Talking Point

Battle of the Bund begins

Why business bosses in Shanghai have been losing sleep

Dai Zhikang-w

Bad day for Dai: the tycoon behind the Zendai Group has been arrested over a P2P lending scandal

Chinese leaders have regularly relied on anti-corruption campaigns to eliminate adversaries and consolidate power.

In 1951 Mao Zedong launched the “Three-Anti” campaign, targeting fellow cadres under the title of rooting out corruption and waste.

A year later he unleashed a new “Five-Anti” effort, expanding the focus to private sector businessmen. As China’s commercial capital, Shanghai was particularly hard hit. Tens of thousands of landlords and entrepreneurs were prosecuted for crimes ranging from bribery and tax evasion to the theft of state-owned assets. With their businesses nationalised and their assets confiscated, hundreds of people killed themselves during the initial months of the campaign.

Over the last 40 years Shanghai has regained its commercial crown and re-emerged as China’s biggest onshore financial hub. However, business bosses there have reason to feel a little restless, after a flurry of arrests of local tycoons.

That’s increasingly stoking a view among more politically sensitive investors that President Xi Jinping’s longrunning anti-graft campaign is paying particular attention to a key faction with its roots in the coastal city.

The latest big-name catch…

Dai Zhikang, the boss of conglomerate Zendai Group, turned himself in to police this month, confessing to fraud at his peer-to-peer (P2P) lending business.

P2P platforms connect investors looking for higher interest income with borrowers having problems getting conventional bank loans. The Chinese P2P sector had grown rapidly in the past few years – with new lending platforms mushrooming across the country. This alarmed regulators which more recently have tightened oversight of this key area of shadow banking.

Total monthly fundraising volumes for P2P platforms in China have plunged from a peak of Rmb253 billion in June 2017 to about Rmb90 billion this July, according to industry monitor wdzj.com.

The country’s biggest P2P platform, Ping An Insurance’s Lufax, is scaling down its P2P business, and refocusing on other areas including fintech and consumer lending (see WiC457). Many lesser players have simply folded after their bosses fled the country (see WiC422).

Dai’s troubles became public last month when Laocaibao, his P2P business, announced that it would suspend its operations. By the end of July more than 28,000 investors had lent money to almost 100,000 borrowers through the platform. Outstanding loans amount to Rmb5 billion ($700 million).

Late last month the 55 year-old tycoon had announced on Laocaibao’s website that he would be personally leading a restructuring. There was no need to worry about him “running away”, Dai told investors, because a disappearing act would jeopardise Zendai’s “27-year reputation in the finance industry”. However, hundreds of investors still crowded Zendai’s offices in Shanghai demanding reimbursement. The mood was so tense that it prompted intervention from the Shanghai police.

According to a statement by Shanghai’s Public Security Bureau, Dai surrendered after the police body took “coercive measures” against the businessman and his firm. He has already confessed to illegal fundraising and embezzlement. At least 40 other people have also been detained in relation to the case.

“The exit of Lufax and the collapse of leading platforms [such as Laocaibao] has lifted the curtain for the ending of the P2P industry,” concluded China Fund, a newspaper focused on the asset management industry.

Why is Dai’s story significant?

Born in 1964 in Jiangsu, Dai was admitted to the elite Graduate School of the People’s Bank of China in the 1980s. After spending several years in the state-run banking system, he departed for the private sector and started China’s first “public mutual fund”.

The venture gained him a place in the “class of 92” – a grouping of entrepreneurs who went on to have success after the country’s economy was rebooted by Deng Xiaoping’s Southern Tour in 1992 (see WiC136).

Thanks to his entrepreneurial longevity Dai commanded a higher standing than many younger but more successful members of the Shanghai business elite – a group that typically encompasses tycoons from the traditionally affluent regions of Shanghai, Hangzhou, Ningbo and Jiangsu.

Take Jack Ma, who was born in Hangzhou in the same year as Dai. The Alibaba founder has dominated the headlines this week with his official retirement as chairman of China’s biggest e-commerce firm. Yet back in 1998, it was Dai who sold Ma the apartment next to Hangzhou’s scenic West Lake, where the 18 so-called “lakeside partners” later co-founded Alibaba (according to Dai, the feng shui at the property is so excellent that Ma registered his key business units at that company address).

