The king of Zhangzi Island has fallen, and "the scallops have run away" is still a mystery

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Written by丨Guan Buyu

At the end of 2023, according to the Supreme People's Procuratorate, Wu Hougang, the former chairman and president of Zhangzidao, was sentenced to 15 years in prison and fined 920,000 yuan for several crimes such as illegal disclosure of important information, fraud, collusive bidding, and bribery to non-state employees.

Figure/Network

The longest absurd drama in China's stock market, the "Zhangzidao scallop escape case", has finally come to an end.

In October 2014, January 2018 and November 2019, the scallops from Zhangzidao ran away and died, which was more difficult to figure out than "Schrödinger's cat", which inspired Chinese investors to be extremely enthusiastic about marine biology and meteorology.

However, this absurdist drama starring scallops is not a comedy, but a tragedy that costs tens of billions. Because what has disappeared with the magic scallop is the huge amount of money, huge assets, and the hard-earned money of thousands of shareholders in Zhangzi Island.

Zhangzidao, once the "undersea bank" and the king of Chinese stocks, has been reduced to a junk stock with serious losses and large-scale asset shrinkage.

The water in Zhangzi Island is very deep, and "scallops have run away" is just an oil splash on the surface of the water.

01

The rise and fall of the "Pearl of the Yellow Sea".

Wu Hougang, the former chairman of Zhangzidao, who was sentenced to 15 years in prison this time, once held a large number of titles: he served as a deputy to the Dalian Municipal People's Congress, vice president of the China Fishery Association, vice president of the China Aquatic Products Circulation and Processing Association, vice president of the Liaoning Fishery Association, president of the Dalian Sea Cucumber Chamber of Commerce, and vice president of the Dalian Federation of Industry and Commerce. In 2012, he won the title of "National Excellent Entrepreneur" and was selected into the Forbes Chinese edition of the 2012 China's Best CEO List, along with Ma Huateng and Li Yanhong.

However, Wu Hougang's most valuable title should be "King of Zhangzi Island". His career in grabbing this "Pearl of the Yellow Sea" began in 1996, when 32-year-old Wu Hougang became the mayor of Zhangzidao Town and concurrently served as the general manager of Zhangzidao Fishery Group Company. Wu Hougang, who has just passed the year of establishment, is facing a mess.

▲Wu Hougang (Photo/Zhangzidao official website)

Zhangzi Island is located 65 nautical miles east of Dalian City, with an area of less than 15 square kilometers, and is known as the "Pearl of the Yellow Sea" because of its abundance of sea treasures. In the 70s of the last century, the fishermen of Zhangzidao once set a national record for single-boat fishing and total catch, and became a political benchmark for "Dazhai on the sea". Even at the historical moment of the diplomatic ice-breaking trip between China and the United States, it also left the mark of Zhangzidao.

In 1972, when then U.S. President Richard Nixon visited China, Wang Tianyong, a diver from Zhangzidao, dived more than 100 times in the severe cold of more than minus 20 degrees Celsius, caught 1,000 kilograms of high-quality abalone and sent it to Beijing.

However, the overfishing of the "sea village" has overdrawn the power of nature in this area. After the 80s of the 20th century, the traditional production mode of "relying on the sea to eat the sea" of Zhangzidao fishery gradually became unsustainable.

In 1983, Zhangzi Commune was changed to Zhangzi Township (later changed to Zhangzidao Town), and a collective ownership company Zhangzi Fishery Industry and Commerce United Company was established, which was later renamed Dalian Zhangzidao Fishery Corporation. This collective-owned enterprise is a combination of government and enterprise, with township and town leaders concurrently serving as company leaders and backed by administrative power, and the company's business is also very simple, that is, the unified purchase and sale of seafood caught by fishermen.

Wu Hougang started out as a worker in a fishing boat factory, and later joined the company as an accountant and was quickly promoted. Because of the integration of government and enterprise, the company's positions and administrative positions have risen at the same time. In 1996, 32-year-old Wu Hougang became the mayor of the town and concurrently served as the general manager of the company as usual.

