Qbao craze unquenched
Fast money mania points to bubble in China’s financial sector: expert
China is well known around the world for its money-making and purchasing powers. But now, the way people accumulate wealth has become risky, as the number of illegal fundraising cases is on the rise. The most recent and infamous one is the case of Qbao, accused of illegal fundraising by the Nanjing police. Despite this, many investors are maintaining an irrational passion for it, a sign of their addiction to its high-risk, high-interest investment model. Experts are now cautioning that the country’s legal system needs to catch up and they are pointing to a looming financial tilt.
In recent years, the world has been amazed by Chinese people’s ability to make as well as spend money, but now, big risks are quickly emerging in relation to the accumulation and usage of private Chinese capital, as the rapid growth of Ponzi schemes and illegal fundraising platforms in the country have stolen the spotlight.
A case of such kind that came into the limelight recently was the case of qbao.com (Qbao), an internet company once hotly sought after by investors and the media. However, its bubble burst after the company’s CEO Zhang Xiaolei on December 26 turned himself into the Nanjing police in East China’s Jiangsu Province.
According to initial investigations by the Nanjing police, Qbao used some rather handsome returns as bait to amass capital from the public, considered illegal fundraising in China. Investors who poured money into the website are “spread all over China,” and so far, Qbao owes investors up to 30 billion yuan ($4.69 billion), the Xinhua News Agency reported on Saturday.
The Xinhua report noted that Qbao investors need to pay certain amounts of “cash deposits” before they are allowed to participate in its investment activities. Xinhua cited Zhang Xiaolei and another senior executive of Qbao as saying that the company mainly used new investors’ cash deposits to pay for old users’ principals (original inputs) and interests.
“This [cash deposit system] is the main method used for how the company solves its capital problems,” Zhang was quoted by Xinhua as saying.
Lu Zhenwang, founder of Shanghai Wanqing Commerce Consulting, pointed out that illegal fundraising crimes show typical company characteristics of opaqueness and fraudulence.
“Qbao collects users’ deposits with high returns as bait, and then pays old users’ capital and yields using money from new users. This operation model has the features of a Ponzi scam,” he noted, adding that the model itself produces no returns.
To prevent the platform from collapsing, Qbao has had to attract more and more users. As of the time Zhang turned himself into the Nanjing police on December 26, the number of registered Qbao users had surpassed 200 million, with daily active users standing at 10 million, according to media reports.
Quick money obsession
The existence and rapid expansion of companies like Qbao reflects a strong thirst among Chinese private investors for fast money, but such desire has not ended with the collapse of such platforms.
Mu Qing, a Nanjing-based Qbao investor, was one of the many investors who chased the dream of making his wealth through the platform.
But even after Zhang turned himself into the police, Mu still refused to believe that Qbao had been involved in illegal fundraising.
“Qbao has real industries to support itself. Its business is not castles in the air,” he told the Global Times on Monday.
He is also clinging to the hope of resuming his investment in Qbao, though such hopes are turning slimmer as time goes by.
“I don’t even want my money back. I just want Zhang Xiaolei to be released and Qbao to resume business,” he said.
Asked why he believes in Zhang so much, Mu, who has met Zhang a few times, listed a number of “qualities” that Zhang possesses, such as being amicable and smiley.
He also said that Zhang had been “honest” with investors and had warned them of the potential risks of investing in Qbao.
But most importantly, Mu said that he admired Zhang’s foresight. “He can sense business opportunities in areas that normal people can’t. I think even if investment in Qbao becomes banned, he can still lead us to make big money in some other industries, of course, if only he is not in prison.”
Mu also said that he would not abandon the high-risk, high-return investment model. After Qbao is investigated, he said he would eye a new investment platform that has an even higher return rate than Qbao.
“I need that fast money to pay my mortgage,” he said.
According to a report by caixin.com released on January 15, Qbao offers an annual interest rate of 80 percent at most. But Mu said that Qbao’s annualized return has been gradually reducing and that on average he gets an annual return of no more than 30 percent from the platform.
In comparison, most domestic banks offer an interest rate of 1.55 percent for half-year deposits and 2.75 percent for three-year deposits.
Rampant Ponzi schemes
Companies like Qbao – illegal fundraising platforms that have attracted a large sum of investment capital – are on the rise in China. After Qbao’s investigation, several other similar platforms such as wabao.com and xiaoshengyoufu.com also went bankrupt.
In 2016, a total of 5,197 illegal fundraising cases occurred in China, worth a combined 251 billion yuan, according to media reports.
Liu Dingding, an independent tech analyst, said that the rise of such platforms shows that bubbles are accumulating in China’s financial sector.
“In the past, such risks also existed, but the rapid development of the internet has maximized them,” Liu told the Global Times on Tuesday, adding that with the “coat” of the internet, it’s hard for the government to intervene at an early stage.
Lu said that behind people’s craze for online wealth management is China’s lack of investment channels.
“On one hand, people are reluctant to deposit their money at the bank with low interest rates at around 2 percent. On the other hand, they harbor an optimistic mind-set which allows them to believe they can safely retreat from the scam before its collapse with high yields,” he said.
Disguising themselves with a new business model and financial innovation, many criminals begin raising funds illegally through certain capital operations, including wealth management, futures and virtual currencies, Pang Renping, deputy director of the Legal Affairs Department of the People’s Bank of China, the country’s central bank, was quoted by Xinhua as saying in a report published in April 2017.
“It is difficult for investors to distinguish risks, and as a result, they may end up getting firmly stuck in a trap,” Lu said, adding that people don’t see the reality of these online platforms until their promised yields are not cashed.
Govt intervention
China has been stepping up its efforts in strengthening the supervision of public fund deposits. On August 24, 2017, the State Council, the country’s cabinet, requested public opinion on a draft bill addressing illegal fundraising.
According to the draft law, local authorities should establish a supervision mechanism to target illegal fundraising and provide assistance in investigations, for example, in cases related to fundraising via online financial platforms, asset management and other money management products.
The Ministry of Public Security has also vowed to further quash financial crimes, with a focus on illegal fundraising and internet finance, according to a statement published on the ministry’s website in November 2017.
“It’s time for the government to fasten the net,” Liu said, adding that otherwise, the “money-playing” game of “using money to get money” would cause the country’s financial order to tilt.