Dai is probably best known for developing Pudong’s Himalayas Centre, a commercial complex with an art museum (see WiC75). He was also a major patron of Shanghai’s contemporary art scene. But Zendai’s commercial expansion in the city – notably paying a record-breaking Rmb9.2 billion in 2010 for a piece of land on the riverside Bund – took it into a challenging sector. Financial trouble followed and Zendai sold its stake in the Bund project a year later. Then there was a spectacular change in direction: a $7.8 billion project to transform a district of Johannesburg into the “New York of Africa” (see WiC218).

Plans by property developers to move more of their funds into foreign real estate projects like these then ran into a roadblock when Chinese government policy became more concerned about capital flight in 2017. Not much has happened in Johannesburg, the South African media reported earlier this year, except for the release of some “futuristic computer-generated images”. Perhaps that was why Zendai switched focus to P2P loans a couple of years ago, China Fund reported, a decision that has undone Dai’s storied career.

“Dai was once more prominent than Jack Ma but now he has completely fallen from grace,” an article on 36Kr.com concluded this week.

A brewing storm?

Barely a day after Dai turned himself in, Shanghai authorities made another major announcement: Baofeng Group’s boss Feng Xin had also been arrested and this time charged with bribery.

Founded in 2007, Baofeng means “storm” in Chinese and the internet-based video-streaming firm made an explosive debut after going public on Shenzhen’s ChiNext in March 2015.

At that time the A-share market was in overdrive. Riding the bull run to perfection, Baofeng’s share price climbed by the 10% daily limit for 34 of the 40 trading sessions following its debut. That 40-times spike pushed Baofeng’s market value beyond Rmb40 billion and earned the company the brief but dubious title of the “the number one demon stock”.

In fact, the connotation is negative: “demon stocks” typically display logic-defying lurches in share price, usually as a result of insider dealing. And when regulators set out to skin the “demons, evil creatures and financial crocodiles” in the stock market (see WiC356), Baofeng’s share price collapsed. Valued at Rmb1.8 billion as of this week, its story is often used by pundits to warn against the risks and volatility of Chinese stocks.

What has Feng done wrong?

Feng was taken into police custody for “suspected crimes”, Baofeng acknowledged in a circular in late July, without elaborating. But the nature of the crimes became clearer this month when the prosecutor’s office in Shanghai’s Jing’an district published his arrest warrant.

Born in 1972, Feng is a year younger than fellow Shanxi native Jia Yueting, the tycoon behind troubled tech firm LeEco. Back in 2015, LeEco was still in good shape and Feng was talking about the prospect of emulating Jia’s business model and turning Baofeng into an internet-to-sports conglomerate.

It wasn’t the best example to follow. Jia fled China two years ago after running up massive debts at LeEco and there was more news on his difficulties this week when he stepped down as CEO of Faraday Future, an electric carmaker he was counting on for a reversal in his fortunes.

On social media Feng has been bestowed with the undesirable nickname “Jia Yueting II” and earlier this year analysts were suggesting that Feng had also plunged Baofeng into a debt crisis.

Following the news of his arrest, Feng has found himself facing far more serious allegations. Baofeng’s troubles started with a Rmb5.2 billion deal in 2016 to acquire a 65% stake in London-based sports rights dealer MP & Silva (MPS). At the time Chinese firms were undertaking an unprecedented M&A binge overseas. But in a fate similar to other big spenders such as Anbang’s Wu Xiaohui, Baofeng’s spree incurred the wrath of Chinese regulators.

The sports deal was a highly leveraged one, financed by a wealth management product (WMP) – another shadow banking tool that’s been subjected to a regulatory crackdown in recent years. In Feng’s case a special vehicle was set up to raise the required funds (Rmb5.2 billion) by selling WMPs to third-party investors. MPS was valued at $1.4 billion, but Baofeng only needed to chip in about Rmb60 million on the purchase, while two senior partners – units of state-owned financial heavyweights China Everbright and China Merchants Bank – coughed up the bulk of the financing.

