China can’t clame everything on wayward billionaires

Minxin Pei, Bloomberg

The fall of Hui Ka Yan, the founder of real estate developer China Evergrande Group and once Asia’s richest man with an estimated fortune of $45.3 billion in 2017, has certainly been steep. But it should not come as a surprise.

Hui, who was placed under investigation last week for possible wrongdoing, is only the latest in a long list of disgraced Chinese billionaires, including Xiao Jianhua (sentenced to 13 years in August 2022), Ye Jianming (reportedly detained in 2018 but not yet formally charged), Wu Xiaohui (serving an 18-year sentence after conviction in 2018), and many others.

In coming months, we should expect the Chinese government to portray Hui as a dishonest, greedy, and unscrupulous character. Missing in that narrative will be any hint that Chinese officials and the system they serve could have acted as Hui’s enablers and partners.

It’s extremely unlikely that China’s fallen tycoons could have taken out huge loans from state-owned banks, engaged in risky behavior, and signed questionable deals that eventually blew up their empires without support from local officials and lax oversight from regulators.

Exhibit A is Evergrande. For years, the real estate giant gambled on a dubious business model highly vulnerable to the slightest puncture in China’s housing bubble. Essentially, the company relied on bank loans, bond issuance, and prepayment from customers to finance its operations.

Constantly rising housing prices provided the principal source of its profit. Over the years, the company’s leverage reached unsustainable levels, requiring more borrowing to stay afloat. At the peak in December 2016, Evergrande’s debt-to-equity ratio stood at 1,221%, meaning about 92 cents for every dollar on its books represented borrowed money.

Yet, government regulators seemed unconcerned that Evergrande’s shaky finances might pose a systemic risk to the housing sector. Instead, Hui was feted as a national hero.

Weak oversight may also be what allowed Xiao Jianhua to defraud the financial system on a massive scale. Through his control of Baoshang Bank Co., a small regional lender in northern China, Xiao secretly funneled billions of dollars to companies affiliated with Tomorrow Group, a conglomerate he owned. After Baoshang went under in 2019, the bailout cost the government 23.5 billion yuan ($3.27 billion).

Venal officials are often the willing accomplices of fraudulent tycoons. Ye Jianming, founder of CEFC China Energy Co., was able to borrow more than $4.5 billion from China Development Bank, a large state lender, because Ye had paid its chief bribes worth “tens of millions of yuan,” according to the Chinese government.

Armed with those loans, Ye went on a shopping spree. In the Czech Republic alone, he bought a football club, brewery, real estate, and stakes in an airline and an investment bank. The total losses from Ye’s risky investments remain unknown.

Most corrupt tycoons may steal from the Chinese state with one hand, but eagerly advance its agenda with another. Wu Xiaohui, the owner of Anbang Insurance Group Co., who was convicted in 2018 of a $10 billion financial fraud, actively cultivated business ties with Jared Kushner, former US President Donald Trump’s son-in-law.

Ten days after Trump won his surprise bid for the White House in 2016, Wu reportedly had a private dinner with Kushner to explore a deal that might have led to a $400 million investment in a property partly owned by the Kushner family. (Kushner Cos. ended talks with Anbang after some details were reported by Bloomberg News.)

More billionaires are sitting in jails in China than any other country, even Russia. This is not because Chinese entrepreneurs are more dishonest. The Chinese system, marred by weak regulatory enforcement and bribe-taking even after a decade of anti-corruption purges, effectively creates more opportunities for reckless risk-takers and rewards them generously before they are caught.

This partnership has made — and destroyed — many tycoons and their eye-watering fortunes. Evergrande’s Hui will not be the last.

[Abridged]

Courtesy Bloomberg