A group of Chinese trust companies have just had the shock of their lives at the hands of Nasdaq-listed Kingold Jewelry. Some 83 tonnes of gold bars that they had accepted as collateral against Rmb20 billion ($2.8 billion) in loans to Kingold have turned out to be no more than copper bars coated in gold leaf (the case remains under investigation with no one as yet charged).
To put this revelation into perspective, the largest recorded theft of gold from a financial institution was for seven times less (a heist in Beirut in 1976). The case instantly propels the Kingold collateral to the number four spot in the all-time rankings of gold robberies, behind the likes of Nazi Germany’s looting of Europe’s reserves during the Second World War (when an estimated 1,038 tonnes was stolen).
The ruse also represents 4.3% of China’s current gold reserves (by tonnage), with many left wondering how it could have happened.
For Caixin, which broke the story, the case is another example of the outsized fraud that festers in corporate China’s murkier depths. But an unnamed official from Mingsheng Trust, the largest affected creditor, told the magazine that he was completely bewildered about how it was pulled off. “I still can’t understand, which part went wrong,” he admitted.
The gold had been deposited in a bank vault under the supervision of a dozen people from Kingold, the trust companies providing the loans, and the insurer, PICC. The deposit was also verified in front of the group by third-party inspectors, who tested small samples at random, deploying spectral screeners for the rest.
Bank records also showed that the vault had not been opened since it was sealed.
The fraud came to light after Kingold started to default on payments in 2019. This prompted Dongguan Trust to sell off its collateral, only to discover that it was fake. Subsequent tests ordered by the other trusts came up with the same result.
Perhaps the trust firms should have dug around more in Hubei province, where Kingold and its larger-than-life founder Jia Zhihong are based. Very few of the firm’s creditors are from the province and the locals were sceptical that Jia owned so much of the precious metal. “We knew for years that he doesn’t have much gold,” one source told Caixin. “All he has is copper.”
The institutions were willing to offer loans to Kingold – a designer and maker of jewellery – because Jia said he would help them dispose of bad loans, the magazine adds.
Another source explained to Sina Finance that Jia, who has a military background, is someone who dines with the ‘black and white’ (gangsters and government) but the man himself made little comment to Caixin, beyond asking why PICC would agree to insure the deal if the gold was fake.
The media is reporting that PICC is holding back on paying the trusts because the insurance contracts are worded to give Kingold the authority to exercise them. Caixin adds that the contracts could be invalidated if it turns out that Kingold and its creditors were aware of the scam. Earlier this year the insurer fired its Hubei general manager and several more staff for unspecified violations.
The mess highlights the financial strain in parts of China’s trust sector, which has been accentuated by the pressure Covid-19 is putting on the economy. One of the trusts affected by the scam (Sichuan) is under investigation over allegations of poor disclosure and misappropriated funds, but Andrew Collier of Orient Capital Research warned the South China Morning Post that there is a growing divide between the better-off parts of China and those areas of the country that can’t afford to support their provincially backed trusts.
At the end of the first quarter, rating agency Moody’s estimated that 3% of the country’s trust products (Rmb643 billion) were at risk of not being paid out. At the end of March, trust assets had fallen 1.28% quarter-on-quarter to Rmb21.33 trillion.
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