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China businessman who built an empire vanishes – Disappearance prompts review of loans made to his conglomerate


By Yu Ning and Wen Xiu

DALIAN ( Caixin Online ) — The sudden disappearance of a self-made billionaire in the coastal city of Dalian has unnerved not only bank executives concerned about loans they made to his companies, but also government officials who have lent generous support to the expansion of his business empire.

Xu Ming, chairman of Dalian Shide Group Co. Ltd., has been out of contact with his companies since March 14, a corporation announcement said.

The notification, dated March 31, says: “So far, the corporate group has not received any official notice related to Chairman Xu Ming, nor has any government department or agency launched any investigation against Shide Group and its subsidiary companies.”

Meanwhile, a source close to the matter in the capital said Xu was taken into custody by Beijing authorities for questioning on suspicion of financial crimes. Shide Group’s president, Chen Chunguo, could not be reached.

Cozy ties to banks

In Dalian, banks with close ties to the corporation were among the first to be shocked by Xu’s disappearance. The day after, a number of banks started reviewing the loans they made to Shide Group and its related concerns, Caixin learned.

China Construction Bank’s CN:601939 +0.86% CICHY -1.42% preliminary investigation found that the amount of its outstanding loans to Shide Group has steadily declined over recent years, but still stands at roughly 1 billion.

The current loans are “relatively well collateralized and have not been classified as non-performing loans,” said a loan officer from CCB’s Dalian branch bank. He added, however, that there was no guarantee that the loans would be repaid in full because all concerned parties had become extremely wary of making further loans to Shide Group, which could put the corporation in financial distress.

Also hanging in the balance is a 600 million yuan ($95.1 million) debt from a wealth management product CCB issued in 2010 on behalf of Shide Group. The debt comes due in May, but it is unclear how much risk the bank assumed.

Shide Group has had a cozy relationship with CCB that dates back more than a decade. Its first large loan from the bank was made in 1999, when Xu acquired Dalian’s football club. It originally belonged to businessman Wang Jianlin under the name of Dalian Wanda Football Club.

The transaction was worth 120 million yuan. Xu paid Wang 50 million yuan in cash and took over repayment of a 70 million yuan debt Wang had with CCB. Since then, Xu kept borrowing from CCB, at one point boosting the amount of outstanding loans to 1.6 billion yuan. This sum started to shrink after his aggressive expansions alerted the bank’s risk-management officials.

Two other state-owned commercial banks, Bank of China BACHY -1.77% CN:601988 -0.33%  and Industrial and Commercial Bank of China CN:601398 +0.23% IDCBY -2.08% , said they had not made any loans to Shide Group. However, BOC said it has strengthened the monitoring of loans to “related enterprises in Dalian,” indicating that BOC may be indirectly linked to Shide Group.

Also, Agricultural Bank of China CN:601288 +0.38%  has a history of lending to the corporation. Loans from ABC were used to establish two of Shide Group’s corporate members: Dalian Shide Machinery Construction Corp. Ltd. in 1992 and Dalian Shide Plastics Industry Co. Ltd. in 1994.

 

Official connections

The establishment of these two companies and the rapid expansion of Xu’s business conglomerate showed that Xu, a member of Liaoning Province’s Chinese People’s Political Consultative Conference committee, enjoyed an intimate relationship with local officials.

He persuaded the then director of Dalian Zhuanghe’s Foreign Economics & Trade Committee, Yang Xingpu, to establish Shide Machinery, Shide Plastics and Shide Group through the committee’s state-owned subsidiary, Zhuanghe Industrial Products and Foreign Trade Co. (Xu had worked for the latter.)

The committee controlled all of the startups until 1999, when Xu, his brother and two other people took over all of the companies’ shares.

More astonishingly, on March 6 and 7, 2001, a combined 3.88 billion yuan was wired to Shide Group’s corporate account with Bank of Communication’s Dalian branch. The money came from 20 people, including Xu and 13 legal persons, and was used to enhance the registered capital of Shide Group and its subsidiary companies.

But it did not take long for the four people originally in control of the corporation to assume dominating positions again after the capital injection. In August 2002, other stakeholders sold some of their shares to the four, enabling them to hold a combined 45.55% of Shide Group. Where the funds came from and what interests were involved in the equity transfers remains a mystery.

Amassing a fortune

What is known, however, is that Xu grew wealthy. In 2001, aged 30, he was 18th on the Forbes China Rich List, and two years later he was 11th.

His business empire developed fast, expanding into areas including the petrochemical industry, home appliances, sports, health care, insurance and property development. But it still relies heavily on revenue from the production of building materials made from petrochemical products. With supply exceeding demand since 2005, it has been increasingly difficult to maintain profits.

Even so, Shide Group kept making high-profile investments, splashing out millions of yuan on new petrochemical production facilities and factories, exacerbating overcapacity.

Xu has also reaped enormous profits from investing in the equities market. But some of his transactions were suspected by securities regulators of involving insider trading and infringing upon listed companies’ interests.

Currently, no special risk reviews have been ordered for financial institutions, including city commercial banks, in which Shide Group holds shares, an official from the China Banking Regulatory Commission said.

However, Xu’s disappearance and the dark clouds hanging over Shide Group have many in Dalian nervous.

“Until it becomes clear whether the authorities intend to use Shide as a breach to hunt down people behind it, every government official and business person in Dalian feels imperiled,” said a local bank executive, who declined to be named.

Read this article on Caixin Online.

Caixin Online staff reporter Jin Qing contributed to this report.

 

Posted in MarketWatch

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