WEBVTT 00:00:00.000 --> 00:00:01.960 Welcome back to the Deep Dive. It is Friday, 00:00:02.240 --> 00:00:06.900 February 6th, 2026. Hello! Today, we are doing 00:00:06.900 --> 00:00:08.980 something a little bit different. You know, we 00:00:08.980 --> 00:00:10.679 usually focus on what's happening right now, 00:00:10.679 --> 00:00:12.400 this week, this month. The immediate present, 00:00:12.580 --> 00:00:16.260 yeah. Exactly. But today, we need to look back. 00:00:16.500 --> 00:00:19.559 We are fifting through the wreckage of something. 00:00:19.940 --> 00:00:23.839 A collapse that's still... I think, smoldering 00:00:23.839 --> 00:00:26.019 in the landscape of a global economy. It is. 00:00:26.059 --> 00:00:28.920 I mean, the site was officially cleared just 00:00:28.920 --> 00:00:32.399 a few months ago. But the scar, the crater it 00:00:32.399 --> 00:00:34.420 left behind, that is going to be there for a 00:00:34.420 --> 00:00:36.820 very, very long time. We are talking, of course, 00:00:36.880 --> 00:00:39.840 about the China Evergrande Group. And I know 00:00:39.840 --> 00:00:41.500 what you're probably thinking if you've been 00:00:41.500 --> 00:00:43.240 following the news for the last five years. Oh, 00:00:43.340 --> 00:00:45.579 that story. Right. I know this story. Big Chinese 00:00:45.579 --> 00:00:47.759 real estate company took on way too much debt 00:00:47.759 --> 00:00:50.280 and went bust. End of story. And that is the 00:00:50.280 --> 00:00:53.219 headline. Yes. But that's like like saying the 00:00:53.219 --> 00:00:55.520 Titanic was just a ship that had some trouble 00:00:55.520 --> 00:00:58.259 with ice. Right. It completely misses the sheer 00:00:58.259 --> 00:01:01.780 scale, the mind bending complexity and frankly, 00:01:01.799 --> 00:01:04.000 the absolute absurdity of what actually went 00:01:04.000 --> 00:01:06.420 down. It really does. Because when we started 00:01:06.420 --> 00:01:09.159 digging into the source material for this, you 00:01:09.159 --> 00:01:11.540 know, the court filings from Hong Kong, the. 00:01:12.090 --> 00:01:14.209 regulatory reports out of Beijing, the bankruptcy 00:01:14.209 --> 00:01:15.909 proceedings that happened in Manhattan of all 00:01:15.909 --> 00:01:18.510 places, we realize this story isn't just about 00:01:18.510 --> 00:01:21.189 buildings. No, not at all. It's a story about 00:01:21.189 --> 00:01:24.469 the largest human migration in history. It's 00:01:24.469 --> 00:01:26.170 a story about electric cars that never really 00:01:26.170 --> 00:01:28.909 existed. It's about pig farms that were maybe 00:01:28.909 --> 00:01:30.870 not really about pigs. Exactly. It's about a 00:01:30.870 --> 00:01:34.230 soccer team that conquered a continent and a 00:01:34.230 --> 00:01:37.810 financial fraud so massive it makes a company 00:01:37.810 --> 00:01:40.750 like Enron look like a rounding error at a lemonade 00:01:40.750 --> 00:01:43.239 stand. That is the part that just floors me every 00:01:43.239 --> 00:01:45.000 time I look at it, the numbers. We're talking 00:01:45.000 --> 00:01:47.519 about a company that, at its peak, was the most 00:01:47.519 --> 00:01:50.180 valuable real estate brand on the entire planet. 00:01:50.379 --> 00:01:53.120 Their revenues were over 500 billion yuan. And 00:01:53.120 --> 00:01:56.180 now, as of August 2025, just a few months back, 00:01:56.379 --> 00:02:00.219 it's gone. Wiped out. Delisted from the Hong 00:02:00.219 --> 00:02:03.120 Kong exchange. That ticker symbol, 3333, it's 00:02:03.120 --> 00:02:06.280 empty space now. And that empty space represents 00:02:06.280 --> 00:02:09.599 hundreds of billions of dollars. So our mission 00:02:09.599 --> 00:02:12.520 today is to get past those headlines. We want 00:02:12.520 --> 00:02:14.400 to understand the mechanism of the disaster. 00:02:14.759 --> 00:02:19.699 Yes. How do you actually fake $78 billion in 00:02:19.699 --> 00:02:21.740 revenue? I mean, what does that even look like? 00:02:21.960 --> 00:02:24.020 And how do you fool some of the world's biggest, 00:02:24.080 --> 00:02:26.539 most respected auditors while you're doing it? 00:02:26.990 --> 00:02:30.289 And maybe the biggest question of all, why did 00:02:30.289 --> 00:02:32.250 a guy who was brilliant at building apartments 00:02:32.250 --> 00:02:34.610 suddenly decide he needed to sell bottled water? 00:02:34.789 --> 00:02:37.129 And build a theme park and start an EV company. 00:02:37.530 --> 00:02:40.509 We're going to find those red lines that were 00:02:40.509 --> 00:02:43.229 crossed, both the government's literal red lines 00:02:43.229 --> 00:02:46.150 and the ethical ones. But to understand the collapse, 00:02:46.210 --> 00:02:47.650 I think you're right. We have to understand the 00:02:47.650 --> 00:02:49.909 height, the peak of the mania. We have to go 00:02:49.909 --> 00:02:52.509 back to the beginning. Back to 1996, Guangzhou 00:02:52.509 --> 00:02:55.469 in southern China. So set the scene for us. 1996, 00:02:56.009 --> 00:02:57.919 I was... Well, I was definitely not paying attention 00:02:57.919 --> 00:03:00.199 to the Chinese property market then. What was 00:03:00.199 --> 00:03:02.539 the vibe? What was the environment that allowed 00:03:02.539 --> 00:03:04.599 this to happen? You really have to visualize 00:03:04.599 --> 00:03:07.120 the single greatest construction site the world 00:03:07.120 --> 00:03:09.460 has ever seen. That was China in the mid 90s. 00:03:09.479 --> 00:03:13.139 Wow. This was the absolute dawn of the mass urbanization 00:03:13.139 --> 00:03:16.800 policy. The government in Beijing was actively, 00:03:16.960 --> 00:03:19.659 explicitly encouraging millions and millions 00:03:19.659 --> 00:03:22.460 of people to leave the countryside, to leave 00:03:22.460 --> 00:03:25.599 the farms, the small villages and move into the 00:03:25.599 --> 00:03:28.280 cities. And the numbers on this are just staggering. 00:03:28.460 --> 00:03:30.759 They're almost unbelievable. We are talking about. 00:03:31.259 --> 00:03:34.099 Roughly 20 million people moving into urban centers. 00:03:34.219 --> 00:03:37.699 Quite a million people. Every single year. Hold 00:03:37.699 --> 00:03:39.419 on, let me just pause on that. That's like the 00:03:39.419 --> 00:03:41.939 entire population of the state of Florida. or 00:03:41.939 --> 00:03:44.259 Australia, deciding to pack up and move to a 00:03:44.259 --> 00:03:47.240 new city every 12 months. For more than a decade 00:03:47.240 --> 00:03:50.199 straight? Uh -huh. And all of these people, they 00:03:50.199 --> 00:03:53.060 need a place to live. They need roofs over their 00:03:53.060 --> 00:03:54.560 heads. They need apartments. Right. They need 00:03:54.560 --> 00:03:58.060 housing. And into this massive vacuum of demand 00:03:58.060 --> 00:04:03.500 steps a man named Hui Kaiyan, or Zhut Zhan in 00:04:03.500 --> 00:04:05.699 Mandarin. And he founds a company. At first it's 00:04:05.699 --> 00:04:07.939 called Hongda, but it eventually becomes Evergrande. 00:04:08.000 --> 00:04:11.900 Exactly. And this founder, Hui Kaiyan, He wasn't 00:04:11.900 --> 00:04:13.319 from a wealthy background or anything, right? 