Welcome back to the Deep Dive. It is Friday,
February 6th, 2026. Hello! Today, we are doing
something a little bit different. You know, we
usually focus on what's happening right now,
this week, this month. The immediate present,
yeah. Exactly. But today, we need to look back.
We are fifting through the wreckage of something.
A collapse that's still... I think, smoldering
in the landscape of a global economy. It is.
I mean, the site was officially cleared just
a few months ago. But the scar, the crater it
left behind, that is going to be there for a
very, very long time. We are talking, of course,
about the China Evergrande Group. And I know
what you're probably thinking if you've been
following the news for the last five years. Oh,
that story. Right. I know this story. Big Chinese
real estate company took on way too much debt
and went bust. End of story. And that is the
headline. Yes. But that's like like saying the
Titanic was just a ship that had some trouble
with ice. Right. It completely misses the sheer
scale, the mind bending complexity and frankly,
the absolute absurdity of what actually went
down. It really does. Because when we started
digging into the source material for this, you
know, the court filings from Hong Kong, the.
regulatory reports out of Beijing, the bankruptcy
proceedings that happened in Manhattan of all
places, we realize this story isn't just about
buildings. No, not at all. It's a story about
the largest human migration in history. It's
a story about electric cars that never really
existed. It's about pig farms that were maybe
not really about pigs. Exactly. It's about a
soccer team that conquered a continent and a
financial fraud so massive it makes a company
like Enron look like a rounding error at a lemonade
stand. That is the part that just floors me every
time I look at it, the numbers. We're talking
about a company that, at its peak, was the most
valuable real estate brand on the entire planet.
Their revenues were over 500 billion yuan. And
now, as of August 2025, just a few months back,
it's gone. Wiped out. Delisted from the Hong
Kong exchange. That ticker symbol, 3333, it's
empty space now. And that empty space represents
hundreds of billions of dollars. So our mission
today is to get past those headlines. We want
to understand the mechanism of the disaster.
Yes. How do you actually fake $78 billion in
revenue? I mean, what does that even look like?
And how do you fool some of the world's biggest,
most respected auditors while you're doing it?
And maybe the biggest question of all, why did
a guy who was brilliant at building apartments
suddenly decide he needed to sell bottled water?
And build a theme park and start an EV company.
We're going to find those red lines that were
crossed, both the government's literal red lines
and the ethical ones. But to understand the collapse,
I think you're right. We have to understand the
height, the peak of the mania. We have to go
back to the beginning. Back to 1996, Guangzhou
in southern China. So set the scene for us. 1996,
I was... Well, I was definitely not paying attention
to the Chinese property market then. What was
the vibe? What was the environment that allowed
this to happen? You really have to visualize
the single greatest construction site the world
has ever seen. That was China in the mid 90s.
Wow. This was the absolute dawn of the mass urbanization
policy. The government in Beijing was actively,
explicitly encouraging millions and millions
of people to leave the countryside, to leave
the farms, the small villages and move into the
cities. And the numbers on this are just staggering.
They're almost unbelievable. We are talking about.
Roughly 20 million people moving into urban centers.
Quite a million people. Every single year. Hold
on, let me just pause on that. That's like the
entire population of the state of Florida. or
Australia, deciding to pack up and move to a
new city every 12 months. For more than a decade
straight? Uh -huh. And all of these people, they
need a place to live. They need roofs over their
heads. They need apartments. Right. They need
housing. And into this massive vacuum of demand
steps a man named Hui Kaiyan, or Zhut Zhan in
Mandarin. And he founds a company. At first it's
called Hongda, but it eventually becomes Evergrande.
Exactly. And this founder, Hui Kaiyan, He wasn't
from a wealthy background or anything, right?
He didn't come from money. Not at all. Very,
very humble background. Grew up in rural poverty.
But he had this incredible, almost predatory
instinct for what the market wanted. Which at
first wasn't luxury condos. No, no, at least
not initially. He wasn't building penthouses
for billionaires. He was targeting the new rising
middle and upper middle classes. So the people
getting their first real jobs in the city. The
factory managers, the office workers, the people
who were finally earning enough money to buy
a piece of what was being sold as the Chinese
dream. So he just rides this enormous wave of
urbanization. And the growth is, I mean, the
word explosive doesn't even do it justice. It's
violent. It really is. They have their IPO in
2009 on the Hong Kong Stock Exchange. They raise
over 700 million U .S. dollars. Which was a huge
amount of money back then. A fortune. And from
there, it just goes vertical. By 2017, they're
the second largest property developer in all
of China by sales. By 2018, just one year later,
they become the most valuable real estate company
in the world. And during this time, they became
part of this kind of exclusive club at the top,
right? Right. There was a nickname for them.
