News / Asia

New 'Private Equity' Scams Target China Retail Investors

A man cycles past security personnel, and uniformed and plainclothes police, who are standing outside the entrance to a government building where petitioners congregate daily to protest private equity scams, in central Beijing, October 22, 2012.A man cycles past security personnel, and uniformed and plainclothes police, who are standing outside the entrance to a government building where petitioners congregate daily to protest private equity scams, in central Beijing, October 22, 2012.
x
A man cycles past security personnel, and uniformed and plainclothes police, who are standing outside the entrance to a government building where petitioners congregate daily to protest private equity scams, in central Beijing, October 22, 2012.
A man cycles past security personnel, and uniformed and plainclothes police, who are standing outside the entrance to a government building where petitioners congregate daily to protest private equity scams, in central Beijing, October 22, 2012.
Reuters
Thousands of retail investors in the Chinese city of Tianjin say they were tricked out of more than $500 million by sellers of illegal wealth management products. It's part of a growing problem stemming from China's rush to develop its private equity sector.

Scam private equity businesses mushroomed in China after a government drive to promote the industry in 2009, leading to a flood of licenses for new firms that were issued without proper regulation.

While private equity is generally the preserve of a small pool of wealthy individuals or institutions, these scams have targeted ordinary small investors, leaving thousands angry, and in some cases taking to the streets to protest.

Interviews carried out by Reuters with dozens of victims across five cities paint a picture of fraudulent private equity schemes that is much wider than official accounts or local media reports have portrayed previously.

"It's a huge problem in China," said Long Zan, a sales consultant at China Marketing Association, adding he has seen many salespeople recently selling what they claim to be private equity products, many of which are illegal. "What has been uncovered is just a tip of the iceberg."

At the heart of the issue is the lack of investment options given to retail investors.

China's tight capital controls limit overseas investments, while a ban on property speculation and a sluggish stock market have made many look elsewhere for returns. The huge profits reaped by legitimate private equity operators in China by taking companies public amid booming IPO markets in recent years also lured investors to fraudulent schemes.

Latest official data shows 10,000 cases of illegal fundraisings - which also include lending and other financial activities - were uncovered between 2005-10, with combined losses of around 100 billion yuan [$16 billion]. While the government has not disclosed detailed data, Reuters calculations based on victims' accounts, indicate losses of at least 100 billion yuan from private equity scams alone.

Demanding compensation

In Tianjin, in the north, more than 14,000 people submitted a petition to the central government demanding compensation for losing a combined 3.4 billion yuan [$544.8 million] from scams in the city. Reuters was shown a copy of the letter in October.

"Frauds of this scale are not a problem of any one company... the government has inescapable responsibilities," said the letter, sent to the Tianjin government, as well as to the State Council, China's cabinet, around July last year. "The current situation is the result of lax government supervision."

The authorities so far have blamed investors for their own greed and misjudgment. An official at the Tianjin government in charge of dealing with illegal fundraising said investors lost money because they were blinded by the promise of stellar returns.

Thousands of private equity fraud victims have taken to the streets in Beijing, Tianjin and Nanjing, demanding government compensation for their losses. In some cases, riot police had to be called in to control the scene.

"I lost everything,'' said Chen Ende, a former real estate agent who lost nearly 3 million yuan, including some money he borrowed from friends, in a private equity scam. "The government must pay."

Confidence dented

Confidence in Chinese wealth management products has already been dented by problems in the ballooning shadow banking sector. In one example, in December, a product sold through Hua Xia Bank failed to pay its annualized return as promised, sparking protests outside the bank's Shanghai branch.

But while those cases involved legal investment products that went bad, the private equity scams generally involve the selling of products that breach rules intended to restrict participation in the sector - such as a requirement that PE funds should have no more than 200 investors and that the minimum investment should be at least 2 million yuan.

China Marketing Association's Long estimates there are at least 5,000 purported private equity schemes currently operating illegally across China.

The Beijing Private Equity Association, an industry group, was so concerned that it warned in October that illegal fundraisers masquerading as private equity firms had "seriously endangered social and financial stability'' as it launched a campaign to educate investors about PE.

Calls to the firms' listed telephone numbers could not be connected.

You May Like

China Investigates Former Powerful Security Chief

Former security chief and member of Politburo Standing Committee, Zhou Yongkang, under investigation for suspected 'serious disciplinary violation' More

India, US Look to Reset Ties During Kerry Visit

This week's talks will be first high level interaction between two countries since Prime Minister Narendra Modi took charge More

Video Young African Leadership Program Renamed to Honor Mandela

YALI program, launched by President Obama in 2010, aims to build skills in business, entrepreneurship, public management and civic leadership More

This forum has been closed.
Comments
     
There are no comments in this forum. Be first and add one

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Vietnamese Staging Chinese Product Boycott After Oil Rig Spati
X
Reasey Poch
July 28, 2014 7:18 PM
China recently pulled an oil rig from an area of the disputed South China Sea that Vietnam also claims. Despite the action, the incident has had a lingering effect on consumers in Vietnam. VOA's Reasey Poch reports from Hanoi on an effort to boycott Chinese products.
Video

Video Vietnamese Staging Chinese Product Boycott After Oil Rig Spat

China recently pulled an oil rig from an area of the disputed South China Sea that Vietnam also claims. Despite the action, the incident has had a lingering effect on consumers in Vietnam. VOA's Reasey Poch reports from Hanoi on an effort to boycott Chinese products.
Video

Video ESA Spacecraft to Land on a Comet

After a long flight through deep space, a European Space Agency probe is finally approaching its target -- a comet millions of kilometers away from earth. Scientists say the mission may lead to some startling discoveries about the origins of the water on earth. VOA’s George Putic has more.
Video

Video Young Africans Arrive in US for Leadership Program

President Barack Obama's Young African Leadership Initiative has brought hundreds of young Africans to the United States for a six-week program aimed at building their knowledge and skills in fields such as public administration and business. Out of the 50,000 young Africans who applied for the program, just one percent was accepted. VOA's Laurel Bowman caught up with some of those who made the cut and has this report.
Video

Video In Honduras, Amnesty Rumors Fuel US Migration Surges

False rumors in Central America are fueling the current surge of undocumented young people being apprehended at the U.S. border. The inaccurate claims suggest the U.S. will give amnesty to young migrants from the region. As VOA's Brian Padden reports from Honduras, these rumors trace back to President Obama's 2012 executive order to halt deportations for some young undocumented immigrants already living in the United States.
Video

Video Students in Business for Themselves

They're only high school students, but they are making accessories for shoes, fabricating backpacks and doing product photography - all through their own businesses. It's the result of a partnership between a non-profit organization that teaches entrepreneurship and their schools. VOA's Mike O'Sullivan and Deyane Moses met the budding entrepreneurs near Los Angeles.
Video

Video Astronauts Train in Underwater Lab

In the world’s only underwater laboratory, four U.S. astronauts train for a planned visit to an asteroid. The lab - called Aquarius- is located five kilometers off Key Largo, in southern Florida. Living in close quarters and making excursions only into the surrounding ocean, they try to simulate the daily routine of a crew that will someday travel to collect samples of a rock orbiting far away from earth. VOA’s George Putic has more.

AppleAndroid