00:04:13.360 --> 00:04:15.500 He didn't come from money. Not at all. Very, 00:04:15.620 --> 00:04:17.639 very humble background. Grew up in rural poverty. 00:04:17.899 --> 00:04:21.120 But he had this incredible, almost predatory 00:04:21.120 --> 00:04:23.699 instinct for what the market wanted. Which at 00:04:23.699 --> 00:04:26.540 first wasn't luxury condos. No, no, at least 00:04:26.540 --> 00:04:28.399 not initially. He wasn't building penthouses 00:04:28.399 --> 00:04:31.480 for billionaires. He was targeting the new rising 00:04:31.480 --> 00:04:33.920 middle and upper middle classes. So the people 00:04:33.920 --> 00:04:35.939 getting their first real jobs in the city. The 00:04:35.939 --> 00:04:39.420 factory managers, the office workers, the people 00:04:39.420 --> 00:04:41.339 who were finally earning enough money to buy 00:04:41.339 --> 00:04:43.540 a piece of what was being sold as the Chinese 00:04:43.540 --> 00:04:47.319 dream. So he just rides this enormous wave of 00:04:47.319 --> 00:04:50.139 urbanization. And the growth is, I mean, the 00:04:50.139 --> 00:04:52.120 word explosive doesn't even do it justice. It's 00:04:52.120 --> 00:04:54.819 violent. It really is. They have their IPO in 00:04:54.819 --> 00:04:57.379 2009 on the Hong Kong Stock Exchange. They raise 00:04:57.379 --> 00:05:00.680 over 700 million U .S. dollars. Which was a huge 00:05:00.680 --> 00:05:03.000 amount of money back then. A fortune. And from 00:05:03.000 --> 00:05:05.860 there, it just goes vertical. By 2017, they're 00:05:05.860 --> 00:05:08.220 the second largest property developer in all 00:05:08.220 --> 00:05:11.920 of China by sales. By 2018, just one year later, 00:05:12.100 --> 00:05:14.160 they become the most valuable real estate company 00:05:14.160 --> 00:05:16.579 in the world. And during this time, they became 00:05:16.579 --> 00:05:20.120 part of this kind of exclusive club at the top, 00:05:20.199 --> 00:05:21.879 right? Right. There was a nickname for them. 00:05:22.110 --> 00:05:24.930 There was. In the industry, they were known as 00:05:24.930 --> 00:05:28.470 Wan Hengbi. Wan Hengbi. It sounds like an ancient 00:05:28.470 --> 00:05:30.699 dynasty or something. It kind of was. It was 00:05:30.699 --> 00:05:33.519 in a corporate sense. It was the big three. One 00:05:33.519 --> 00:05:36.180 stood for Wanke, which was another huge developer. 00:05:37.040 --> 00:05:39.800 Heng was for Hengda, that's Evergrande. And B 00:05:39.800 --> 00:05:42.339 was for Country Garden. So these were the three 00:05:42.339 --> 00:05:45.180 giants. These three companies were, I mean, literally 00:05:45.180 --> 00:05:48.199 reshaping the skyline of practically every major 00:05:48.199 --> 00:05:50.680 city in China. And a lot of minor ones, too. 00:05:50.740 --> 00:05:53.839 They were active in over 170 cities. But Evergrande 00:05:53.839 --> 00:05:55.360 was different from the other two. There was something 00:05:55.360 --> 00:05:57.839 in their DNA that made them stand out and ultimately 00:05:57.839 --> 00:06:00.779 made them more dangerous. There was. in one very 00:06:00.779 --> 00:06:03.980 specific, very dangerous way. The leverage. The 00:06:03.980 --> 00:06:07.379 leverage. The debt. Hui Kean absolutely loved 00:06:07.379 --> 00:06:09.899 debt. He was pathologically aggressive with it. 00:06:10.000 --> 00:06:12.259 So while a company like Von Kay was maybe a little 00:06:12.259 --> 00:06:13.980 more cautious? A little more conservative, yeah. 00:06:14.399 --> 00:06:17.720 Evergrande was just running on pure, high -octane 00:06:17.720 --> 00:06:20.379 financial fuel. They became massive players in 00:06:20.379 --> 00:06:23.019 the global junk bond market. Okay, let's break 00:06:23.019 --> 00:06:25.180 that down. Because we all hear the term junk 00:06:25.180 --> 00:06:28.480 bond thrown around. For someone who isn't a Wall 00:06:28.480 --> 00:06:32.060 Street trader, why on earth would you buy a bond 00:06:32.060 --> 00:06:35.360 that has the word junk in its name? The very 00:06:35.360 --> 00:06:38.519 fair question. The answer is one word. Yield. 00:06:38.860 --> 00:06:41.360 The interest rate. The return you get. Exactly. 00:06:42.139 --> 00:06:44.600 When a safe investment, like a U .S. Treasury 00:06:44.600 --> 00:06:48.120 bond, is paying you maybe 2%, Evergrande comes 00:06:48.120 --> 00:06:50.660 along and says, give us your money and we'll 00:06:50.660 --> 00:06:54.829 pay you 10%. Or 12 or sometimes even more. Wow. 00:06:55.050 --> 00:06:57.329 So if you're an investment manager in New York 00:06:57.329 --> 00:06:59.769 or London or Tokyo, that's incredibly tempting. 00:06:59.949 --> 00:07:02.529 You take that risk and you justify it to yourself. 00:07:02.709 --> 00:07:04.189 You say, well, it's one of the biggest companies 00:07:04.189 --> 00:07:06.670 in China. It's a national champion. Beijing will 00:07:06.670 --> 00:07:08.730 never let it fail. The classic too big to fail 00:07:08.730 --> 00:07:10.930 argument. The ultimate moral hazard. It defined 00:07:10.930 --> 00:07:13.410 the entire market for a decade. But the junk 00:07:13.410 --> 00:07:15.269 bonds were really just one part of their funding. 00:07:15.290 --> 00:07:17.230 Yeah. Right. There was another layer to how they 00:07:17.230 --> 00:07:21.509 got their cash that was even more. Let's say 00:07:21.509 --> 00:07:23.550 creative. Oh, yeah. Much more insidious than 00:07:23.550 --> 00:07:26.290 just the bonds. It's a model we call supply -side 00:07:26.290 --> 00:07:28.410 finance. This is something I really wanted to 00:07:28.410 --> 00:07:32.430 dig into. Because on paper, it seems simple. 00:07:32.509 --> 00:07:35.089 They borrow from banks. They sell bonds. But 00:07:35.089 --> 00:07:38.829 in reality, they were borrowing from, well, from 00:07:38.829 --> 00:07:41.389 everyone. Their own suppliers, their own customers. 00:07:41.670 --> 00:07:44.410 Everyone. To really get this, you have to understand 00:07:44.410 --> 00:07:47.889 the pre -sale model, which is common in China. 00:07:48.170 --> 00:07:50.500 Right. You buy the apartment before it's even 00:07:50.500 --> 00:07:53.660 built. Correct. You, the home buyer, will go 00:07:53.660 --> 00:07:56.379 to an Evergrande sales office. You'll see a model 00:07:56.379 --> 00:07:58.639 of a building that's just a dirt plot right now. 00:07:58.759 --> 00:08:01.319 And you'll pay the full amount in cash or you'll 00:08:01.319 --> 00:08:03.360 take out a mortgage for the full amount years 00:08:03.360 --> 00:08:06.089 before you get the keys. So Evergrande gets all 00:08:06.089 --> 00:08:08.730 this cash from thousands of buyers up front. 