NYT
In China, a Building Frenzy’s Fault Lines
By DAVID BARBOZAMARCH 13, 2015
As the real estate market in the United States was collapsing in the mid-2000s, Wall Street went in search
of new terrain, and found it in China. All across the country, from Beijing to Shenzhen, sprawling housing
developments and business districts were popping up, seemingly overnight. Real estate prices were soaring.
Western banks, hedge funds, private equity firms and other investors wanted a piece of the action.
Billions poured into Chinese real estate, and big foreign financial firms hunted for the next hit — the small
bet that investors could ride to great heights. One of those firms, Credit Suisse, scoured the landscape and
in 2007 discovered Kaisa, a relatively small property developer in Shenzhen that mostly bought and
rehabilitated distressed properties. Credit Suisse brokered a $300 million investment deal for Kaisa, and
two years later, it went public. Its chairman, Guo Yingcheng, posed for photographs on the floor of the
Hong Kong Stock Exchange holding a statue of a bull, which seemed to signify hopes for his company’s
coming bull run. His colleagues poured Champagne into an ice sculpture of the company’s stock code:
1638.
With the $450 million raised in the initial public offering, Kaisa embarked on an aggressive expansion into
20 more cities. It formed a partnership with Marriott hotels and announced plans to build one of the world’s
tallest buildings. Kaisa shares skyrocketed, helping lift the fortunes of its Western patrons, including the
Carlyle Group, an American private equity firm.
Then came the fall.
The real estate market slumped, dragging down the rest of the Chinese economy. Developers, in particular,
were under pressure, as foreign investment dried up.
And in this market tumult, reports surfaced late last year that Kaisa’s chairman was being questioned in a
corruption case. With little explanation, in December, Shenzhen authorities blocked Kaisa from selling
homes at several major residential developments.
Soon after, Mr. Guo, the chairman, resigned “due to health reasons.” A string of resignations followed that
wiped out virtually the entire senior management team, including the chief executive, chief financial officer
and the head of investor relations.
The chairman’s family bailed out of the company in February, agreeing to sell its 49 percent stake to a
Chinese developer for $580 million, a small fraction of its value just months earlier.
Stock investors got burned as Kaisa’s share price fell 55 percent in just a few months. The developer had
also tapped the debt markets, selling $2.5 billion worth of bonds overseas to big fund management
companies like BlackRock and Fidelity Investments.
Photo
Pedestrians rode an escalator outside the Sinopec Tower, in Guangzhou, China. The tower is one of Kaisa’s
flagship properties. Credit The New York Times
Kaisa is now pushing such bondholders to accept roughly 50 percent of the value of their holdings, or risk
getting pennies on the dollar if the company goes bankrupt.
“We’ve seen problems with other developers, but nothing like this,” said Peter Churchouse, a property
consultant in Hong Kong and a former executive with Morgan Stanley. “There’s a deep mystery here.”
The Kaisa story offers an unusual window into what can go wrong when investors rush headlong into
China. In a country where the profits have been so tempting, the warning signs — the complex corporate
structures, the opaque deals, the political influence — often go unheeded. Investors, even sophisticated
investors, either miss them or ignore them.
The Chinese authorities have offered no reason for their decision to freeze sales at Kaisa properties. And
the company’s executives are not talking. But there were hints. Reports of bribery. Insider deals involving
more than a dozen of the chairman’s relatives. An increasingly complex network of affiliated companies.
And a land development project tied to a former Chinese security chief and Politburo member, Zhou
Yongkang, who was arrested and expelled from the Communist Party last year in one of the biggest graft
cases in decades.
The most striking details about Kaisa were public. Court documents from a 2010 corruption trial in
southern China show that the chairman, Mr. Guo, confessed to paying a $130,000 bribe to a high-ranking
judicial official in Guangzhou to gain favorable treatment in a Kaisa property deal. And while the company
has never acknowledged the case in public filings, the details are available in the court’s verdict.