At this time, the Zhangzidao Fishery Corporation was in trouble. Overfishing has led to the depletion of resources in the surrounding waters, and fishermen have started to engage in deep-sea fishing. The company can manage its own one-third of an acre, but it can't control the fishermen who release the ocean. The outside purchase price is higher than the company's purchase price, and the fishermen will certainly not sell their catch to the company. The company's revenue has dropped significantly, but various costs cannot be saved at all. In 1996 and 1997, it lost 50 million yuan, and a township collective enterprise could not afford such a loss.

Wu Hougang's response was to reform the contract system, and the fishing boats were contracted to various fishermen, which greatly reduced the company's costs. The company came forward to negotiate with the vendors in a unified manner, which strengthened the bargaining power. Fishermen can increase their income, and they are willing to hand over their catch to the company, and the company's revenue has risen again. This was a successful market-oriented reform, and the company turned a profit in 1998. A revenue of 30 million a year is not much, but it is enough for this fishing town of 15,000 people to live and work in peace and contentment.

▲The whole picture of Zhangzi Island (photo/network)

Wu Hougang was not satisfied, he had a new idea - "ploughing the sea", bidding farewell to traditional fishing operations, promoting bottom-sowing aquaculture, and revitalizing the coastal waters where resources are depleted. At the time of the Liaoning Provincial Fisheries Research Institute, the bottom sowing culture technology of Ezo scallops was introduced from Japan, and Wu Hougang introduced this new technology to Zhangzidao despite public opinion. The cultivation cycle of Ezo scallops is three years, Wu Hougang endured two years of doubts, and in the third year, the Ezo scallops were harvested, and the fat and large Ezo scallops were sold for twice the market price.

In 2000, the then leaders of Dalian City visited Zhangzidao, calling the bottom seeding technology an "undersea bank" and praising Wu Hougang for his foresight and courage. The leader also mentioned that if Zhangzidao wants to achieve greater development, it must borrow from the capital market. This is the precursor of Zhangzidao's listing.

In short, the conclusion of the "undersea bank" has been closed, and there has been no doubt since then. With two successful reforms and high-level endorsement, Wu Hougang became the undisputed "king of Zhangzi Island".

Ironically, the biggest concern about bottom-seeding farming – "what to do if the scallops run away from the typhoon" – came true many years later. It's just that it wasn't the typhoon that ran the scallops, but Wu Hougang.

02

"King of Zhangzi Island"

In 2001, the central government promoted the policy of separating government from enterprises, and Wu Hougang, the secretary of the town party committee and the general manager of the company, faced a choice, either to enter politics or go to sea. Wu Hougang resolutely chose the latter. It's not that difficult to choose.

He has been in charge of Zhangzidao, the richest township in Northeast China, for a long time, and Wu Hougang has accumulated strong political and business connections. As long as we continue to grasp the economic lifeline of Zhangzidao Town, the Fishery Corporation, without the official title of secretary of the town party committee, Zhangzidao is still Wu Hougang's Zhangzidao.

In the small Zhangzi Island, "government and enterprise" are actually inseparable. Not only is it inseparable, but this round of "separation of government and enterprise" has further strengthened Wu Hougang's control over the company. The ensuing restructuring of the fishery company, Wu Hougang justifiably became the actual controller of the company.

In this shareholding system reform, Wu Hougang served as the chairman of the company and obtained 10% of the shares of Zhangzidao, becoming the third largest shareholder of the company. The company's largest shareholder is the investment platform of the county government. In addition, the village committees of the three administrative villages of Zhangzidao Town hold shares of the company on behalf of the villagers, which is equivalent to the villagers exchanging the right to use the sea area for the company's right to dividends.

After the shareholding reform, Dalian Zhangzidao Fishery Group Co., Ltd. obtained the right to use all the sea areas of Zhangzidao. Having completed the "great unification" of the waters of Zhangzidao, Wu Hougang was full of enthusiasm. With the application of new technologies such as artificial reef building, the "undersea bank" of Zhangzidao is getting bigger and bigger.

Photo/Zhangzidao official website

In just a few years, Zhangzidao scallops accounted for eighty percent of the national market and were exported in large quantities. Zhangzidao is the undisputed star enterprise of China's fishing industry.