00:08:08.810 --> 00:08:11.170 Exactly. They have this enormous pile of cash, 00:08:11.389 --> 00:08:13.730 but they still have to actually, you know, build 00:08:13.730 --> 00:08:15.790 the building. Pay with the concrete, the steel, 00:08:15.930 --> 00:08:18.610 the workers. Right. But here's the genius and 00:08:18.610 --> 00:08:21.550 the poison of their model. Instead of using that 00:08:21.550 --> 00:08:23.769 home buyer's cash to pay the construction crew 00:08:23.769 --> 00:08:27.029 or the cement supplier or the painters, Evergrande 00:08:27.029 --> 00:08:28.750 would issue them something called a commercial 00:08:28.750 --> 00:08:31.269 acceptance bill. A commercial acceptance bill. 00:08:31.350 --> 00:08:34.120 That sounds very official and important. It does, 00:08:34.179 --> 00:08:36.440 doesn't it? What is it really? It's an IOU. That's 00:08:36.440 --> 00:08:38.860 all it is. It's a piece of paper, a promise that 00:08:38.860 --> 00:08:42.019 says Evergrande will pay you, the cement supplier, 00:08:42.720 --> 00:08:46.120 one million yuan in six months or nine months 00:08:46.120 --> 00:08:49.279 or a year. So the cement guy does all the work, 00:08:49.399 --> 00:08:53.059 delivers all the materials and gets a piece of 00:08:53.059 --> 00:08:55.379 paper for his trouble. He gets a piece of paper. 00:08:56.059 --> 00:08:58.700 And here's where it gets even crazier. Because 00:08:58.700 --> 00:09:01.820 Evergrown was so massive, so seemingly powerful, 00:09:02.200 --> 00:09:06.240 these pieces of paper, these IOUs, started circulating 00:09:06.240 --> 00:09:08.879 in the economy like currency. What do you mean? 00:09:09.179 --> 00:09:11.600 The cement supplier who needs to buy sand and 00:09:11.600 --> 00:09:14.500 gravel would take that Evergrande IOU and just 00:09:14.500 --> 00:09:16.620 give it to the quarry owner as payment. And the 00:09:16.620 --> 00:09:19.019 quarry owner would accept it. Yes, because he 00:09:19.019 --> 00:09:20.779 could then take it and give it to a trucking 00:09:20.779 --> 00:09:23.200 company to pay for fuel. Everyone accepted them 00:09:23.200 --> 00:09:25.299 because they all believed that at the end of 00:09:25.299 --> 00:09:27.539 the day, Evergrande was good for the money. So 00:09:27.539 --> 00:09:29.720 they were essentially printing their own private 00:09:29.720 --> 00:09:32.919 money, a parallel financial system based on their 00:09:32.919 --> 00:09:35.940 own credit worthiness. In a way, yes. It was 00:09:35.940 --> 00:09:39.259 a brilliant and terrifying way to extract liquidity 00:09:39.259 --> 00:09:42.679 from the entire supply chain. They kept the homebuyers' 00:09:42.740 --> 00:09:45.120 actual cash for themselves, and they paid their 00:09:45.120 --> 00:09:47.620 suppliers with promises. And that cash they kept, 00:09:47.700 --> 00:09:50.360 they used it to go buy more land. to start the 00:09:50.360 --> 00:09:52.600 cycle all over again. Exactly. It is a perfect 00:09:52.600 --> 00:09:54.740 money printing machine. It works beautifully 00:09:54.740 --> 00:09:57.759 as long as two very specific things continue 00:09:57.759 --> 00:10:00.740 to happen. Okay, let me guess. Number one, home 00:10:00.740 --> 00:10:03.379 prices have to keep going up forever. Correct. 00:10:03.659 --> 00:10:06.639 As long as the market is hot, new buyers keep 00:10:06.639 --> 00:10:09.500 lining up to give you cash up front. No problem. 00:10:09.700 --> 00:10:12.100 And number two, you have to be able to keep borrowing 00:10:12.100 --> 00:10:15.059 new money to pay off the old IOUs when they finally 00:10:15.059 --> 00:10:17.580 come due. You've got it. The whole system relies 00:10:17.580 --> 00:10:20.440 on an endless flow of new credit. It's what financial 00:10:20.440 --> 00:10:23.179 analysts politely call a Ponzi adjacent structure. 00:10:23.480 --> 00:10:26.159 You absolutely need fresh cash inflows to pay 00:10:26.159 --> 00:10:28.899 off your past liabilities. And Hu Qian, he wasn't 00:10:28.899 --> 00:10:31.080 just sitting on this mountain of cash and IOUs. 00:10:31.080 --> 00:10:34.179 He was spending it. Which brings us to part two 00:10:34.179 --> 00:10:37.080 of this saga, the empire of stuff. Because looking 00:10:37.080 --> 00:10:40.059 back at their diversification strategy now, from 00:10:40.059 --> 00:10:42.779 our 2026 perspective, it's just... It's wild. 00:10:42.919 --> 00:10:45.960 It's completely unhinged. It is classic corporate 00:10:45.960 --> 00:10:48.259 hubris. You see this pattern again and again 00:10:48.259 --> 00:10:52.360 in business history. A company completely dominates 00:10:52.360 --> 00:10:55.899 one sector, and the founder or CEO starts to 00:10:55.899 --> 00:10:58.639 believe they have the Midas touch. They think, 00:10:58.659 --> 00:11:01.320 I'm a genius at building condos, therefore I 00:11:01.320 --> 00:11:04.100 must also be a genius at raising pigs. Precisely. 00:11:04.100 --> 00:11:06.460 The logic doesn't have to make sense. The belief 00:11:06.460 --> 00:11:09.240 is in their own brilliance. So let's start with 00:11:09.240 --> 00:11:12.139 the most visible part of this empire. The sports 00:11:12.139 --> 00:11:15.539 team, Guangzhou Evergrande FC. This was actually, 00:11:15.580 --> 00:11:17.759 in the beginning, a brilliant marketing move. 00:11:17.879 --> 00:11:20.039 They bought the team in 2010 when it was in a 00:11:20.039 --> 00:11:21.659 bit of trouble. And they just poured money into 00:11:21.659 --> 00:11:24.000 it. An unbelievable amount of money. They bought 00:11:24.000 --> 00:11:26.600 the best foreign players from South America and 00:11:26.600 --> 00:11:28.879 Europe. They hired world -class coaches like 00:11:28.879 --> 00:11:30.899 Marcello Lippi, who had won the World Cup with 00:11:30.899 --> 00:11:34.679 Italy. And it worked. They started winning everything. 00:11:35.019 --> 00:11:38.059 They won the AFC Champions League in 2013, which 00:11:38.059 --> 00:11:41.039 is a huge deal in Asia. It is. And it put the 00:11:41.039 --> 00:11:43.480 Evergrande brand on the map across the entire 00:11:43.480 --> 00:11:46.779 continent. It associated the name Evergrande 00:11:46.779 --> 00:11:50.200 with victory, with national pride, with excellence. 00:11:50.679 --> 00:11:53.220 So when you bought an Evergrande apartment, you 00:11:53.220 --> 00:11:55.100 felt like you were buying into that winning team. 00:11:55.299 --> 00:11:57.539 That was the idea. And they doubled down on it. 00:11:57.559 --> 00:12:00.320 In 2020, they even started construction on a 00:12:00.320 --> 00:12:03.039 new stadium in Guangzhou. The pictures of this 00:12:03.039 --> 00:12:05.259 thing are incredible. It was designed to look 00:12:05.259 --> 00:12:08.889 like a giant glowing lotus flower. It was going 00:12:08.889 --> 00:12:12.070 to hold 100 ,000 people, one of the biggest soccer 00:12:12.070 --> 00:12:14.929 -specific stadiums in the world. But then the 00:12:14.929 --> 00:12:17.409 logic starts to get a little fuzzy. Let's talk 00:12:17.409 --> 00:12:20.429 about the water, Evergrande Spring. Oh, the water, 00:12:20.529 --> 00:12:24.090 yes. So in 2014, they decide, for reasons that 00:12:24.090 --> 00:12:25.730 are still a bit baffling, that they are going 00:12:25.730 --> 00:12:28.809 to dominate China's premium bottled water market. 00:12:29.029 --> 00:12:30.750 And to launch it, they hired one of the most 00:12:30.750 --> 00:12:32.690 famous people on the planet. They hired Jackie 00:12:32.690 --> 00:12:35.049 Chan. Of course they did. They spent a fortune 00:12:35.049 --> 00:12:38.450 on advertising on Super Bowl style TV commercials. 