Rise and fall of Ezubao, a Chinese Ponzi scheme

February 03, 2016 16:33
Ezubao was the title sponsor for the online subsidiary of Xinhua during top national meetings in Beijing in March last year. Photo: internet

About 500 investors of Ezubao, a peer-to-peer lending platform, protested at the headquarters of the Central Commission for Discipline Inspection, China's top anti-corruption agency, in Beijing.

They intended to organize a protest of 100,000 people in the capital city.

Ezubao has been accused of engaging in a massive Ponzi scheme that swindled more than 900,000 people out of 75 billion yuan (US$11.4 billion), the official Xinhua news agency reported.

The company, launched in Beijing in 2014, was very good at building relationships with the government.

In fact, Ezubao was the title sponsor for the online subsidiary of Xinhua during the sessions of the National People's Congress and the Chinese People's Political Consultative Conference in March last year.

The company logo was placed in the Great Hall of the People in Beijing and seen by millions of people all across the country.

It also managed to obtain the 20-second "golden" advertising time slot on CCTV news, the national broadcaster.

Ezubao even received an award as one of the most responsible internet finance companies from China Newsweek, another state media outlet.

Endorsement and recognition by various official media convinced a large number of mainland Chinese within a year and a half that it was safe to invest a total of up to 75 billion yuan using the platform.

That’s why many investors who have lost all their wealth feel they were cheated by the state media.

Ezubao emerged as the country's largest P2P platform so quickly because it claimed to be in the business of financial leasing, rather than highly risky speculation in stocks, property, gold or virtual currencies such as Bitcoin.

For example, many large companies are tapping into airplane leasing, in which airlines rent the planes for a few years at a time, with a leasing company bearing the risk of any slump in their second-hand value.

In fact, financial leasing is very popular in developed countries.

Over 50 percent of the capital expenditure of companies in the United States is funded by financial leasing.

It makes it far more flexible to start up a company, and the investor does not need to buy furniture, a computer, copy machine or coffee machine. They can just rent them monthly.

Since the financial leasing model looks far more reliable than speculation, it was able to woo investors more easily.

Unlike traditional financial companies, Ezubao was a FinTech firm that matched investors with potential borrowers over the internet.

The business model offered a new investment option and exposure to financial leasing for retail investors.

Also, it helped cut intermediary costs and benefited both investors and lessees.

Besides, the company did not offer an unusually high return, just annual interest payments of 8-14 percent to investors, as stated on its website.

The return was far below the interest rates available in the shadow banking system, and even lower than the return promised by some wealth management products sold by banks.

Many investors trusted that its business model was viable and treated their investment as a high-interest deposit or wealth management product.

But investigations by local authorities found that most of the investment products the company marketed were fake.

The company had to attract more capital to pay its investors.

As a result, many of its projects failed to deliver the targeted returns, and investors could not recoup their principal.

Xinhua said Ding Ning, founder of Ezubao, embezzled as much as 1.5 billion yuan.

He spent lavishly on luxury gifts and salaries, and company executives bought luxury items in Louis Vuitton stores all over China.

Many investors believe Ding was just a puppet for some big guy, and he only admitted embezzling 1.5 billion yuan.

That means there is still several dozen billion yuan to account for.

A great number of people may lose all they invested on Ezubao.

This article appeared in the Hong Kong Economic Journal on Feb. 3.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist