Caught On Tape: Chinese Investors Find Out They Got Fleeced By A $7 Billion Ponzi Scheme

Tyler Durden's picture

When it comes to all things China, the old adage “go big or go home” certainly applies.

The country’s monumental expansion in the wake of the financial crisis was financed by borrowing on a massive scale, as the country’s debt burden rose from “just” $7 trillion in 2007 to more than $28 trillion today. That’s big.

Last year, at the peak of the country’s equity bubble, margin financing outstanding amounted to 18% of the SHCOMP’s free float market cap. Also big.

When the PBoC moved to devalue the yuan last August, Beijing ended up triggering an enormous amount of volatility that reverberated through global markets and culminated with an 8% one-day decline for the SHCOMP on August 24 and a 1,000 point drop in the Dow the same day. Again, big.

On Monday we got the latest “big” news out of China when Beijing announced it had arrested 21 people over a $7.6 billion P2P fraud Ezubao. 900,000 people were defrauded, making the fiasco the biggest ponzi scheme in history by number of victims.

Ezubao’s model was simple: they pitched the “business” as a P2P lending company through which investors could fund a variety of projects. The problem: 95% of the projects didn’t exist. Ezubao just made them up and used the new money to repay existing investors who were promised annual returns of between 9% and 15%.

(the locked door at Ezubao's office in Hangzhou)

Zhang Min, the former president of Yucheng Group, Ezubao’s parent, calls the company “a complete Ponzi scheme.”

Yes, a “complete ponzi scheme”, and one that was quite lucrative for Yucheng chairman Ding Ning who allegedly bought extravagant gifts for friends including a CNY12 million pink diamond ring and a CNY50 million green emerald.

The company's assets have been frozen since December. Investments were pitched to unsuspecting Chinese as "high yield, low risk." 

"According to more than one suspect confessed, Ding Ning and several closely related group of female executives, their private life extremely extravagant, spendthrift to suck money," a highly amusing Google translation of the original Xinhua story reads. 

Ding Ning paid his brother CNY100 million per month, Xinhua says.

"Police used two excavators and dug for 20 hours to unearth 80 bags of evidence that Ezubo executives had buried six meters underground on the outskirts of Hefei, a city in the eastern province of Anhui," Bloomberg adds.

On thing we've discussed at length over the past year is the extent to which China is teetering on the verge of social unrest. Between the stock market meltdown, the cratering economy (which will invariably lead to massive job losses) Chinese policymakers are going to have their hands full explaining what went wrong to the country's 1.4 billion people (see here for more).

Needless to say, the revelation that 900,000 people were defrauded in a ponzi scheme run through China's largely unregulated P2P space won't help matters. "Cases of illegal fund-raising related to peer-to-peer lending have grown quickly in the past two years, according to the local authorities, and officials pledged in December to tighten regulation of the industry," The New York Times writes. "Because of the enormous sums involved and the large investor base, the collapse of a major online-financing platform could raise concerns over confidence in the security of such investments."

Here's a clip of Ezubao's defrauded "clients" protesting late last month. Expect more of this to come. And not just as it relates to ponzi schemes.

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Bull Bear Nice Pair's picture

It's a learning process.

EscapeKey's picture

your money combined with their experience is now your experience and their money

Durrmockracy's picture

Teh sky is high!

Teh clouds are low!

But my Ponzi techniques are hot!!

Divided States of America's picture

I dont pity fools who are driven by greed and stupidity.

 

Kefeer's picture

You have no pity then, even for yourself.

Mr.Sono's picture

Suckers deserve it.

NuckingFuts's picture

I was living in Albania in 97 when their Ponzi schemes failed and it was fucked up. I ended up getting evacuated from the embassy compound while under fire, tanks in the streets, complete anarchy. You could trade a loaf of bread for an AK. Kids dying playing with grenades. Marines picked me up in helicopters, it was like the fall of Saigon.

When folks have no ideas about free markets, and the government is in collusion with the ponzi then it's hard to blame the ignorant investors who just want a to make a return.

This has a long way to go.

Uchtdorf's picture

For realz?

I'd like to hear more. Probably plenty of experiences there will be applicable here.

NuckingFuts's picture

Yes for realz. I was 24-25 and was in the Peace Corps there (yes everyone go ahead and flame me for being tin the peace corps... Whatever.)

All over Eastern Europe there were similar situations in the mid-90's. Albania just happened to be the most violent. I'm sure you could google "Albanian economic collapse 1997" and find plenty of info.

El Oregonian's picture

"Ding Ning paid his brother"...

Ding aling???

