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Rampant Illegal Fundraising Highlights Private Lending Conundrum

02-28 15:12 Caijing
Despite a tough crackdown since the mid-1990s, the number of illegal fundraising cases has escalated, showing that under the current financial system, mainstream fundraising channels are unable to meet market demand.

By staff reporters Xu Kai, Yan Jianbo, and Zhang Youyi

The public is paying close attention to the fate of Wu Ying, a 31-year-old female billionaire from Zhejiang Province.

Wu, former chairman of Zhejiang-based Bense Group, was charged with financial fraud and sentenced to death by a provincial court. The court argued that Wu had illegally raised 770 million yuan, with 380 million yuan unaccounted for at the time of her arrest. Despite this, the public is generally sympathetic to Wu. Many hope that the Supreme People’s Court, which is reviewing Wu’s case as required by law, will overturn her death sentence. Supreme Court Spokesman Sun Jungong stated on Feb. 14 that the court has accepted the case and would deal with it cautiously.

Even before Wu, many have lost their personal freedom and even their lives for the crime of illegal fundraising. According to the Zhejiang Higher People's Court, from 2007 to 2011, 219 people were punished for financial fraud; in addition, the number of people punished increased over eightfold in five years from eight in 2007 to 75 in 2011.

Financial fraud is the most serious charge in connection with illegal fundraising, which also includes charges such as illegally absorbing deposits from the public, illegal business operations, false advertising, and “unauthorized issue of shares and corporate bonds” according to a judicial interpretation released by the Supreme Court in 2011. Among these charges, illegally absorbing deposits from the public is the most common.

The Wu Ying case highlights a nationwide private financing conundrum. Statistics from the Ministry of Public Security show that more than 1,000 illegal fundraising cases occur each year. In addition, a report released by China International Capital Corporation Limited (CICC) points out that the domestic private lending balance increased 38 percent over the last year to 3.8 trillion yuan in mid-2011, which accounts for about 33 percent of the total loan size in China’s shadow banking system and is equivalent to 7 percent of total bank loans.

Since the first illegal fundraising case in 1993, China’s judicial policy has been wavering between two options: one is to crack down on illegal fundraising, so as to ensure the security of the financial market; the other is to recognize the legitimacy of private lending to some extent, so as to protect the freedom of private financing.

As illegal fundraising became increasingly rampant, the State Council approved the establishment of a ministerial-level joint meeting on combating illegal fundraising led by the China Banking Regulatory Commission (CBRC) in 2007. Provincial governments are at the center of this system, while public security bureaus, procuratorates, and courts typically do not move forward with their work until the government has come to a decision. This government-dominated model has hidden dangers. Wu Yongzheng, the father of Wu Ying, said that the local government froze Bense Group’s bank accounts and disbanded its staff immediately after Wu Ying’s case came to light. Given that the enterprise is out of operation, it is doubtful that its assets would be properly evaluated.

Despite a tough crackdown since the mid-1990s, the number of illegal fundraising cases has escalated, showing that under the current financial system, mainstream fundraising channels such as bank lending are unable to meet market demand. Scholars including Chen Guangzhong, tenured professor at China University of Political Science and Law, suggest that China amend relevant laws to remove financial fraud from the death penalty list, in order to unblock private financing channels and ensure the security of the financial market.

In a research report on private financing submitted to the Financial Affairs Office of Zhejiang Provincial Government, Li Youxing, professor at Guanghua Law School, Zhejiang University, suggests that private financing service agencies be set up to broker private financing deals. He also advocates the establishment of a private financing registration mechanism to help regulatory authorities provide better macro guidance. Lastly, Li argues that a credit system be installed in the private financing market to impose sanctions on breaches and prevent financial risks.

1 yuan = 15 U.S. cents

 

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