State media estimates that more than Rmb100 million ($16 million) may be at risk in the collapse of Platinum Assemblage, a relatively tiny sum. But a series of similar incidents this year suggests China's slowing economy has created fertile ground for hucksters, as companies become increasingly desperate for funds amid a pullback in lending from banks as well as more mainstream non-bank lenders such as trust companies.
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In March, depositors in Yancheng city, Jiangsu province, rushed to withdraw funds from rural co-operatives and were told that the institutions — which operate like banks but whose legal status exempt them from liquidity regulations — had lent out all the money. Analysts said many co-ops, which were created to lend to farmers, had in fact been investing in real estate.
It is not known how Platinum Assemblage invested clients' funds, but a large share of shadow banking funding flows into real estate, one of the few industries that, until recently at least, could deliver rates of return high enough to service loans at interest rates often exceeding 20 percent.
Local media reported that wealth management clients of another guarantee company, Henan Swiftly Soaring Investment, blocked a road in Xinxiang city, Henan province, on Sunday to protest against the lack of payout on similarly structured wealth management products. China Business News, a national newspaper, reported that much of that money was also used for property purchases. Swiftly Soaring could not be reached for comment.
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Late last year eight government agencies including the banking regulator, the central bank and the commerce ministry released a notice warning of rampant irregularities among non-financial guarantee companies.
"Problems with chaotic business are increasingly evident. A large number of non-financial guarantee companies are not engaged in guarantee business. They even engage in illegal deposit-taking, illegal fundraising, illegal wealth management and high-interest loans," the notice said.
As of last week, branches of Platinum Assemblage in Taiyuan were still operating. However, employees told investors the company was short on funds and that while it could still make monthly interest payments, it could not repay principal on maturing products. They pressed investors to roll over their investment, promising that principal would be paid before the May 1 holiday next year. By Sunday, the office's doors were locked from the outside and the police notice appeared on the door.
In interviews outside the police station, investors all said they had had little idea what they were buying into. A police officer recording investor complaints declined to comment.
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"The salesmen said the boss was a connected guy, that he had a fireworks factory and a hotel," said one man surnamed Liu, who had invested a total of Rmb54,000. "The salesmen were always showing us photos of the projects. Here a supermarket, there a hotel."