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Shadow Banks on Trial as China’s Rich Sister Faces Death


By Bloomberg News – Apr 11, 2012 2:24 AM CT

When a Chinese court sentenced 28- year-old Wu Ying, known as “Rich Sister,” to death for taking $55.7 million from investors without paying them back, it sparked an unexpected firestorm that has drawn in China’s top leadership.

Her crime involved a common, illegal practice in China: raising money from the public with promises to pay back high interest rates. Known as shadow banking, these underground lending and investing networks are estimated to total $1.3 trillion, according to Ren Xianfang, an economist with IHS Global Insight Ltd. (IHS) in Beijing. That’s the size of the 2011 U.S. government deficit.


Chinese businesswoman Wu Ying who was accused of illegally raising funds and defrauding investors weeps during a trial at the Intermediate Peoples Court of Jinhua in Jinhua city, east Chinas Zhejiang province, 16 April 2009. Photograph: Imaginechina via AP Images

Operating outside the banking system or government regulation, the informal networks provide an important source of economic growth, capital for private companies and return for investors seeking to beat inflation. Premier Wen Jiabao, in an unusual move, weighed in on the Wu case at a March 14 news conference. His comments highlighted a public debate over the importance of shadow banking to the Chinese economy, government efforts to bring it under control — and whether capital punishment is an effective means to do so.

“Chinese companies, especially small ones, need access to funds,” Wen said when asked about Wu’s case. “Banks have yet to be able to meet those companies’ needs, and there is a massive amount of idle private capital. We need to bring private finance out into the open.”

Unfairly Singled Out

Wu’s lawyer says his client, now 30, was unfairly singled out and is no different from the estimated 42 million Chinese business owners who rely on the shadow-banking system for financing when they cannot get loans from state-owned banks. The Supreme People’s Court is reviewing the 2009 verdict and will decide as early as this month whether Wu Ying lives or dies.

“Entrepreneurs are paying attention to it because today’s Wu Ying could be any of them tomorrow,” the lawyer, Yang Zhaodong, said in an interview in Beijing last month. “There are so many of them doing the same thing Wu Ying did. This case not only relates to Wu’s life, but to whether China’s legal and judicial system is fair.”

Shadow banking has been fueled by a two-year credit squeeze in China and by large, state-owned banks’ preference for lending to government-run companies rather than small businesses. Private entrepreneurs account for 60 percent of China’s total economic activity and provide jobs for 80 percent of its urban population, according to China’s National Development and Reform Commission.

Meteoric Rise

“Underground banking filled the hole left by China’s state-owned banks, which have this long-term bias toward big enterprises,” said IHS’s Ren. “Even though it is an extremely opaque market and has a lot of hidden problems, the government needs it to meet the basic financing needs of small businesses.”

Wu’s rise and fall have been meteoric. The daughter of a farmer in Zhejiang province, south of Shanghai, Wu dropped out of technical school as a teenager to work at her aunt’s beauty salon and later opened two of her own, according to the state- run Global Times newspaper. She branched out into a foot-massage parlor and bought 10 cars which she rented out. An entertainment center and a boutique featuring Korean clothes followed, as did investments in real estate and copper, the report said.

Wu collected 770 million yuan ($122 million) from private investors between May 2005 and February 2007, according to government prosecutors. She also accumulated more than 100 properties and 40 cars, including a $500,000 Ferrari, the Global Times said.

Knowing the Risks

Wu borrowed money to fund her businesses and didn’t lie to anyone, her lawyer said. She never committed fraud, Yang said, adding that her investors, like anyone who took part in the private-banking business, knew the risks involved.

“Even her biggest creditor who she owed 320 million yuan doesn’t think Wu was lying to her,” said Yang. “These were real projects.”

The court in Wu’s home province of Zhejiang said she “brought huge losses to the nation and people with her severe crimes and should therefore be severely punished” when it upheld her death sentence in January, according to the Xinhua News Agency.

Nicknamed “Fu Jie,” or “Rich Sister,” in the media, Wu and her case were discussed at the annual legislative session in Beijing in March, where delegates debated the larger issues of shadow banking.

“You cannot try to stop this just by killing people,” Wang Yongzheng, a delegate to China’s People’s Political Consultative Conference and owner of a textile company, told a small group session at the meetings.

