly to his rise. The proximity to power makes it easier to get new loans despite ever increasing debts. But the relationship has cooled: In August the central bank asked Evergrande publicly to restructure its debt and not to spread “false information”. Shortly before, Xu had attended the official celebration of the CP’s 100th birthday in Tiananmen Square in Beijing. “The fact that Xu received an invitation means that Xi has him on the radar,” quoted the Financial Times as quoting the ventilation company Cercius, which specializes in China. “And that’s usually not a good thing.”

“Good tightrope walker”

After many years of the boom in China’s real estate market, the country’s leadership wants to take action against speculation and to take air out of the real estate bubble. Rents should no longer rise so strongly. Supervisory authorities are taking action against excessive lending by banks to real estate companies, restricting borrowing and setting upper limits – also to curb the growing risks in the financial sector as a whole.

With its size and debt, the group has meanwhile posed a systemic risk to the Chinese financial sector. Debt to financial institutions and bondholders is nearly $ 90 billion. The total liabilities add up to 1.97 trillion yuan – the equivalent of a good 300 billion dollars. That corresponds to two percent of the Chinese gross domestic product. According to data from last year, Evergrande is in the chalk with 128 banks and more than 120 companies that do not come from the financial sector.

Evergrande is in a vicious circle: The business model is based on demanding prepayment from customers for apartments that have not yet been built. This money is then used to finance the completion of projects. But according to the regulators’ action, it will be more difficult for Evergrande to finish building the apartments. In addition, given the difficulties, potential customers are now staying away from the company. Evergrande’s share price plummeted, and Xu’s net worth shrank to $ 7.5 billion.

“Xu is a pretty good side dancer,” “Bloomberg” quotes Rupert Hoogewerf, founder of the business magazine “Hurun Report”. “So far, he has always managed to find a balance between debt and growth.” At the moment, however, it looks like the dance may end suddenly.