00:12:38.669 --> 00:12:41.509 But this whole venture is a perfect example of 00:12:41.509 --> 00:12:44.009 how throwing money at a problem doesn't guarantee 00:12:44.009 --> 00:12:46.850 success, especially if you don't understand the 00:12:46.850 --> 00:12:50.779 new industry. They made a critical almost. amateurish 00:12:50.779 --> 00:12:53.360 mistake with the branding. The label controversy. 00:12:53.460 --> 00:12:56.340 The label controversy. So they sourced the water 00:12:56.340 --> 00:12:59.080 from a mountain range on the border between China 00:12:59.080 --> 00:13:01.960 and North Korea. Okay. Now, in China, this mountain 00:13:01.960 --> 00:13:05.080 is called Changbai Shan. But in Korea, it's known 00:13:05.080 --> 00:13:08.279 as Mount Baekdusan. And it's a deeply sacred, 00:13:08.500 --> 00:13:11.779 culturally significant site for Koreans. I think 00:13:11.779 --> 00:13:13.639 I see where this is going. Evergrande slapped 00:13:13.639 --> 00:13:16.879 the Chinese name Changbai Shan on the label and 00:13:16.879 --> 00:13:18.500 started trying to sell it all over the world. 00:13:18.639 --> 00:13:20.120 Including in South Korea? South Korea. Including 00:13:20.120 --> 00:13:22.580 South Korea. The backlash was instantaneous and 00:13:22.580 --> 00:13:25.480 furious. South Korean consumers were outraged. 00:13:25.559 --> 00:13:28.720 It was seen as a cultural appropriation, a political 00:13:28.720 --> 00:13:31.639 statement. It became a diplomatic incident over 00:13:31.639 --> 00:13:33.620 a bottle of water. It's just incredible. You 00:13:33.620 --> 00:13:36.299 have a real estate developer accidentally starting 00:13:36.299 --> 00:13:38.919 a geopolitical feud because they didn't do a 00:13:38.919 --> 00:13:40.820 five -minute Google search or run a focus group. 00:13:41.179 --> 00:13:43.559 And financially, it was a complete and utter 00:13:43.559 --> 00:13:45.980 disaster. They lost something like 4 billion, 00:13:46.220 --> 00:13:48.820 over half a billion U .S. dollars on their water, 00:13:48.919 --> 00:13:51.740 dairy, and grain businesses before they finally 00:13:51.740 --> 00:13:54.259 sold them off in 2016. Wait, dairy and grain 00:13:54.259 --> 00:13:56.919 too? Oh, yeah. They were in everything. And pigs. 00:13:57.100 --> 00:14:00.759 We can't forget the pigs. Right. In 2016, they 00:14:00.759 --> 00:14:05.480 invested 300 million yuan to build 110 pig farms 00:14:05.480 --> 00:14:09.990 in Guizhou province. I mean, why? What is the 00:14:09.990 --> 00:14:13.129 strategic link between building a 50 -story apartment 00:14:13.129 --> 00:14:15.950 tower and raising pigs? Well, there are two ways 00:14:15.950 --> 00:14:17.330 to look at it. The charitable interpretation 00:14:17.330 --> 00:14:20.289 is that pork is a staple food in China and pork 00:14:20.289 --> 00:14:22.710 prices were rising, so they saw a business opportunity. 00:14:23.009 --> 00:14:24.490 Okay, that's the charitable view. What's the 00:14:24.490 --> 00:14:26.669 cynical one? The cynical view is that it was 00:14:26.669 --> 00:14:29.480 always about the land. Agricultural land is much, 00:14:29.519 --> 00:14:31.580 much cheaper to acquire from local governments 00:14:31.580 --> 00:14:34.419 than residential land. So the theory is you acquire 00:14:34.419 --> 00:14:36.860 huge tracts of land under the guise of building 00:14:36.860 --> 00:14:39.759 pig farms, and then maybe, just maybe down the 00:14:39.759 --> 00:14:41.899 line, you can get it rezoned for property development. 00:14:42.100 --> 00:14:44.820 Or at the very least, you use the land itself 00:14:44.820 --> 00:14:47.419 as collateral to get more loans. It always comes 00:14:47.419 --> 00:14:50.360 back to land and loans. Always. But the biggest 00:14:50.360 --> 00:14:53.299 side quest, the venture that truly became a black 00:14:53.299 --> 00:14:57.299 hole for capital, was the car. The Hengshi Dream. 00:14:57.580 --> 00:14:59.759 This, in retrospect, really does feel like the 00:14:59.759 --> 00:15:02.019 nail in the coffin. It was the peak of the hubris. 00:15:02.039 --> 00:15:05.460 In 2019, Evergrande boldly announces they are 00:15:05.460 --> 00:15:07.320 going to become the world's largest and most 00:15:07.320 --> 00:15:10.899 powerful electric vehicle manufacturer. Not just 00:15:10.899 --> 00:15:13.830 a manufacturer. The biggest. Bigger than Tesla. 00:15:14.149 --> 00:15:16.350 Bigger than Volkswagen. And at this point, they 00:15:16.350 --> 00:15:18.690 had never built a car before. They'd never manufactured 00:15:18.690 --> 00:15:21.309 so much as a scooter or a bicycle. Nothing with 00:15:21.309 --> 00:15:24.029 wheels. And Houkihan's strategy for achieving 00:15:24.029 --> 00:15:26.289 this was, well, it was summed up perfectly in 00:15:26.289 --> 00:15:28.590 a speech he gave. His official strategy, and 00:15:28.590 --> 00:15:31.889 I'm quoting here, was, buy, buy, buy, merch, 00:15:32.070 --> 00:15:35.090 merch, merch, big, big, big. That sounds like 00:15:35.090 --> 00:15:37.409 something a villain in a 1980s movie would say. 00:15:37.830 --> 00:15:40.490 That can't be a real corporate strategy. It was. 00:15:40.490 --> 00:15:42.990 And he meant it. Since they had zero research 00:15:42.990 --> 00:15:44.549 envelopment, they decided they would just buy 00:15:44.549 --> 00:15:46.570 it all. So what did they buy? Everything they 00:15:46.570 --> 00:15:49.529 could. They threw $2 billion at a stake in a 00:15:49.529 --> 00:15:52.029 struggling American EV startup, Faraday Future. 00:15:52.549 --> 00:15:56.649 They bought a Swedish car company, NEVS, outright. 00:15:56.889 --> 00:15:59.389 They bought a Dutch company that made in -wheel 00:15:59.389 --> 00:16:01.990 motors. They bought a Japanese battery technology 00:16:01.990 --> 00:16:04.450 company. They were trying to stitch together 00:16:04.450 --> 00:16:06.649 a car company like some kind of Frankenstein's 00:16:06.649 --> 00:16:09.669 monster just by writing enormous checks. And 00:16:09.669 --> 00:16:12.690 after all that buying, Did they ever actually 00:16:12.690 --> 00:16:15.610 make a car? Barely. They produced a few hundred 00:16:15.610 --> 00:16:18.509 of one model, the Hengchi 5, but they held these 00:16:18.509 --> 00:16:20.870 huge flashy events where they'd show off nine 00:16:20.870 --> 00:16:23.429 different prototypes at once. The problem was 00:16:23.429 --> 00:16:25.230 none of them were ready for mass production. 00:16:25.350 --> 00:16:27.450 It was all just for show. It was theater to impress 00:16:27.450 --> 00:16:29.950 investors and, crucially, local governments. 00:16:30.330 --> 00:16:32.970 And we now know, looking back from 2026, how 00:16:32.970 --> 00:16:36.429 hollow it was. In June of 2024, the Chinese government 00:16:36.429 --> 00:16:39.389 officially ordered the EV unit to repay 1 .9 00:16:39.389 --> 00:16:42.250 billion yuan in state subsidies. Why? Because 00:16:42.250 --> 00:16:44.110 they never actually... delivered on their promises. 