There was. In the industry, they were known as
Wan Hengbi. Wan Hengbi. It sounds like an ancient
dynasty or something. It kind of was. It was
in a corporate sense. It was the big three. One
stood for Wanke, which was another huge developer.
Heng was for Hengda, that's Evergrande. And B
was for Country Garden. So these were the three
giants. These three companies were, I mean, literally
reshaping the skyline of practically every major
city in China. And a lot of minor ones, too.
They were active in over 170 cities. But Evergrande
was different from the other two. There was something
in their DNA that made them stand out and ultimately
made them more dangerous. There was. in one very
specific, very dangerous way. The leverage. The
leverage. The debt. Hui Kean absolutely loved
debt. He was pathologically aggressive with it.
So while a company like Von Kay was maybe a little
more cautious? A little more conservative, yeah.
Evergrande was just running on pure, high -octane
financial fuel. They became massive players in
the global junk bond market. Okay, let's break
that down. Because we all hear the term junk
bond thrown around. For someone who isn't a Wall
Street trader, why on earth would you buy a bond
that has the word junk in its name? The very
fair question. The answer is one word. Yield.
The interest rate. The return you get. Exactly.
When a safe investment, like a U .S. Treasury
bond, is paying you maybe 2%, Evergrande comes
along and says, give us your money and we'll
pay you 10%. Or 12 or sometimes even more. Wow.
So if you're an investment manager in New York
or London or Tokyo, that's incredibly tempting.
You take that risk and you justify it to yourself.
You say, well, it's one of the biggest companies
in China. It's a national champion. Beijing will
never let it fail. The classic too big to fail
argument. The ultimate moral hazard. It defined
the entire market for a decade. But the junk
bonds were really just one part of their funding.
Yeah. Right. There was another layer to how they
got their cash that was even more. Let's say
creative. Oh, yeah. Much more insidious than
just the bonds. It's a model we call supply -side
finance. This is something I really wanted to
dig into. Because on paper, it seems simple.
They borrow from banks. They sell bonds. But
in reality, they were borrowing from, well, from
everyone. Their own suppliers, their own customers.
Everyone. To really get this, you have to understand
the pre -sale model, which is common in China.
Right. You buy the apartment before it's even
built. Correct. You, the home buyer, will go
to an Evergrande sales office. You'll see a model
of a building that's just a dirt plot right now.
And you'll pay the full amount in cash or you'll
take out a mortgage for the full amount years
before you get the keys. So Evergrande gets all
this cash from thousands of buyers up front.
Exactly. They have this enormous pile of cash,
but they still have to actually, you know, build
the building. Pay with the concrete, the steel,
the workers. Right. But here's the genius and
the poison of their model. Instead of using that
home buyer's cash to pay the construction crew
or the cement supplier or the painters, Evergrande
would issue them something called a commercial
acceptance bill. A commercial acceptance bill.
That sounds very official and important. It does,
doesn't it? What is it really? It's an IOU. That's
all it is. It's a piece of paper, a promise that
says Evergrande will pay you, the cement supplier,
one million yuan in six months or nine months
or a year. So the cement guy does all the work,
delivers all the materials and gets a piece of
paper for his trouble. He gets a piece of paper.
And here's where it gets even crazier. Because
Evergrown was so massive, so seemingly powerful,
these pieces of paper, these IOUs, started circulating
in the economy like currency. What do you mean?
The cement supplier who needs to buy sand and
gravel would take that Evergrande IOU and just
give it to the quarry owner as payment. And the
quarry owner would accept it. Yes, because he
could then take it and give it to a trucking
company to pay for fuel. Everyone accepted them
because they all believed that at the end of
the day, Evergrande was good for the money. So
they were essentially printing their own private
money, a parallel financial system based on their
own credit worthiness. In a way, yes. It was
a brilliant and terrifying way to extract liquidity
from the entire supply chain. They kept the homebuyers'
actual cash for themselves, and they paid their
suppliers with promises. And that cash they kept,
they used it to go buy more land. to start the
cycle all over again. Exactly. It is a perfect
money printing machine. It works beautifully
as long as two very specific things continue
to happen. Okay, let me guess. Number one, home
prices have to keep going up forever. Correct.
