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Big gold fraud busted in China! Gold market spooked by massive counterfeiting scandal

The fake gold bars are equivalent to 22 per cent of China's annual gold production and 4.2 per cent of the China's gold reserve as of 2019

twitter-logoBusinessToday.In | July 1, 2020 | Updated 04:24 IST
Big gold fraud busted in China! Gold market spooked by massive counterfeiting scandal
The scam came to light in February this year when Kingold defaulted on loans to Dongguan Trust Co. Ltd

Over the past decade, China has emerged as the world's biggest counterfeiter of various, mostly industrial metals used to secure bank loans, infamously called "ghost collateral", and often several banks would have claims to the same (fake) asset. In a recent development, which would spark a brief wave of outrage among physical gold holders, China's Wuhan-based Kingold Jewelry Inc has been accused of depositing fake gold bars as collateral to obtain loan worth 20 billion yuan ($2.8 billion) from 14 Chinese financial institutions, mostly trust companies (also known as shadow banks), over the past five years, as per a report in Zero Hedge.

Considered to be one of the biggest gold counterfeiting scandals in recent history, the scam not only involves China, but it emerges from Wuhan city, the capital of Hubei Province, that has become synonymous for all that is scandalous about the country.

Listed on Nasdaq stock exchange, Kingold Jewelry is one of the world's largest privately owned gold processor with a current market cap of just $8 million. The company is led by Chairman Jia Zhihong, an intimidating ex-military man who is the controlling stakeholder in the company.

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As per the report, the company used 83 tonnes of gold bars as collateral and insurance policies to cover any losses but many of them have turned out to be gilded copper. This has left creditors holding the collateral for the remaining 16 billion yuan of loans outstanding against the fake gold bars.

The loans were covered by 30 billion yuan of property insurance policies issued by Chinese insurer PICC Property and Casualty Co. Ltd. (PICC P&C) and other smaller insurers, it said.

The scam came to light in February this year when Kingold defaulted on loans to Dongguan Trust Co. Ltd. (a Chinese shadow bank). Dongguan Trust said it found that the gold bars that were pledged as collateral turned out to be gilded copper alloy. The news spooked Kingold's creditors.

Following Dongguan Trust, China Minsheng Trust, one of Kingold's biggest creditors, obtained a court order to test collateral before Kingold's debts came due. The test result, which came on May 22, said the bars sealed in Minsheng Trust's coffers were also copper alloy.

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Authorities have already begun investigations into securities fraud. Meanwhile, Kingold chief Jia Zhihong, known as "an intimidating ex-military man", has denied that the company lodged fake bars with Chinese lenders. Jia has served in the military in Wuhan and Guangzhou.

Established in 2002 by Jia, Kingold was previously a gold factory in Hubei affiliated with the People's Bank of China that was split off from the central bank during restructuring. The company's shares are listed on the Nasdaq stock exchange.

According to Trading Economics, China ranks sixth in terms of total gold reserves with total reserves of 1,948.30 tonnes as on March 31, 2020. The US leads the country list with total gold reserves of 8,134 tonnes followed by Germany and Italy with 3,364 tonnes and 2,452 tonnes, respectively. India has also entered into the list of top ten countries with gold reserves of 642 tonnes, which is ninth highest in the world.

By Chitranjan Kumar

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