00:16:44.330 --> 00:16:46.110 Because they failed to meet their contractual 00:16:46.110 --> 00:16:48.309 obligations. They took the money but never built 00:16:48.309 --> 00:16:50.230 the factories or produced the cars they said 00:16:50.230 --> 00:16:53.049 they would. The whole thing was a shell. And 00:16:53.049 --> 00:16:56.629 all of this empire of stuff, the cars, the theme 00:16:56.629 --> 00:17:00.269 parks, the water, the soccer team, it all required 00:17:00.269 --> 00:17:03.909 a constant, massive fire hose of cash to keep 00:17:03.909 --> 00:17:05.910 it going. A fire hose that was being supplied 00:17:05.910 --> 00:17:08.170 by the property development business. And in 00:17:08.170 --> 00:17:11.450 2020, someone in Beijing finally decided to turn 00:17:11.450 --> 00:17:13.420 off the tap. They didn't just turn it off. They 00:17:13.420 --> 00:17:16.019 smashed the faucet with a sledgehammer. This 00:17:16.019 --> 00:17:19.519 is part three, the turning point, the policy 00:17:19.519 --> 00:17:22.740 known as the three red lines. To understand why 00:17:22.740 --> 00:17:25.740 Evergrande and the whole Chinese property sector 00:17:25.740 --> 00:17:28.420 fell off a cliff, you have to understand the 00:17:28.420 --> 00:17:31.180 mindset of the government in Beijing in 2020. 00:17:31.440 --> 00:17:33.009 They were getting scared. They were terrified. 00:17:33.309 --> 00:17:35.329 They looked at the property market and they didn't 00:17:35.329 --> 00:17:37.930 see a vibrant engine of growth anymore. They 00:17:37.930 --> 00:17:41.150 saw a bubble, a massive debt -fueled bubble that 00:17:41.150 --> 00:17:43.109 was threatening to swallow the entire Chinese 00:17:43.109 --> 00:17:45.650 economy. And this is when President Xi Jinping 00:17:45.650 --> 00:17:48.210 came out with that famous slogan. The one that 00:17:48.210 --> 00:17:50.049 sent a chill down the spine of every developer 00:17:50.049 --> 00:17:52.950 in the country. Property is to be lived in, not 00:17:52.950 --> 00:17:55.369 to be speculated on. Now you hear slogans from 00:17:55.369 --> 00:17:57.509 governments all the time. Markets usually just 00:17:57.509 --> 00:17:59.910 shrug them off. Why was this one so different? 00:18:00.150 --> 00:18:03.049 Because they backed it up with policy. With cold, 00:18:03.069 --> 00:18:06.750 hard mathematical rules, the People's Bank of 00:18:06.750 --> 00:18:08.670 China and the Ministry of Housing got together 00:18:08.670 --> 00:18:13.650 and issued the three red lines policy. And this 00:18:13.650 --> 00:18:15.809 wasn't a suggestion. It was not a suggestion. 00:18:15.930 --> 00:18:18.990 It was a direct order to the banks. If a property 00:18:18.990 --> 00:18:21.230 developer crossed these lines, the banks were 00:18:21.230 --> 00:18:23.869 forbidden from lending them any more money. Full 00:18:23.869 --> 00:18:27.029 stop. OK, so we absolutely have to understand 00:18:27.029 --> 00:18:31.250 these three lines. They are the murder weapon, 00:18:31.609 --> 00:18:33.950 so to speak, that killed the old model. What 00:18:33.950 --> 00:18:35.990 were they? They're a bit technical, but we can 00:18:35.990 --> 00:18:37.930 break them down pretty simply. The first red 00:18:37.930 --> 00:18:40.730 line was a liability to assets ratio of less 00:18:40.730 --> 00:18:43.750 than 70%. In simple terms. Basically, the value 00:18:43.750 --> 00:18:46.009 of everything you owe can't be more than 70 % 00:18:46.009 --> 00:18:48.170 of the value of everything you own. It's a measure 00:18:48.170 --> 00:18:50.710 of your overall indebtedness. Okay, red line 00:18:50.710 --> 00:18:52.690 one. What was the second? A net gearing ratio 00:18:52.690 --> 00:18:55.569 of less than 100%. This one compares your total 00:18:55.569 --> 00:18:58.410 debt to your total equity or ownership stake. 00:18:58.829 --> 00:19:00.950 It's a measure of how much of the company is 00:19:00.950 --> 00:19:03.789 funded by debt versus the owner's money. So far, 00:19:03.849 --> 00:19:05.559 so good. good. Who's the third one? The third 00:19:05.559 --> 00:19:08.240 one was, in my opinion, the most critical for 00:19:08.240 --> 00:19:11.119 day -to -day survival. It was a cash to short 00:19:11.119 --> 00:19:14.259 -term debt ratio of at least one. That one sounds 00:19:14.259 --> 00:19:16.759 like the most direct gut punch. It is. It's a 00:19:16.759 --> 00:19:20.299 very simple, brutal question. Do you have enough 00:19:20.299 --> 00:19:23.940 cash in the bank right now, today, to pay off 00:19:23.940 --> 00:19:26.079 all the loans and bills that are due in the next 00:19:26.079 --> 00:19:29.539 12 months? You need at least $1 of cash for every 00:19:29.539 --> 00:19:32.720 dollar of short -term debt. And how did Everbrond 00:19:33.200 --> 00:19:36.859 do on this test one out of three two out of three 00:19:36.859 --> 00:19:39.980 they crossed all three red lines they were deep 00:19:39.980 --> 00:19:41.940 in what the government designated as the red 00:19:41.940 --> 00:19:43.940 zone so the government effectively sent a memo 00:19:43.940 --> 00:19:46.980 to every bank in china saying cut them off no 00:19:46.980 --> 00:19:49.789 more loans And you have to remember their business 00:19:49.789 --> 00:19:52.289 model. The Ponzi adjacent one. The one that needed 00:19:52.289 --> 00:19:54.690 a constant flow of new loans just to pay off 00:19:54.690 --> 00:19:57.250 the old loans and the old IOUs. So when the new 00:19:57.250 --> 00:19:59.970 loans stopped. The entire machine just seized 00:19:59.970 --> 00:20:02.509 up. It was like throwing a wrench into the gears 00:20:02.509 --> 00:20:04.329 of a massive engine. They couldn't pay their 00:20:04.329 --> 00:20:07.109 suppliers. The suppliers walked off the job sites. 00:20:07.589 --> 00:20:10.009 Construction on hundreds of apartment buildings 00:20:10.009 --> 00:20:12.970 just stopped. And the homebuyers, the people 00:20:12.970 --> 00:20:14.789 who have paid all their money up front, they 00:20:14.789 --> 00:20:17.089 see the construction cranes stop moving. And 00:20:17.089 --> 00:20:19.230 they panic. Many of them stopped paying their 00:20:19.230 --> 00:20:21.710 mortgages in protest. It became a full -blown 00:20:21.710 --> 00:20:24.430 death spiral. The desperation inside the company 00:20:24.430 --> 00:20:26.650 at this point must have been just off the charts. 00:20:26.789 --> 00:20:28.890 I remember reading the reports about how they 00:20:28.890 --> 00:20:30.690 started trying to get money from their own employees. 00:20:31.009 --> 00:20:33.690 Yes, this is one of the darkest and saddest parts 00:20:33.690 --> 00:20:36.930 of the whole saga. They essentially forced their 00:20:36.930 --> 00:20:40.559 own staff. From executives down to receptionists 00:20:40.559 --> 00:20:44.720 to buy high yield wealth management products 00:20:44.720 --> 00:20:47.559 that were issued by the company. They were forcing 00:20:47.559 --> 00:20:49.720 their employees to loan the company their life 00:20:49.720 --> 00:20:52.180 savings. Pretty much. The message was, if you 00:20:52.180 --> 00:20:54.180 want to get your bonus or maybe even keep your 00:20:54.180 --> 00:20:56.519 job, you need to invest in these products. That 00:20:56.519 --> 00:20:59.799 is just, it's beyond predatory. It's the sign 00:20:59.799 --> 00:21:02.059 of a company that knows the end is coming and 00:21:02.059 --> 00:21:04.400 is just trying to grab any cash it can to survive 00:21:04.400 --> 00:21:06.839 for another day. So that brings us to the collapse 00:21:06.839 --> 00:21:09.279 itself. the slow -motion train wreck that played 00:21:09.279 --> 00:21:12.500 out from 2021 through 2023. By the summer of 00:21:12.500 --> 00:21:15.440 2021, the cracks were no longer hidden. They 00:21:15.440 --> 00:21:18.440 were giant canyons visible to the entire world. 