As long as the market is hot, new buyers keep
lining up to give you cash up front. No problem.
And number two, you have to be able to keep borrowing
new money to pay off the old IOUs when they finally
come due. You've got it. The whole system relies
on an endless flow of new credit. It's what financial
analysts politely call a Ponzi adjacent structure.
You absolutely need fresh cash inflows to pay
off your past liabilities. And Hu Qian, he wasn't
just sitting on this mountain of cash and IOUs.
He was spending it. Which brings us to part two
of this saga, the empire of stuff. Because looking
back at their diversification strategy now, from
our 2026 perspective, it's just... It's wild.
It's completely unhinged. It is classic corporate
hubris. You see this pattern again and again
in business history. A company completely dominates
one sector, and the founder or CEO starts to
believe they have the Midas touch. They think,
I'm a genius at building condos, therefore I
must also be a genius at raising pigs. Precisely.
The logic doesn't have to make sense. The belief
is in their own brilliance. So let's start with
the most visible part of this empire. The sports
team, Guangzhou Evergrande FC. This was actually,
in the beginning, a brilliant marketing move.
They bought the team in 2010 when it was in a
bit of trouble. And they just poured money into
it. An unbelievable amount of money. They bought
the best foreign players from South America and
Europe. They hired world -class coaches like
Marcello Lippi, who had won the World Cup with
Italy. And it worked. They started winning everything.
They won the AFC Champions League in 2013, which
is a huge deal in Asia. It is. And it put the
Evergrande brand on the map across the entire
continent. It associated the name Evergrande
with victory, with national pride, with excellence.
So when you bought an Evergrande apartment, you
felt like you were buying into that winning team.
That was the idea. And they doubled down on it.
In 2020, they even started construction on a
new stadium in Guangzhou. The pictures of this
thing are incredible. It was designed to look
like a giant glowing lotus flower. It was going
to hold 100 ,000 people, one of the biggest soccer
-specific stadiums in the world. But then the
logic starts to get a little fuzzy. Let's talk
about the water, Evergrande Spring. Oh, the water,
yes. So in 2014, they decide, for reasons that
are still a bit baffling, that they are going
to dominate China's premium bottled water market.
And to launch it, they hired one of the most
famous people on the planet. They hired Jackie
Chan. Of course they did. They spent a fortune
on advertising on Super Bowl style TV commercials.
But this whole venture is a perfect example of
how throwing money at a problem doesn't guarantee
success, especially if you don't understand the
new industry. They made a critical almost. amateurish
mistake with the branding. The label controversy.
The label controversy. So they sourced the water
from a mountain range on the border between China
and North Korea. Okay. Now, in China, this mountain
is called Changbai Shan. But in Korea, it's known
as Mount Baekdusan. And it's a deeply sacred,
culturally significant site for Koreans. I think
I see where this is going. Evergrande slapped
the Chinese name Changbai Shan on the label and
started trying to sell it all over the world.
Including in South Korea? South Korea. Including
South Korea. The backlash was instantaneous and
furious. South Korean consumers were outraged.
It was seen as a cultural appropriation, a political
statement. It became a diplomatic incident over
a bottle of water. It's just incredible. You
have a real estate developer accidentally starting
a geopolitical feud because they didn't do a
five -minute Google search or run a focus group.
And financially, it was a complete and utter
disaster. They lost something like 4 billion,
over half a billion U .S. dollars on their water,
dairy, and grain businesses before they finally
sold them off in 2016. Wait, dairy and grain
too? Oh, yeah. They were in everything. And pigs.
We can't forget the pigs. Right. In 2016, they
invested 300 million yuan to build 110 pig farms
in Guizhou province. I mean, why? What is the
strategic link between building a 50 -story apartment
tower and raising pigs? Well, there are two ways
to look at it. The charitable interpretation
is that pork is a staple food in China and pork
prices were rising, so they saw a business opportunity.
