Many comparisons have been made lately between the collapse of Lehman Brothers and the apocalypse at China Evergrande Group, the world’s most indebted real estate developer. But they are nowhere close. Lehman was a top-tier investment bank that went from good to bad during the 2007 subprime mortgage crisis. On the other hand, Evergrande, a well-known presence in Hong Kong’s capital markets for years, has always been bad.

For almost a decade, critics have been calling Evergrande out, questioning the asset quality of its unsold properties and asking if its auditors were asleep. All those warnings fell on deaf ears; the developer-turned-conglomerate went on living out its nine lives. Last week, however, Beijing finally told local governments to prepare for Evergrande’s potential demise. The unanswered question is why China and its often merciless regulators allowed it to go on for so long.

Evergrande’s liquidity crisis came about because all of its working capital is tied to its inventory, mostly composed of $202 billion in unfinished housing projects. When unpaid suppliers and employees came knocking on its door, all Evergrande could offer as repayment was unsold apartments, store fronts and empty parking lots. Some properties were offered to creditors at a discount of as much as 52%, giving a sense of their true market value.

Perhaps investors chose to look on the bright side because the authorities were on Evergrande’s side. In 2016, Hong Kong’s financial markets regulator declared that US-based short-seller Citron Research and its founder Andrew Left were culpable of market misconduct because of their negative assessment of Evergrande. “Left used sensationalist language in his report that Evergrande was insolvent and engaged in accounting fraud," it said. Left responded, saying, “This court’s opinion simply stifles negative commentary." Evergrande is among the most-often shorted stocks on the Hong Kong bourse.

Short sellers may be feeling vindicated. But if anything, the 2016 decision could have emboldened Evergrande. Founder Hui Ka Yan has relied on powerful tycoon friends, and, over the years, they have short squeezed naysayers, helped Hui raise billions in equity financing, and even solidified his control of a regional Chinese bank listed in Hong Kong. Owning a bank can be very useful for a developer whose balance sheet is stretched to the limit.

Evergrande became Asia’s largest high-yield dollar bond issuer. Its sheer size meant that the world’s big asset managers, from Pimco to BlackRock, had holdings. It had liabilities with 128 banks last year. What kind of exposure might global banks such as HSBC and JPMorgan Chase have?

If Hong Kong’s laissez-faire traditions excuse its lax regulation of Evergrande, Beijing’s inaction is baffling. Beijing had vowed to cut down corporate leverage in late 2017: It was during this period that Evergrande’s debt pile ballooned. Were Beijing’s iron-fisted regulators distracted? In 2017, China was busy cracking its whip at conglomerates for debt-fuelled global shopping sprees. Evergrande was the good stay-at-home citizen, expanding domestically, building projects in lower-tier cities. But those virtues were piling up bad debt. Between 2016 and 2020, Evergrande’s liabilities almost doubled to about $300 billion. Its working capital became strained. Unpaid bills owed to suppliers ballooned to about 30% of total liabilities from 20% five years earlier. Because of its large exposure to lower-tier cities, it ended up with dead ‘dead assets’.

Hui persevered. He ticked all the right boxes. He was ‘woke’, in Communist party terms, even before Xi Jinping decided to wake the country to its old socialist values. A party member for more than 35 years, the 62-year-old Hui was already speaking of “common prosperity" in 2018. In 2020, with $465 million in donations, Hui ranked as China’s most charitable person for the fourth year in a row. He was proactive with the covid pandemic, contributing cash to Wuhan one day after its lockdown and donating millions of dollars to medical research. Hui was given a much coveted spot at the Tiananmen Square gate tower at the 70th anniversary of the People’s Republic on 1 October 2019, and again, at the Party’s 100th birthday party this July. In that way, he was more enlightened than other Chinese tycoons, such as Jack Ma.

It worked. Authorities from lower-tier cities would be intoxicated by Hui and his visible political correctness and connections—welcoming his development projects and proposals with open arms. “Everything Evergrande and I have belong to the party, the country and the people," he said in a much-cited 2018 speech. If it sounded grand and charitable then, it feels ominous now.