China has finally come full circle. Recall that last year as equities surged, Chinese “investors” opened enough brokerage accounts for every man, woman, and child in LA. The slowing of the economy and pending devaluation of the currency led the smart money to short the market, putting significant downward pressure on stocks. The answer to all of this was to of course arrest anyone who was involved in short selling stocks.
In the end, as people slowly learned that making money trading stocks isn’t as easy as they’d once thought, they asked where else can they put their money, perhaps real estate if it wasn’t so expensive. To which we pointed out that sadly, people will never learn.
But there remain some always those who will never learn., such as Helen Lu.
“Where else can I put my money?” said Helen Lu. “Real estate is so expensive and beyond our reach, and there are no other good investment channels.”
Unfortunately, that proved to be an exchange that foreshadowed where we are today. Real estate prices may still be high, but those “investors” managed to find another place to put their money: Peer to Peer Lending.
As we covered a few days ago, in an effort to push people into owning more homes and juice the economy, the government has eased credit conditions and relaxed tax laws. However this alone hasn’t been quite enough to get buyers enough cash to get the deals done. Enter P2P lending, a shadow banking entity which essentially raises funds from the aforementioned investors, and loans them out as short term loans to buyers so they have enough cash for a down payment on their property. As it turns out, this is has been the answer to the question of “where else can I put my money.”
Just like their foray into stocks, Chinese investors are finding out that it isn’t easy to make money in short-term lending either. Defaults are on the rise and China’s subprime lending bubble has burst.
And just like it responded to “malicious short sellers” when stocks went down, China is now arresting those involved in the shadow banking world.
As Reuters reports, Zhongjin Capital Management was shut down earlier this month on “suspicion of illegal fundraising”, and 21 executives have been arrested. This comes on the heels of the Government stating they were going to crack down on illegal fundraising as part of a broader effort to stem financial risks hide the severity of the crisis. In their promotional material, the fund claimed they handled over 25 billion yuan according to Caixin.
And while they may not have missed any payments to investors as some close to the situation claim, they didn’t do themselves any favors staying off the radar by the way they portrayed themselves.
Zhongjin’s offices were often in some of the most expensive commercial buildings in the country and known for being full of investors eager to put down millions to buy its products. Investors told Reuters they would line up overnight to get a place in the queue, and offices were often full from 8 a.m. until 11 p.m.
They looked like banks, and were often located next to banks, giving them an air of reputability – a common practice among Shanghai wealth management firms seeking to burnish their reputations for stability in the face of rising reports of failure and fraud.
Local media showed posts from social media accounts featuring a young woman claiming to be a manager at Zhongjin, including pictures of her holding what looked like six 100,000 yuan bricks of cash garnished with thinner 10,000 yuan sheafs. More boxes of cash were in the background. Other posts show her driving a Ferrari and claiming to have just purchased a 2 million yuan investment product from the company.
Investors gather at the office of Zhongjin Capital Management
This is the second notable closing of a P2P firm in the last few months, as back in February China arrested 21 executives of internet finance platform Ezubao for allegedly defrauding investors (see Caught On Tape: Chinese Investors Find Out They Got Fleeced By A $7 Billion Ponzi Scheme).
And each time something like this occurs, as with any bubble, it has a significant impact on those who worked hard to save money and want to try to grow it.
An investor who gave his surname as Jiang told Reuters in a phone interview that he put 300,000 yuan ($46,345) of his family’s money into the company in March because of its perceived trustworthiness and high profile.
“The company’s offices were always busy, and they always paid back investments on time. Who would expect this type of company to have problems?” he said.
As China continues to scramble to do damage control relating to the latest bubble it helped create and then pop, these arrests are just the tip of the iceberg.
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