'Electric Vehicle Companies Eyeing Real Estate'... Moral Hazard of Chinese Firms Surfacing

China's Top Construction Firm Evergrande Group's Empty Electric Vehicle Factory in Guangzhou... Corporate Credit Rating Agency Collusion
Chinese Government Warns Over Policy Loophole Exploitation

[Asia Economy Beijing=Special Correspondent Jo Young-shin] Ethical issues, including allegations that Chinese real estate giant Evergrande Group exploited electric vehicle promotion policies to invest in real estate, have surfaced among Chinese companies.

Some credit rating agencies were also found to have colluded by assigning false credit ratings to companies. The Chinese government has judged the moral hazard of companies to be serious and launched a comprehensive investigation.

On the 1st, Late Post, an online media outlet operated by the Chinese media Caijing (財經), questioned the authenticity of Evergrande’s electric vehicle business in an article titled "Evergrande’s Absurd Automobile Business."

According to the report, Evergrande Auto built a factory for electric vehicle production in Guangzhou, but most of the internal space was empty, and there were no workers at the factory. It has never produced a single electric vehicle, and whenever high-ranking Chinese officials inspected the factory, electric vehicles were brought in and only pretended to be working.

This is because Evergrande Group places more emphasis on profits through real estate rather than automobile production. Evergrande Group is also China’s number one construction company. It was revealed that from September last year for one year, Evergrande purchased land totaling 11.33 million square meters (3.43 million pyeong) across China for electric vehicle factory sites. Of this, 52% was factory land, 35% residential, and 13% mixed-use land for offices and commercial buildings, according to the media.

China had relaxed regulations to allow local governments to sell residential land to new energy vehicle companies as part of fostering new industries. Also, various benefits such as tax reductions are given when purchasing factory land. Evergrande exploited these institutional loopholes. Citing a source from the Chinese construction industry, the media reported that Evergrande would not suffer losses even if it failed in the electric vehicle business.

Xu Jiayin, chairman of Evergrande Group, who ranked first in Forbes’ list of China’s richest in 2017, accumulated wealth through real estate and established Evergrande Auto in Guangzhou in January last year, entering the electric vehicle business. To this end, in June 2018, Evergrande acquired Chinese electric vehicle company FF, and in November last year, it also purchased Swedish electric vehicle company NEVS. Evergrande showcased six electric vehicle models last August, stating it would establish a mass production system from the second half of next year.

Ultimately, if the electric vehicle project was used as a pretext for real estate investment, Evergrande’s electric vehicle business is likely to fail.

Evergrande’s case shocked many as it demonstrated the moral hazard of Chinese companies. The National Development and Reform Commission (NDRC), which oversees China’s economic development plans, recently instructed local governments to "report detailed investment information on new energy vehicle manufacturing projects." It urged to "curb blind investment in new energy vehicle manufacturing projects" and to organize investment details by individual companies over the past six years since 2015.

The Chinese government also decided to crack down on collusion between companies and credit rating agencies. The recent wave of defaults on corporate bonds by large Chinese state-owned enterprises that had received the highest credit ratings was partly attributed to collusion with rating agencies. Companies such as Huachen Group, Yongcheng Coal Enterprise, and semiconductor company Tsinghua Unigroup, which declared defaults, had all received 'AAA' credit ratings from rating agencies.

Chinese Premier Li Keqiang instructed at a State Council meeting that the government and public institutions actively provide data related to credit rating work to improve the accuracy of credit ratings.

This content was produced with the assistance of AI translation services.