China heightens alert over fundraising fraud

Rapid economic growth, vast wealth with few investment channels, and insatiable greed have driven up illegal fundraising cases in China.

One 47-year-old woman surnamed Wang will never see her money back. The former hospital worker committed suicide after she failed to recover money she lent to a private school in Xi'an, capital city of northwest China's Shaanxi Province.

The school illegally raised funds from more than 4,000 people between 2009 and 2011, ostensibly to fund college programs.

Attracted by a 30-percent annual interest rate, Wang gave all of her savings, a total of 60,000 yuan (about 10,000 US dollars), to the school and signed a one-year loan agreement.

But one day when she rushed to the school, she found it had been closed and its heads had been arrested over a funding scam involving 360 million yuan. Wang lost her money and killed herself after an argument with her family in June.

In early October, residents in coal-rich Yulin City ran down to a pawnshop to demand all of their money back, but what they found was an empty office.

A man surnamed Liu, 63 years old, lent more than six million yuan to the pawnshop. The pawnbroker, who claimed he owned two coal mines, had run off with his money.

"He comes from the same village as me and collected over 800 million yuan from locals," Liu said.

The pawnbroker promised to pay Liu hundreds of thousands of yuan in interest each month. "He seemed very rich and I could earn a lot, so I believed in him," Liu recalled.

An official in charge of combating illegal fundraising in Yulin revealed that some fundraisers have invested money in real estate or coal mines, while others use the funds to pay high interest on loans and bonuses to employees. When coal prices or housing prices drop, the capital chain is broken, and lenders go bankrupt.

"With low bank interest rates, a gloomy stock market, and skyrocketing housing prices, many people find their idle funds have nowhere to go, so they join in illegal fund-raising activity," he said, quoting lenders during investigations.

China has taken a harsh stance toward "illegal fundraising" -- a term used to describe taking deposits from the public by people without licenses to do so -- by mapping out regulations and strengthening supervision on financial markets since the 1990s.

This April, the country vowed to enhance crackdown efforts against fraudulent advertisements while educating the public about risks. But crackdown measures have still failed to prevent such cases from happening.

Chinese public security departments cracked 3,700 illegal fundraising cases in 2013. Over the past three months, more than 30 illegal fundraising cases involving over 500 million yuan were exposed in Lanzhou, capital city of China's Gansu Province.

Some private companies involved in fraud have actual businesses in need of capital. They seek funding for development since it is difficult to obtain loans from state-controlled banks, said Wang Yongsheng, a police officer from the public security bureau of Lanzhou.

But others exist just to defraud the public. "These cases are malicious crimes. It is difficult to retrieve victims' money since it has already been transferred or squandered when the cases are exposed," he added.

Illegal fundraising can lead to financial market disorder and threaten social stability. The country should strengthen investor education campaigns to guide the public to effectively identify and resist illegal fund-raising, said Xia Xueluan, professor of sociology at Peking University.

"Clamping down on illegal fundraising is not a sustainable solution. In the long run, more financing channels for small and medium-sized enterprises and reliable investment opportunities for individuals should be created," he said.