In 2005, Zhangzidao Group achieved an output value of 520 million yuan, a net profit of 150 million yuan, and an export of 170 million yuan.

In 2006, Zhangzidao was listed and became a big star in the A-share market. The issue price was 25 yuan, which soon rose to 60 yuan, and Wu Hougang became a billionaire worth 500 million. The islanders also benefited from this, with 15,000 islanders each having 1,000 shares, and the "Pearl of the Yellow Sea" was transformed into a "Rich Island" with an average household of one million.

From the shareholding reform to the successful listing, it is the honeymoon period of Wu Hougang and the people of Zhangzidao. Many villagers have joined the company, receiving monthly salaries and dividends at the end of the year, and they are happy. The elderly who cannot enter the company to work will also receive special care when the dividend is distributed at the end of the year.

Beneath the peaceful scene, there is an undercurrent of crisis brewing.

03

The "King of Stocks in the Two Cities"

The shareholding reform of 2001 itself had insurmountable shortcomings, and problems gradually surfaced as companies expanded rapidly and stock prices rose sharply.

The "singularity" of the company's crisis is Wu Hougang, and the root cause is that the property rights have been reformed and changed. Wu Hougang's 10% personal stake is not enough to be deeply tied to the company's long-term interests. However, Wu Hougang's special status of being all-encompassing from government and enterprises is completely unconstrained by other major shareholders.

The investment platform of the county government, the largest shareholder, is hindered by Wu's political aura, and it is impossible to make a voice of countermeasures. It is even more impossible for the three village collectives to argue with Wu. As for those islanders who hold 1,000 shares, they only have the right to benefit, not the right to transfer, let alone participate in the management and decision-making of the company.

In the reform of the shareholding system of this township and town collective enterprise, one foot has landed on the shore of the private sector, and the other foot is still stuck in the old quagmire of "collective ownership." In fact, it is not even possible to achieve "the same shares and the same rights", and it is fundamentally impossible to establish a modern joint-stock enterprise governance structure.

Photo/Zhangzidao official website

After the successful listing in 2006, the company soon became the confinement of the Wu Hougang family, and there were many "Wu Hou" in the company's middle and high-level positions, and these Wu family members have plucked their feathers in all aspects of the company's supply. The biggest "goose feather" is the supply of shell seedlings, and the Wu family designated the seedling company to sell the shellfish seedlings to the company at a high price.

The fishing industry is a small circle, and this kind of thing cannot be concealed at all. The islanders complained about it, and finally the company had to come forward to investigate. As a result, Wu Houmou, who was in charge of the supply of Bei Miao, resigned, and his subordinates were sentenced for embezzlement. After Wu Hou left the company, he opened a seedling enterprise and was also the main supplier of shellfish seedlings to Zhangzidao Company. This Wu Houmou is Wu Hougang's younger brother, and he is also one of the important characters who later "scalloped away" for the first time in 2014.

After the listing, the main business operation became increasingly chaotic, and the strategic expansion of Wu Hougang's main focus became more and more absurd. After the successful listing, Zhangzidao Company had hundreds of millions of cash on its books, the stock price rose again and again, and the financing channels were unimpeded.

Zhangzidao is not short of money, so like many listed companies that have become rich, they happily spend money. In just a few years, the sea area of Zhangzidao has expanded from the initial 50,000 mu of "submarine ranch" to the highest peak of 2 million mu, and the asset growth rate is staggering.

The number of cultured species has also increased substantially, and in 2006 it was listed to raise funds from abalone farming, then sea cucumbers, and then fish farming. In May 2011, Zhangzidao spent 100 million yuan to acquire a 20% stake in Amur, a sturgeon breeding company, which caused a sensation. The valuation of this Amur company is 500 million yuan, and the company's actual book assets are only 4.82 million yuan, a premium of more than 100 times.

Quickly expanding the asset package and attacking large-scale mergers and acquisitions everywhere were all good places to invest in the A-stock market that year, which became a booster for the rise of Zhangzidao's stock price. Zhangzidao's share price reached 120 yuan at its peak, beating Moutai and becoming the "king of stocks in the two cities". The market value of Zhangzidao has also reached 25 billion, and Wu Hougang's worth has skyrocketed several times.

