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China sentences underground bank operator to death

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JOE McDONALD | May 20, 2013 04:45 AM EST | AP

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BEIJING — A businesswoman in southern China has been sentenced to death on charges of defrauding investors as the government tightens controls on informal financing that is widely used by entrepreneurs.

Lin Haiyan was convicted of "illegal fundraising" for collecting 640 million yuan ($100 million) from investors by promising high returns and low risk, according to a statement by the Intermediate People's Court in Wenzhou, a center for private sector business. It said the scheme collapsed in October 2011 and 428 million yuan could not be recovered.

The case highlighted potential abuses in largely unregulated informal lending that supports entrepreneurs who generate China's new jobs and wealth but often cannot get loans from the state-owned banking industry. The government is tightening controls after the global economic downturn sparked a wave of defaults and protests by lenders.

Another businesswoman from Wenzhou also was sentenced to death last year on illegal fundraising charges. That penalty was overturned following an outcry on the Internet and she was sentenced to prison.

Communist leaders have promised more bank lending for entrepreneurs and announced a pilot project in 2012 in Wenzhou to allow closely supervised private sector lending. But business leaders in Wenzhou say it is harder for entrepreneurs to get loans because worsening economic conditions have made banks and private sources reluctant to lend.

The underground credit market is estimated by China's central bank and private sector analysts at 2 trillion to 4 trillion yuan ($325 billion to $650 billion), or as much as 7 percent of total lending. In some areas, informal lending exceeds that of official banks.

Many households provide money for private lending in an effort to get a better return than the low deposit rates paid by Chinese banks, which effectively force depositors to subsidize low-interest loans to state industry.

Authorities have sentenced 1,449 people to prison terms of at least five years for involvement in underground lending since 2011, a police official, Du Jinfu, said last month.

Legal experts say loans between individuals are legal and the government has failed to make clear what lenders and borrowers are allowed to do.

"The distinction between illegal fundraising and private lending still remains unclear," said the Dui Hua Foundation, a San Francisco-based group that researches China's justice system, in a report in February.

Lin started raising money from friends, relatives and coworkers in 2007, according to a statement on the court website. It said Lin told investors the money was going into stock offerings and bank deposits but used it to speculate in stocks.

Even as losses mounted, Lin continued to raise money until the scheme collapsed, the court said.

The statement said the penalty still must be confirmed. All death sentences in China are automatically appealed to the country's highest court for review.

The court took the unusual step of issuing a second statement to support sentencing Lin to death after a Chinese blogger questioned the penalty in a comment that included the phrase "killing the witness."

"Lin Haiyan's actions constituted financial fraud that caused huge losses and seriously damaged the people and the state," said the statement, which was several times the length of the original announcement. It criticized the blogger for challenging the court's decision.

Protests erupted in 2011 and early 2012 in cities and towns throughout central China and along the southeast coast, areas with large concentrations of small private businesses, after the downturn in global trade triggered a wave of defaults. Schoolteachers, retirees and others who had lent to entrepreneurs demanded authorities get back their money.

Regulators also worried banks and state companies had gotten involved in underground lending, exposing the official financial system to unreported risks.

In the earlier case in Wenzhou, an entrepreneur, Wu Ying, was sentenced to death for improperly raising 770 million yuan ($120 million) from investors in 2005-07. Wu, who started with a hair salon and built a business empire, had earlier been praised by state media as a role model for female entrepreneurs.

China's supreme court overturned Wu's death sentence following an outcry on the Internet over the severity of the penalty. She was re-sentenced to death with a two-year reprieve, which usually is commuted to a long prison term.

A statement on the website of China's highest court, dated in 2011, says charges of "illegal fundraising" can be applied to an individual who receives more than 200,000 yuan ($32,000) of informal loans or causes losses to lenders of 100,000 yuan ($16,000). Enterprises can face charges if they receive 1 million yuan ($160,000) or causes losses of 2.5 million yuan ($400,000).

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AP researcher Flora Ji contributed.