Wei Jie was once the poster child for young and successful real estate developers focused on the country’s smaller cities. His company once boasted a contract value of more than 570 billion yuan (US$82.64 billion) from 58 projects.
Still in his 30s, Wei enjoyed a lot of attention and was even invited to deliver speeches in the world’s top universities including Harvard and Oxford.
Last Friday, all of a sudden, Gold-Finance Holdings Ltd. (01462.HK), the flagship of Wei’s business group, saw its share price slump by 64 percent. Trading of its shares was suspended.
What triggered the sharp plunge was news that its parent company, Hangzhou Gold-Finance Group, failed to redeem 14 billion yuan worth of investment products.
Gold-Finance focused on real estate projects in remote towns, using public-private partnership (PPP) as a key financing channel.
Previously a lawyer, Wei entered the real estate business in 2007. The first few years had been good. But policy shifted and became hostile towards PPP-funded projects.
Compared with peers like China Fortune Land Co. (600340.CN) and China VAST Industrial Urban Development Co. (06166.HK), Gold-Finance was particularly hard hit because of its aggressive approach.
Players in small-city property projects typically cooperate with local governments.
The local government usually sells a large land plot in the middle of nowhere at a very low cost, along with other incentives such as tax breaks, to attract developers, who in turn try to attract corporates and residents into those remote locations.
Such projects require massive capital. Although developers rely on sales proceeds to partly fund a project, large sums are still needed to build pre-development infrastructure such as roads, power systems, and water facilities.
China Fortune Land Development and China VAST Industrial Urban Development have strong balance sheets.
By contrast, Gold-Finance lacked capital, and Wei often resorted to PPP for financing.
The company signed deals with local governments and then issued investment funds to private investors to raise money for the projects.
Problems began to surface in 2016 when the central government became less supportive of such projects and the PPP model.
Beijing even called for a crackdown on such projects nationwide and halted approval of any new projects.
Most of Gold-Finance’s projects were still in the preparatory or early planning stages when the government changed its policy.
As a result, Gold-Finance suffered a heavy blow and failed to repay over 14 billion yuan worth of investment funds when they matured in May.
Investors agreed to a six-month extension but the firm still could not repay after the grace period.
This article appeared in the Hong Kong Economic Journal on Dec 17
Translation by Julie Zhu
[Chinese version 中文版]
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