Enticed by the promise of a yield close to 12%, gifts such as Dyson air purifiers, Gucci bags, and guarantees from China’s best-selling developers, tens of thousands of investors have purchased wealth management products through China Evergrande Group.
Now, many people worry that after this short-funded real estate developer recently stopped repaying some investors and sounded the global alarm for its huge debt, they may never be able to recover their investment.
Some people have been protesting at Evergrande’s offices, refusing to accept the company’s plan to offer discounted payments to apartments, offices, shops and parking lots, which it began implementing on Saturday.
“I bought it from the property manager after seeing the advertisement in the elevator because I believe Evergrande is a Fortune 500 company,” said a property owner surnamed Du from Evergrande in his hometown of Guangdong Province.
“It is unethical for Evergrande not to repay my hard-earned money,” said the investor, who invested 650,000 yuan ($100,533) in Evergrande wealth management products (WMP) last year at an interest rate of more than 7%.
A sales manager of Evergrande Wealth, which was launched in 2016, stated that in the past five years, more than 80,000 people (including employees, their families and friends, and owners of Evergrande properties) have purchased wealth management products and have raised more than 100 billion yuan. Renminbi (15.4 billion US dollars). As a peer-to-peer (P2) online lending platform initially used to fund its real estate projects.
The person, who asked not to be named, said that about 40 billion yuan (US$6.1 billion) of investment has not yet been completed.
China Evergrande did not respond to a request for comment on Tuesday, which is a public holiday in China.
With debts exceeding US$300 billion, Evergrande’s liquidity crisis shook the global market this week. The company has promised to repay investors in wealth management products.
Pressure from new sources of capital
China’s efforts to deleverage the economy over the years have prompted companies to turn to off-balance-sheet investments to find funding.
Following Beijing’s further restrictions on the debt levels of real estate developers last year, the most indebted companies such as Evergrande are facing greater pressure and need to find new sources of funds to alleviate the increasing pressure on liquidity. They use commercial paper, trusts and wealth. Seek cash management products from employees, suppliers and customers.
The sales manager and another Evergrande employee who bought wealth management products stated that Evergrande Wealth began selling wealth management products to individuals in 2019 after the regulatory crackdown caused the P2P lending industry to collapse.
In order to attract investors, the sales manager gave gifts such as Dyson air purifiers and Gucci handbags to everyone who bought more than 3 million WMP in the Christmas promotion last year.
The product flyer provided by the sales manager seen by Reuters shows that wealth management products are classified as fixed-income products suitable for “conservative investors seeking stable returns.”
The promise of high returns
Among the two products sold in November last year, a construction company in Qingdao hopes to raise up to RMB 10 million (US$1.5 million), with an annualized rate of return of 7% and RMB 20 million (US$3 million). Percentages from 7.8% to 9.5%, depending on the scale of investment, and additional. The minimum investment amounts are RMB 100,000 (US$15,459.7) and RMB 300,000 (US$46,379).
The sales manager said that Evergrande usually provides some investors with an additional return rate of up to 1.8%, which can push the 12-month investment return rate to more than 11%.
The documents show that the proceeds will be used for the working capital of Qingdao Luye International Construction Co., Ltd. The company could not be reached for comment during public holidays.
The prospectus stated that the repayment came either from the issuer’s income or from Evergrande Internet Information Services (Shenzhen) Co., Ltd., a subsidiary of Evergrande Wealth, and promised if the issuer was unable to repay the principal and interest.
The sales manager said that the Qingdao company is undertaking the construction of the Evergrande project and will use Evergrande’s funds to repay investors after completion.
“This is a de facto Evergrande product,” the person said.
Other highly leveraged Chinese conglomerates, including HNA Group and China Baoneng, which declared bankruptcy at the beginning of this year, have also used similar products.
In petitions submitted to various government agencies, a group of wealth management product investors in Guangdong accused Evergrande of improperly using funds that should have been allocated to the issuer to fund its own projects and did not fully disclose the risks.
They also complained that they were misled by the position of its chairman Xu Jiaren, and pointed out that he was sitting in a prominent position when celebrating the 70th anniversary of the founding of the People’s Republic of China in 2019.
They wrote: “Investors trust Evergrande and bought Evergrande wealth management products out of their love and confidence in the party and the government.”