00:21:18.619 --> 00:21:20.960 They started missing payments on their international 00:21:20.960 --> 00:21:23.339 bonds. The gent bonds we talked about earlier. 00:21:23.440 --> 00:21:27.500 Yes. The rating agencies Fitch, S &P slashed 00:21:27.500 --> 00:21:29.359 their ratings and eventually declared them to 00:21:29.359 --> 00:21:32.140 be in restricted default. And the numbers that 00:21:32.140 --> 00:21:33.740 started to come out in their financial filings? 00:21:34.509 --> 00:21:37.670 They were just staggering. Their total liabilities 00:21:37.670 --> 00:21:40.230 eventually stood at around 2 .4 trillion yuan. 00:21:40.509 --> 00:21:44.609 Which is roughly 340 billion U .S. dollars. I 00:21:44.609 --> 00:21:46.930 just want to pause on that number again. 340 00:21:46.930 --> 00:21:50.170 billion dollars. That is more than the entire 00:21:50.170 --> 00:21:52.829 annual economic output of countries like Finland 00:21:52.829 --> 00:21:55.569 or Portugal. It's more than the GDP of New Zealand. 00:21:55.750 --> 00:21:58.410 One single company owed more money than entire 00:21:58.410 --> 00:22:00.730 developed nations produce in a year. And the 00:22:00.730 --> 00:22:04.049 big fear at the time in September 2021 was contagion. 00:22:04.380 --> 00:22:06.319 The Lehman Brothers moment. That was the phrase 00:22:06.319 --> 00:22:08.200 on everyone's lips. If Evergrown collapses, does 00:22:08.200 --> 00:22:10.140 it take the banks down with it? Do all the other 00:22:10.140 --> 00:22:12.460 property developers fall like dominoes? Global 00:22:12.460 --> 00:22:15.089 stock markets were plunging on this fear. But 00:22:15.089 --> 00:22:17.670 unlike with Lehman Brothers in the U .S. in 2008, 00:22:17.970 --> 00:22:20.750 the government in Beijing didn't step in with 00:22:20.750 --> 00:22:23.009 a massive bailout. No, they made a very clear 00:22:23.009 --> 00:22:25.089 choice. They wanted to manage the demolition. 00:22:25.150 --> 00:22:26.869 They wanted to prick the bubble without blowing 00:22:26.869 --> 00:22:29.630 up the entire economy. So they let Evergrande 00:22:29.630 --> 00:22:32.450 suffer the consequences. Which led to Evergrande 00:22:32.450 --> 00:22:35.309 filing for Chapter 15 bankruptcy protection in 00:22:35.309 --> 00:22:39.410 New York in August 2023. Right. Why New York? 00:22:39.569 --> 00:22:42.349 The company is Chinese. It's listed in Hong Kong. 00:22:42.410 --> 00:22:45.200 Why file in Manhattan? It's a legal move. Chapter 00:22:45.200 --> 00:22:48.200 15 is for foreign companies. It essentially asks 00:22:48.200 --> 00:22:50.700 a U .S. court to recognize the restructuring 00:22:50.700 --> 00:22:53.140 efforts happening elsewhere and, crucially, to 00:22:53.140 --> 00:22:55.660 protect any U .S.-based assets the company has 00:22:55.660 --> 00:22:58.099 from being seized by creditors while they try 00:22:58.099 --> 00:23:00.140 to work out a deal. But it was too little, too 00:23:00.140 --> 00:23:01.940 late. The restructuring plans never really came 00:23:01.940 --> 00:23:04.279 together. No. And when trading of their stock 00:23:04.279 --> 00:23:06.660 finally resumed in Hong Kong after a 17 -month 00:23:06.660 --> 00:23:09.619 halt, the market delivered its verdict. The stock 00:23:09.619 --> 00:23:13.180 plunged 79 percent in a single day. It went from 00:23:13.180 --> 00:23:16.420 a peak of over 31 Hong Kong dollars in 2017 to 00:23:16.420 --> 00:23:18.859 just 35 cents. It was effectively worthless. 00:23:19.319 --> 00:23:21.940 But up until this point, you could still, if 00:23:21.940 --> 00:23:25.599 you squinted, frame this whole story as a colossal 00:23:25.599 --> 00:23:28.380 business failure, a tragedy of hubris and too 00:23:28.380 --> 00:23:31.539 much debt. You could. A very, very big failure, 00:23:31.579 --> 00:23:34.160 but a failure nonetheless. But then we get to 00:23:34.160 --> 00:23:37.880 part five, the fraud. And the narrative changes 00:23:37.880 --> 00:23:40.140 completely. It does. This is where the story 00:23:40.140 --> 00:23:43.640 shifts from bad business decisions to a coordinated 00:23:43.640 --> 00:23:48.220 criminal enterprise. March 2024. The China Securities 00:23:48.220 --> 00:23:51.380 Regulatory Commission, the CSRC, finishes its 00:23:51.380 --> 00:23:54.180 investigation and drops an absolute bombshell. 00:23:54.599 --> 00:23:57.039 What did they find? They found that Evergrande 00:23:57.039 --> 00:23:59.039 hadn't just been struggling. They had been lying. 00:23:59.640 --> 00:24:02.180 On an industrial, almost incomprehensible scale, 00:24:02.339 --> 00:24:04.500 they had been systematically overstating their 00:24:04.500 --> 00:24:07.000 revenue for years. And the numbers? The numbers 00:24:07.000 --> 00:24:09.279 are just insane. In 2019, they inflated their 00:24:09.279 --> 00:24:13.079 revenue by 214 billion yuan. That was about half 00:24:13.079 --> 00:24:15.220 50 % of their officially reported income for 00:24:15.220 --> 00:24:16.920 the year. So half the money they said they made 00:24:16.920 --> 00:24:19.099 in 2019 was fake. Half of it was fake. And then 00:24:19.099 --> 00:24:21.400 it got worse. In 2020, they inflated their revenue 00:24:21.400 --> 00:24:24.240 by nearly 350 billion yuan. And what percentage 00:24:24.240 --> 00:24:26.420 was that? That was almost 80 % of their reported 00:24:26.420 --> 00:24:28.309 revenue. Wait, wait, wait. Let me get this straight. 00:24:28.829 --> 00:24:32.130 80%. So you're telling me that for every dollar 00:24:32.130 --> 00:24:34.609 Evergrande claimed to have earned in revenue 00:24:34.609 --> 00:24:38.029 in 2020, 80 cents of it was completely imaginary? 00:24:38.390 --> 00:24:40.569 Essentially, yes. The total overstatement across 00:24:40.569 --> 00:24:43.990 those two years was nearly 78 billion U .S. dollars. 00:24:44.410 --> 00:24:48.710 How? I mean, physically, how do you fake 78 billion 00:24:48.710 --> 00:24:51.369 dollars in revenue? You can't just add zeros 00:24:51.369 --> 00:24:53.190 to a spreadsheet, can you? There has to be a 00:24:53.190 --> 00:24:55.849 mechanism. There is. And it goes back to a seemingly 00:24:55.849 --> 00:24:58.869 boring accounting principle called revenue recognition. 00:24:59.470 --> 00:25:01.170 Okay, explain that. In property development, 00:25:01.529 --> 00:25:04.630 the generally accepted conservative accounting 00:25:04.630 --> 00:25:07.190 rule is that you cannot count the money from 00:25:07.190 --> 00:25:09.710 selling an apartment as revenue until the project 00:25:09.710 --> 00:25:11.529 is finished and you actually hand the keys over 00:25:11.529 --> 00:25:13.190 to the buyer. That makes sense. Because until 00:25:13.190 --> 00:25:15.549 then, if you fail to build the house, you technically 00:25:15.549 --> 00:25:18.029 owe them the money back. Exactly. Until you deliver 00:25:18.029 --> 00:25:20.769 the product, that cash you received is a liability 00:25:20.769 --> 00:25:24.099 on your books, not revenue. Grant just decided 00:25:24.099 --> 00:25:26.799 to ignore that rule. They decided to create their 00:25:26.799 --> 00:25:29.519 own reality. They started recognizing revenue 00:25:29.519 --> 00:25:32.740 way, way earlier in the process. Sometimes as 00:25:32.740 --> 00:25:35.400 soon as a contract was signed, years before the 00:25:35.400 --> 00:25:37.640 building was even close to being finished, they 00:25:37.640 --> 00:25:39.519 were essentially using an accounting time machine. 