Baofeng promised to pay off its partners within 18 months but it never honoured that obligation as soon after the deal closed MPS went under. It had secured TV rights for popular sports events such as top-flight European football and Grand Slam tennis. Yet many of its most lucrative contracts were running out when Feng knocked on the door. Worse, MPS started to miss payments to the relevant sports bodies and key executives jumped ship. In late 2018 it was liquidated by a British court.

Baofeng’s disastrous M&A dealings have stoked a brewing storm in Chinese financial markets. Everbright Securities wrote off Rmb1.5 billion of its MPS investment last year, while China Merchants Bank has sued another Everbright unit for Rmb3.5 billion for failing to meet contractual obligations. A Shanghai court put Baofeng on a “dishonesty blacklist”, a category created for individuals and firms which have failed to repay their debts (hence the comparison with Jia Yueting).

There were more damaging allegations after Feng’s arrest last month, when Caixin Weekly reported that several Everbright executives had also been detained by authorities for accepting bribes. And in a signal of how far Baofeng’s star has fallen, ThePaper.cn noted that not a single shareholder bothered to show up at an emergency general meeting last month (just five of its 70,000 or so shareholders bothered to vote online).

Who else has been locked up?

A number of other high-profile arrests in Shanghai over the past few months have already rattled investors. In one of the detentions, billionaire Wang Zhenhua was arrested by police in July on allegations of child molestation at a hotel in Pudong. The 57 year-old made a televised confession via state broadcaster CCTV a few days later.

Wang’s detention also inflicted serious damage on investors in his property group. The share price of his listed vehicles in Shanghai and Hong Kong, respectively Seazen Holdings and Fortune Land, both plummeted and billions of dollars of market value have been wiped out as a result.

The stock price of Camsing International, a Hong Kong-listed media firm that owns Stan Lee’s POW! Entertainment, also dived nearly 80% in a single session in early July after its founder and chairwoman Lo Ching was also detained by Shanghai police.

Lo only took control of Camsing in 2015 and two years later became the biggest shareholder in Shanghai-listed financing firm Jiangsu Boxin Investing. According to Shanghai Securities News, she has been financing her stock market dealings by selling WMPs linked to supply-chain financing (securities backed by corporate accounts receivables). Her detention has sparked fears that billions of yuan raised by Camsing through these products are backed by falsified accounts, the state-run paper said.

This inglorious list of fallen tycoons still seems to be growing. Indeed Caijing magazine reported last month (before Dai’s surrender) that 14 chairpersons or controllers of A-share firms had been detained or put under official investigation by regulators.

Most of those are in trouble for similar reasons, Caijing observed, as the Chinese government has been trying to restore order in the financial system in three ways: clamping down on questionable overseas M&A; rooting out improper conduct in the stock market; and deleveraging shadow banking activities such as P2P and WMPs. Yet the magazine still believed the current situation is unusually intense. “A listed firm’s chairperson is evidently a highly dangerous role,” it reckoned. “The crime rate in this profession for the first eight months of this year has vastly exceeded the national average.”

Other observers wonder if it is more a case of high-level political infighting in Beijing spilling over into the business world in Shanghai. In the political hierarchy, the so-called ‘Shanghai Gang’ was the dominant faction in the central government during the leadership of former President Jiang Zemin, a long-time Party boss in Shanghai. The faction’s power has waned significantly since – notably after Chen Liangyu, another former Party boss in Shanghai, was disgraced by an anti-corruption probe in 2006.

Since Xi Jinping began his anti-graft campaign in 2013 – assisted by the ever-vigilant Wang Qishan – a host of factions has been struck down or sidelined (one early casualty was the ‘Shengli Gang’, an oil-sector-based faction led by purged Party elder Zhou Yongkang). But in the first six years of graftbusting Shanghai had seemed relatively untouched by investigators – which makes the news of the recent arrests in the city more significant.

That’s what’s led some to speculate that we might see the term ‘Shanghai Gang’ creeping into the news headlines in the near future.


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