Chinese investors being duped by online financial schemes
THE company’s name appeared in ads for the local marathon. Its logo was emblazoned on the jerseys of two professional soccer teams in Spain. Its founder had been lauded by the government’s official television channel.
To investors, it seemed like a safe bet. For years, it was. Then some of them tried to take their money out.
Now as much as $5 billion is missing, the head of the company is in jail and in one city, angry investors took to the streets.
Online investing in China isn’t for the vulnerable or the naive – but frequently, that’s exactly who it draws. The flameout last week of the popular online investment portal Qianbao is the latest in a string of collapses that has devastated small investors and prompted Beijing to take steps to tamp down on potential unrest.
The pitches frequently appeal to aspiring small investors like Walter Xu, a recent university graduate who was drawn to Qianbao by promises of skyhigh returns. Qianbao looked like a real business: Its portal sold cellphones and appliances – with discounts for members – as well as big returns for those who gave it money. In exchange for depositing money, watching ads and writing reviews, it offered returns of as much as 50 percent. In all, Xu invested $32,000 of his savings in Qianbao.
On December 26, when Qianbao’s founder turned himself over to author- ities, Xu turned to fellow investors on WeChat, China’s popular social messaging platform, to commiserate. “I talked until 3 in the morning,” he said. “I was shocked.”
Now, he said, he must put the episode behind him. “I need to work and start over,” he said.
Some investors who lost their savings in Qianbao protested last week in Nanjing, where the online investment platform had been based. Police acted swiftly, detaining the organisers of the demonstration and giving others warnings, according to a notice by Nanjing police. Government censors appeared to have taken down some discussions about Qianbao on social media and removed some news articles about it.
China has been rife with investment frauds in the decades since its economic reopening led to a boom. But online versions have the potential to reach more people in a country with more than 700 million internet users, many of whom now conduct most of their financial transactions on smartphones.
Investors in online products are often drawn by promises of high rates of return and the idea that the investments are safer than China’s stock market, which has long had a reputation for casino-like uncertainty. But they are often unsophisticated investors who are unaware of the risks, experts warn.
“If you are earning 10 or 11 percent on an investment product, you should know that you are taking on a high amount of risk,” said Michael Pettis, professor of finance at the Guanghua School of Management at Peking University and a senior associate of the Carnegie Endowment for International Peace.
“It’s not clear to me that investors understand that they are taking on this risk,” he added.
In a country where everything is tightly managed by the government, many investors believe that the government will take steps to make sure investors get their money if something goes wrong.
“The big difference between China and US consumer finance is the Chinese have implicit faith that someone in government will step in if any products or companies default,” said Andrew Collier, founder of research firm Orient Capital Research.
Qianbao – whose name translates to money treasure – possessed a veneer of credibility. Local officials attended its events. It sponsored the Nanjing Marathon and two Spanish soccer teams, Real Sociedad and Rayo Vallecano. Qianbao’s founder, Zhang Xiaolei, was even profiled by China Central Television, the government’s official broadcaster, the ultimate sign of success.
Over its six years, Qianbao collected money from as many as 200 million users who deposited their money into the website, raising $5 billion in deposits, according to the state-run news agency Xinhua. In order to earn interest on their deposits, investors were told they had to participate in promotional activities like watching ads, posting information about various products on social media and filling out questionnaires. The website also provided a platform for retailers for their products, which members could buy.
Then its founder turned himself in, with state-run media saying he took the step after the company drew attention from officials. Zhang and his company are being investigated by authorities in Nanjing.
“I have taken in money from new investors to pay old investors,” Zhang said in a handwritten statement published by Nanjing police.
“I cannot pay back the principal and interest and I am very sorry about the loss to investors,” he added. An email to the company’s public relations officials seeking comment bounced back unanswered.