The Bear's Lair

First arrested in 2007, the story of Wu Ying, a millionaire Chinese businesswoman sentenced to death for financial fraud has captivated the nation. The rejection of her final appeal earlier this year led to an outpouring of sympathy among the Chinese public and angered the business community and legal academics.

At first this may seem a little odd. After all, China is a country which recently lamented it own cold-hearted nature, after a child was repeatedly run-over by a car and left for dead while observers casually strolled by. So what has caused this outpouring of sympathy for a high-rolling businesswoman, whose personal assets in 2006 totalled over 3 billion Yuan?

Ultimately there is more to the case than meets the eye. Although there are serious allegations that Wu was running a glorified pyramid scheme, this is not a routine case of fraud and corruption within China’s business and government elite – of which there are many. Rather, as a special Caixin report reveals, it is a case which not only has huge implications for China’s huge array of private financing networks but also for China’s approach towards entrepreneurs and the private sector as a whole, amid criticisms that its state-owned behemoths are taking over the economy and stifling growth and innovation

Wu hailed from a rural family in Dongyang. She famously dropped out of school as a youngster, when she spotted an opportunity to sell lamb placentas for use in high-priced cosmetics. She became rich after investing in several real estate projects and later expanded into trade, financial services and hotels. She consolidated her interests, which included her own private financing network, under her Bense Group and in 2006 was named China’s sixth richest woman.

Private lending networks play a key role the Chinese economy. They provide crucial funding for individuals and business, starved of credit from government-owned banks. They also operate in a high-risk, high-reward environment. When creditors can no longer pay back their loans, whole networks become threatened. This became evident in Wenzhou earlier this year, when a spate of businessmen disappeared as their debts fell due. The Chinese government, worried about the impact on the economy, stepped in to loosen financing conditions in official channels.

One of the reasons for the surge in private lending in recent years was the government-dictated tightening of credit among China’s banks. While this tightening was advised by many economists – given China’s large monetary stimulus in 2008- the result was that state-owned companies hovered up all of the remaining credit while individuals and the private sector were left to fend for themselves. This led to a flourishing private lending system, which today provides trillions of lending to individuals and companies across the country.

As Caixin makes clear, “private lending”, as an expression, does not exist in China’s legal system. Nor however is it illegal, unless it can be proven that lending was “harmful to society”. It was this very charge that led Wu’s death sentence.

As Caixin reports, Wu’s alleged crime was to lure 11 individual investors to contribute 770 million yuan to an investment fund. According to the government, these funds were then diverted towards paying off creditors of Wu’s Bense Group as well as funding her own extravagant lifestyle. It is further alleged that Wu illegally tapped up to 14 million Yuan in public loans which she then re-lent at interest rates of up to 80%. Originally charged with fund-raising fraud, which comes with a maximum sentence of 15 years, the charges were later elevated to financial fraud, a much more serious charge, which carries the death sentence.

Wu’s defense, including the prominent activist lawyer Zhang Sizhi, vehemently denied the charges and alleged that the 11 investors were family members who were perfectly aware of how the money was being handled and argued that all money borrowed by Wu was used to build up her business empire.

The trial, which lasted 5 months, ended with a guilty conviction, the death penalty and all of Wu’s property being confiscated. Wu appealed however, and when the case was referred to the local high court many supporters hoped that the judgement would be overturned. However on January 18 this year, the high court upheld the judgement and the execution order. The case has now gone before the Supreme Court of China for its final review.

Both scholars and bloggers have criticised the decision and many family and supporters allege that the trial amounted to little more than an asset grab. During the trial itself, and amid huge media scrutiny, Wu tabled detailed corruption charges against a dozen bank and government officials. The officials were later found guilty and are now in jail. Some observers believe that Wu’s death penalty is a response to this whistle blowing while other argue that the conviction is a government warning shot, meant to deter future money lending networks.

The sentence continues an ominous pattern in China where 10 people involved in private lending networks have been sentenced to death since 2004. While the conviction itself is not overly controversial, and Wu has accepted several of the charges, it is the severity of the punishment that has raised the most ire, especially considering the ubiquity of private lending in China. As Chen Jun, the vice-chairman of the Zhejiang Chamber of Commerce in Beijing summed up on his microblog, “If Wu Ying should die for what she has done, then you can set a machine gun anywhere in Zhejiang and go on rampaging. I can guarantee that every single one who gets shot would be a lender.” Ultimately the question about where the line is drawn between a successful business tycoon and an enemy of the people has become decidedly muddy.

The sentence also ties into an ongoing debate about the death penalty in China. Although China continues to execute thousands of people a year, according to Amnesty International, capital punishment is now the subject of much debate, particularly among legal scholars. Many Chinese scholars now advocate an abolishment, or at least a gradual phase out of capital punishment. Continuing in this vein, recent legal reforms removed several economic crimes from the death penalty list (but not financial fraud). In addition, all death penalty convictions must now go before the Supreme Court for a final review.

It is this review that may provide some hope for Wu. Amid an outpouring of public sympathy, the Supreme Court has promised to review the sentence “cautiously.” For the business community however, the sentence signals another nail in the coffin for entrepreneurs and the private sector. As Zhang Weiyang, former dean at Peiking University’s Guanghua School of Management lamented to Caixin, the country remains “300 years” away from a market economy.

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