China’s ‘House sister’ case exposes flaws in underground financial market

‘House sister’ case exposes flaws in underground financial market

Staff Reporter


On the eve of Chinese New Year, Gong Aiai, the vice president of an agricultural and commercial bank in Shenmu county in northwestern China’s Shaanxi province, was taken into custody for forging public documents and government seals following the disclosure on the internet that she illegally owns dozens of properties worth a total of 1 billion yuan (US$160 million) in Beijing and making her known nationally as the infamous “house sister.”

New Century weekly reports that Gong rose through the ranks at the bank thanks to her diligent study and hard work, becoming one of the four richest women in Shenmu, a boom town with abundant coal reserves, by meeting the funding needs of many coal-related enterprises in the county. She is also a local representative of the National People’s Congress.

Gong’s success coincides with the development of Shenmu county, which became a boom town in 2000 thanks to surging energy demands in the global market. The prosperity turned many local coal mine owners into billionaires overnight. While state banks were stringent in offering unsecured loans, the Agricultural and Commercial bank in Shenmu raked in hefty profits by providing unsecured loans to the coal sector. As vice president of the bank, Gong controlled huge amounts in loans and deposits, much higher than the local branches of state banks.

The rapid development of the bank resulted from its flexible loaning policy, as it required the borrowers to provide two guarantors only for the extension of unsecured loans. In December 2012, the bank boasted half of the banking market share of Shenmu county, whose total deposits topped 60 billion yuan (US$9.6 billion) and loans reached over 40 billion yuan (US$64 billion).

Gong was generous in approving loan applications, often only requiring a recommendation from her acquaintances. As a result, the amounts of loans and deposits under her control surged. In return, bosses of coal miner often gave her free shares. In addition, from 2006 Gong’s family has also taken part in the coal industry.

Gong also dipped into Shenmu’s huge underground financial market, whose capacity is estimated at 50 billion yuan (US$8 billion) a year. Taking advantage of her post and credibility, Gong absorbed huge amounts of funds from the private sector and loaned the money to various fields including coal, realty and other industries. Like other local underground financiers, a substantial amount of the funds also flew to other places such as Xi’an, Beijing, Hainan, Inner Mongolia, Xinjiang and Gansu. Gong pocketed tidy profits as the broker between financiers and borrowers.

Backed by her huge fortune, Gong began to invest in realty markets in other places, including Beijing and Xi’an. Some of her investments were in the form of joint ventures but Gong had quarrels with some of her partners due to her failure to honor the original agreements. A resentful partner then exposed her dubious practices on the internet.

Along with Gong’s setback, the underground financial market in Shenmu has also encountered major difficulties. Gong teamed up with a number of financiers in Shenmu to invest 100 million yuan (US$16 million) in an urban renewal project in the provincial capital Xi’an. Due to the opposition of some landowners the project has been deferred repeatedly, placing the financiers in a quandary. In mid-2012, Shenmu money broker Liu Xumin was arrested by police in Inner Mongolia for defaulting on several investment projects. Some financiers in Shenmu suffered heavy losses, as they had loaned over 1 billion yuan (US$160 million) to Liu.

A further blow was inflicted on Shenmu financiers in the second half of 2012 when Zhang Xiaochang, a local jewelry shop owner, incurred heavy losses in gold investment before defaulting on the huge loans he borrowed from the local underground financial market.

In this jittery environment, Gong’s bank in Shenmu stopped providing unsecured loans in the second half of 2012. Local market players say other major defaults may be in the pipeline.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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