China arrests 21 people for $10.7 billion P2P lending ‘ponzi scheme’

Chinese authorities have arrested 21 people that are involved with the country’s largest peer-to-peer lending service Ezubao for allegedly conducting a “ponzi scheme.”

A ponzi scheme is basically a pyramid scheme where an investment operation pays fake returns from money given by other new investors. The returns are normally unusually high to get you to invest in the first place.

The Xinhua newspaper, the mouthpiece for the Chinese government, reported that the fintech company is suspected of conning 900,000 investors out of about 50 billion yuan (£5.3 billion, $US7.6 billion, $A10.7 billion).

Peer-to-peer lending in China is like the wild west right now — an unregulated free for all where scam artists are as welcome as genuine entrepreneurs.

Most of the malpractice happens on a small scale at the bottom of the market, which partly explains why it has failed to generate big headlines.

Despite the huge number of platforms going bust, there are still an estimated 2,000 online lenders in China and just 50 represent about 50% of the market. And online lending remains a tiny fraction of China’s financial services overall too.

But this is the largest scam to emerge from the country yet. Apparently, according to the Xinhua report, police used two excavators to “uncover some 1,200 account books that had been buried deep below ground.”

The Xinhua report said that Ding Ning, the chairman of holding firm Yucheng Group which launched Ezubao in 2014, used new investors money to fund his own real estate projects and to pay off existing investors. It also mentioned that state investigations revealed that more than 95% of the investment offerings on the site were fake.

Investors have already lost a whole heap of money on P2P lending services in China.

In October, Henry Yin, managing director of CreditEase, one of China’s biggest platforms, said Chinese investors, the majority of them unsophisticated individuals playing with savings, have lost an estimated $1.2 billion (£780 million) putting money into Chinese P2P lending platforms, largely over the last 18 months.

In late summer 2015, the Chinese government pledged to crack down on the industry.

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