Banking & Finance

Cashing out

Erdos next in line after Wenzhou for private lending crisis?

Building flat out: Erdos may have China’s worst property bubble

The life of Su Yenü was shaping up to be a rags-to-riches story, very much like that of the town in which she is now being held by police – Erdos City in Inner Mongolia.

But could Erdos now be heading for a less desirable reputation – as worse than Wenzhou when it comes to collapsing private lending schemes? “The crisis has come now. If no proper measures are carried out, Erdos is very likely to follow the path of Wenzhou,” Zhou Dewen, chief of Wenzhou’s small and medium-sized business association, told reporters this week.

This follows news that businesswoman Su is being investigated by police. Her network of private debt grew by as much as Rmb1.3 billion in the last year, reports Securities Times, luring in 4,000 lenders.

Su is the third Erdos property developer to be brought down in recent weeks. Caijing magazine reported in late September that Wang Fujin, the second-biggest shareholder of Zhongfu Real Estate, a property developer in the city, had committed suicide, and that Hao Xiaojun, the largest shareholder, was also on the run.

Su’s business career started a few years ago when she borrowed from friends and family to set up restaurants, including a successful downtown hotpot eatery. She then began to spend more aggressively, on a large portfolio of property and a fleet of luxury cars.

But Su started to have problems when she borrowed Rmb360 million to invest in a hotel. Investors found out that she had only invested Rmb200 million of their capital and suspected that she had pocketed the rest. They started asking for their money back.

The whereabouts of the remaining funds are unknown. But they look likely to be difficult to recover, especially if they have been put to work in China’s most famous real estate white elephant, the Kangbashi New Central District.

Built for more than a million Erdos residents, it has remained virtually empty for years.

It was speculative real estate projects like these that hedge fund manager Jim Chanos had in mind when he first warned that China’s property market had put the national economy on to “a treadmill to hell”. So he and others like him will be heartened by news that the volume of property sales in Erdos was down by 80% in the first three quarters, compared to the same period last year.

Last week, nearly 100 construction workers smashed up the offices of an Erdos developer that had fallen into arrears paying their wages, reports Oriental Morning Post.

What’s notable is the willingness of local people to hand over their life savings to Su. One cousin worked for her in one of her restaurants. He offered up Rmb4 million of his own cash, plus another Rmb8 million from those close to him. Others were happy to lend money after introductions by friends.

The wider question is whether Erdos’ rapid ascent leaves it more exposed to a private lending implosion. As a key supplier of natural resources, the city’s average GDP per capita is often said to exceed that of Hong Kong, with 7,000 locals having at least Rmb100 million ($15 million) in assets, and 100,000 millionaires (in yuan terms) in the city, according to estimates from the Ministry of Housing and Urban-Rural Development.

Much of that wealth seems to have been loaned out informally. Zhou Dewen – probably pleased that Wenzhou has someone to share the spotlight – told local media that private lending may account for 30% to 40% of real estate industry funding and 60% to 70% for the local coal mining industry.

In the meantime, Su is under arrest. Just as well: a Miss Zhao, who lent Su Rmb7 million, told Securities Times that she wanted to see her “shot 10 times ”.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.