‘Public Outrage’

In a country where public criticism of government policy is rarely sanctioned, state-run media outlets such as Xinhua and the People’s Daily, both Communist Party mouthpieces, have run stories, editorials and online chat sessions airing public sympathy for Wu.

On Feb. 8, the China Daily newspaper ran an article noting “public outrage” and the “wide sympathy and pleas for the fair-skinned woman with a short haircut.” It quoted a legal expert as saying the government’s seizure and sell-off of her assets was illegal.

On the Defensive

As the public outcry surrounding Wu’s case began to swell, court officials and police took the rare step of publicly defending their verdict. The presiding judge in her case, Shen Xiaoming, appeared in a Feb. 7 Internet chat to explain that Wu Ying was sentenced to death because the court found she intended to defraud investors.

“This was more than just illegal fundraising,” Shen said in the chat.

China’s entire shadow-banking system is bigger than just underground borrowing and lending, totaling about $2.4 trillion, a third the size of China’s official loan market, according to Societe Generale SA economist Yao Wei. In addition to informal lending, it includes the off-balance-sheet activities of banks, trust companies, and businesses lending to each other, Yao said. The amount is almost the size of U.S. consumer debt, which exceeded $2.5 trillion as of January, according to the U.S. Federal Reserve.

Ordinary Chinese savers also fuel the country’s shadow- banking system. They have few legal options if they want to earn a return that beats inflation, which hit 5.4 percent in 2011. The government sets China’s current ceiling for savings account interest rates at 3.5 percent, a figure that has trailed inflation for two straight years as of January. Wu offered interest rates of as much as 0.5 percent a day to attract investors, according to Xinhua.

Bankruptcies and Suicides

Zhejiang province, where Wu’s home village of Dongyang is located, has been at the heart of private lending activity. Between April and September last year, more than 80 indebted businessmen committed suicide or declared bankruptcy in its boomtown manufacturing city of Wenzhou because they couldn’t repay informal lenders, according to Xinhua.

Bankruptcies and arrests continue to be reported almost daily. Today, the China Securities Journal reported that Hangzhou Glory Real Estate Co., also located in Zhejiang, had filed for bankruptcy after borrowing 2.5 billion yuan from individuals.

Pilot Program

The government has stepped in to deal with the troubles and bring some aspects of shadow banking under government control. In October, Premier Wen traveled to Wenzhou, a city of 9.1 million people 230 miles (370 kilometers) south of Shanghai, pledging help for troubled businesses. Then, on March 28, China’s State Council approved a pilot program for Wenzhou that would ease some restrictions on private lending.

Private capital will be encouraged to participate in “innovative financial organizations” such as credit unions, and banks will be encouraged to lend money to small enterprises, the State Council said.

“The Wenzhou trial program has started us on the right track,” Zhou Dewen, president of the Wenzhou Small and Medium Sized Enterprises Development Association, said by phone the day after the announcement. “The trial program is a step forward toward making private lending a practice that’s legal.”

By the time Wu was in her mid-twenties, she had founded the Bense Holding Group — the name means “original color” — and established 12 companies, according to a profile in the Guangzhou-based Southern Weekly before her arrest.

Drawing Attention

Wu’s success drew the attention of the Chinese media. In its Feb. 1, 2007 profile, the Southern Weekly said she drove to the interview in a BMW and couldn’t explain where her wealth had come from.

“I don’t launder money,” Wu said, according to the newspaper. “My money is clean.”

According to the article, Wu had a tattoo of a rose on her chest and once donated 6.3 million yuan to charity. Less than two weeks after the article was published, authorities announced that Wu had been arrested on suspicion of illegal fundraising.

Prosecutors later upgraded the charges against her to financial fraud, a crime punishable by death in the most severe cases, for losing 380 million yuan of investors’ money. Two years later, she was sentenced to die.

The court found that Wu raised her money by “fabricating facts, deliberately hiding the truth, and promising high returns as an incentive,” according to Xinhua.

Photographs of Wu in court show her sobbing as she stands at the dock, clad in a yellow prison jacket, her tattoo peeking from the neckline. She has been in prison appealing her conviction since her arrest in 2007. Xinhua reported in April 2011 that Wu was writing a book called “Black Swan,” a fictional account of her life, while in prison.

