A new month, another scandal involving a U.S.-listed Chinese company.
U.S. Securities and Exchange Commission is due on Thursday to start hearings on the risks of investing in Chinese companies listed on U.S. exchanges. It will have more material to discuss after the implosion of yet another such stock.
Nasdaq-listed and Wuhan-based Kingold Jewelry (KGJI) used 83 tons of gold bars as collateral to secure the equivalent of US$2.8 billion in loans from more than a dozen Chinese financial institutions. Or did it?
Those gold bars instead are copper with a nice coating of gold leaf, according to a cover story in China's pre-eminent business publication, Caixin. The banks and trusts allegedly made this nasty discovery after Kingold defaulted on debts in late 2019, causing one of its lenders, Dongguan Trust Co., to try to sell the gold.
Cu, not Au.
Kingold's chief financial officer, Bin Liu, works out of a Manhattan office on 8th Avenue. The company fashions 24 karat jewelry. Its purchasers may want to check the quality of their baubles. Copper is a lot less dense than gold, and their expensive purchases may be feeling a little light.
The company was founded by a well-connected former Chinese military man, Chairman Jia Zhihong. His Wuhan company's problems pre-date the coronavirus, but the cash crunch caused by the temporary collapse in customers cannot have helped Kingold's attempts to rebound.
After Dongguan Trust's surprise, Kingold's largest creditor, China Mingsheng Trust Co., ordered a court test on its collateral gold bar before Kingold's debts came due. The results, which came back May 22, said the bars sealed in its coffers are also copper alloy. Two other lenders reportedly ran tests and came to the same conclusions.
Shares in Kingold fell 57% after the Caixin cover story came out. Already a penny stock, the company now trades at 48 U.S. cents a share, giving it a tiny market capitalization of US$5.3 million. That market cap for a company that reported US$3.3 billion in total assets against US$2.4 billion in liabilities as of September 2019.
We're used to seeing Chinese fakes here in Hong Kong. Fake eggs, fake pork dumplings, a fake Goldman Sachs branch. Now fake gold?
However, this would not be the first time that fake gold has been detected. In China's biggest gold loan fraud, regulators in Shaanxi Province and neighboring Hunan found adulterated gold bars in the vaults of 19 lenders; those bars backed 19 billion yuan in loans. In one case, a lender found a black tungsten plate in the middle of the gold bars to add to their weight.
Kingold says it took out 20 billion yuan (US$2.8 billion) in loans against the gold so that it could support business operations, supplement cash holdings and expand its own gold reserves.
In 2018, Kingold beat out rivals to buy the state-owned auto parts maker Tri-Ring Group. The government of Hubei Province, which contains Wuhan, said the deal was a model example of "mixed-ownership reform," in which private enterprise takes stakes in state-owned enterprises.
Chairman denies fraud
The takeover is now subject to a series of corruption probes and disputes surrounding Tri-Ring. Kingold Chairman Jia, who served in the People's Liberation Army, has close ties to the local government.
At Kingold, Jia denies that his gold is a fraud. When Mingsheng Trust confronted him about the copper bars, "he flatly denied it and said it was because some of the gold the company acquired in early days had low purity," a Mingsheng executive told Caixin.
Caixin also contacted Jia, who again denied the bars were fake. "How could it be fake if insurance companies agreed to cover it?" he said before refusing to comment further. The state-owned insurer PICC Property and Casualty Co. and other insurers have covered the gold with 30 billion yuan (US$4.2 billion) in property insurance policies.
Mingsheng Trust, Dongguan Trust and another lender, Chang'An Trust, have sued Kingold and demanded PICC P&C to cover their losses. PICC has declined to comment on an ongoing court case.
But Caixin quotes a PICC source who said Kingold must initiate the claim on the policies because it is the insured party. It has not done so, the source said.
Dongguan Trust reported the case to the police on Feb. 27, the day after it got back its test results, according to Caixin. It also demanded 1.3 billion yuan in compensation from PICC's Hubei branch. Kingold had defaulted on 1.8 billion yuan in loans from Dongguan Trust, with another 1.6 billion yuan due in July.
The Hubei Province government has set up a task force to oversee the Kingold case and the public security department has launched an investigation. The Shanghai Gold Exchange, a self-regulatory body set up by the gold industry, kicked Kingold out from its membership on June 24, Caixin reports.
The 83 tons of gold that Kingold deposited at lenders would be equivalent to 19.8% of China's gold production in 2018 and around 4.3% of China's entire gold reserves.
Founder Jia started Kingold in 2002. Jia worked in the rear supply service of the People's Liberation Army in Guangzhou and Wuhan, according to company documents, and previously managed gold mines owned by the government. He remains the largest shareholder in the company, with a 25.5% stake as of April 2019.
Jia has a commanding presence, according to the Caixin report, "tall and strong," according to a finance industry source, "an imposing figure and speaks loudly. He is bold, reckless and eloquent, always making you feel he knows better than you."
But local financial institutions in Hubei and Wuhan avoided doing business with Kingold, Caixin reports. A source told the publication that locals suspected his gold was not real, melded with copper.
The company was originally listed over the counter on Nasdaq's "pink sheets" OTC Bulletin Board. But it switched to the Nasdaq Capital Market, which is intended for early-stage companies that need to raise capital, in 2010. Its share price fell below US$1 in 2018, at which point Nasdaq warned the company that it could be delisted if its stock remains below that minimum price.
In an SEC filing from 2018, Kingold said many of its loans were borrowed based on personal guarantees by Jia "because of his personal credit worthiness and his reputation and expertise in the China gold industry." Its ability to secure credit depends on the continued service of Jia as chairman and CEO, it stated.
The company first borrowed against its gold in 2013. It pledged one ton of gold to get 200 million yuan in loans from Chang'An Trust, and it repaid the two-year loan, which it used to fund a property project in Wuhan, on time.
The gold was a big factor in its successful acquisition of the car parts maker Tri-Ring. The Hubei Province government announced in 2016 that it would sell stakes to private investors in a bid to overhaul the government-controlled company. Kingold was picked as the investor in 2018 in a 7-billion-yuan deal. The backing was intended to take Tri-Ring into the world of hydrogen fuel cells.
Kingold and Jia may have been more attracted to Tri-Ring's land bank. The company holds land blocks in Wuhan and Shenzhen valued at almost 40 billion yuan that are industrial land with the potential for far more lucrative commercial development.
Rival bidders for Tri-Ring immediately questioned the transparency of the bidding and Kingold's qualifications, according to Caixin. The company had only 100 million yuan in net assets in 2016 and 2 billion yuan in 2017, raising eyebrows about how it could afford a 7 billion purchase. It paid 2.8 billion yuan shortly after the deal, then another 2.4 billion yuan using gold-backed money from Dongguan Trust.
Tri-Ring has now been taken over by Kingold. But corruption probes have swirled around the company since early 2019, with its former chairman forced to resign. Much of its assets have been frozen during the investigation, meaning Jia cannot access that money.