Okay, that's the charitable view. What's the
cynical one? The cynical view is that it was
always about the land. Agricultural land is much,
much cheaper to acquire from local governments
than residential land. So the theory is you acquire
huge tracts of land under the guise of building
pig farms, and then maybe, just maybe down the
line, you can get it rezoned for property development.
Or at the very least, you use the land itself
as collateral to get more loans. It always comes
back to land and loans. Always. But the biggest
side quest, the venture that truly became a black
hole for capital, was the car. The Hengshi Dream.
This, in retrospect, really does feel like the
nail in the coffin. It was the peak of the hubris.
In 2019, Evergrande boldly announces they are
going to become the world's largest and most
powerful electric vehicle manufacturer. Not just
a manufacturer. The biggest. Bigger than Tesla.
Bigger than Volkswagen. And at this point, they
had never built a car before. They'd never manufactured
so much as a scooter or a bicycle. Nothing with
wheels. And Houkihan's strategy for achieving
this was, well, it was summed up perfectly in
a speech he gave. His official strategy, and
I'm quoting here, was, buy, buy, buy, merch,
merch, merch, big, big, big. That sounds like
something a villain in a 1980s movie would say.
That can't be a real corporate strategy. It was.
And he meant it. Since they had zero research
envelopment, they decided they would just buy
it all. So what did they buy? Everything they
could. They threw $2 billion at a stake in a
struggling American EV startup, Faraday Future.
They bought a Swedish car company, NEVS, outright.
They bought a Dutch company that made in -wheel
motors. They bought a Japanese battery technology
company. They were trying to stitch together
a car company like some kind of Frankenstein's
monster just by writing enormous checks. And
after all that buying, Did they ever actually
make a car? Barely. They produced a few hundred
of one model, the Hengchi 5, but they held these
huge flashy events where they'd show off nine
different prototypes at once. The problem was
none of them were ready for mass production.
It was all just for show. It was theater to impress
investors and, crucially, local governments.
And we now know, looking back from 2026, how
hollow it was. In June of 2024, the Chinese government
officially ordered the EV unit to repay 1 .9
billion yuan in state subsidies. Why? Because
they never actually... delivered on their promises.
Because they failed to meet their contractual
obligations. They took the money but never built
the factories or produced the cars they said
they would. The whole thing was a shell. And
all of this empire of stuff, the cars, the theme
parks, the water, the soccer team, it all required
a constant, massive fire hose of cash to keep
it going. A fire hose that was being supplied
by the property development business. And in
2020, someone in Beijing finally decided to turn
off the tap. They didn't just turn it off. They
smashed the faucet with a sledgehammer. This
is part three, the turning point, the policy
known as the three red lines. To understand why
Evergrande and the whole Chinese property sector
fell off a cliff, you have to understand the
mindset of the government in Beijing in 2020.
They were getting scared. They were terrified.
They looked at the property market and they didn't
see a vibrant engine of growth anymore. They
saw a bubble, a massive debt -fueled bubble that
was threatening to swallow the entire Chinese
economy. And this is when President Xi Jinping
came out with that famous slogan. The one that
sent a chill down the spine of every developer
in the country. Property is to be lived in, not
to be speculated on. Now you hear slogans from
governments all the time. Markets usually just
shrug them off. Why was this one so different?
Because they backed it up with policy. With cold,
hard mathematical rules, the People's Bank of
China and the Ministry of Housing got together
and issued the three red lines policy. And this
wasn't a suggestion. It was not a suggestion.
It was a direct order to the banks. If a property
developer crossed these lines, the banks were
forbidden from lending them any more money. Full
stop. OK, so we absolutely have to understand
these three lines. They are the murder weapon,
so to speak, that killed the old model. What
were they? They're a bit technical, but we can
break them down pretty simply. The first red
line was a liability to assets ratio of less
than 70%. In simple terms. Basically, the value
of everything you owe can't be more than 70 %
of the value of everything you own. It's a measure
of your overall indebtedness. Okay, red line
one. What was the second? A net gearing ratio
of less than 100%. This one compares your total
debt to your total equity or ownership stake.