Not the First

Wu wouldn’t be the first shadow banker to be put to death in China. On Aug. 5, 2009, the Supreme Court approved the execution of two female entrepreneurs in separate cases. Si Chaxian, age unreported, was charged with defrauding 300 people of 167 million yuan over five years and promising returns of as much as 108 percent annually, while Du Yimin — who was 44 at the time her death sentence was upheld — was charged with defrauding 709 million yuan by promising to pay as much as 10 percent per month, the official CCTV reported. Both women were from Zhejiang province.

On Death Row

At least 17 people, including Wu, now sit on death row after being sentenced for illegally raising funds from individuals, according to Chinese media reports compiled by Bloomberg since 2009. Seven of them are women.

In the latest case, on April 6, 30-year-old Wang Caiping was sentenced to death for borrowing along with her brother more than 100 million yuan from 15 victims, according to the official Xinhua News Agency. Wang and her brother, who has fled, invested the money in gold and futures speculation and incurred losses, the report said. They had paid out 5.8 million yuan in interest as of the day Wang was arrested, with 94 million yuan unpaid, Xinhua added.

In Zhejiang, sentences handed out for various shadow- banking-related crimes rose to 75 last year, up from eight in 2007, the official Legal Daily reported, citing the provincial high court.

In Shanghai, police said March 29 they had arrested Gu Chunfang, a woman in her early forties who runs a trading company, for racking up 500 million yuan in underground-lending debts, China Daily reported. Her nickname: “Most Beautiful Businesswoman.”

Striking a Chord

Wu’s case, unlike the two executions, 16 other death sentences and numerous arrests, has struck a chord and spurred a broader national debate.

“She’s not some sort of privileged person who just had everything handed to her,” said Sarah Schafer, a Hong Kong- based researcher with Amnesty International. “People see her as someone who is closer to them than they care to admit.”

Amid the demands for change to China’s shadow-banking system, Wu’s case has also been taken up as part of a parallel debate about China’s death penalty.

Groups including Amnesty International that monitor capital punishment say attitudes toward it have begun to change in China — especially in cases of financial fraud. The government has allowed broader public debate on the death penalty, and government officials have talked more often of pushing China toward abolishing the practice, according to Schafer.

Accepting Abolition

“The argument from the Chinese government has always been that the public wouldn’t accept abolishing the death penalty,” Schafer said. “This case has shown that maybe the public isn’t ready for full abolition but we think they are ready for abolishing it for nonviolent crimes.”

The Chinese government does not release statistics on the number of executions it performs. Groups like Amnesty International, which track the cases in the media, say the reports may underestimate the total number of executions carried out, since the media tend to report only the most sensational crime and corruption cases.

Still, China has cut the number of executions it carries out every year from 8,000 in 2006 to 4,000 per year now, according to the San Francisco-based Dui Hua Foundation. Even so, it executes more people than every other government in the world put together. The next highest is Iran, with more than 360 in 2011, according to Amnesty International.

Starting in 2007, China’s Supreme Court decreed it must approve all the country’s executions. In a 2010 annual report, the court said it should “respect and protect citizens’ right to life, the most basic human right,” according to Xinhua.

Premier Wen’s remarks in March and the changes to the private banking system make Wu’s lawyer hopeful that the Supreme Court will commute her death sentence. On March 30, an editorial in the Financial News, a publication of the People’s Bank of China, said reforms in Wenzhou were a “turning point” for the development of private financing in China.

“Wu Ying’s case happened in a special time during China’s reform, where the financial system is hugely lagging behind economic development,” said Zhou, of the Wenzhou enterprise association. “Wu Ying won’t be executed now that the trial program has been announced. She can’t die before the dawn.”

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at; Yidi Zhao in Beijing at

To contact the editor responsible for this story: Peter Hirschberg at


Credit crunch


Manufacturing center faces shutdowns as private moneylenders demand loans be repaid before Chinese New Year

By Andrew Moody and Hu Haiyan (China Daily)

Small businesses in China could be facing their bleakest Chinese New Year in more than 30 years – up to 20,000 businesses in the city of Wenzhou, one of the country’s main entrepreneurial centers on the east coast, could suspend operations or close down altogether over the next month, according to a leading local business organization.

The small business sector in China, which makes many products which find their way to Europe and the United States, has had to rely on private moneylenders, some charging exorbitant interest rates, for a number of months.

Now many of the moneylenders – often consortia of other small businesses – want their money back.

