Briefing: financial scams in China, why so many?

Scams in China’s finance industry is a trend I think will continue for a long time. Quartz has done this great compilation of financial scandals in China:

Here are a few highlights:

E Zubao and other P2P financing platforms—at least $11 billion

Fanya Metal Exchange—about $6 billion

MMM social financial network—beyond calculation

Zhuoda Group—about $1.6 billion

GSM Financial Group—about %6.2 billion

And it also discusses why these schemes succeed, or why investors keep falling for them:

First off, opportunities in real estate and of course the stock market seem dubious, and new financial companies, especially peer-2-peer lending firms present an attractive alternative.

But of course, while rule of law has much to catch up on this new and upcoming industry, presenting a great opportunity for crooks with a bit of brains to come in and attract innocent investors looking for swift gains.

Indeed, many of these firms lie beyond the scope of supervision. P2P lending platforms often go beyond their normal role as sole information brokers and provide services and products that only licensed banks or lending companies offer. Many of them are not even registered with the State Administration for Industry and Commerce.

And investors will just go for these seemingly shady companies for really quite simple reasons: i)friends recommended it,

ii)just believed in their marketing campaign promising incredibly high returns (in some cases, people know it’s a ponzi scheme but still go for it confident they can get out with some gains before it all collapses),

iii)some famous investor spoke well of it (eg.,

iv) some local government has backed them like in the case of Fanya. People just expect the government will have their back once things go south. Nothing more than the trusting soul of man under authoritarianism.

v)And another unique feature on mainland:


Put these all together: it’s a lack of experience in investments. Mainland has arrived to capitalism late and so investing habits are also in its teenage years. So all of this will take time to develop, but it will also require reform on all fronts, law, regulation, supervision, general education, and availability of information etc. But most importantly, my view is that it is the enforcement of law, as always, they can make most difference in the short-term.


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