“Many investors are shocked at what happened,” says Neil McDonald, a lawyer in Hong Kong for Kirkland
& Ellis, which is advising some of Kaisa’s bondholders. “It’s troubling that in a market as sophisticated as
this, no one knew what was going on.”
A Murky Past
Kaisa’s 2009 initial public offering prospectus is a mind-numbing 837 pages of data. It includes a corporate
history and a compendium of regulations, risks, financial covenants, options plans and term loan facilities.
It also contains a breakdown of Kaisa assets, a corporate chart with 90 affiliates, and mailing addresses for
the directors.
Continue reading the main story Video
Play Video|3:48
The Casualties in China’s Economy
The Casualties in China’s Economy
After years of increases, home prices in China have begun to drop. This is good news for buyers, but bad
news for residents of the Xixi Moho apartment complex that developers stopped building.
Video by Jonah M. Kessel on Publish Date December 18, 2014. Photo by Gilles Sabrie for The New York
Times.
But a search for the most basic biographical information about the company’s chairman and co-founders,
usually standard fare in offering documents, will end in disappointment. The prospectus says nothing about
Guo Yingcheng’s education or work history before he founded Kaisa, at 35. Nor does it include the work
histories of other important players, including his brother, the vice chairman.
How Mr. Guo, 50, made his early fortune is a mystery, even to research analysts who have covered Kaisa
for years. “There’s a history of Kaisa, but not too much on how the founders made their money,” says
Franco Leung, an analyst at Moody’s Investors Service.
Mr. Guo is from Chaoshan, a region of southern China that is the birthplace of some of the country’s most
dynamic entrepreneurs. He grew up in a poor village, called Tieshanyang, dotted with ancestral temples
and clay-tiled homes. Residents say that Mr. Guo is the son of a local shopkeeper and that he left home at
16 to join his uncles on Hainan Island, where he sold fish and traded in imported goods.
“He went to Hainan after the opening and reform,” says Guo Wenxiong, a resident of the village. “He just
sold some household goods, at that time, whatever you could sell. Later, his business picked up, and he
brought his brothers to Hainan.”
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After that, his story has major gaps. Corporate records suggest that he and his brothers worked in property
construction or the import and export business.
What is known is that by 1999, Mr. Guo had amassed enough money to start Kaisa, in China’s fast-growing
manufacturing center Shenzhen. From the outset, the company focused on redeveloping distressed
properties near one of Shenzhen’s biggest industrial parks.
When Credit Suisse found Kaisa, the company had completed only a handful of residential developments,
hardly noteworthy for their architecture or amenities. But given the property boom, the bank saw the
potential, as did investors. The Carlyle Group, the Singapore investment fund Temasek Holdings and other
investors bought a 12 percent stake in Kaisa in 2007 for $300 million. That deal helped attract investments
from a group of Hong Kong tycoons, including the billionaires Cheng Yu-tung and Lee Shau-kee.
Energized with money from major backers, Kaisa underwent a rapid transformation. The developer started
building residential communities with aspirational names like Lake View Place and Monarch Residences,
and built more than a dozen hotels, including the Jinsha Bay Kaisa Marriott Hotel in Shenzhen.
Photo
Zhong Hua, the original developer of Sinopec Tower, said he was pressured to sell at a below-market price.
When he refused to cooperate, a court approved the sale to Kaisa anyway, and he said he never received a
penny. Credit Sim Chi Yin for The New York Times
Kaisa then went in search of more money, this time tapping global bond investors. Citigroup, JPMorgan
Chase and Credit Suisse lined up to win a share of the fat fees from selling the bonds. Mutual funds and
other major investors were attracted by the high interest rates, up to 13 percent. In all, Kaisa sold about $2.5
billion in bonds.
“They were a turnaround story,” said Wee Liat Lee, a property analyst at BNP Paribas. “They had started
out with bad-quality land and then got better land and hired good people.”