It is traditional in China to settle all debts before the beginning of the Chinese New Year, which falls on Jan 23 this year.

Zhou Dewen, head of the Wenzhou Small and Medium-sized Business Development and Promotion Association, believes one in 20 of Wenzhou’s small businesses could face closure.

“I believe it will be the worst Spring Festival since reform and opening-up more than 30 years ago because small business entrepreneurs are facing greater pressure than ever to pay back their loans and the profits from the manufacturing industry have been much reduced,” he says.

Wenzhou, which is in the prosperous Zhejiang province, and the plight of its small businesses has been in the international media spotlight for many months.

The city, which has a population of 9.1 million and is famous for producing spectacles, cigarette lighters and shoe wear among dozens of other such products, is seen as a bellwether of the Chinese economy as a whole.

Many businesses have been hit hard by the economic crisis which has affected exports and up to 100 business owners are believed to have fled the country as a result of not being able to repay loans to moneylenders.

One of the most high profile of these was Hu Fulin, president of Center Group, one of China’s largest spectacle makers, who absconded to the US in September. There have also been a number of suicides.

Until recently Wenzhou, a former treaty port and a city largely unknown outside of China, basked in its reputation of having more millionaires per capita than any other Chinese city and some of the country’s most expensive real estate.

It was one of the first cities to develop a private economy in the wake of reform and opening-up led by Deng Xiaoping in 1978.

Despite designer stores like Gucci and Bentley car showrooms, there is now more of a chill in the city, which is some 600 km south of Shanghai, despite its mild winter climate.

Hu Xucang, the 36-year-old president and CEO of Aroundasia, a Wenzhou private equity company, says many of the city’s small business owners feel trapped by their circumstances.

“They feel they have no choice but to borrow from underground lenders. If they don’t, they will die today. By borrowing money, they just have a chance of not dying tomorrow,” he says.

Hu, who has a suite of modern offices in the Financial Center Building in Chezan Avenue, is himself a successful entrepreneur.

Hu, who set up a plastic pipes business in his early 20s, which now employs 800, and his private equity fund has 5 billion yuan to invest, says there is now a big mismatch between the funding available and the needs of businesses.

“One of the major problems is that those in traditional manufacturing businesses have diversified into other areas such as real estate and high-tech businesses. All these sectors need long-term finance but all they can get is short term and high interest funding, which is why their cash flow is so damaged,” he says.

The Chinese government has recognized the seriousness of the problem. Following a visit to the city by Premier Wen Jiabao in October, the State Council (China’s cabinet) introduced a number of measures.

These included lowering the reserve requirement ratio specifically for small business lending so banks can lend more.

Other measures included tax concessions, including raising thresholds for when businesses have to pay various corporate and business taxes, and stamp duty relief.

The government said it would also boost the scale of specialized funds available to small businesses.

Some, including the Wenzhou Small and Medium-sized Business Development and Promotion Association, doubt whether these measures will provide the longer-term solution to the financing difficulties of the small business sector.

“The policies and measures introduced so far are to eradicate the crisis. What we need are more long-term reforms in terms of the structure of finance, taxation, investment, the availability of funding and a better administrative environment for small businesses,” adds Zhou.

One of the big questions is how far the problems experienced in Wenzhou are indicative of a generalized funding crisis in China as a result of the government’s credit-tightening policies.

Certainly, there are reports of problems in other entrepreneurial centers such as in Ordos in the Inner Mongolia autonomous region and Xiamen in Fujian province.

Joe Fuller, founder and chief executive of the Monitor Group, the global management consultancy, is one who believes it could put a brake on China’s juggernaut economic growth.

“The absence of legitimate or regulated private lending to small- and medium-sized companies is a big threat to China’s future growth,” he said at the 10th China Entrepreneur Summit held by the China Entrepreneur magazine in late December.

“If the SMEs cannot get financing to develop their business, the growth will be damaged.”

Simon Eckersley, founder and CEO of Hao Capital, a private equity company with offices in Beijing and Hong Kong, says, however, it is wrong to see Wenzhou’s problems as being unique.

He cites the problems that Western SMEs currently have in getting loans from European and American banks still trying to restore their balance sheets in the aftermath of the economic crisis.

“I don’t think it is a reflection of a broader problem of the Chinese economy because you also have it in Japan and in the UK,” he says.