00:25:39.950 --> 00:25:42.049 They were pulling money they hoped to earn in, 00:25:42.109 --> 00:25:44.970 say, 2023 and claiming they had already earned 00:25:44.970 --> 00:25:48.109 it in 2020. Precisely. And this had two massive 00:25:48.109 --> 00:25:51.670 and very deliberate effects. One, it made them 00:25:51.670 --> 00:25:54.069 look incredibly profitable on caper, which kept 00:25:54.069 --> 00:25:56.609 their stock price high and made investors happy. 00:25:56.750 --> 00:25:59.150 OK. And who, and this is the absolutely crucial 00:25:59.150 --> 00:26:02.210 part, by inflating their revenue, they were also 00:26:02.210 --> 00:26:04.650 inflating their assets. And that allowed them 00:26:04.650 --> 00:26:08.069 to pass or appear to pass the debt ratio tests, 00:26:08.289 --> 00:26:10.569 which in turn. allowed them to borrow even more 00:26:10.569 --> 00:26:12.529 money to keep the whole scheme going. It's a 00:26:12.529 --> 00:26:15.049 perfect circle of fraud. You fake the profit 00:26:15.049 --> 00:26:17.309 to get the loan, which you use to start a new 00:26:17.309 --> 00:26:19.950 project, which you use to get cash up front from 00:26:19.950 --> 00:26:22.869 buyers, which you then book as fake profit. It's 00:26:22.869 --> 00:26:25.450 a self -perpetuating machine powered by lies. 00:26:25.710 --> 00:26:29.069 And that $78 billion figure, I mean, just to 00:26:29.069 --> 00:26:31.190 put that in perspective for everyone, the famous 00:26:31.190 --> 00:26:33.710 Enron scandal was about a billion dollars in 00:26:33.710 --> 00:26:37.009 fake profit. The WorldCom fraud was around $11 00:26:37.009 --> 00:26:40.359 billion. This isn't a completely different universe 00:26:40.359 --> 00:26:43.980 of deceit. It is, by a huge margin, the largest 00:26:43.980 --> 00:26:46.299 financial fraud in history. Which brings us to 00:26:46.299 --> 00:26:48.079 the question that has just been burning a hole 00:26:48.079 --> 00:26:49.759 in my mind since I first read these reports. 00:26:50.240 --> 00:26:53.599 Where were the watchdogs? Yes. You don't hide 00:26:53.599 --> 00:26:56.839 $78 billion under a mattress. This company is 00:26:56.839 --> 00:26:58.940 a publicly listed giant. Somebody had to look 00:26:58.940 --> 00:27:00.759 at these numbers. Somebody had to sign off on 00:27:00.759 --> 00:27:03.789 the audit. And that somebody was PricewaterhouseCoopers, 00:27:03.910 --> 00:27:06.869 PwC, one of the big four global accounting firms, 00:27:07.009 --> 00:27:09.569 the supposed gold standard of financial verification. 00:27:10.049 --> 00:27:11.769 They were Evergrande's auditor for more than 00:27:11.769 --> 00:27:13.890 a decade. They were. And they signed off on the 00:27:13.890 --> 00:27:17.069 2019 and 2020 financial accounts. The very years 00:27:17.069 --> 00:27:19.569 with the 50 percent and 80 percent fake revenue 00:27:19.569 --> 00:27:22.309 without raising any major red flags. They gave 00:27:22.309 --> 00:27:24.589 it a clean bill of health. How is that even possible? 00:27:25.009 --> 00:27:27.470 I mean, at this level, are we talking about gross 00:27:27.470 --> 00:27:30.650 incompetence or are we talking about complicity? 00:27:30.940 --> 00:27:33.799 That is the multi -billion dollar question that 00:27:33.799 --> 00:27:36.339 liquidators and courts are still trying to answer. 00:27:36.559 --> 00:27:38.740 The official investigation from the Hong Kong 00:27:38.740 --> 00:27:41.420 accounting regulator found that PwC failed to 00:27:41.420 --> 00:27:44.319 gather sufficient audit evidence. They noted 00:27:44.319 --> 00:27:46.559 that Evergrande itself had raised going concern 00:27:46.559 --> 00:27:49.940 risks in its half -year reports, but PwC didn't 00:27:49.940 --> 00:27:52.299 reference this in their final audit. So the company 00:27:52.299 --> 00:27:53.880 itself was hinting that it might go bankrupt 00:27:53.880 --> 00:27:56.119 and the auditor just ignored it. They didn't 00:27:56.119 --> 00:27:58.900 highlight it in their final opinion. Now, PwC 00:27:58.900 --> 00:28:01.559 eventually resigned as Evergrande's auditor in 00:28:01.559 --> 00:28:04.720 January 2023, citing disagreements over the 2021 00:28:04.720 --> 00:28:07.539 audit. But by then, the damage was long since 00:28:07.539 --> 00:28:10.140 done. The house had already burned down. And 00:28:10.140 --> 00:28:11.819 the punishment from the authorities when it came 00:28:11.819 --> 00:28:15.519 was severe. It was historic. In September 2024, 00:28:15.940 --> 00:28:18.180 the Chinese Ministry of Finance took an unprecedented 00:28:18.180 --> 00:28:21.740 step. They suspended PWC from operating in mainland 00:28:21.740 --> 00:28:25.099 China for six months. A six -month ban. For a 00:28:25.099 --> 00:28:26.740 major accounting firm, that's not just a slap 00:28:26.740 --> 00:28:28.259 on the wrist. That's a death sentence for your 00:28:28.259 --> 00:28:30.940 business there. It really is. Your clients can't 00:28:30.940 --> 00:28:32.519 wait six months for you to be allowed to work 00:28:32.519 --> 00:28:34.220 again. They have audits they need to file. They 00:28:34.220 --> 00:28:36.099 have to leave you. And they did. There was a 00:28:36.099 --> 00:28:39.579 mass exodus. Dozens of major state -owned and 00:28:39.579 --> 00:28:42.039 private companies dropped PWC as their auditor. 00:28:42.440 --> 00:28:45.500 And there was a mass exodus of staff. By June 00:28:45.500 --> 00:28:48.240 of 2025, we know that at least 30 partners in 00:28:48.240 --> 00:28:50.799 the Hong Kong office and another 77 partners 00:28:50.799 --> 00:28:53.440 in mainland China had left the firm. The brand 00:28:53.440 --> 00:28:55.960 was just decimated in the region. It really just 00:28:55.960 --> 00:28:57.920 shakes your faith in the entire financial system. 00:28:58.019 --> 00:29:00.220 Yeah. You see that stamp on a report that says 00:29:00.220 --> 00:29:03.059 audited by PwC and you're conditioned to think, 00:29:03.079 --> 00:29:04.700 OK, these numbers are real. They've been checked. 00:29:05.119 --> 00:29:07.700 And this is a brutal reminder that an audit is 00:29:07.700 --> 00:29:10.599 not a guarantee. It's an opinion based on the 00:29:10.599 --> 00:29:12.640 information that the company's management provides. 00:29:13.019 --> 00:29:15.079 And if the management is fundamentally determined 00:29:15.079 --> 00:29:18.140 to lie and the auditor is, let's be generous 00:29:18.140 --> 00:29:21.420 and say, not curious enough, catastrophe happens. 