China has made the headlines with one of the country’s biggest gold jewelry manufacturers at the center of a fake gold scandal. Wuhan-based and NASDAQ-listed Kingold Jewelry is facing allegations that it deposited fake gold bars as collateral to get loans from up to 14 Chinese financial organizations.
The 83 tonnes of gold was supposedly valued at a staggering 20.6 billion yuan (A$4.2 billion). However, most of these gold bars turned out to be gilded copper, according to official reports from Beijing.
Two New York law firms have already launched investigations into securities fraud acting on behalf of investors in Kingold Jewelry Inc (NASDAQ: KGJI). The story came into the limelight after a Beijing-based site investigated complaints and allegations that came up. This site then posted the news with the headline: “The mystery of [US]$2 billion of loans backed by fake gold”.
Kingold has strongly refuted these claims that state that the company lodged fake gold bars with Chinese lenders. Some of the mentioned lenders include Bank of Zhangjiakou, Dongguan Trust, Hengfeng Bank, and China Minsheng Trust. These trust companies that are involved are mainly known as ‘shadow banks.’
Fake Gold Offered By Kingold As Collateral After Loan Defaults
This purported scam came into the limelight earlier this year when Kingold defaulted on loans given by Dongguan Trust. The gold bars it pledged as collateral turned out to be a gilded copper alloy. Furthermore, Minsheng Trust’s “gold” bars have also turned out as copper alloy under the gilded surface.
A lot of the money that the company borrowed was used to invest in China’s housing bubble with some of those investments have already gone sour. Kingold purchased a company known as Tri-Ring that currently owns blocks of land in Wuhan and Shenzhen with some of the borrowed money.
Military Backing Enabled Kingold Get Money
Kingold’s controlling shareholder is Jia Zhihong which is described as “an intimidating ex-military man”. Mr. Jia has served in the military in Wuhan and Guangzhou. At one time, he managed gold mines for the People’s Liberation Army. Originally, Kingold was a gold factory located in Wuhan and it was affiliated with the People’s Bank of China.
Comments on this breaking story indicate that Mr. Jia’s connections with China’s powerful army meant that the man could do whatever he wanted without any questions asked. In that connection, a state-owned insurer covered some of the loans but Kingold was the beneficiary and not the lenders.
Wuhan Kingold is the biggest gold processor in Hubei province. Many questions are already coming up asking whether more of China’s ‘hard assets of gold’ really exist. It is not the first scandal of its kind: In 2016, some ‘gold’ bars given as collateral to 19 lenders in the Shaanxi province were also discovered to be fake or adulterated. In that incident, the core of most of the bars comprised of tungsten.
Fears now are that other Chinese gold producers and jewelry makers may also be involved in similar scandals. After that report, the Shanghai Gold Exchange has canceled Kingold’s membership. The company’s shares lost 23.77% overnight to settle at US$0.85.