BEIJING (BLOOMBERG) - "Work hard when young or enjoy no reputation later in life," so goes a famous saying from China's Fujian province. Mr Ou Zongrong stood by it, building a property empire with its roots in the province.

At first, things worked out well. Now, the tide has turned. In February, Mr Ou's Zhenro Properties Group spooked investors by saying it may not have cash to redeem a perpetual note, just weeks after promising it would. In fact, it said it may not have enough liquidity to repay other near-term maturities.

That was a shock for investors in a developer that had been weathering China's massive real estate crisis relatively well, never missing a public debt payment until then.

Zhenro's stock slumped on the announcement, taking its drop for the year to 77 per cent, while its dollar bonds plummeted to around 20 cents on the dollar from near par in January.

Mr Ou transferred about one-third of his stake in the company's property services unit to settle loans following a forced disposal of some Zhenro shares.

Market watchers began questioning the firm's transparency, eroding already-fragile confidence in the sector's corporate governance. The latest blow came on Wednesday (March 30), when Fitch Ratings downgraded Zhenro to restricted default.

Zhenro's fallout is a warning for investors in what is known as the "Fujian gang" - publicly listed developers whose bosses came from the province and are famous for their risk-taking, even outbidding some of China's biggest builders.

As they did so, their debt ballooned, leaving them exposed when the government launched a nationwide campaign to deleverage the sector that triggered a wave of failures.

The clan, which comprises at least 11 developers traded in Hong Kong and mainland China, includes some of the most troubled names. Yango Group and Yuzhou Group Holdings are responsible for at least US$3.2 billion (S$4.3 billion) of defaults on dollar bonds this year - more than half the sector's total - while many have asked investors for more time to repay their debt.

"Fujian-based developers such as Ronshine, Yuzhou and Zhenro have been aggressively funding land acquisitions with debts," said Mr Dan Wang, a credit analyst at Bloomberg Intelligence. "This has left them vulnerable in a property market downturn and in a scenario where capital markets shut down."

China's private housing market expanded rapidly after its liberalisation in the 1990s, leading to a surge in prices for one of the few safe investments available to the nation's emerging middle class.

Developers in Fujian, a province originally famous for its apparel and manufacturing businesses, were relatively late to the property game and had to use leverage to catch up.

To help gain scale, many firms that originated in the province moved their headquarters to bigger cities, while their founders or top executives sought to gain political influence.

Mr Ou, who created Zhenro's predecessor in 1998, transferred the company's main offices to Shanghai in 2016 and is a delegate for one of China's top advisory bodies, along with four bosses from the developers with Fujian roots.

While generally smaller than giants such as China Evergrande Group and Country Garden Holdings, aggressive land acquisitions allowed the Fujian companies to grow quickly.

In 2016, Zhenro made headlines for buying a parcel in Wuhan at a peak price, outbidding some of the country's top names including Sunac China Holdings with premiums exceeding 400 per cent.

The same year, Ronshine China Holdings - founded by Mr Ou's younger brother - set a national record by splashing 11 billion yuan (S$2.4 billion) for a site in Shanghai.

The strategy paid off: Revenue surged for the companies from the group, rising more than tenfold at Zhenro and Ronshine in the six years up till 2020. Now, five of China's top 30 developers have their roots in Fujian, from two in 2012.

But the quick expansion led to a pile of debt, including a large pool of money borrowed from global investors. Annual dollar bond sales by developers with Fujian roots rose ninefold from 2016 to peak at US$16.7 billion in 2019, representing more than one-quarter of all dollar debt sold by the sector that year.

As at March 31, the group had US$32 billion of dollar bonds outstanding.

While China has relaxed some of its rules to ease the burden on the real estate market, Country Garden's results showed that the gap is widening between the better-funded developers and the others.

For many, the outlook remains bleak as home sales are still falling and access to financing remains tight. Adding to investors' concerns, Shimao Group Holdings, Powerlong Real Estate Holdings and Ronshine are among those that delayed the release of their 2021 financial results, citing reasons including auditor resignations and the impact of Covid-19.