Housing and Illegal Fundraising Schemes Collapse Across Henan Province

With the end of the "liang hui" (两会), bad news is flowing again in the Chinese media. Out today are a couple of stories on financing collapses in 2014, which still ongoing in 2015 as the government deals with and tried to get to the bottom of, a major credit bubble implosion.

The real estate market and private lending market collapsed in Nanyang, Henan. Since August of last year, the market has been in trouble, but in recent months, illegal fundraisers have gone down like a series of dominoes. One investor who lost his money said he estimates half the city participated in various fundraising schemes. One government official said many investors have already died, either by suicide or out of despair, and many government officials have also lost their money.

This incident isn't isolated, in fact similar stories are playing out across all of Henan province, including the capital of Zhengzhou, Anyang, Luoyang and Jiaozuo. In Xinyang, an investor committed suicide by jumping into the icy river.

A team leader with the Public Security Bureau's illegal fundraising task force in Nanyang said, "This is only the beginning, I expect next year will be even more serious."

A 40 year-old investor Li said he invested ￥2,490,000 with Nanyang Moyu Development. Since August, he's been unable to get his money. Everyday he does two things: demand repayment with other investors and fight with his wife. 38 year-old investor Song invested ￥1,700,000 with Moyu and said he quickly realized after investing that he had been duped. Investor Fang took his life savings and the savings of his family. He invested ￥1,000,000, hiding the fact even from his son, and now finds his money is stuck. The three stories are a sample of the more than 3000 investors who are victims of the latest real estate collapse in China.

Around Spring Festival, Moyu, Daxin and Yilin, three investment companies, went broke one after the other. All told more than 10,000 investors are estimated to have lost upwards of ￥1 billion in a still unfolding collapse that has crushed their dreams of striking it rich.

Aforementioned Song only last winter invested ￥700,000, attracted by the allure of 2% monthly interest, or ￥14,000 in interest. To put that number in perspective, the average monthly salary in Nanyang last year was ￥4696. Had Song placed the money in the bank, he would have earned only ￥1000 in monthly interest.

Aside from greed, Song said a big reason why he invested was that a "trustworthy relative/friend" came looking for money. After interest at 10 times the bank's rate started flowing into his account, he lowered his guard and added another ￥1,000,000 to what he had lent his relative/friend.

"It's like multi-level marketing, illegal fundraising in a traditional Chinese way between friends and relatives" said Song. Everyone involved is a relative or close friend. The illegal fundraising companies also offered investors a cut of interest from new investors, leading many to start large scale fundraising operations, inviting their fathers, sisters and even sons to invest.

In 2012, the China National Farmers Games' were held in Nanyang. Many real estate developers came to the city and home sales in July of that year jumped 71% above June levels. Li Liang of Nanyang's Finance Bureau and official in charge of illegal fundraising cases, said that all developers had to do was buy land. They didn't begin construction or take any steps towards building, yet they sold out their homes.

Moyu was started by a retired city official, Zhao Mingyun, looking for something to do. "At that time, I never thought it would get so big." He was considered trustworthy by friends, so several put up ￥3,000,000 each for an equity share. His first project in 2007 involved a distillery with environmental problems. Working with the government, the factory was moved from the city center and he built housing on the land. He spent ￥9,000,000 and earned ￥10,000,000 on the project. He admitted that like every other developer, he was able to sell homes before construction was completed. Today, he has 10 projects ongoing and not one of them is completed.

With government no longer supporting real estate, banks refusing to lend and the housing market cooling, illegal fundraising firms had one choice: raise money from the general public. Li Liang says of Daxin, since inception the firm never borrowed from a single financial institution. Since 2011, Moyu was unable to borrow from banks, so the firm turned to illegal fundraising. Zhao Mingyun says the government had to be aware of what he was doing, "Every developer was like me, they relied on social financing for development."

Seeing the chance to turn big profits into great profits, developers jumped at high interest rate loans via illegal fundraising. They expanded their projects in the city and branched out to other cities and industries, encompassing hospitals and tourism among others. The projects exceeded these small developers' operating and management capabilities. For example, Zhao Mingyun grew his company with more and more projects, needing more and more money, causing him to look everywhere for capital.

Things changed in a single month. Suddenly, real estate sales dried up and firms could not repay their loans. It was June 2014, with the national market already cooling, a Nanyang developer Sanjie was exposed by CCTV for using substandard steel rebar. The government ordered all projects halted. One developer remembers the situation, it was like dominoes falling over. Sales collapsed and the market entered a depression. Some homebuyers also came back to demand developers inspect the rebar in the buildings. Zhao Mingyun's firm was no different and with capital needs increasing, interest costs rising and unable to recoup capital, the firm collapsed.

Li Liang revealed that some firms were offering as much as 3% and 4% monthly interest. With up to ￥500 million invested, this came to ￥20 million in interest each month. He says at that point, the illegal fundraising was purely a scam. According to one official with the PSB, the real estate fundraising cases are only part of the picture. This year could expose even more serious cases.

Henan's case has attracted the attention of the central government, which has called on the province to clean up the problem and reform. For three straight years, Henan's illegal fundraising amount was the largest of any province in China. Song Jianbo of Nanyang's Finance Bureau says the government is working on classifying the cases. Those that involve outright fraud or with a failed project will be handled directly, but those where the project is ongoing, the government will offer help. OF the latter, he said arresting people settles the matter, but it is not good for stability.

In all of 2014, there were 13 cases of illegal fundraising investigated by the government. In a little over one month in 2015, there are already 5 cases.

iFeng: 南阳楼市崩塌致非法集资链断裂 数位投资人死亡