On June 29, the Chinese media group Caixin reported that the Chinese jewelry company Wuhan Kingold Jewelry Inc. (Kingold), which had received a total of $2.8 billion from at least 14 Chinese financial institutions over the past five years, had used as collateral 83 tons of purportedly gold bars that later proved to be gilded copper bars. Caixin stated that the fake gold was exposed in February 2020, when one of Kingold’s lenders, Dongguan Trust, sought to liquidate Kingold’s collateral to cover defaulted debts. In late 2019, Kingold allegedly failed to repay investors in several trust products.
Caixin also reported that Kingold was being investigated by unspecified “authorities.” Because Kingold is traded on NASDAQ, however, the apparent fraud could also attract the attention of the U.S. Department of Justice and the Securities and Exchange Commission for criminal and civil investigations. For example, in its Form 10-Q for the quarter ending September 30, 2019, Kingold affirmatively represented that it had pledged gold as collateral for financial institution loans, and particularly stated that to secure a $280.2 million loan from Sichuan Trust, it had pledged “7,258 kilograms of Au9999 gold.”
Note: The size of this alleged fraud substantially dwarfs the recently discovered $300 million accounting fraud at another Chinese company, Luckin Coffee. The Kingold situation is likely to heighten the scrutiny of Chinese companies trading in U.S. markets, and to prompt further questions about the degree of care that Chinese financial institutions are using when making collateralized loans. “Ghost collateral” has been recognized for some time as a problem in the Chinese financial sector, and this latest development provides further confirmation that Chinese financial regulators are failing to deal aggressively with that problem.