Carlyle, which sold the last of its stake in Kaisa in 2012 at a decent profit, declined to comment. Citigroup,
Credit Suisse and JPMorgan Chase also declined to comment.
As the money poured in, Kaisa’s deals started to look increasingly risky, fraught with potential conflicts of
interest. Company disclosure became less transparent.
Corporate records filed with the Chinese authorities show that more than a dozen of the chairman’s
relatives have been involved in Kaisa property deals, including his father, brothers, cousins and in-laws.
One affiliate was set up by the spouse of a Kaisa senior executive. Another was registered by two low-level
Kaisa employees who, until recently, were cooks at the company’s headquarters, according to interviews
with employees.
Regulators often require detailed disclosures on deals with affiliates. The risk is that such parties could
siphon off money from the company or allow senior executives to make deals with favorable terms to
friends and relatives, at the expense of the company.
As Kaisa grew, it also became entangled in power politics.
According to corporate documents, Mr. Guo and several Kaisa affiliates last year acquired a large stake in
National Trust, a midsize financial services firm based in Beijing that has long had connections with the
relatives of the former prime minister Wen Jiabao. In 2004, the prime minister’s daughter, Wen Ruchun,
held a stake in National Trust through a network of shell companies using an alias, Lily Chang. Mr. Guo
and the Kaisa affiliates bought the position from companies controlled by the Hong Kong businessman
Zheng Jianyuan, a longtime partner of the Wen family.
Photo
Continue reading the main story
A National Trust spokeswoman denies such a sale took place and says the privately held firm had no
relationship to Kaisa.
Kaisa may have also stepped into a political minefield by acquiring land in the city of Chengdu with a
company partly controlled by the relatives of the former Politburo member Zhou Yongkang. Mr. Zhou’s
downfall last year set off political fallout that has rippled through the business community. A group of
Communist Party officials who worked with Mr. Zhou were arrested, while business executives who were
in partnerships with his family have also been detained or imprisoned.
Battle for the Tower
The Sinopec Tower is one of Kaisa’s flagship properties. The building, in Guangzhou, one of southern
China’s biggest cities, consists of two 51-story office towers and a six-story shopping arcade. One of the
shops is a Chaoshan-style restaurant that cooks food from Mr. Guo’s hometown.
But Kaisa took control of Sinopec Tower in a controversial deal, tainted by bribery and corruption.
Sinopec Tower was originally developed by a Chinese businessman named Zhong Hua in the early 1990s.
His vision was to build an office and shopping complex that would anchor the city’s newest commercial
corridor. He called it Zhongcheng Plaza.
But in 1996, as the complex was nearing completion, work was halted by a court order. A state-owned
company had demanded payment for debts it said were owed by one of the building’s partners. The court
case dragged on for years, and the project languished.
In 2004, a proposed sale fell apart when the buyer was accused of fraud. That is when Kaisa stepped in.
Kaisa, with court approval, acquired Zhongcheng Plaza in 2006 for about $118 million, according to staterun media. Soon after, Kaisa sold one of the plaza’s two office towers to Sinopec for $160 million. Kaisa
kept the other tower and shopping mall, valuing those three years later, in its I.P.O. prospectus, at more
than $200 million. It was an extremely profitable investment.
Photo
The plaza on the ground level of the Sinopec Tower. Kaisa took control of the property in a questionable
deal. Credit The New York Times
Two years later, however, a case against a high-ranking judicial official at the Guangdong High People’s
Court cast a shadow on Kaisa’s deal. The judicial official, Yang Xiancai, was arrested on corruption
charges.
At his trial, Mr. Yang confessed to receiving many payoffs, including a $130,000 bribe from Kaisa’s
chairman, Mr. Guo, for help acquiring Zhongcheng Plaza. Mr. Yang is now serving a life sentence. During
the trial, Mr. Guo confessed to making the bribe payment, according to the court verdict. He escaped
punishment.