He says if businesses cannot demonstrate their competitiveness in any market at present, they are going to find it difficult to get money.

“This is the case in every country and every region. China’s growth is maintaining its momentum, and the credit crisis in one region cannot reflect the whole picture.”

What separates Wenzhou and China from many other countries is the level of non-bank private lending in the economy.

According to estimates by China’s central bank, such lending could represent 4 trillion yuan ($632 billion, 487 billion euros) or 8 percent of all formal lending in the economy.

Much of this is dominated by people from Wenzhou. According to the forecasting organization IHS Global Insight, they have some 800 billion yuan of capital to issue as loans.

This sector is largely unregulated, consisting of consortia of small business owners and also private individuals sometimes lending to private individuals.

For many lending money at above-normal interest rates is a better investment than investing in equities or other financial schemes.

Over tea in the lobby of the Olympic Hotel in Minhang Road, Hu Zhenhua, professor of economics at Wenzhou University, paints a picture of the precariousness of this informal loans system.

“The whole system is based on A lending to B and B lending to C lending to D etc,” he says.

“If D, however, flees the country, you get this domino effect where the whole system collapses. It is a crisis and it is probably getting worse.”

The banks themselves claim there is plenty of money available for small businesses in Wenzhou and they themselves are not to be blamed for the funding crisis.

Wenzhou Bank, the largest local bank, lent 15.6 billion yuan in the first 11 months of 2011, a 17.5 percent increase on the 13.27 billion yuan of the whole of 2010.

Bad debts have increased from 0.87 percent of all loans at the beginning of 2011 to 1.03 percent by the end of November.

Pan Shifei, the bank’s head of small business lending who cuts a youthful figure, was relaxed about the situation in his offices in Chezhan Road.

“No, I am not worried about it. The bad debts are way below the 3 percent we would regard as a warning sign. I don’t think that is likely to happen,” he says.

He adds it is not always straightforward lending to small businesses in the city because it is often difficult to assess the financial position of their businesses.

“There is often no clear dividing line between their personal and company accounts which makes it difficult to make lending decisions. Many also have little in the way of long-term planning and without planning it is easy to go bankrupt.”

At Xiaonan Road in Wenzhou, Miao Wenlin, vice-president of the Wenzhou branch of the Agricultural Bank of China (ABC), one of China’s Big Four banks, says the availability of bank loans is not the key reason for the funding crisis.

“The typical small business does not rely on bank finance. It is only when businesses aggressively expand that they become dependent on bank loans,” he says.

ABC in Wenzhou issued 2,758 loans to SMEs in the first nine months of 2011 with an average value of 20 million yuan.

Miao says 80 percent of these loans were for either 6 months or 12 months and were for working capital, which he says is typical in Wenzhou. “Most small companies use it to boost their working capital. Those who borrow money to invest in technology or plant and machinery are rare.”

Some believe the banks are not being completely open and are adding to the funding crisis.

Lu Peixin, executive director of Sunrise Capital, a private equity company, based in Wenzhou and Shanghai, says the bank statistics that show a growth in small business lending are misleading because they don’t take into account other factors.

“Bank lending may have gone up because there has been a stronger need for SMEs to borrow from the bank since companies have had difficulty getting paid for their products from clients,” he says.

“You also have to consider the costs have risen. Raw materials have gone up in price and wages in Wenzhou have gone up by as much as 20 percent. These are probably more to do with bank lending going up. So there is no real increase at all.”

Since the crisis began to hit the headlines, the private lenders have been the ones that have often been demonized but that often ignores the important role they play in the economy, which even the mainstream banks admit.

“They are an important part of the financing system,” says Miao at the Agricultural Bank of China.

“There are so many people taking part, including business people in a number of sectors as well as doctors, teachers and even public servants.”

This begs the question as to how easy it will be to regulate, if the government does attempt to control the moneylenders.

Hu believes that the schemes proposed by the local government in Wenzhou to get small businesses to register all private loans will not work.

“They want to set up a private lending registration center but nobody will use it since there is no benefit to either the lender or the borrower since the local government is not acting as any form of guarantor,” he says

“The actual characteristics of private lending are that it is hidden and basically free. It is also irreplaceable.”

That it is irreplaceable is the essential problem as businesses try to steer their way through the Spring Festival period.

Many of them need the private lenders as well as the banks to start issuing new loans again – and fast.


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