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Wenzhou officials implicated in illegal loan sharking

  • Staff Reporter
  • 2011-10-01
  • 10:04 (GMT+8)
Eighty percent of creditors in a usury case in Wenzhou are believed to be government officials who supplied funds for a local women to run her loan shark business. (File Photo/CFP)

Eighty percent of creditors in a usury case in Wenzhou are believed to be government officials who supplied funds for a local women to run her loan shark business. (File Photo/CFP)

It is not unusual in China for people or companies to illegally collect deposits and re-lend them to others at exorbitantly high rates of interest. This week in the city of Wenzhou, the city in eastern China's Zhejiang province renowned as the home of private lending, a case emerged in which the majority of debtors were senior government employees.

At the heart of the financial scandal is a woman from the city known as Shi Xiaojie, who in 2009 used the name of a leading local private enterprise, the Shun Ji Group, to raise funds from the public for lending.

Since she promised returns at rates far higher than open market levels, it was easy for her to raise huge amounts of money, estimated at some 1.3 billion yuan (US$203 million).

All of a sudden she and her husband Liu Xiaosong on Sept. 21 went into hiding along with all the funds they had illegally collected. A few days later, the couple were captured by local police.

Shi Xiaojie formerly worked for Shun Ji as an accountant and reportedly is a relative of the group's chairman, Shi Shunji.

Knowing of their relationship, many creditors gathered to lay siege to the company and recover their funds soon after the wife and husband went to ground.

According to the 21st Century Business Herald, Shi Xiaojie and her family ran a number of guarantee corporations in Wenzhou, companies which essentially play a collateral role to help small and medium businesses obtain loans from banks.

Instead of helping businesses secure bank loans, however, Shi operated her guarantee firms as a loan shark operation with the backing of ample funds which she had illegally raised from the public over the years.

Up to this point, there was no evidence to prove that her unlawful fundraising and usury had anything to do with Shun Ji.

What is especially striking is that this latest Wenzhou financial fraud scandal involved a large number of local government officials who acted as fund suppliers, or one may say as loan sharks themselves.

"To my understanding, close to 80% of the creditors involved in this financial scandal are public servants with some of them officials of the level of bureau chief and above. Now these government officials all want to get back their money and in a low-key manner." The person who made the remarks is himself a creditor. He too did not want to draw attention to himself and refused to be named.

Generally speaking, the funds lent out by Shi Xiaojie and her guarantee companies carried interest rates ranging from 24% to 140% per annum, said another creditor, who also preferred to remain anonymous.

One source at a local bank which had business relations with the Shi family revealed that this past August alone saw 800 million yuan (US$125 million) flowing into the family account. "When we tried to find out the sources that remitted the funds, no such sources existed and we thus could not get any credible information," said the bank source.

One week after the fund-collecting and lending scandal was brought to light, the Shun Ji business group issued a statement, saying: "Our business operations remain normal. The rumors that have been spreading have caused damage to our reputation. We reserve the right to take legal action against any individuals or institutions that spread these rumors."

Shun Ji, with registered capital of 65.8 million yuan (US$10.28 million), is a leading construction company in Wenzhou and currently contracted to build a national-grade highway. It is also a regular contractor providing building materials and services for the municipal government.

A Wenzhou judicial official told the 21st Century Business Herald that it was common for government officials to lend money to private loan sharks. "Many loan sharks or guarantee companies all maintain close relations with local public servants. The latter rely on the former to get rich," the official said.

"It has become a rule in this usury business. You do me a favor (loan sharks), I help you lend your money to people at higher than market level rates (government officials). Actually, this is bribery," the official added.

However, the practice of government officials participating in loan sharking is not unique to Wenzhou but has also been seen elsewhere in the province.

Not so long ago, the county-level city of Jiangshan issued an order banning party and government officials from involvment in any illegal fund collecting and lending activities.

Who's Who

  • Wang Dongming(王東明)

    Wang Dongming(王東明)

    Wang Dongming is chairman of CITIC Securities International. He is also an executive director and its compliance officer. Wang has been with CITIC ...