Financial firm fails in Beijing

Take out a loan from a bank, using a guarantee from a credit firm. Use part of the money to make short-term, high-yield loans to said firm. That firm then loans high-interest money to pawn shops.

Fool's Gold Behind Beijing Loan Guarantees
The domino effect began in January when bankers reacted to rumors of a liquidity crunch at one of Beijing's most prominent loan-guarantee firms, Zhongdan Investment Credit Guarantee Co. Ltd.

Several banks that cooperated with Zhongdan smelled trouble and started calling loans they had issued to companies backed by the firm.

At the time, Zhongdan counted more than 300 clients and 3.3 billion yuan worth of loan guarantee contracts, according to the firm's President Liu Hui.

The next domino fell when the creditor companies, seeking to appease the banks, turned to Zhongdan for help repaying the called loans.

But Zhongdan executives balked, and the domino effect accelerated as companies teetered under bank pressure and the city's business community shuddered with credit freeze fears.

Now trying to sort out the Zhongdan case are the loan guarantor's executives, its hundreds of business clients, some of China's top banks, and officials with Beijing's Municipal Finance Bureau and Banking Regulatory Bureau.
The joys of subprime lending at the end of a credit bubble.
An executive for a building materials manufacturer that signed a contract with a Zhongdan subsidiary, for example, said the guarantor forged documents to obtain bank loans.

To nail one loan, he said, Zhongdan formed a shell building materials supplier and wrote a fake contract between the supplier and his company. The document was presented to the bank, which approved the loan. Zhongdan later de-registered the phony supplier.

Another business owner surnamed Fang told Caixin most of Zhongdan's clients willingly participated in its wealth management schemes, sometimes letting the firm use every bit of the borrowed money to invest and earn up to 18 percent interest. Investment targets were not specified.
The article goes on to say this type of behavior went on for years. It would have been relatively easy in 2009 and 2010, when the government was urging the banks to lend. The sheer volume of credit allowed unqualified borrowers to slip through the cracks, including what may be a significant amount of fraud. Big things have small beginnings.

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