Lost property

How to lose a billion in the real estate market

Lost property

Last Easter WiC published China’s Tycoons, a book recounting the rags-to-riches tales of the nation’s top entrepreneurs. Men like Cao Dewang, who started out selling fruit. Cao cycled 80 kilometres a day around the city of Fuqing. Today he’s a billionaire who makes windscreens for cars. Or Xu Ming. His first business deal had him selling shrimps. But he made his fortune making PVC window frames. Meanwhile Liang Qingde started out making dusters; but he ended up as the world’s biggest manufacturer of microwave ovens.

In all 75 of the profiles in the book the self-made individuals start small. But through a combination of savvy judgement, well-timed risk-taking and breakneck expansion they grow their firms into industry titans. In many cases the entrepreneurs diversify quickly away from their core competences, often plunging into property development to make even bigger fortunes.

Of course, the problem of books like China’s Tycoons is that they are guilty of success-bias – i.e. they only profile the winners. The harsher business reality is that for every high-octane entrepreneur who strikes it rich, there are thousands more who don’t.

So the story of Yu Zhongjiang is a good antidote to tales of glory retold in our tycoons book – namely that big bets, untrammelled ambition and a major foray into real estate investment are the sure route to untold riches in China.

Yu’s case proves they aren’t.

True to form, Yu started out modestly, in his case driving a taxi in Jiande city, according to South Weekend. Then he moved into a small business renting out cars, and his interests were soon expanding into nearby (and much larger) Hangzhou, the capital of Zhejiang province.

Then another change of direction: just over a decade ago Yu set up Hangzhou Youbang Flavours and Fragrances to make food flavourings. This proved a profitable move, and in his native Jiande Yu soon became something of a business celebrity. But as South Weekend notes “Yu did not want to stick to his main business” and established Hangzhou Zhejiang Zhongjiang Holdings. This saw him branch out into chemicals, as well start to build a lakeside airport in Jiande (on which he lost an estimated Rmb100 million).

But his real mistake was to enter the real estate business. In 2008 Yu took over Hangzhou Jinxing Real Estate Company – whose main asset was an unfinished housing project. He also embarked on a riverside luxury complex in Jiande. The projects weren’t a success and he was unable to sell many units.

Undeterred Yu spent a further Rmb700 million in 2010 to buy the Wyndham Hotel Royale on Hangzhou’s prestigious West Lake. Not only had Yu overextended himself to fund the acquisition, local insiders say he had little understanding of the hospitality industry. Once again he paid top dollar at a time when the government was readying a raft of tightening measures designed to slow the real estate market.

Evidently, Yu didn’t have much luck. But he seems to have been a master at raising funds. To keep his increasingly shaky empire afloat he borrowed a around Rmb2.5 billion ($395 million) from the private lending market, paying monthly interest rates of up to 6%.

But with no sign that the property market was turning, his debt pyramid recently began to unravel.

Unlike others in a similar position, Yu didn’t try to disappear. Instead he has approached the local government this month for help in negotiating asset sales with his creditors and to ensure the 1,000 workers in the food flavouring business didn’t lose their jobs.

Then again, his passport has still been confiscated, just in case.

The media meanwhile is speculating on the impact of Yu’s borrowing binge, and the billions in bad debts his business activities have left behind. South Weekend says three banks, a dozen large companies and hundreds of small businesses lent to Yu via the private loan market. Not an auspicious start to the Year of the Dragon for them.

If you didn’t read China’s Tycoons: Profiles of 75 Top Business Leaders you can download it from the books section on our website

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