Liquidation begins for firm embroiled in major lending scams

WENZHOU - Authorities in east China have started to liquidate a bankrupt private firm at the center of a series of lending scams that have heightened public concerns over reforms in the financial sector.

The liquidation process for Liren Group has begun, officials with Taishun County, Zhejiang province, said Wednesday. An initial investigation showed the group owed between 4.5 billion to 5 billion yuan ($713.4 million to $792.7 million) to 7,000 individual creditors.

As a common practice, Liren borrowed money from private investors with a promise to pay high interest. But as it failed to secure enough loans from big banks to repay the debts, the group declared itself insolvent last October. Many of the creditors are local officials and businesspeople looking to beat inflation.

Liren previously operated in the education, real estate and mining industries. The group's head Dong Shunsheng was detained on Feb 3 for alleged fundraising fraud.

The group's assets subject to liquidation include real estate, properties, stocks, mining rights and assets freezed by police, said county government officials in charge of overseeing the liquidation process.

Authorities also warned local officials who are Liren's creditors not to abuse their power to grab the liquidated assets in advance or to put themselves as prioritized creditors to be repaid first.

"Officials who violate the liquidation rules will be punished by the Party and even judicial authorities," the county government said in a circular.

Liren's downfall has raised concerns about private financing risks, an issue that has become particularly relevant in Zhejiang, where private businesses have become a pillar of the prosperous local economy.

More than half of 2,835 companies surveyed in Zhejiang last year have sought financial help from private creditors, as banks are typically unwilling to lend to smaller companies.

During last year's credit crunch, about 100 managers or heads of private companies in Wenzhou, which governs Taishun, were reported to have disappeared, committed suicide or declared bankruptcy -- invalidating debts worth about 10 billion yuan.

In late March, China's State Council announced plans to set up a pilot zone in Wenzhou to regulate private financing activities in order to "effectively sort out Wenzhou's problems and make financing serve the real economy," a central government statement said.

It said the reform is not only important for the healthy development of Wenzhou, but also of great pioneering significance for financial reform and economic development throughout the nation.