Pinto Currency's picture

 

 

As these frauds and the stock market blows up, more and more Chinese are going to be motivated to buy gold.

The real thing.

No wonder the Shanghai Gold Exchange stopped reporting withdrawals from vault on Jan 1.

God's picture

What will happen when the USA sheep find out about the $999 Trillion ponzi they they are immersed in?

Line up for the final sheering.

Richard Chesler's picture

That's still less than the trillions Obongo added to the federal debt.

http://www.washingtontimes.com/news/2016/feb/1/federal-debt-hits-19-tril...

 

old naughty's picture

900K got fleeced by a 7B ponzi...

the scheme is much bigger, no? And the numbers moar...

ding a ling ga ling

Placerville's picture

It was a SHAM A LAMA DING DONG.

AGuy's picture

"900K got fleeced by a 7B ponzi...the scheme is much bigger, no? And the numbers moar..."

 

yes, more like 1.5B will get fleeced. China, the entire nation is a one giant ponzi scheme.

 

 

tenpanhandle's picture

Some folks got dinged.

 

 

So much for the Ding Dynasty.

Dame Ednas Possum's picture

He has a wife you know?

Bling Bling Minge

Kiwi Pete's picture

When I was a little biddy boy
My grandma bought me a cute little toy
Two Silver bells on a string
She told me it was my ding-a-ling-a-ling

My Ding-A-Ling My Ding-A-Ling won't you play with My Ding-A-Ling
My Ding-A-Ling My Ding-A-Ling won't you play with My Ding-A-Ling

When I was little boy In Grammar school
Always went by the very best rule
But Evertime the bell would ring
You'd catch me playing with my ding-a-ling

Once while climbing the garden wall,
Slipped and fell had a very bad fall
I fell so hard I heard birds sing,
But I held on to My ding-a-ling

Once while swimming cross turtle creek
Man them snappers right at my feet
Sure was hard swimming cross that thing
with both hands holding my dingaling

Now this here song it ain't so bad
Prettiest little song that you ever had
And those of you who will not sing
must be playing with your on Ding-a-ling

Chuck Berry

lincolnsteffens's picture

The Peace Corps for selfless service is a noble calling. I would never flame anyone for that. Now if you were a CIA asset undercover as a Peace Corps volunteer I would  fire up the flame thrower.

I remember the Albanian debacle from the comfort of my living room. I'm glad I wasn't there with you.

NuckingFuts's picture

Thanks, but funny stories abound regarding your comment. You maybe interested, if not, I don't mean to bore you.

1. All applicants sign a form stating they never have/ nor will not for two years after completion of service, work for any intelligence agency.

2. About 1 year or so after I was home, all that shit went down with Kosovo. I was contacted by the OSCE to be an election observer since I knew the language and culture. I declined mostly due to a job and a woman.

3. About 1 year after that, right when I had hit my 2 year mark for being out, I was contacted by the CIa. I was asked how my language was and who I knew where. Then asked if I would like to come in and talk about a job. I declined.

tenpanhandle's picture

Looking for a job with the CIA?  Just pick up the phone and speak to the dial tone.

astroloungers's picture

Interesting story. I suppose there is nothing better than a true "boots have been on the ground" asset. Kudos to you for declining the whores.

AldousHuxley's picture

#1 Reason politicians and economists desire perpetual population growth even by allowing illegal immigrants despite the free market demanding smarter choices as the mass middle class realizes that raising children properly is too expensive since they are not part of the 0.1% who'd benefit from labor surplus. Your kids won't grow up to work on your farm, they will instead go work for corporate shareholders while all you get is social security (aka corporate welfare for consumer staples industry).

Population growth enables asset overinflation showing fake growth of the economy markers which are mostly ponzi schemes...

 

  • The housing market
  • The stock market
  • The banking sector
  • Social Security

 

As long as the base of the pyramid grows, all political actions seem to be justifiable for the short term as elites plunder wealth from increased productivity, which is just more work for less money due to ever increasing competition.

 

Manufacturing strategy in china was neo-liberal's plan to make the Chinese  support US ponzi schemes when they ran out of US citizens. Now Chinese are slowly catching on, TPP will bring in more suckers Vietnamese, Indonesians, etc. into another rung down.

I'd like to see economists grow GDP in a closed economy with net zero increase in population.

Jack Burton's picture

Bravo! Finance Capitalism as practiced in the modern era can only survive with a constantly growing population. Fact is, this can't go on for ever.

FreedomGuy's picture

That's not true at all and is similar to the "broken window" theory of economics.

