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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Chinese lose savings in underground banks

Joe Mcdonald Associated Press

BEIJING – Fan Xiaolin, an engineer in central China, thought he was safe when he deposited his family’s savings of $130,000 in a private finance company he said was recommended by employees of state-owned Bank of China.

The company, part of an informal industry of lenders and investment managers that operates outside China’s state-run banking system, collapsed six months later as economic growth slowed. Today, Fan said he and about 100 other depositors in Hunan Bofeng Asset Management Ltd. protest several times each week outside state banks and government offices, demanding their money back.

“The security people at the bank hit us,” Fan said. “The police ask us to go home and wait.”

Thousands of Chinese savers like Fan who entrusted money to an informal finance industry that operates with little government oversight are suffering painful losses.

Beijing allowed underground finance to flourish over the past decade to support entrepreneurs who generate wealth but get little credit from state banks.

Now, as losses rise, Beijing faces pressure to help investors recover their money.

“Many investors don’t realize the risk until something goes wrong,” said Guo Tianyong, director of the Banking Research Center at Central University of Finance and Economics.

The industry’s popularity reflects the public’s urgent search for an alternative to low interest paid by banks, which has driven repeated bouts of boom-and-bust speculation in real estate and other assets. One portion of informal finance is allowed by Chinese law: small loans from individuals to entrepreneurs. For a fee, brokers put borrowers in touch with small savers.

Regulators have tried to keep official banks separate from the underground industry, but complaints in Changsha that Bofeng was recommended by employees of Bank of China and another state-owned lender, Industrial & Commercial Bank of China Ltd., highlight the tangled connections between the two sides.

“I went to deposit money in the bank and the bank manager recommended this to me,” said an ICBC customer, Sheng Weimin, 48. He put $16,000 into Bofeng in January 2014.

Bofeng raised $65 million to $80 million by selling “trust products” to several hundred investors, according to the official Xinhua News Agency. It cited local authorities as saying the company was not authorized to do so.

Where that money went is unclear. Bofeng’s website says the company is an investor and asset manager. But the Web portal Sina.com reported it also traded stocks and made high-interest loans to real estate and other businesses.

Sheng said some depositors wanted to sue ICBC but a lawyer said they would lose because contracts were signed only by Bofeng.

“At least there should be someone to give us an official answer to tell us when we get part of the money,” Sheng said. “I ask the bank staff and always am told, ‘It is being processed, wait.’ ”