Cross-posted from Investing in Chinese Stocks.
Here’s an example of China’s ongoing battle with illegal fundraising from The Diplomat:
For example, we have seen a flagging coal company’s owner throw a large wedding celebration for his daughter while defaulting on his trust loans. Xing Libin, founder of Liansheng Resources, borrowed a total of 1 billion RMB ($165 million) from Jilin Trust and spent $11 million on a celebration on Hainan Island. Xing later applied for debt restructuring at a local court, and Jilin Trust warned investors that Liansheng faces problems with repayment of its debt. Xing faced no legal repercussions as a result of his behavior. By contrast, in a very public case, Wu Ying, or “Rich Sister,” was indicted for taking $55.7 million from investors on behalf of her company, Bense Group. She had spent some of the money on cosmetics, clothing and luxury cars.
The general rule of thumb in these cases may be that the less formal the type of fundraising carried out within the shadow banking sector, the more at risk it is of being pursued as an illegal fundraising case.
In the case of Jilin Trust, the company is in court over ￥150 million loan to a Shandong businessmen.
The man in question, Dai Yingzhong, was looking for credit. Evergrowing Bank investigated the firm and denied the firm credit, deeming the company too great of a credit risk.
One of his high interest lenders, in order to obtain return of his capital, introduced Dai to a middleman who could help Dai obtain credit. This middle man introduced another and another and another until they reached Xu Bo. This middlemand, Xu Bo, dealt with the trust companies and eventually arranged for a loan from Jilin Trust, having contact with an employee at that firm in Shanghai. Xu Bo sent financial statements to the Shanghai office. Later, an inspection team from Shanghai came and reported that the machines were operating in the company’s mines, but there were hardly any workers. They delivered their report to their department. The loans were approved. Dai eventually paid the middle men more than ￥37 million yuan in fees for the help. The rest of the money was spent in various ways, some money given to his lover, accountant, etc., plus company debts.
