Banking & Finance

Your money or your wife

Underground lending (again): this time it leads to a kidnapping

Make the loan or else

When the wife of a senior official from the Bank of China was abducted in Inner Mongolia this summer, the kidnapper promised to release her if one of two conditions were met.

The first option was to hand over a ransom of Rmb200 million ($31.3 million). But the less conventional request was for the husband to use his position as the head of Bank of China’s Inner Mongolia business to reinstate three employees recently fired from the Hohhot branch.

Neither demand was met and the prisoner was freed after the police made a series of arrests.

But the kidnapping case – and especially the demand to reinstate the sacked employees – also brought to light another illicit financing business, this time the misappropriation of at least Rmb2 billion in funds from state-owned banks, reports Century Weekly.

Behind the scheme was an ethnic-Mongolian woman called Tuya. She ran her business by finding people with large deposits at certain state-owned banks, and then offering them double digit returns on their money.

Tuya would then have her moles at the bank secretly remove the cash and hand it over to her. She then tried to profit by lending to companies, trading in mineral rights and investing in real estate.

Her ‘depositors’ were told they had nothing to lose. In the worst-case scenario, the lending business would fail. But the depositor would then be able to claim that unauthorised withdrawals had been made from their accounts. The state banks would have to take responsibility.

But Tuya was offering such high returns – a minimum of 20% – that she constantly needed to find new deposits in order to pay out as promised to her earlier customers. In this respect, her business took the form of a Ponzi scheme (not unlike the scandal involving Rongdian in Xiamen, see WiC114).

In June, Bank of China noticed that 40 accounts in Inner Mongolia were fluctuating abnormally. Three of Tuya’s bank insiders were suspended, and the capital chain looked as though it might break.

She then ordered the kidnapping, which ended with her arrest.

WiC has covered underground lending extensively in the past 18 months, sometimes to the point that we feared we had bored readers.

But it has become newsworthy on a much wider scale in the last two weeks, with financial markets now worried that private lending schemes could be unravelling, with serious consequences for the wider economy.

Our own focus was often on manufacturing centres like Wenzhou (see WiC124). There, smaller, privately-owned businesses were among the first to feel the impact of a tightening credit environment, and on the look-out for cash.

Conversely, there were also plenty of private businessmen ready to lend out a mixture of their own capital plus deposits taken from third parties, for higher returns than the banks could offer.

Business conditions for small businesses continue to be challenging (the front page of the South China Morning Post this week warned that an “SME credit crisis” could soon sweep the country).

WiC has also reported on cases of absconding entrepreneurs, unable to meet their financial obligations.

But the potentially bleak scenario is now starting to raise questions from investors further afield.

There was a sell-off in Chinese banking stocks this week, on concerns that a private lending meltdown will leak into the formal sector (Tuya’s scheme suggests that it might).

And casino stocks like Las Vegas Sands have also taken a battering, on concerns that the gaming take in Macau could also be hit.

The fear is that the middlemen who fund high-stakes clients in the city often rely on underground financing too. If their credit dries up, casino revenues could suffer.


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