It’s been a year since Xu Qin, the 35-year-old founder of Zhongjin Capital Management, was accused of defrauding almost 13,000 investors of just over a billion dollars in what he later confessed was a Ponzi scheme.
It was one of Shanghai’s most high-profile shake-downs, and China’s normally staid state-owned media helped stir it up with sensational reports of Xu’s extravagant lifestyle.
Among the details that emerged was that he kept a peacock in his enormous Shanghai apartment, which he rented for just under $40,000 a month. Photos began circulating of his living room with Hermes gift boxes piled high to the ceiling and two Hermes bicycles, which cost more than $10,000 apiece, on display.
However, the arrest and sentencing of one of Xu’s victims, Ke Shengzhong, generated far less attention. The vegetable-seller had organised a protest last September after investing with Zhongjin and losing his family’s life savings of 280,000 yuan ($54,000).
Four days after the protest, in which about 10,000 aggrieved investors marched along one of Shanghai’s major shopping streets, police came to Ke’s small, barely-furnished apartment to take him away. And last week in a courtroom in the city’s leafy French Concession, Ke was sentenced to a year’s jail for disrupting the public order. The man who allegedly ripped him off, meanwhile, is still awaiting trial.
The relatively harsh sentence for Ke and three other protesters – all of whom lost hundreds of thousands of yuan in financial firm collapses – shows how concerned Chinese authorities are about a growing backlash from duped investors.
Problems in China’s fast-growing shadow banking sector are threatening not just the country’s financial system but also social stability, which has long been the Communist Party’s number one priority.
The value of outstanding wealth management products (WMPs) has exploded since 2012, more than quadrupling to 29 trillion yuan ($5.6 billion) by the end of last year. The surge in demand came as investors sought higher returns than the 1.5 per cent on offer from one-year bank deposits.
At first the massive take-up of WMPs was tolerated because it kept the credit taps on, providing alternative finance for smaller and medium-sized businesses and ensuring growth ticked over. However, the industry which built up around these products was only lightly regulated. And many investors were under the false impression their capital and returns were protected. It was believed banks, the government and the trust companies would not allow these financial products to default. Unethical firms perpetuated this belief in order to convince people to hand over their life savings.
“The sales agent told me if there were any losses, they would be covered by Zhongjin,” Ke said in a television interview before he was detained.
Now the Chinese government and key financial regulators are stepping up efforts to address the problems in the shadow banking sector amid heightened concerns about the country’s high debt levels. On Wednesday, Moody’s downgraded China’s credit rating on the “expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.”
The China Banking Regulatory Commission has warned investors not to expect bail-outs and last week announced it was drafting new rules for wealth management products.
Wang Shengbang, a senior official at the CBRC told The Australian Financial Review last November: “In these wealth management products investors should expect higher risks for higher returns.”
“It is normal when the economy is slowing for some of these products to have problems,” he said.
However, investors who have lost money believe the government is partly responsible for these financial collapses because of poor regulation and also, in some cases, endorsement of the products from local officials.
Zhongjin set up grand offices in prestigious locations around the city, where sales agents would boast of receiving government awards and insist their funds would be invested in official Shanghai city projects. Many of the company’s investors were directed to its sales agents from over-the-top advertising on a popular television dating show which it sponsored.
Another failed financial firm, Wang Bo, preferred to hold fund-raising events in grandly decorated rooms, often with a local government official giving a speech. At one of these events in Guangdong, Wang Bo’s sales people said funds would be invested in a local construction materials company that was about to list on the Australian Stock Exchange.
After Ke lost his money, which was everything he had saved selling pickled vegetables at a local “wet” market, he tried approaching the police, regulators and the local government finance department but he was ignored. Only then did he start organising the protest, says one friend, who asked not to be named.
Protests are rare in China and local authorities were surprised by the number of people prepared to demonstrate last September in Shanghai. The protesters crowded together sharing their tales of woe and chanting: “We want our money back”. Some investors put together pages of research citing the number of scams, people affected and whether investigations into the related companies had begun.
Police set up checks at entrances to nearby subway stations and began questioning anyone on the way to join the protest.
Supporters of Ke say his detention and jailing was part of an effort to shut down what was becoming an increasingly vocal movement.
“The trial was a farce,” says one person, who was able to sit in the courtroom and asked to remain anonymous for fear of reprisal. “The defendants weren’t allowed to choose their own lawyers and I don’t think they even met them before it started.”
“People are angry,” said another aggrieved investor. “But we are also helpless. There is nothing we can do. After this trial, I don’t think there will be another protest any time soon.”
By Lisa Murray