In a recent interview, Mr. Zhong, the original developer of the site, said that the judicial officer, Mr. Yang,
had pressured him to sell at a below-market price.
“They were working together,” Mr. Zhong said about Mr. Yang and Kaisa’s chairman, Mr. Guo, who both
grew up in the Chaoshan area. “I got trapped by this Chaoshan group.”
While he refused to go along, the court approved the sale to Kaisa anyway. Mr. Zhong said he never
received a penny.
Neither Kaisa nor Mr. Guo ever publicly commented on the case or discussed it in regulatory filings.
But it was no secret. In 2010, accounts of the trial, and the battle for control of what became known as the
Sinopec Tower, were published in major Chinese publications.
A publication affiliated with Xinhua, the official government news agency, even described the Sinopec
Tower deal with Kaisa as a miscarriage of justice by a “manipulated judiciary.”
Photo
Kaisa executives pose for the company's listing ceremony at the Hong Kong Stock Exchange. Credit Hong
Kong Stock Exchange
It did not register outside China. Analysts called the stock a “preferred name” and a “top pick.” Kaisa’s
stock price soared, and global bond investors snapped up billions of dollars of offshore debt.
None of them reached out to Mr. Zhong, the original developer, or the lead lawyer in the trial of the judicial
officer.
“No, one ever called about that,” said Yang Wenlong, Yang Xiancai’s lawyer. “We didn’t hear from any
Kaisa investors.”
Reversal of Fortune
Kaisa, the champion of redeveloping distressed property in Shenzhen, is now a distressed asset.
After sales of its Shenzhen properties were blocked by the authorities last December, the bad news piled
up. In January, the company missed a payment on a $50 million loan from the British bank HSBC.
Analysts began speculating about whether the developer would file for bankruptcy.
Adding to the worries, Kaisa announced in February that its debt was valued at $10.4 billion, twice earlier
projections. Several analysts said that it appeared the company had been borrowing through off-the-books
affiliates, perhaps making its balance sheet look stronger than it was.
“A lot of these Chinese developers are leveraged to the teeth,” says Anne Stevenson-Yang, an analyst at J
Capital Research.
Now investors, creditors and banks are fighting over its assets. Sunac, the Chinese developer, has agreed to
pay $580 million to acquire 49 percent of the company’s stock from the Guo family.
With billions of dollars at stake, Chinese state banks and creditors have asked the courts to freeze Kaisa’s
assets to ensure they can recover money they lent it. Most likely, global investors, who bought billions in
offshore bonds from Kaisa, will take a huge loss. A restructuring, announced by Kaisa on Monday, outlined
plans to cut the interest rates on bonds and defer payments on them, essentially cutting their value in half.
Bondholders are pushing for better terms. If they do not come to a deal, offshore bondholders will not have
much recourse, because they have little claim on the underlying assets. Kaisa says they may get only 2.4
cents on the dollar.
Whether politics played a role in Kaisa’s downfall is unclear, though there has been speculation that the
company’s connection to the family of the former security chief Zhou Yongkang was a factor. Bloomberg
News has reported that the company may have been undone by its ties to Jiang Zunyu, a high-ranking
Communist Party official in Shenzhen who was detained last October on suspicion of corruption and later
found to have 42 homes and $32 million in unexplained cash.
But analysts say Kaisa may also have been suffering from financial stress in the property slump. Chinese
government restrictions on borrowing for land purchases had also made it more difficult to finance
developments. While other Chinese property firms have run into serious trouble, few have prompted such a
fallout among Western investors.
Whatever the case, the situation was dire enough that the Guo brothers sold their entire stake in Kaisa.
Several lawyers in the case say that Guo Yingcheng is in Hong Kong, which is under a separate legal
system, and refuses to return to mainland China. In early February, a young woman at the luxurious
Residence Bel-Air, a complex where he has an apartment, came to the door. She said Mr. Guo was home
and then went to consult with him. She came back several minutes later with a message from the chairman:
“Please go away!”