It's a measure of how much of the company is
funded by debt versus the owner's money. So far,
so good. good. Who's the third one? The third
one was, in my opinion, the most critical for
day -to -day survival. It was a cash to short
-term debt ratio of at least one. That one sounds
like the most direct gut punch. It is. It's a
very simple, brutal question. Do you have enough
cash in the bank right now, today, to pay off
all the loans and bills that are due in the next
12 months? You need at least $1 of cash for every
dollar of short -term debt. And how did Everbrond
do on this test one out of three two out of three
they crossed all three red lines they were deep
in what the government designated as the red
zone so the government effectively sent a memo
to every bank in china saying cut them off no
more loans And you have to remember their business
model. The Ponzi adjacent one. The one that needed
a constant flow of new loans just to pay off
the old loans and the old IOUs. So when the new
loans stopped. The entire machine just seized
up. It was like throwing a wrench into the gears
of a massive engine. They couldn't pay their
suppliers. The suppliers walked off the job sites.
Construction on hundreds of apartment buildings
just stopped. And the homebuyers, the people
who have paid all their money up front, they
see the construction cranes stop moving. And
they panic. Many of them stopped paying their
mortgages in protest. It became a full -blown
death spiral. The desperation inside the company
at this point must have been just off the charts.
I remember reading the reports about how they
started trying to get money from their own employees.
Yes, this is one of the darkest and saddest parts
of the whole saga. They essentially forced their
own staff. From executives down to receptionists
to buy high yield wealth management products
that were issued by the company. They were forcing
their employees to loan the company their life
savings. Pretty much. The message was, if you
want to get your bonus or maybe even keep your
job, you need to invest in these products. That
is just, it's beyond predatory. It's the sign
of a company that knows the end is coming and
is just trying to grab any cash it can to survive
for another day. So that brings us to the collapse
itself. the slow -motion train wreck that played
out from 2021 through 2023. By the summer of
2021, the cracks were no longer hidden. They
were giant canyons visible to the entire world.
They started missing payments on their international
bonds. The gent bonds we talked about earlier.
Yes. The rating agencies Fitch, S &P slashed
their ratings and eventually declared them to
be in restricted default. And the numbers that
started to come out in their financial filings?
They were just staggering. Their total liabilities
eventually stood at around 2 .4 trillion yuan.
Which is roughly 340 billion U .S. dollars. I
just want to pause on that number again. 340
billion dollars. That is more than the entire
annual economic output of countries like Finland
or Portugal. It's more than the GDP of New Zealand.
One single company owed more money than entire
developed nations produce in a year. And the
big fear at the time in September 2021 was contagion.
The Lehman Brothers moment. That was the phrase
on everyone's lips. If Evergrown collapses, does
it take the banks down with it? Do all the other
property developers fall like dominoes? Global
stock markets were plunging on this fear. But
unlike with Lehman Brothers in the U .S. in 2008,
the government in Beijing didn't step in with
a massive bailout. No, they made a very clear
choice. They wanted to manage the demolition.
They wanted to prick the bubble without blowing
up the entire economy. So they let Evergrande
suffer the consequences. Which led to Evergrande
filing for Chapter 15 bankruptcy protection in
New York in August 2023. Right. Why New York?
The company is Chinese. It's listed in Hong Kong.
Why file in Manhattan? It's a legal move. Chapter
15 is for foreign companies. It essentially asks
a U .S. court to recognize the restructuring
efforts happening elsewhere and, crucially, to
protect any U .S.-based assets the company has
from being seized by creditors while they try
to work out a deal. But it was too little, too
late. The restructuring plans never really came
together. No. And when trading of their stock
finally resumed in Hong Kong after a 17 -month
halt, the market delivered its verdict. The stock
plunged 79 percent in a single day. It went from
a peak of over 31 Hong Kong dollars in 2017 to
just 35 cents. It was effectively worthless.
But up until this point, you could still, if
you squinted, frame this whole story as a colossal
business failure, a tragedy of hubris and too
much debt. You could. A very, very big failure,
but a failure nonetheless. But then we get to
part five, the fraud. And the narrative changes
completely. It does. This is where the story
shifts from bad business decisions to a coordinated
criminal enterprise. March 2024. The China Securities
Regulatory Commission, the CSRC, finishes its
investigation and drops an absolute bombshell.
What did they find? They found that Evergrande
hadn't just been struggling. They had been lying.