You can grow and more importantly you can build wealth with stable populations Valuations and demand for different things may change over time, but as long as their is trade there is prosperity.

FixItAgainTony's picture

Also in theory, capitalism works great.  But in practice we have govt collateralizing debt to the tune of a million dollars per SSN, imported or otherwise, buying those windows to be broken from cronies who are GSA approved.  The rest of the economy being duopoly vendor lock-in or IP monopoly rackets looking to inflate CEO bonuses by expanding a contract bound customer base. 

I believe in a net-zero population growth nation where the little guy succeeds through meaningful and effective participation in markets, but the US (and its me-too franchise in PRC) will never be it.

BringOnTheAsteroid's picture

"You can grow and more importantly you can build wealth with stable populations"

You sound an awful lot like an economics professor. OK, so if the economy can continue to grow then in say 10,000 years world GDP will be what - 100 quadrillion dollars?

We all suffer from a very basic lack of understanding of the most fundamental concepts of mathematics.

You cannot grow forever in a finite world, even at one tenth of one percent.

FreedomGuy's picture

The world is not finite. The possibilities are infinite. GDP is nothing real. It is simply an attempt to quantify the output of an economy. There are several ways to do it and it has many huge flaws including the ravages of inflation, bad trade theory (Exports-imports) and measuring government spending the same as private.

There are an infinite number of things for us to discover, invent and trade. In fact, one day our world may be the solar system, galaxy and then universe. Who knows?

BringOnTheAsteroid's picture

"You can grow and more importantly you can build wealth with stable populations"

You sound an awful lot like an economics professor. OK, so if the economy can continue to grow then in say 10,000 years world GDP will be what - 100 quadrillion dollars?

We all suffer from a very basic lack of understanding of the most fundamental concepts of mathematics.

You cannot grow forever in a finite world, even at one tenth of one percent.

Max Cynical's picture

They didn't spend $7B...where's the MONEY?

Kiwi Pete's picture

Blow, Hookers, Macau. The rest they wasted!

J Pancreas's picture

Thank you for sharing your experience and a reasonable post. The Chinese lady crying and pushed to the ground by a thug cop should trigger sympathy from at least a few blowhards on here (but I doubt it). Ladys like her arent necessarily greedy; just trying to get a return like you said. She may have lost everything, people. Most in the world arent ZH readers and have little financial understanding. Have a heart. 

aVileRat's picture

Glad you said it.

Many like to think Deing made 'chinese capitalism' out of some deep motivation for western reform. The cold reality is that post-Mao the country was heavily indebited, stupidly undercapitalized and the stagflation was turning into street riots after 2 classes of 'elite' students had zero job placements. In a system which allegedly promised 'full employment'. The trigger for the iconic riots & protests was a leak where only princelings, some of which were at the worst percentile of their class had job offers to party posts which threw an entire generation (Gen X) to question their leadership and use 'modern' communication (IRC at the time) to organize or escape the country.

Now compare & contrast to the student riots today in the manufacturing provinces of CZ. While it was easy to put down a single major protest after locking down Bejing telecom systems in 1989, a modern populist revolt would be akin to a Boxer revolution with regional leaders forced to distance themself from the corrupt central CCP, or pray a brual military crackdown can bring the population to heel. The last time the Chinese tried to jackboot their population back to servitude we had the major revolts in the 1300-1500's, which led to horrible migation and civil wars (and the Mongol-Dark Ages).

I'd wager the true NIM of China is about 30%+ of their known banks, and well over 45% for the entire lit credit + shadow economy. Nothing short of 30% devaluation is going to stave off the endgame (more if Japan goes deeper NIRP and it becomes an export war).

 

YuShun's picture

the guiding principle of banksters

Antifaschistische's picture

I do pity them....because, yes there is a greed problem, but Chinese also trust people.   When they sit down with investment advisors they believe what they are being told...like they believe the value of their homes will always go up so they buy three even when they're just shells.  They believe this.  I do pity the them because these people are not wealthy people...they are poor people who saved all their lives and now, yes, their own greed and over optimism results in a wipe of their savings.  It's a painful lesson.  The only lining is that this will eventually bring about change...we can only hope the change comes in the form of a higher moral standard for all things financial rather than revolution and war.

Divided States of America's picture

They are stupid because they will go to the highest returns without thinking twice about how realistic it is? Actually I do feel for them but you cannot help stupid people.

As for the timing, didnt Madoff happen right before the big stock makret crash here as well in 2008?

