China Gold Scandal: Former Chairman Investigated Amid Collapse of Gold Custody Services

In a shocking development, the former chairman of China Gold Group Corporation, Lu Jin, is under investigation by Chinese authorities. Lu, who was dismissed from his role in August 2023, had resigned from his position at China National Gold Corporation (CNGC) earlier that month for "personal reasons." His removal came amid growing concerns over financial irregularities and alleged mismanagement, particularly in connection with the collapse of multiple gold custody services under China Gold's name.

This investigation follows a string of controversies involving China Gold Group’s franchisees and their gold custody services, which have left many consumers in financial ruin. In March 2023, one of the company’s Beijing stores abruptly closed, leaving approximately 70 customers without access to 70 kilograms of gold—worth millions of yuan—that had been stored in the outlet. The store’s sudden disappearance ignited widespread outrage, with many consumers accusing China Gold of shirking responsibility, despite the gold being registered under the company’s name.

The investigation into Lu Jin's role in this fiasco has cast a spotlight on the broader governance and oversight issues within China's state-owned enterprises, especially those operating in the gold and precious metals sector.

This is not an isolated incident. We recently reported on another major gold custody collapse involving Lai Rui Jin Yu, titled "Gold Custody Scandal Explodes in China: Lai Rui Jin Yu's High-Yield Scheme Unravels, Leaving Investors in Shock." In that case, the company lured investors with promises of high returns on gold investments, only to abruptly close and leave customers scrambling to recover their lost assets. These events highlight a troubling pattern in China's gold custody market, where regulatory oversight and corporate accountability are increasingly under scrutiny.

Key Takeaways

China Gold Scandal: Former China Gold Chairman Lu Jin is under investigation, following multiple reports of collapsed gold custody services tied to China Gold Group franchisees.
Franchisee Scams: Several China Gold-affiliated stores, including major outlets in Beijing and Shandong, closed unexpectedly in 2023, leaving customers without access to their gold.
Lack of Accountability: Although China Gold claimed these stores were independently operated franchisees, customers allege that the company did not adequately supervise or regulate these franchisees, leading to significant financial losses.
Government Involvement: The Chinese government’s involvement in investigating Lu Jin and the company's role highlights the severity of the issue and its impact on public trust in state-owned enterprises.

Deep Analysis

The collapse of China Gold's gold custody services reflects deeper structural and governance problems within China’s state-owned enterprises (SOEs). China Gold, like many other SOEs, operates through a large network of franchisees—over 90% of its stores are not directly operated by the company. This franchise model has made it difficult for customers to discern between legitimate company operations and rogue franchisees operating under the same brand.

The gold custody business, where customers store gold at franchise locations with the promise of interest or other financial returns, has been a major point of contention. In Beijing, several China Gold stores offered a service called "worry-free gold reservations," wherein customers could deposit their gold in exchange for future returns. When these stores suddenly closed, customers were left without access to millions of yuan worth of gold. Many consumers assumed that their gold was secured by the reputation of China Gold, a state-owned enterprise, only to find out later that the stores were not under the company’s direct control.

This controversy raises questions about the regulatory framework surrounding franchise operations and gold custody businesses. The Chinese legal system restricts gold custody services to licensed financial institutions, but franchisees have managed to operate these services without oversight, exploiting legal loopholes. As a result, both franchise owners and China Gold could be held accountable for negligence and failure to protect consumers.

The investigation into Lu Jin, while centered on his leadership of China Gold Group, also touches on broader issues of corporate governance within China’s SOEs. Allegations of mismanagement and corruption have plagued the sector for years, and this scandal could serve as a case study for the need for stricter oversight of franchise models and greater transparency in financial dealings within SOEs.

Did You Know?

China Gold Group Corporation is the only central state-owned enterprise (SOE) in China’s gold industry. It was founded in 2003, inheriting operations from the former National Gold Bureau and China National Gold Corporation.
Despite its central role in China’s gold industry, China Gold only directly operates 105 stores. More than 90% of its 3,642 stores are independently run by franchisees.
In addition to China Gold, Shandong Gold, another prominent state-owned enterprise, also experienced similar gold custody service failures in 2023, with six of its Beijing stores closing abruptly, resulting in the disappearance of billions of yuan worth of gold.
The gold custody service failures are not new. In 2021, China Gold's Hangzhou flagship store also collapsed, leaving over 1,000 customers unable to retrieve over a billion yuan in gold.

This scandal and the resulting investigation underscore the need for tighter regulation and clearer accountability measures within China's state-owned enterprises, particularly those dealing with precious metals. The financial security of consumers depends on better governance and oversight, especially in sectors where trust is paramount.

China Gold Scandal: Former Chairman Investigated Amid Collapse of Gold Custody Services