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 But executives at Ezubao's parent company, Yucheng Group, now say it
was "a complete Ponzi scheme", which used investor funds to support
a lavish lifestyle, the official Xinhua News Agency reported this
week.
Among gifts that Yucheng Chairman Ding Ning gave his president,
Zhang Min, were a $20 million Singapore villa, a $1.8 million pink
diamond ring, luxury limousines and watches and more than $83
million in cash, Xinhua stated.
The alleged scam underscores the risks in China's fast growing and
loosely regulated wealth management product industry, with many
products peddled through online financial investment platforms and
privately run exchanges.
Products promising annual returns of up to 14 percent have drawn in
investors at a time when savings rates are low and property is no
longer a guaranteed get-rich-quick bet.
A report on China's stock market crash authored last year by former
senior officials, including former central bank vice governor Wu
Xiaoling, said Chinese retail investors are short-sighted, have a
weak investment philosophy and a herd mentality.
China's P2P and the online finance industry also serve as a critical
channel for the emerging small business and consumer market, which
is often ignored by banks and mainstream financial institutions.
iResearch predicts China's unsecured consumer finance market alone
will triple in size by 2019, reaching outstanding loans of over $1.7
trillion.
RISKY BUSINESS
By November, there were over 3,600 P2P platforms as the industry
raised more than 400 billion yuan, according to the China Banking
Regulatory Commission (CBRC). More than 1,000 of those were
problematic, it said.
The consequences when these schemes fail can be devastating, said
Yang Dong, vice-dean at Renmin Law School and an expert on finance
and securities law. "The harm is obvious. It's going to damage
financial reforms, cause social unrest and destabilize the regime to
some extent," he told Reuters.
Yang said there needs to be more supervision at both a national and
local level, with more staffing, funding and a central bank-led
financial risk monitoring system capable of tracking Internet
financial activity and flagging problems.
Last year, hundreds of angry investors protested on the streets in
Beijing and Shanghai, saying they lost $6 billion from the Fanya
Metals Exchange, which offered an investment product promising up to
14 percent annual return and the flexibility to deposit and withdraw
money at will.
The CBRC published draft rules in December to oversee the P2P
industry, banning the pooling of investor money, concealing risks of
financial program and using fraudulent sales tactics. "Due to the
lack of necessary regulation, many P2P platforms play in the area
between legal and illegal, using Internet concepts to brand
themselves, fraudulent advertising and illegal deposit-taking to
hurt public interest," it said.
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WELCOME ABOARD 'TRAIN EZUBAO'
At Ezubao, Ding collected a monthly salary of 1 million yuan, and
admitted on state television to spending an estimated 1.5 billion
yuan in Ezubao funds on himself.
"We fabricated projects to raise money," he said, adding Ezubao used
project companies to re-circulate money back into accounts linked to
his companies, Xinhua reported. Yong Lei, head of risk management at
Yucheng's financial leasing company, said 95 percent of projects on
Ezubao were fake.
Ding asked dozens of his secretaries to dress only in Chanel, Gucci
and other luxury branded clothing to make the company appear highly
successful. Zhang, the group president who was marketed as "the most
beautiful executive in online finance", said on state broadcaster
CCTV that Ding asked her to buy up everything from every Louis
Vuitton and Hermès store in China, "and go overseas to buy more if
that wasn't enough."
Ezubao investors contacted by Reuters attributed their willingness
to hand cash to the company to high-profile commercials on
state-owned TV and a high-speed train named after "Ezubao" that ran
between Beijing and Shanghai.
"When you got on the train, there was an announcement saying:
'Welcome aboard Train Ezubao'," said a company employee who said she
lost about 100,000 yuan in the scheme.
When Ezubao's fraud was detected late last year, executives buried
80 bags of documents in a 6 meter (near 20-foot) hole on the
outskirts of Hefei in Anhui province, where the company started,
Xinhua said.
"I feel terrible," said another Ezubao investor surnamed Liu who
said she invested 800,000 yuan. "I haven't dared tell my husband
yet."
(Reporting by Matthew Miller and Shu Zhang, with additional
reporting by the Beijing Newsroom; Editing by Ian Geoghegan)
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