On an industrial, almost incomprehensible scale,
they had been systematically overstating their
revenue for years. And the numbers? The numbers
are just insane. In 2019, they inflated their
revenue by 214 billion yuan. That was about half
50 % of their officially reported income for
the year. So half the money they said they made
in 2019 was fake. Half of it was fake. And then
it got worse. In 2020, they inflated their revenue
by nearly 350 billion yuan. And what percentage
was that? That was almost 80 % of their reported
revenue. Wait, wait, wait. Let me get this straight.
80%. So you're telling me that for every dollar
Evergrande claimed to have earned in revenue
in 2020, 80 cents of it was completely imaginary?
Essentially, yes. The total overstatement across
those two years was nearly 78 billion U .S. dollars.
How? I mean, physically, how do you fake 78 billion
dollars in revenue? You can't just add zeros
to a spreadsheet, can you? There has to be a
mechanism. There is. And it goes back to a seemingly
boring accounting principle called revenue recognition.
Okay, explain that. In property development,
the generally accepted conservative accounting
rule is that you cannot count the money from
selling an apartment as revenue until the project
is finished and you actually hand the keys over
to the buyer. That makes sense. Because until
then, if you fail to build the house, you technically
owe them the money back. Exactly. Until you deliver
the product, that cash you received is a liability
on your books, not revenue. Grant just decided
to ignore that rule. They decided to create their
own reality. They started recognizing revenue
way, way earlier in the process. Sometimes as
soon as a contract was signed, years before the
building was even close to being finished, they
were essentially using an accounting time machine.
They were pulling money they hoped to earn in,
say, 2023 and claiming they had already earned
it in 2020. Precisely. And this had two massive
and very deliberate effects. One, it made them
look incredibly profitable on caper, which kept
their stock price high and made investors happy.
OK. And who, and this is the absolutely crucial
part, by inflating their revenue, they were also
inflating their assets. And that allowed them
to pass or appear to pass the debt ratio tests,
which in turn. allowed them to borrow even more
money to keep the whole scheme going. It's a
perfect circle of fraud. You fake the profit
to get the loan, which you use to start a new
project, which you use to get cash up front from
buyers, which you then book as fake profit. It's
a self -perpetuating machine powered by lies.
And that $78 billion figure, I mean, just to
put that in perspective for everyone, the famous
Enron scandal was about a billion dollars in
fake profit. The WorldCom fraud was around $11
billion. This isn't a completely different universe
of deceit. It is, by a huge margin, the largest
financial fraud in history. Which brings us to
the question that has just been burning a hole
in my mind since I first read these reports.
Where were the watchdogs? Yes. You don't hide
$78 billion under a mattress. This company is
a publicly listed giant. Somebody had to look
at these numbers. Somebody had to sign off on
the audit. And that somebody was PricewaterhouseCoopers,
PwC, one of the big four global accounting firms,
the supposed gold standard of financial verification.
They were Evergrande's auditor for more than
a decade. They were. And they signed off on the
2019 and 2020 financial accounts. The very years
with the 50 percent and 80 percent fake revenue
without raising any major red flags. They gave
it a clean bill of health. How is that even possible?
I mean, at this level, are we talking about gross
incompetence or are we talking about complicity?
That is the multi -billion dollar question that
liquidators and courts are still trying to answer.
The official investigation from the Hong Kong
accounting regulator found that PwC failed to
gather sufficient audit evidence. They noted
that Evergrande itself had raised going concern
risks in its half -year reports, but PwC didn't
reference this in their final audit. So the company
itself was hinting that it might go bankrupt
and the auditor just ignored it. They didn't
highlight it in their final opinion. Now, PwC
eventually resigned as Evergrande's auditor in
January 2023, citing disagreements over the 2021
audit. But by then, the damage was long since
done. The house had already burned down. And
the punishment from the authorities when it came
was severe. It was historic. In September 2024,
the Chinese Ministry of Finance took an unprecedented
step. They suspended PWC from operating in mainland
China for six months. A six -month ban. For a
major accounting firm, that's not just a slap
on the wrist. That's a death sentence for your
business there. It really is. Your clients can't
wait six months for you to be allowed to work
again. They have audits they need to file. They
have to leave you. And they did. There was a
mass exodus. Dozens of major state -owned and
private companies dropped PWC as their auditor.