Zhangzidao's dazzling capital operation has become a veritable "undersea bank", and it may be the only marine aquaculture enterprise in the world with its own financial attributes.

Wu Hougang, who caught up in finance, became interested in real estate. Around 2008, the news of Zhangzidao's "scallop money" being invested in real estate circulated in the rivers and lakes, but only one record of corporate mergers and acquisitions could be confirmed later, and the acquisition target was a very inconspicuous local real estate company. Zhangzidao's involvement in real estate is inconclusive whether it is a false rumor or a secret.

It has been on the market for four years, and the operation is as fierce as a tiger. In 2011, there were already signs of problematic enterprises in Zhangzidao, and on June 17 of this year, Wu Hougang reduced his holdings of 12.72 million shares and cashed out 300 million yuan. The takeover was the county investment platform, another major shareholder of Zhangzidao. The company said that the reduction was to fulfill the relevant commitments in the equity incentive plan.

In 2014, the scallops that "ran away" were sown in 2011.

04

The truth about "the scallops ran away".

In October 2014, Zhangzidao suddenly announced that due to the influence of the cold water mass, its scallops had run away en masse, and their whereabouts were unknown. As a result, the company has more than 1 million acres of scallops in arrears, resulting in a loss of nearly 1.2 billion yuan.

Figure/Network

"The scallops ran away" became a joke for a while, and public opinion was turbulent.

Later, he said that he was dead, and asked experts from the Institute of Oceanography of the Chinese Academy of Sciences to come forward to explain that the "cold water mass" could not stop the scene. Wu Hougang personally came forward and said that "Japan's scallops are also dead", but when the good deeds checked that the people were obviously scallop harvesters, they were ridiculed by the group as "Zhangzidao scallops were smuggled to Japan".

The subsequent disclosure of information is becoming more and more outrageous, saying that the sea area damaged by the cold water mass is scallops that have been sown for three years to be harvested, and the scallops in the rearing period have not been affected. Some aquatic experts have also questioned that juvenile scallops are more fragile, how can they die big and not die? Netizens have said that the cold water group is very merciful and treats young scallops well.

Half a year later, in June 2015, Zhangzidao issued another announcement, which attracted the attention of investors. The announcement said that the company launched a scallop spot check activity in May 2015, sampling more than 160 acres of sea area that was not harvested after sowing seedlings in previous years, and the results of the sampling survey showed that the company's scallops did not have the risk of impairment. The focus of netizens' "controversy" was changed to whether the Zhangzidao scallops were resurrected or ran back.

The biggest beneficiary of the whole event was scallops, a common ingredient that has rarely become a national topic. The second is netizens, who enjoyed a social media carnival that perfectly combines entertainment and popular science. The biggest victim is Zhangzidao Company, with huge performance losses, plummeting stock prices, and a nightmare.

The islanders of Zhangzi Island were heartbroken, and 2,000 people signed a public question about "the scallops ran away". A number of news organizations have investigated and reported on Zhangzi Island, exposing many problems on Zhangzi Island. It all dates back to 2011.

Figure/Network

The islanders generally do not believe in the cold-water disaster, saying that the Institute of Oceanography of the Chinese Academy of Sciences, which is endorsed by the platform, has a long-term relationship with the company, and their "scientific explanations" cannot be counted.

Some islanders said that the shellfish seedlings released by the company from 2010 to 2011 were mixed with a large amount of sand and gravel, and the operator was Wu Hougang's younger brother Wu Houmou.

Another islander said that the people of the Zhangzidao Company were guarding and stealing, and they had been secretly hunting and selling their own scallops for a long time, "the trunk of the car was full of scallops and went out to sell."

Some islanders said that in the past few years, the company no longer paid dividends, and was not allowed to go to the sea to fish, and even did not even raise chickens and ducks in order to protect the island's environment. Some employees of Zhangzidao also said that the islanders went to the sea to poach the company's scallops, and the company could not control it.

