Chinese anger grows as ‘get rich quick’ investment schemes go bust

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When Cao downloaded the Qiangqiantong app, he certainly never expected it could ruin his life.

The 61-year-old grandfather retired from his factory job last year, and bills were piling up: rent for an apartment near his son, money for his family. It was becoming harder and harder for him to stretch his pension of about $300 a month.

So Cao invested the equivalent of $11,600 — his entire savings — with Qiangqiantong. And why not? The app claimed to offer amazing investment opportunities, with high returns and little risk.

Instead, this June, the company shut down.

Now Cao does not know if he will ever see his money again. He has gone to the police, but they say they cannot help. He has thought about getting another job, though he doubts anyone will hire him. He has not told his wife or children and asked to use only his first name so they do not find out.

“I don’t know what to do,” he said. “I can only wait.”cc disabled

Beijing is struggling with public anger over a lending crisis after a wave of online, peer-to-peer lending platforms went bust since June. 

Cao is among the many Chinese left battered and baffled by the recent collapse of China’s peer-to-peer lending industry, or P2P, a collection of once-unregulated investment houses critics now say were little more than pyramid schemes allowed to flourish for years in China’s overheated economy.

Over the past decade, millions of investors sunk their cash into thousands of companies like Qiangqiantong (which roughly translates to Get Rich Quick) and others with names like Money Pig and Qianbao, or Wallet.

The promises were the same: steady growth, big dividends and a chance for investors to put financial worries behind. Investors lapped it up. It was once among the largest small-investor cash flood in the world, with as much as $200 billion riding on P2P dreams.

Some state-owned banks even helped facilitate payments, and government officials spoke of some of the P2P companies in glowing terms.

But since June, hundreds of upstart investment companies have gone bust — many falling victim to credit runs, risky bets or the same Ponzi-scheme unraveling that brought down fraudsters such as Bernie Madoff.

The rise and fall of the investment mania in China also offers a window into the wild and risky sides of China’s economic boom. The money flows — creating a middle class in a generation — but regulations to protect investors and squeeze out swindlers have lagged far behind.

“There is a human and social cost to the bad behavior” of lenders, said Jeffrey Towson, professor of investment at Peking University’s Guanghua School of Management. “Managing this as the system is cleaned up will be the biggest challenge for the government.”

In the past few weeks, protests by those defrauded in the failed investment schemes have vented their anger at the government, calling for more accountability and bailouts.

It is unclear whether the Chinese leaders will step in to help people recoup their money.

Authorities did little to curb the free-for-all investment atmosphere as it grew.

Online P2P sites began to spread across China about a decade ago. Initially, the companies wooed potential donors with flashy advertising campaigns on social media sites, in movie theaters and even on apartment building elevators.

P2P appealed for other reasons, too. State-run banks offer few investment opportunities beyond a savings account with painfully low returns, explained Kellee S. Tsai, who studies China’s economy at the Hong Kong University of Science and Technology.

So millions of students, farmers, pensioners and factory workers turned to P2P. By 2015, an estimated 3,500 businesses were taking investor cash.

Then cracks began to show.

In 2015, nearly 1 million investors lost a collective $9 billion in a Ponzi scheme conducted by P2P lender Ezubao. Afterward, the government slowly began to roll out some new regulations. But they moved slowly, delaying implementation of any rules until June 30 this year.

Ahead of that deadline, some P2P companies shut down without warning rather than try to comply. In response, investors began pulling their money out en masse, leading to a run on funds and the collapse of several key players.

Just in the past three months, more than 240 P2P lenders have been shuttered, according to wdzj.com, which collects information on the industry, leaving thousands of investors in a lurch.

The Chinese government has become a choice target for the anger.

Earlier this month, swindled investors from around the country planned a protest outside the China Banking and Insurance Regulatory Commission in Beijing to demand repayment.

The demonstration was pre-emptively crippled by security officials, who rounded up potential activists at their homes and workplaces. Some who arrived at the protest site were promptly forced onto buses and carted to a detention center outside the city.

On Monday, China’s banking regulator publicly called for urgent measures to clean up the fiscal mess left by the failing peer-to-peer industry. It also laid out a 10-point plan to address the financial risks inherent in the industry.

The new regulations require local governments to set up “communications windows” where investors can complain. New P2P companies and platforms are strictly banned. Those who do not repay their loans will be blacklisted under China’s social credit rating system.

Tang Ning, founder and chief executive officer of CreditEase, a majority owner of the investment firm Yirendai, expressed worry the crackdowns will take down the entire industry, rather than only the bad actors.

If the rules are too broad, he said, it could be “winter for the industry,” he told the Reuters news agency.

“That’s not only hurting the financial system but also the real economy,” he added.

It is also unclear what the new rules might mean for the investors themselves.

One woman, a 33-year-old from Gansu province in north-central China, invested nearly $100,000 in five platforms over the past six months on the advice of friends. Three of the platforms have since gone bust, and she has not been able to get her money back.

So she and several other victims connected online via WeChat. Together, they pooled about $7,000, enough to hire a lawyer to try to seek their money. They also began petitioning different government offices, though they have not heard much in return.

Zhang, a Beijing lawyer who asked to use only his first name to protect himself and his clients, said a lawsuit is the best tool many investors have.

Right now, he has been working with a couple of clients who lost money in P2P busts. In one case, he was able to help his client get about $1 million back, but that kind of success remains extremely rare.

The Gansu woman, who asked to remain anonymous because her husband does not know she lost her savings to P2P, knows the odds of success are low. But it is the best she can do, she says.

“The government,” she said, “has completely failed to act.”

By Amanda Erickson
Yang Lui contributed to this report.
Washington Post

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