Beijing must stamp out Ponzi schemes

Economic history tells us that one of the factors that can undermine confidence, or even precipitate a financial crash, is exposure to massive fraud that sucks in hundreds of thousands of investors and ordinary folk alike. Typically it can wreak most devastation if it prompts anxiety about an asset bubble, such as in property. Just a hint of scandal or impropriety can be enough to trigger a collapse and threaten economic and social stability.

Hence China’s deep concern about Ponzi schemes, with the ringleader of the country’s biggest to date having been sentenced to life in jail by a Beijing court. Convicted among other crimes of fraudulent fundraising and smuggling precious metals, Ding Ning, 35, has been dubbed China’s Bernie Madoff, the Wall Street con man effectively jailed for life over a Ponzi scheme that involved nearly US$65 billion. There the resemblance between the two ends. It was the market crash precipitated by the US subprime housing mortgage crisis that left Madoff exposed, not the other way round.

China’s ‘Bernie Madoff’ jailed for life for huge fundraising fraud

Unlike the term “black swans” for catastrophic events such as the collapse of Lehman Brothers in the financial crisis, “grey rhinos” refers to potential systemic risks that can easily escape regulators and hurt a lot of people if they go bad. Ding’s peer-to-peer online financing firm Ezubao is one example. It amassed more than 50 billion yuan (HK$59.65 billion) from fabricated projects and returns in 18 months to December 2015. That may be dwarfed by Madoff’s scam, but Ding conned a client base of 900,000 investors compared with Madoff’s 4,800.

Many victims were not investors, but typically middle class and even students. The case underlines the financial and social risks as such schemes thrive across the country amid lax regulations and explains why Beijing is trying to crack down hard. With China being so big, Ponzi schemes, in which the day of reckoning is put off with revenue from new investors paying existing ones, can move from one province to another for years before the inevitable collapse wipes out the victims. Given such a build-up of risk, the potential threat to China’s economy and social stability is not to be taken lightly.