00:29:21.619 --> 00:29:24.359 So let's bring the story to its bitter end. January 00:29:24.359 --> 00:29:28.880 2024. The liquidation? Yes. After months and 00:29:28.880 --> 00:29:31.660 months of failed restructuring talks, a judge 00:29:31.660 --> 00:29:34.640 in the Hong Kong High Court finally said, Enough 00:29:34.640 --> 00:29:37.539 is enough. There is no viable plan here. And 00:29:37.539 --> 00:29:40.000 he ordered the company to be liquidated, to be 00:29:40.000 --> 00:29:42.920 wound down. But that created this fascinating 00:29:42.920 --> 00:29:47.079 and very complicated legal mess. It did. Because 00:29:47.079 --> 00:29:49.859 you have a court in Hong Kong issuing an order. 00:29:50.059 --> 00:29:54.460 But 90 % of Evergrande's assets, the actual buildings 00:29:54.460 --> 00:29:57.740 and land, are in mainland China. The famous... 00:29:58.039 --> 00:30:00.579 One country, two systems problem. In a nutshell, 00:30:00.819 --> 00:30:03.220 the liquidators, a big international firm called 00:30:03.220 --> 00:30:06.059 Alvarez and Marsal, were appointed and their 00:30:06.059 --> 00:30:08.900 job was to try and seize assets in the mainland 00:30:08.900 --> 00:30:11.059 to sell them off and pay back the creditors, 00:30:11.119 --> 00:30:13.700 especially the foreign bondholders. But the courts 00:30:13.700 --> 00:30:15.559 and the local governments in the mainland had 00:30:15.559 --> 00:30:17.779 a very different set of priorities. Their number 00:30:17.779 --> 00:30:20.220 one, two and three priorities were social stability. 00:30:20.839 --> 00:30:22.759 Their main concern is finishing the apartments 00:30:22.759 --> 00:30:24.759 for the millions of people who have already paid 00:30:24.759 --> 00:30:27.079 for them. Keeping the local citizens happy is 00:30:27.079 --> 00:30:28.940 more important than paying back a hedge fund 00:30:28.940 --> 00:30:31.779 in New York. Infinitely more important. That's 00:30:31.779 --> 00:30:35.220 the social contract in China. So the local governments 00:30:35.220 --> 00:30:37.880 effectively seized control of many of the projects 00:30:37.880 --> 00:30:41.559 to ensure they got completed. The foreign bondholders 00:30:41.559 --> 00:30:45.039 who are owed billions. They were pushed to the 00:30:45.039 --> 00:30:47.140 very back of the line. So if you were one of 00:30:47.140 --> 00:30:49.339 those investors who bought the junk bonds paying 00:30:49.339 --> 00:30:52.819 12%, you're likely getting, what, close to zero? 00:30:53.019 --> 00:30:55.359 Pennies on the dollar if they're lucky. It's 00:30:55.359 --> 00:30:57.980 a very, very expensive lesson in what's called 00:30:57.980 --> 00:31:01.619 structural subordination. Your claims as a foreign 00:31:01.619 --> 00:31:03.559 creditor are subordinate to the claims of the 00:31:03.559 --> 00:31:06.869 domestic system. So here we are, February 2026. 00:31:07.190 --> 00:31:09.529 The company is officially delisted and dissolved. 00:31:10.029 --> 00:31:13.069 Hui Keyan is under police control. The auditors 00:31:13.069 --> 00:31:16.250 are disgraced. The investors are wiped out. What 00:31:16.250 --> 00:31:18.109 is the lasting legacy of this whole disaster? 00:31:18.490 --> 00:31:20.849 I think it marks the definitive end of an entire 00:31:20.849 --> 00:31:23.990 era of China's economic model. That build, borrow, 00:31:24.130 --> 00:31:26.130 build engine, which was fueled by a constantly 00:31:26.130 --> 00:31:28.910 rising property market, powered China's incredible 00:31:28.910 --> 00:31:31.029 growth for 30 years. And it's gone. It's over. 00:31:31.150 --> 00:31:32.630 And now they have to find something to replace 00:31:32.630 --> 00:31:35.259 it. Right. China is now trying to pivot to what 00:31:35.259 --> 00:31:37.900 they call high quality growth, things like advanced 00:31:37.900 --> 00:31:40.740 manufacturing, green energy, artificial intelligence. 00:31:40.940 --> 00:31:43.859 But that transition is proving to be incredibly 00:31:43.859 --> 00:31:46.700 painful. The property sector used to account 00:31:46.700 --> 00:31:48.819 for something like a quarter of China's entire 00:31:48.819 --> 00:31:52.680 GDP. You just can't replace a hole that big overnight. 00:31:52.940 --> 00:31:55.019 And what's the lesson for the global investor? 00:31:55.960 --> 00:31:59.099 For that person in London or New York? It's a 00:31:59.099 --> 00:32:01.900 brutal reality check. It proved that the China 00:32:01.900 --> 00:32:04.140 premium, that old idea that you could get high 00:32:04.140 --> 00:32:05.819 growth with an implicit government guarantee 00:32:05.819 --> 00:32:09.420 behind it was a mirage. The political and systemic 00:32:09.420 --> 00:32:12.609 risks are very, very real. I want to leave our 00:32:12.609 --> 00:32:14.569 listeners with one final provocative thought, 00:32:14.630 --> 00:32:16.509 something you touched on earlier. We know the 00:32:16.509 --> 00:32:18.829 whole story of Evergrande now because they collapsed. 00:32:19.029 --> 00:32:20.829 They got caught because the music stopped and 00:32:20.829 --> 00:32:23.250 they ran out of cash. Yes. Their failure exposed 00:32:23.250 --> 00:32:26.170 the fraud. But if this practice of aggressive 00:32:26.170 --> 00:32:28.369 revenue recognition was considered, let's say, 00:32:28.509 --> 00:32:31.190 standard practice in the industry at the time, 00:32:31.250 --> 00:32:33.490 and if the world's biggest auditors were willing 00:32:33.490 --> 00:32:36.019 to sign off on it. You're asking the big question. 00:32:36.119 --> 00:32:38.680 You're asking if there are other Evergrandes 00:32:38.680 --> 00:32:40.519 still out there, maybe ones that just manage 00:32:40.519 --> 00:32:43.059 their debt a little better. Exactly. Are we looking 00:32:43.059 --> 00:32:47.059 at one singular, uniquely bad apple? Or was the 00:32:47.059 --> 00:32:49.839 entire orchard rotten during that boom period? 00:32:50.279 --> 00:32:53.880 Because if $78 billion of revenue at one company 00:32:53.880 --> 00:32:57.059 can just be conjured out of thin air, how can 00:32:57.059 --> 00:32:59.779 we be confident that any of the spectacular numbers 00:32:59.779 --> 00:33:02.319 we saw coming out of that era were real? That 00:33:02.319 --> 00:33:04.559 is the terrifying question that I think keeps 00:33:04.559 --> 00:33:07.200 a lot of people in finance awake at night. When 00:33:07.200 --> 00:33:08.799 you look at the debt loads and the accounting 00:33:08.799 --> 00:33:11.279 practices of other major conglomerates that were 00:33:11.279 --> 00:33:13.420 operating under the exact same incentives with 00:33:13.420 --> 00:33:15.740 the same auditors and the same regulatory environment, 00:33:15.960 --> 00:33:18.140 it really makes you wonder if we've actually 00:33:18.140 --> 00:33:21.019 seen the bottom of this crisis yet. A sobering 00:33:21.019 --> 00:33:23.619 thought to end on. A reminder that the numbers 00:33:23.619 --> 00:33:25.380 on the screen are only as good as the people 00:33:25.380 --> 00:33:27.670 who are typing them in. Indeed. That's all we 00:33:27.670 --> 00:33:29.549 have for this deep dive into the spectacular 00:33:29.549 --> 00:33:32.650 rise and the even more spectacular fall of Evergrande. 00:33:32.650 --> 00:33:36.289 A story of ambition, of fraud, and of a $300 00:33:36.289 --> 00:33:39.490 billion reality check. Thanks for listening. 00:33:39.609 --> 00:33:41.349 We will catch you next time. Goodbye.