Investing in China Took Her From Rags to Riches to Death Row

When a businessman makes a bad bet in America, he's apt to lose money. But as a couple of news items out of China this week reveal, doing business is quite a bit dicier in the Middle Kingdom. Make the wrong bet there, and you may lose more than just money. You may lose your life.

That's the fate awaiting two businesswomen sentenced to death by Chinese courts last week. The first, "rogue trader" Wang Caipang, is said to have defrauded investors of some $15.9 million borrowed for the purposes of buying equipment and property, and relending through "credit guarantee" firms. Instead, Caipang is said to have used the borrowed funds to speculate (badly) in the futures and gold markets, losing the bulk of the money.

If this story so far has you cheering "Hurray for China! Too bad Bernie Madoff was charged in America," then hold on a second. The allegations against the second defendant going to the gallows were a bit less clear-cut.

In fact, while greater in scale than the Wang Caipang case, the "fraud" alleged against 31-year-old Wu Ying hardly sounds criminal at all.

As reported on Bloomberg, Wu borrowed some $122 million from her investors, claiming that she would use the funds for the general business purposes of her "Bense" group of companies. Like Caipang, Wu wound up losing about half the money -- but there's a key difference here. Wu used the money for precisely the purposes she promised.

Banking in the Shadows

Wu's case illustrates a crucial "missing link" in China's financial system, a segment referred to locally as "shadow banks" (not to be confused with America's so-called "shadow banking system," in which real banks repackage and sell to investors loans they've issued to consumers, as a way to add leverage to their balance sheets).

In China, the situation is a bit different:

• On the one hand stand small businesses, who struggle to win loans from China's big, state-owned banks, and as a result often lack access to the capital they need to grow their businesses.

• On the other hand stand investors who, even if they have cash, often lack a viable place to invest it. The same state-owned banks that won't lend to small businesses offer their depositors interest rates capped (by law) at 3.5% per year when Chinese inflation is running at 5.4%.

In the U.S., a situation like this can give rise to loan sharking, and that's basically where Wu wound up -- borrowing large sums from loan sharks (albeit very well-heeled ones, including both government officials and bank employees).

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The daughter of a poor farmer, Wu parlayed a job working in her aunt's beauty parlor into a multimillion-dollar empire comprised of salons, a clothing store, a car rental company, real estate investments, and loan offices.

To finance this business, she reportedly paid her private investors interest rates as high as 0.5% per day (roughly 518.5% per year) for access to their money. But even in China's go-go growth economy, it's hard to keep up with these kinds of rates. Add in a turndown in the real estate market, and a slowing economy generally, and Wu wound up losing about half the money borrowed from her financiers.

'Off With Her Head!'

That's when things got really bad. Between the high level of publicity she received from her business success, and the fact that how she got her financing was technically illegal, Wu quickly attracted the attention of state prosecutors. Arrested and sentenced to death, she joins Wang Caipang and more than a dozen other individuals convicted of illegally attracting money from individual investors.

Even worse, once arrested, Wu was apparently asked to name names, with the result that some of her investors got themselves arrested as well.

Conspiracy theorists (such as, for example, The Economist) are now arguing that this is the real reason Wu now sits on death row: that her other investors have decided that "dead businesswomen tell no tales."

At least in America, when you can't make the payments to your loan shark, the worst you have to fear is a pair of busted kneecaps. Our gangsters don't co-opt the government to do their dirty work.