NuckingFuts's picture

From my experience in a "newer" capitalistic system with a similar out come (see my post above), the folks are not stupid or greedy, they are ignorant... In the truest sense of the word. They have no idea how investments work and their government encourages them to invest. In my case the first "investors" we're making 33% a MONTH. When you see your neighbors doubling their money in 3 months and you have ZERO experience with investing and risk, what do you expect. Yes, they are foolish, and yes I did try to talk some of the locals I knew out of investing (I was only 25 at the time). But ultimately they wanted a better life for their kids after 40 years of totalitarian dictatorship, they were just ignorant and were easily taken advantage of. By the time the first Ponzi collapsed all of the funds had left the country.

FreedomGuy's picture

These are not unheard of numbers in third world countries, either. These are loan rates and margins from sharks and black marketers prior to any semi-free markets. To us it is obviously suspicious but not necessarily to them.

We also have our Bernie Madoffs, too amonst the sophisticated.

CheapBastard's picture

When I was there this company had ads plastered all over train stations, in buses, etc. I asked my friend what's the deal and he said it's a P2P company but he smelled something rotten in it so did not invest. It's odd that despite its high profile not one "regulator" looked into this company. Of course, we have our own Enrons and MFGlobals (Corzines) also so can't be too hard on them.

GhostOfDiogenes's picture

"It's odd that despite its high profile not one "regulator" looked into this company. "

http://youtu.be/ad3muFUM4r0

Glasnost's picture

When you have had no financial literacy courses or have absolutely no idea what financial literacy is for that matter, and then free(ish) market models are introduced into your adult life over a fairly quick pace of time, a model which has been idealized as 'free' and 'good',

then yes, you tend not to think twice about it.

 

Is a person stupid if he has no idea what reading or writing is?  No.  He's illiterate.  If he's never taught how to read or write, he isn't suddenly able to do them although he might try to, perhaps relying upon the advice of his friend who tells him that these black splotches of ink on paper mean 'x'.

NuckingFuts's picture

Yes. Nice to see someone else not talking the same "they are stupid" mantra.

TheReplacement's picture

^This and more.  Not only are they fresh fish to be taken advantage of they were taken advantage of by the people with guns who showed them how great it is in America (Chinese gov't controls the information flow) and that THIS is how it is done and if you act now and buy two you can be rolling in a Benz fo sho.  Given their indoctrination and reliance on the leadership of the party this could not have turned out any other way.

It was always a scam perpetrated by their own against them no matter how much western banksters helped.

FreedomGuy's picture

Agreed, AntiFas. I have family in China and I can visualize this whole thing. They have what I call the Cappy-Commie belief system. They love the newfound prosperity and possibilities of the Capitalist system. They also have the near religious belief in old government system so they instinctively believe it will save them or protect them.

They work hard, save like crazy and look for ways to build their wealth. They understand street vendor and price bargaining but not any advanced investing or economics.

I will say on the home front, the people advising them may well believe that homes go up forever, as well. We kind of believed it here prior to 2008.

These Ponzi scum exploited those very simple and honest beliefs and franklly anyone who laughs at them is an asshole and deserves a similar fate.

I also personally believe in the death penalty for this kind of embezzlement and fraud. I am not kidding or exaggerating. I believe when someone steals something from you that they steal a part of your life. For example, if you saved for a bought a big screen TV and entertainment system and it costs a month's work for you, then they stole a month of your life you cannot get back (apart from legal recovery). In fact, you probably saved your extra income for a whole year to get it and some dickhead took it in 15 minutes and fenced it for 20% of it's value.

So, a ponzi of this size stole perhaps the entire life savings of many many relatively poor and middle class (by Chinese standards). They should forfeit theirs apart from being able to restore 100% of the stolen loot.

COSMOS's picture

Advance investing or economics as you said above is really just an euphemism for Stealing money/Ponzi Schemes/Fraud etc...

greenskeeper carl's picture

instead of the death penalty, what about indentured servitude? Ive always thought it was pretty fucked up how the current system works, there and here. Take a muderer, for instance. Lets say a man is the primary earner in his family, the wife a stay at home mom with 2 kids. The man makes 75k a year, and is killed, leaving the wife with 2 kids and no income. Obviously, she will have ot work, but what about the lost family income that results from that person's actions? They "pay their debt for society" by spending 30 years in prison, or the state returns the favor and gives them the death penalty. Is the wife better off? Aside from knowing the person is punished, this does nothing to restore her lost financial security. In prison, the murderer will probably be in a for-profit prison, working for 8 hours a day, getting paid 25 cents an hour in prison commisary funds, while the company, or govt, keeps the rest. Just like when a bank engages in fraud. They pay a penalty that typically just goes to the government.