Jan 10, 2020 07:58 PM

In Depth: How Fake SOEs Conned Investors out of $575 Million

Using misleading names and opaque shareholding structures, private companies are passing themselves off as state-backed to fool investors.
Using misleading names and opaque shareholding structures, private companies are passing themselves off as state-backed to fool investors.

Investors have plowed billions of yuan into investment fund products guaranteed by firms with names that misleadingly make them sound as if they’re linked to major state-owned enterprises (SOEs), Caixin has learned.

Now, the products backed by these “fake SOEs” are failing to pay up, some of the investors told Caixin, with the overdue balance amounting to nearly 4 billion yuan ($575 million).

These privately owned companies, and others like them, have posed as SOEs by including Chinese characters in their names often linked to government-owned companies, such as “Zhong,” “Guo” or “Hua,” which can all mean “China.” Due to the notion that SOEs will always be bailed out by the government, pretending to be one helps companies win public trust and thereby raise funds more easily.

Unreal railway

The privately offered fund products involved in the scandal include several issued by two private investment firms, Shanghai Zhou Shi Asset Management Co. Ltd. and Shanghai TanShi Capital Management Co. Ltd., which are guaranteed by China Railway Supply Chain Group (link in Chinese) and Zhongtie Zhongji Construction Group, according to product documents provided to Caixin by the investors. Both the guarantors’ Chinese names start with “Zhongtie,” which is a common abbreviation of the full name of the country’s gigantic state-owned railway operator, China State Railway Group Co. Ltd. The documents claim that both guarantors are SOEs.

However, public business registration records show that China Railway Supply Chain is not connected to China State Railway, but is instead controlled through layers of shareholding by a little known public institution — specifically a rural education development body — which organizes out-of-school education in rural areas. Records show that Zhongtie Zhongji Construction Group is ultimately controlled by an individual — Xu Qingxiao — who indirectly holds a total 52.6% stake in the company.

These “fake SOEs” and others like them are rarely seen on public markets, but are active in private investment. Some fake SOE-backed funds’ managers, investment targets and guarantors are interlinked, leading to concerns surrounding common financial scams, where scammers raise funds for their own use instead of the investments outlined in prospectuses. Cen Peng, a businessman that has years of experience in private equity investment, sits at the heart of such a web.

Cen is legal representative of Shanghai Zhou Shi, public records show. The funds raised by some of its products were invested in Zhongtie Logistics Group Co. Ltd., another privately held company of which Cen served as a director of the board until November. Cen also serves as legal representative at Shanghai TanShi, and general manager at China Railway Supply Chain, which provided guarantee for some of Shanghai TanShi’s products.

Both Shanghai Zhou Shi (link in Chinese) and Shanghai TanShi (link in Chinese) received warning letters in November from the Shanghai branch of the China Securities Regulatory Commission, and have been labeled as having an “abnormal operation” status by the Asset Management Association of China, a self-regulatory body for fund management companies.

Faking an SOE

Fake SOEs often confuse investors with an opaque ownership structure that conceals their actual controllers, analysts at Industrial Securities Co. Ltd. said in a research report (link in Chinese) in December 2018.

Sometimes these companies have shares held by an institution with a connection to an SOE that helps give the false impression that they are state-owned, Zhou Guannan, an analyst of Huachuang Securities Co. Ltd., said in a note.

According to registration rules on the Chinese mainland, companies that are not controlled by overseas investors can’t put Chinese characters “Zhong Guo” or “Zhong Hua,” which means China, in their names if they’re not approved by the State Council. In practice, some companies use only one of these key characters — be it “Zhong,” “Guo” or “Hua” — in their names, and choose names similar to those often used to refer to SOEs in a hope of achieving a better reputation or raising funds more easily, Zhou said.

In Hong Kong, the rules are different. Companies can easily put “Zhong Guo,” “Zhong Hua,” or any of the characters in their names. Among those who did so is CRG Logistics Investment Holdings Group Ltd., which wholly owns Shanghai TanShi, whose Chinese name also starts with “Zhongtie.”

Contact reporter Timmy Shen (, Twitter: @timmyhmshen) and editor Joshua Dummer (

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