Taiyuan: It seemed an unbeatable investment: a biomedical company in a rust-belt province in China where the government was backing high-tech enterprises enthusiastically.

Doors were opening for Sydney entrepreneurs David Nan and Jack Liang. Through a series of personal introductions – so crucial to success in Chinese business – they acquired a 20 per cent stake in Bolang Biological Technology in 2011. The company, based in gritty Taiyuan, the capital of northern China's coal-rich Shanxi province, had patented an absorbable medical film used during surgery. They believed the new film would undercut the cost of imported equivalents used in Chinese hospitals and make them a fortune.

The venture could have been a textbook success story, showcasing China's efforts to transition its economy from heavy, polluting industry. Instead the pair were trapped in a byzantine maze of bureaucracy, arbitrary decision-making, and a larger-than-life celebrity mayor with an ominous nickname: Demolition Geng.

The two Australians represent an emerging breed of young entrepreneurs straddling both countries. They have been firm friends since they first met almost a decade ago, having both migrated to Sydney from China. Nan, now 38, arrived with wife and daughter in tow, while Liang, 27, pursued a business degree at the University of Newcastle. Together, they run Chinese restaurants and organise customised deep-water fishing and hunting trips tailored to Chinese tourists in regional NSW. They had big plans to earn big money in China and reinvest the proceeds in Australia.

But in 2013, Taiyuan mayor Geng Yanbo had just been moved across the province from the city of Datong and was eager to make his mark. As part of broader ambitions to "unlock Taiyuan's economic potential", he announced in March a 49-kilometre elevated ring road encircling the city centre to alleviate traffic congestion. Everything standing in its path would have to go.

Just a few weeks later, Bolang staff arrived at work to find dozens of security guards surrounding their four-storey premises, blocking them from entering. Within hours, bulldozers demolished the site, including millions of dollars of precision equipment.

"The notification was only issued days after they knocked the building down," Nan says. "This is forced demolition, it shouldn't hold water under Chinese law."

Demolition Geng earned his nickname during his previous post in Datong, one of China's most polluted cities, built on coalmining but with the industry now in decline. What transpired is a typical Chinese tale of mid-ranking officials, desperate to boost their personal political standing while holding disproportionate powers over cities with millions of residents, aggressively over-building and overspending to the detriment of long-term economic sustainability and the rights of residents and business owners.

As documented in faithful detail by the award-winning documentary "The Chinese Mayor", Geng razed much of the old town centre in an attempt to transform Datong into a tourist destination, trying to recapture its historic status as China's capital across three separate dynasties, starting with the Northern Wei dynasty 1600 years ago. On the city's outskirts, the spectacular Yungang Grottoes – a UNESCO heritage site of ancient Buddhist carvings – have been adorned with lavish new gardens, temples and shopping strips.

He ordered the relocation of 40,000 households to make way for an ostentatious ancient-style city wall encircling the old town. Locals still joke their former mayor could make entire buildings disappear just by pointing at them.

But when the Communist Party reassigned Geng to Taiyuan in January 2013, he was forced to leave before he could finish what he started. By the time of his departure, his construction binge had, according to Chinese media reports, cost 100 billion yuan ($20 billion), and left the city saddled with 30 billion yuan in debts. Datong's government revenue for 2012, meanwhile, was 19 billion yuan.

"The urban development was not simply about building a city, it has changed the people's lives and left behind so many assets, this is all a legacy for future wealth," Geng said in a 2013 interview with Chinese media.

Locals still joke their former mayor could make entire buildings disappear just by pointing at them.

Under his successor, construction has slowed to a crawl. More than three years on, the city wall's west face remains unfinished. A concert hall, arts centre, museum, library, and a planned 50,000-seat stadium in a new economic area remain half-built and in various states of disrepair. Many displaced residents never received satisfactory compensation, though most in Datong remember Geng fondly, recognising his ability to "get things done", improving roads and "beautifying" what had previously been an ugly coal town.

This is unlikely to be of comfort to Bolang and its Australian investors. Taiyuan authorities have refused to improve on a take-it-or-leave-it compensation offer of 2.3 million yuan ($461,000), which Nan and Liang say fails to cover their initial investment, let alone the cost of rebuilding a new premises and replacing their destroyed equipment.

Geng has rebuffed approaches from Bolang to negotiate in person, leaving junior officials to delay and obfuscate. This month, the party-controlled judiciary knocked back the company's appeals in court, leaving Bolang struggling to pay wages and medical benefits for its 300 employees. The Taiyuan government did not respond to Fairfax Media's requests for comment.

The irony is that Bolang would have nicely fitted the bill for China's proclaimed efforts to move away from an economy reliant on credit-intensive construction and heavy industry to one driven by higher value-added manufacturing and domestic consumption. Bolang had already gone through major transformation itself, beginning life in 1990 as a clothing manufacturer before switching into high-value biomedical research in 2003.

Nan and Liang meanwhile, have been forced to put their Australian expansion plans on hold. As is typical with many migrants straddling China and Australia, the pair, despite long obtaining Australian permanent residency, had retained their Chinese citizenship to avoid the trouble of applying for Chinese visas when returning for work or to visit family. (China does not recognise dual nationality.)

Nan has since traded his Chinese passport for an Australian one, while Liang is considering following suit, believing it could provide an extra layer of protection now he is in dispute with the Chinese government. But nationality hasn't helped other high-profile Chinese-Australians over the years, including Matthew Ng, Charlotte Chou and Du Zuying, all subject to lengthy detention after disputes with local business partners.

"We came to China to invest, we may have been making renminbi but we planned to use the profits to reinvest in Australia," Nan says.

"We had investment plans in Australia which now have to be pushed back. We even thought we were doing something for the economic relationship between the two countries, but this has dragged on helplessly for three years … the investment environment is really too bad."

The ring road in Taiyuan was – with typical Chinese speed – completed within months. But Geng's signature project for his new city was never just about improving traffic.

With Shanxi province's economic growth languishing second-last in the country, Geng was also executing a tried and tested tactic to boost GDP. The land adjacent to the new ring road, acquired forcibly and cheaply, was sold to property developers. Luxury apartments and office towers sprouted on what was now the city's prime real estate.

With the ring road completed, Geng has moved swiftly on to his next bold plan: a new subway system for the city of 3.3 million. Once again, dozens of major arterial roads in the city centre are fenced off for excavation. And for now at least, the city's traffic is worse than ever.

With Sanghee Liu