As per a report by Caixin, which is a Chinese media group based in Beijing known for investigative journalism, China is at the centre of the discovery of the biggest gold counterfeiting scandal in human history.
Kingold Jewelry Inc, China’s largest privately-owned gold processing and jewellery company headquartered in Wuhan, took a loan of more than 20 billion Yuan, that is, 2.8 billion dollars with pure gold as collateral. But, when the shadow banks claimed the pure gold after the company was unable to pay back, they found that what the company claimed as pure gold is actually not gold.
The 83 tons of metal which the company claimed as pure gold is in fact gilded copper. This is equivalent to 22 percent of China’s annual gold production or 4.2 percent of China’s gold reserves as of 2019. In short, more than 4 per cent of China’s official gold reserves may be fake. And this assumes that no other Chinese gold producers and jewellery makers are engaging in similar fraud, the report said.
This is set to unravel a shadow banking crisis in China. Given the fact that the collateral is fake, this means the shadow banks would not be able to recover their money. But, these loans are secured by state-owned insurance companies and ultimately the shares of the shadow banks, insurance companies, and the company itself are going to tank. In short, China’s Lehman Brothers moment is here and the Chinese economy is set to suffer a jolt of the scale the American economy suffered after 2007-08 financial crisis.
The share of Kingold Inc, which is listed at NASDAQ in New York, tanked by 40 percent in a few hours after the fraud was revealed. However, Kingold chairman Jia Zhihong, a former People’s Liberation Army veteran, who is known for using his links to PLA and the Communist Party to overpass regulations and proper audit, denied any wrongdoing.
The lack of transparency in China will lead to a fall of all the financial companies which have loaned with gold as collateral, and the cascading effect of this will lead to a crisis which will destroy Chinese economy in the short run.
The wrongdoing by Chinese companies without accountability is set to irk the United States, which is already mulling over a complete ban on the listing of Chinese companies at American stock exchanges.
The Luckin Coffee fraud, which hit American investors, has fuelled the recent resentment against Chinese companies, and before it cooled off, another big fraud in a Chinese company listed at an American stock exchange is unveiled.
The story was reported in the Western media first by ZeroHedge, a libertarian blog with adherence to the Austrian School of Economics. The counterfeit gold is set to destroy whatever reputation the Chinese economy has in global audience.
The ZeroHedge report said that this exposes just how multi-faceted fraud exists in China. Capitalizing on pre-existing cronyism and connections with China’s powerful army, the founder of Kingold was allowed to basically do anything he wanted, no questions asked, including counterfeiting over 83 tons of gold bars to get billions in funds to participate in China’s housing bubble, only for a series of unexpected events to unwind the frauds one after another and expose the type of sordid scandal that exists at the heart of most Chinese “enterprises” and business ventures.
As for the gold, several billion gold bars never existed and yet resulted in a cascade of subsequent cash flow events allowing tens of billions in funds to be released, “benefiting” not only its founder Jia, but also China’s broader economy.
It now appears that a major part of China’s subsequent economic boom has been predicated on tens of billions in hard assets — such as gold — which simply do not exist.
