Gold mine scams point to trouble ahead, analysts say

Retired Chinese diplomats and non-existent gold mines have been linked to fraudulent investment schemes in what analysts say may be a sign of trouble ahead as tightening liquidity and concerns about the viability of lending products are likely to result in further scams unravelling.

"Whenever there is a downturn, there is an increase in scams. That is true of China, as it is true of everywhere," said Daniel Harris, a lawyer at Harris & Moure and a specialist in investigating mainland scam artists. "I haven't seen that increase yet and I don't know why."

As Warren Buffett said, when the tide goes out, you discover who is swimming naked, and the challenges facing the mainland's economy and credit markets are likely to expose fake or struggling investments that rely on new capital inflows, rather than asset-generating returns, to fund client coupon payments and withdrawals.

Government data published last year showed the number of reported cases of illegal fundraising on the mainland rose 79 per cent between 2011 and 2012, with more than 16,000 cases solved since 2008. Since 2005, the total annualised value of cases handled exceeded US$3.26 billion.

Illegal fundraising is a catch-all term that can include fraudulent Ponzi schemes and unlicensed investment structures in the shadow banking sector.

In its broadest sense, shadow banking involves online lending, pawn shops, microcredit lending and loans to local government funding vehicles - much of it legitimate business. Mizuho analyst Shen Jianguang estimates it is a 30 trillion yuan (HK$38.3 trillion) business, equivalent to almost a third of credit created on the mainland.

Between 2011 and 2013, 4,170 people were convicted of illegal fundraising, with 1,449 given sentences ranging from five years in prison to the death penalty, according to the court.