A Death Sentence Puts Shadow Banking on Trial

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.