China is at the center of the discovery of what may be one of the biggest gold counterfeiting scandal in recent history. According to a report in Zero Hedge, not only does it involve China, but it emerges from Wuhan.

The 83 tons of purportedly pure gold stored in creditors’ coffers by Kingold as of June, backing the 16 billion yuan of loans, would be equivalent to 22 per cent of China’s annual gold production and 4.2 per cent of the state gold reserve as of 2019. In short, more than 4 per cent of China’s official gold reserves may be fake. And this assume that no other Chinese gold producers and jewelry makers are engaging in similar fraud, the report said.

In early June, Minsheng Trust, Dongguan Trust and a smaller creditor Chang’An Trust filed lawsuits against Kingold and demanded that PICC Property and Casualty Company (PICC P&C) cover their losses.

PICC P&C declined to comment to Caixin Media, a Chinese media group, on the matter but said the case is in judicial procedure. A source from PICC P&C told Caixin that the claim procedure should be initiated by Kingold as the insured party rather than financial institutions as beneficiaries. Kingold hasn’t made a claim, the Caixin source said.

In total, Kingold pledge tens of thousands of kilograms of gold to no less than 14 creditors amounting to just under 20 billion yuan.

As for the gold, several billion in gold bars never existed and yet resulted in a cascade of subsequent cash flow events allowing tens of billions in funds to be released, “benefiting” not only Kingold‘s founder Jia, but China’s broader economy.

Kingold is certainly not the only Chinese company engaging in such blatant fraud, and the consequences are clear: once Chinese creditors or insurance companies start testing the “collateral” they have received in exchange for tens of billions in loans and discover, to their “amazement”, that instead of gold they are proud owners of tungsten or copper, they have two choices: reveal the fraud, risking tremendous adverse consequences and/or prison time, or quietly buy up all the gold needed to literally fill the void from years of gold counterfeiting.

At the center of the fraud is Wuhan Kingold Jewelry Inc., a company which as the name implies was founded and operates out of Wuhan, and which says it is a “A Company with a Golden future.”

In retrospect, it probably meant “copper” future, because as a an expose by Caixin has found, more than a dozen Chinese financial institutions, mainly trust companies (i.e., shadow banks) loaned 20 billion yuan ($2.8 billion) over the past five years to Wuhan Kingold Jewelry with pure gold as collateral and insurance policies to cover any losses. There was just one problem: the “gold” turned out to be gold-plated copper.

Kingold — whose name was probably stolen from Kinross Gold, one of the world’s largest gold miners — is the largest privately owned gold processor in central China’s Hubei province. Its shares are listed on the Nasdaq stock exchange in New York . The company is led by Chairman Jia Zhihong, an intimidating ex-military man who is the controlling shareholder.

Well, apparently everything as at least some of 83 tons of gold bars used as loan collateral turned out to be nothing but gilded copper. That has left lenders holding the bag for the remaining 16 billion yuan of loans outstanding against the bogus bars. And as Caixin adds, the loans were covered by 30 billion yuan of property insurance policies issued by state insurer PICC Property and Casualty and various other smaller insurers, the report in Zero Hedge said.

The fake gold came to light in February when Dongguan Trust (one of those infamous Chinese shadow banks) set out to liquidate Kingold collateral to cover defaulted debts. As the report continues, in late 2019 Kingold failed to repay investors in several trust products. To its shock, Dongguan Trust said it discovered that the gleaming gold bars were actually gilded copper alloy.

The news sent shock waves through Kingold’s creditors. China Minsheng Trust — another shadow banking company and one of Kingold’s largest creditors — obtained a court order to test collateral before Kingold’s debts came due. On May 22, the test result returned saying the bars sealed in Minsheng Trust’s coffers are also copper alloy.

And with authorities investigating how this happened, Kingold chief Jia flatly denies that anything is wrong with the collateral his company put up.

As Caxin notes, the Kingold counterfeiting case echoes China’s largest gold-loan fraud case, unfolding since 2016 in the northwest Shaanxi province and neighboring Hunan, where regulators found adulterated gold bars in 19 lenders’ coffers backing 19 billion yuan of loans, or about USD 2.5 billion. In that case, a lender seeking to melt gold collateral found black tungsten plate in the middle of the bars.

In total, Kingold pledge tens of thousands of kilograms of gold to no less than 14 creditors amounting to just under 20 billion yuan, the Zero Hedge report said.