Chinese mega development teeters on brink of collapse

Chinese mega development teeters on brink of collapse

At the end of last month, police carried out a surprise raid at the head offices of Chinese property developer JC Group in Hangzhou, China, according to reports in international media.

The company, whose offices have been sealed off by the authorities, is suspected of having carried out “illegal fundraising.” Thirty-two senior executives are believed to have been detained, while the whereabouts of the company’s founder and chairman Jay Wei is currently unknown. Furthermore, between August and October last year, JC Group slid into a payments crisis — the company still has 17 billion yuan (approx. US$2.5 billion) of outstanding liabilities on its books.

The above described problems may mean that the “charming towns” development project — a partnership between JC Group and local governments, which has attracted an estimated 3,800 individual investors — could be about to go bust. The scheme aims to build 59 “themed villages” across China, and local governments have already signed individual contracts worth up to a total of 570 billion yuan. Yucheng Town government in Zhejiang Province joined forces with JC Group, signing a deal with the company worth 10 billion yuan to turn itself into a one-stop marketplace for the adult entertainment industry called “Happy Town.”

However, JC Group is reported to have used China’s shadow banking system to raise funds for the project, while promising investors annual returns of up to 12 percent. With a minimum investment amount of 100 million yuan, total losses sustained by investors may be to the tune of 38 billion yuan.

Chinese media has also revealed that a large number of JC Group’s development projects have either not been formally initiated or construction work has yet to begin. Further, in April last year, China’s regulatory authorities discovered that the company was engaging in misleading advertising and required the group to temporarily suspend its fundraising operations. Then in August, the company began to postpone payments relating to the projects.

According to the South China Morning Post, the JC Group case shows the significant risks posed by China’s state-led, debt-driven model of economic development. Additionally, collaboration between local governments and private companies through public-private partnership (PPP) arrangements have increasingly become a tool for local governments to hide debt.

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