And there was a mass exodus of staff. By June
of 2025, we know that at least 30 partners in
the Hong Kong office and another 77 partners
in mainland China had left the firm. The brand
was just decimated in the region. It really just
shakes your faith in the entire financial system.
Yeah. You see that stamp on a report that says
audited by PwC and you're conditioned to think,
OK, these numbers are real. They've been checked.
And this is a brutal reminder that an audit is
not a guarantee. It's an opinion based on the
information that the company's management provides.
And if the management is fundamentally determined
to lie and the auditor is, let's be generous
and say, not curious enough, catastrophe happens.
So let's bring the story to its bitter end. January
2024. The liquidation? Yes. After months and
months of failed restructuring talks, a judge
in the Hong Kong High Court finally said, Enough
is enough. There is no viable plan here. And
he ordered the company to be liquidated, to be
wound down. But that created this fascinating
and very complicated legal mess. It did. Because
you have a court in Hong Kong issuing an order.
But 90 % of Evergrande's assets, the actual buildings
and land, are in mainland China. The famous...
One country, two systems problem. In a nutshell,
the liquidators, a big international firm called
Alvarez and Marsal, were appointed and their
job was to try and seize assets in the mainland
to sell them off and pay back the creditors,
especially the foreign bondholders. But the courts
and the local governments in the mainland had
a very different set of priorities. Their number
one, two and three priorities were social stability.
Their main concern is finishing the apartments
for the millions of people who have already paid
for them. Keeping the local citizens happy is
more important than paying back a hedge fund
in New York. Infinitely more important. That's
the social contract in China. So the local governments
effectively seized control of many of the projects
to ensure they got completed. The foreign bondholders
who are owed billions. They were pushed to the
very back of the line. So if you were one of
those investors who bought the junk bonds paying
12%, you're likely getting, what, close to zero?
Pennies on the dollar if they're lucky. It's
a very, very expensive lesson in what's called
structural subordination. Your claims as a foreign
creditor are subordinate to the claims of the
domestic system. So here we are, February 2026.
The company is officially delisted and dissolved.
Hui Keyan is under police control. The auditors
are disgraced. The investors are wiped out. What
is the lasting legacy of this whole disaster?
I think it marks the definitive end of an entire
era of China's economic model. That build, borrow,
build engine, which was fueled by a constantly
rising property market, powered China's incredible
growth for 30 years. And it's gone. It's over.
And now they have to find something to replace
it. Right. China is now trying to pivot to what
they call high quality growth, things like advanced
manufacturing, green energy, artificial intelligence.
But that transition is proving to be incredibly
painful. The property sector used to account
for something like a quarter of China's entire
GDP. You just can't replace a hole that big overnight.
And what's the lesson for the global investor?
For that person in London or New York? It's a
brutal reality check. It proved that the China
premium, that old idea that you could get high
growth with an implicit government guarantee
behind it was a mirage. The political and systemic
risks are very, very real. I want to leave our
listeners with one final provocative thought,
something you touched on earlier. We know the
whole story of Evergrande now because they collapsed.
They got caught because the music stopped and
they ran out of cash. Yes. Their failure exposed
the fraud. But if this practice of aggressive
revenue recognition was considered, let's say,
standard practice in the industry at the time,
and if the world's biggest auditors were willing
to sign off on it. You're asking the big question.
You're asking if there are other Evergrandes
still out there, maybe ones that just manage
their debt a little better. Exactly. Are we looking
at one singular, uniquely bad apple? Or was the
entire orchard rotten during that boom period?
Because if $78 billion of revenue at one company
can just be conjured out of thin air, how can
we be confident that any of the spectacular numbers
we saw coming out of that era were real? That
is the terrifying question that I think keeps
a lot of people in finance awake at night. When
you look at the debt loads and the accounting
practices of other major conglomerates that were
operating under the exact same incentives with
the same auditors and the same regulatory environment,
it really makes you wonder if we've actually
seen the bottom of this crisis yet. A sobering
thought to end on. A reminder that the numbers
on the screen are only as good as the people
who are typing them in. Indeed. That's all we
have for this deep dive into the spectacular
rise and the even more spectacular fall of Evergrande.
A story of ambition, of fraud, and of a $300
billion reality check. Thanks for listening.
We will catch you next time. Goodbye.