When a Chinese court sentenced then-28-year-old Wu Ying, known as “Rich Sister,” to death for taking $55.7 million from investors without paying them back, it sparked a controversy over China’s shadow banking system that may lead to reforms. Wu’s crime involved a common illegal practice in China: raising money from the public with promises to pay back high interest rates. Operating outside the banking system or government regulation, the informal lending networks, known as the shadow banking system, are estimated to total $1.3 trillion, according to Ren Xianfang, an economist at IHS Global Insight in Beijing. They provide an important source of economic growth, capital for private companies, and return for investors seeking to beat inflation.
Premier Wen Jiabao weighed in on Wu’s case at a March 14 news conference, saying the Supreme People’s Court, which is reviewing the 2009 verdict and will decide as early as this month whether Wu lives or dies, was handling it with caution. “Chinese companies, especially small ones, need access to funds,” Wen said. “Banks have yet to be able to meet those companies’ needs, and there is a massive amount of idle private capital. We need to bring private finance out into the open.” His comments called more attention to the public debate over the importance of shadow banking to the economy and government efforts to bring it under control—and whether capital punishment is an effective means to do so.
Shadow banking has been fueled by a two-year credit squeeze in China as well as large, state-owned banks’ preference for lending to government-run companies rather than small businesses. “Underground banking filled the hole left by China’s state-owned banks, which have this long-term bias toward big enterprises,” says IHS’s Ren.
Wu’s lawyer, Yang Zhaodong, says his client, now 30, was unfairly singled out and is no different from the estimated 42 million Chinese business owners who rely on the shadow banking system. “Entrepreneurs are paying attention to it because today’s Wu Ying could be any of them tomorrow,” says Yang. “There are so many of them doing the same thing Wu Ying did. This case not only relates to Wu’s life, but to whether China’s legal and judicial system is fair.”
Wu, the daughter of a farmer in Zhejiang province, south of Shanghai, dropped out of technical school as a teenager to work at her aunt’s beauty salon and later opened two of her own, according to the state-run Global Times newspaper. She branched out into a foot massage parlor and bought 10 cars, which she rented out. A nightclub and a clothing boutique followed, as did investments in real estate and copper, the report said.
By the time Wu was in her mid-20s, she had founded the Bense Holding Group and established 12 companies, according to a Feb. 1, 2007, profile in the Guangzhou-based Southern Weekly. The story said she drove to the interview in a BMW and couldn’t explain where her wealth had come from. “I don’t launder money,” Wu said, according to the newspaper. “My money is clean.”
In February 2007, authorities announced that Wu had been arrested on suspicion of illegal fundraising. Wu collected 770 million yuan ($122 million) from private investors between May 2005 and February 2007, according to the case against her. Prosecutors later upgraded the charges to financial fraud, a crime punishable by death in the most severe instances, for losing 380 million yuan of investors’ money. In 2009 she was sentenced to die.
Wu’s defense in court was that she borrowed money to fund her businesses and never committed fraud, Yang says, adding that her investors, like anyone who took part in the private banking business, knew the risks. “Even her biggest creditor, who she owed 320 million yuan, doesn’t think Wu was lying to her,” says Yang. “These were real projects.”
Photographs of Wu in court show her sobbing as she stands at the dock, clad in a yellow prison jacket, a rose tattoo peeking from her neckline. She has been in prison appealing her case and sentence since her arrest in 2007. The official Xinhua News Agency reported in April 2011 that Wu was writing a book called Black Swan while in prison, a fictional account of her life.
In a country where public criticism of government policy is rarely tolerated, state-controlled media outlets such as Xinhua and the People’s Daily have run stories, editorials, and online chat sessions airing public sympathy for Wu. On Feb. 8, the China Daily newspaper ran an article noting “public outrage” and the “wide sympathy and pleas for the fair-skinned woman with a short haircut.” It quoted a legal expert as saying the government’s seizure and sale of her assets was illegal.
Court officials and police have taken the rare step of publicly defending their verdict. The presiding judge in the case, Shen Xiaoming, appeared in a Feb. 7 Internet chat to explain that Wu was sentenced to death because the court found she intended to defraud investors. “This was more than just illegal fundraising,” Shen said in the chat.
Other shadow bankers have been put to death in China. On Aug. 5, 2009, the Supreme Court approved the execution of two female entrepreneurs in separate cases. Si Chaxian was charged with defrauding 300 people of 167 million yuan over five years, while Du Yimin—who was 44 at the time her death sentence was carried out—was charged with cheating investors out of 709 million yuan, the official CCTV reported. At least 17 people, including Wu, now sit on death row after being sentenced for illegally raising funds from individuals, according to Chinese media reports compiled by Bloomberg since 2009. Seven are women.
In the latest case, on April 6, 30-year-old Wang Caiping was sentenced to die for borrowing along with her brother more than 100 million yuan from 15 victims, according to Xinhua. Wang and her brother, who has fled, invested the money in gold and futures speculation and incurred losses, the report said.
Wu’s case, unlike the two executions, 16 other death sentences, and numerous arrests, has struck a chord and spurred a broader national debate. “She’s not some sort of privileged person who just had everything handed to her,” says Sarah Schafer, a Hong Kong-based researcher with Amnesty International. “People see her as someone who is closer to them than they care to admit.”
On March 28, China’s State Council approved a pilot program for Wenzhou, a city in Zhejiang province and a center of private lending, that would ease some restrictions on the transactions. “The pilot program is a step forward toward making private lending a practice that’s legal,” says Zhou Dewen, head of the Wenzhou Small and Medium Sized Enterprises Development Association.
That program, along with Premier Wen’s remarks in March, makes Wu’s lawyer hopeful that the Supreme Court will commute her death sentence. “Wu Ying’s case happened in a special time during China’s reform, where the financial system is hugely lagging behind economic development,” says Zhou. “Wu Ying won’t be executed now that the trial program has been announced. She can’t die before the dawn.”