Only weeks after a court upheld the death sentence of Wu Ying, an once hugely wealthy businesswoman who was convicted of fundraising fraud -- another entrepreneur also from Zhejiang province has been detained, suspected of committing similar crime.
Following the detaining of education tycoon Dong Shunsheng on Feb. 3 in the east China city of Wenzhou, an accounting firm, which is a third party in the case, has said Dong's company owed a whopping 4.5 billion yuan (714 million U.S. dollars) to over 7,000 private creditors.
The company had declared itself earlier that it owed 2.2 billion yuan to about 1,000 lenders.
Liren Education Group announced on Oct. 31 that it would stop repaying creditors and start asset restructuring.
The group based in Wenzhou's Taishun owns 36 schools and companies across the country. Its subsidiaries operate in several sectors including education, real estate and mining.
"GOD OF CREDIBILITY"
Everyone in the county of Taishun viewed Dong as a star who had greatly contributed to promoting local education, said an official with the county's education bureau.
Dong started his business in 1998 by renting a ceramics factory and turning it into a private high school.
The business later developed into a chain that has schools from kindergartens to high schools, all under the name "Yu Cai" which in Chinese means "create talents."
Dong invested massively in his schools, making them among the best in Taishun. Yucai schools have over 4,700 students and 1,000 faculty members.
Much of the investment came from private financing.
Though the schools' tuition fees were much higher than public schools, the company still operated in red in the first few years.
To cover the loss, Dong came up with other ways to make more profit. In 2003, he established the Liren Group and began expanding into the mining and real estate sectors, which again required enormous investment.
But the man was never late in repaying his loans, and consequently locals referred to him as the "God of Credibility."
People with extra cash rushed to loan money to Dong. Those without even borrowed money from family and friends, expecting to make a fortune by investing in Liren.
PONZI SCHEME
Paying high interest for years led to Liren's downfall, said Zhang Hongguo, Taishun's Party chief.
Auditors said the company had paid 3 to 3.5 billion yuan in interest over the past 10 years.
When Liren's real businesses could no longer pay back creditors, the whole thing turned into a Ponzi scheme -- the company started offering even higher interest to draw more money and then use investors' money to pay returns to earlier creditors.
Tempted by high returns, people took bank loans and some even mortgaged their homes to invest in Liren.
Many of Liren's creditors are civil servants and some even work for the judicial departments, which may explain why those government organs turned a blind eye to the extensive fundraising earlier.
Some creditors had learned about Liren's alarming situation but still wanted to gamble.
"Many knew that the profit was not enough to pay off the interest with an annual interest rate up to 60 percent. But who would have thought that this ended so quickly," said a creditor who demanded anonymity.
CONCERNS
Dong's fall from grace again raises concerns over the risks in private financing, which is booming in China, especially in Zhejiang where private businesses have become a pillar of the prosperous local economy, accounting for about 70 percent of the region's gross domestic product and providing 90 percent of its jobs.
However, most private companies have problems getting bank loans as banks prefer state-owned enterprises.
"If Liren could get loans from banks, this never would have happened. Who wants to pay high interest," said Yan Hanrong, an entrepreneur in Taishun.
It has been over 30 years since China started implementing market economic policies, but the country's financial market is yet to be fully opened up.
Last year, a government survey found that more than half of the 2,835 investigated companies in Zhejiang have sought financial help from private creditors. About 9 percent of the companies said they use high-interest private loans "all the time."
During last year's credit crunch, about 100 managers or leaders of private companies in Wenzhou were reported to have disappeared, committed suicide or declared bankruptcy -- invalidating debts of about 10 billion yuan by the end of October.
Prof. Fu Yunsheng with the research institute of economics under the Zhejiang Academy of Social Sciences suggests that private financing should be brought under unified regulation, a standardized information disclosure system should be established for the capital sources, investment and operation of private fundraisers and that efforts should be made to improve risk awareness for individual investors. Enditem (Xinhua reporters Zhang Heping and Chen Yuming also contributed to the story)