A piece of information puzzle can roughly deduce the truth of the event. Around 2011, Zhangzidao Company had already experienced abnormal operations, due to a lack of funds, resulting in problems in the release of shellfish seedlings, harvesting management, and the relationship between the company and the islanders.

It's not the scallops that are the problem, it's the money.

The fraud in the seedlings is so serious that it is necessary to cover it up with a big lie about the harvest season three years later, so is it for the sake of embezzling a little money from the seedlings? At the expense of completely stiffening the relationship with the islanders, the dividends of several thousand per capita are "saved if they can be saved." This should be the result of a large gap in funds.

That is to say, around 2011, even if Zhangzidao Company was not hollowed out, at least there was a large funding gap, and both the province and the province should not have been saved. The deficit of that year laid the foreshadowing of "scallop running away". The scallops ran away not lightly, but ran away with the money, and took away the "small ledger".

Public opinion was turbulent, and the joint questioning of 2,000 islanders pressing the red handprint was huge, but it did not shake Wu Hougang. He still calmly attends various high-end social activities, insisting that it is the force majeure of natural disasters, and saying something like "awe of the sea". The only substantive move was to take out 100 million yuan to increase his stake in the company, which was the only time he increased his holdings in Zhangzidao.

Photo/Zhangzidao official website

I almost forgot that Wu Hougang also kindly lowered his monthly salary to 1 yuan. Of course, this is not important, the "undersea bank" is at your disposal, who cares about the monthly salary?

The vigorous "scallop ran away" and it was gone. And this is just the beginning, and then it "runs" twice. In November 2019, 1.5 million acres of "complex sea waters" ran away with scallops – a large area of sea area that Zhangzidao announced would abandon in order to reduce the cost of 70 million yuan a year, and the company's goal was to compress the scallop farming area to 100,000 mu. Abalone, sturgeon, and even more so don't mention it.

Zhangzidao's once-glorious aquaculture industry, where did it come from, and where did it go back. Zhangzidao's 2019 annual report shows that "the company's net profit attributable to shareholders of listed companies in 2019 was -392,183,690.07 yuan, down 1321.41% from the same period last year".

In June 2020, Wu Hougang and his main partner filed for resignation. This was the end of the "Wu Hougang era" in Zhangzi Island. However, the "scallop ran away" incident remains a mystery.

05

epilogue

Wu Hougang was punished by the China Securities Regulatory Commission and even sentenced to 15 years in prison, which can be described as very happy, but not because of the "scallop ran away" incident, but because of the financial fraud cases in 2016 and 2017.

In 2014 and 2015, because of "scallops ran away", Zhangzidao suffered huge losses for two consecutive years, and the losses in the two years exceeded the total profit of the previous 10 years. After 3 years of losses, it faced delisting, so Zhangzidao inflated its profits by financial fraud in 2016. The inflated profits were then filled back by falsifying and exaggerating losses again in 2017.

After nearly two years of investigation, the CSRC made a penalty decision in 2019, and Wu Hougang was banned from the market for life and fined.

Screenshot of picture/video

Dissatisfied with the decision, Mr. Wu hired a top-tier legal team to sue the CSRC in a protracted administrative lawsuit. After a fierce confrontation, it ended in Wu Hougang's defeat. It was precisely because of losing this lawsuit that Wu Hougang had to resign in 2020.

This administrative lawsuit has attracted much attention, and the level of litigation is very high, and it can be used as a textbook case for judges. However, this case of financial fraud is at best the aftermath of "the scallops have run away" and does not involve the incident itself. To this day, we still don't know the whole truth about the scallops of Zhangzidao that have been a demon in the stock market for many years.

Zhangzidao is a joke of A-shares, but it is an unbelievably expensive joke. The scallops are not worth a few dollars, what is really worth is the evaporation of the market value of 20 billion yuan, and the entry and exit of a large amount of cash and debts.

Wu Hougang was sentenced to 15 years in prison and eventually paid a heavy price. However, the thousands of injured shareholders did not receive any compensation. Wu Hougang, who used to be invincible, has fallen, and the shareholders have not stood up yet.