It’s a Chinese Ponzi scheme
that should really scare us
Forget Bernie Madoff - China's Ding Ning is the face of an industry which is beginning to crumble
03 Feb 2016
One evening in December 2008, Bernie Madoff sat his sons down to tell them that he had swindled hundreds of his clients out of billions of dollars. He knew the game was up. He’d already written last cheques to close friends and family for $137m to say sorry – cheques that were never cashed.
Within hours, the pair had informed the FBI, and agents had appeared at the Madoff family home in New York’s Upper East Side.
Lots of people had been taken in: from Steven Spielberg to Kevin Bacon, from former New York governor Eliot Spitzer to City superwoman Nicola Horlick. In total, more than $65bn (£45bn) is estimated to have been lost in the fraud.
The story dominated the headlines for months until Madoff himself wasjailed for 150 years in June 2009. His eldest son Mark committed suicide in his apartment two years after Bernie was jailed; younger son Andrew died of cancer in 2014, having blamed his father in a magazine interview for “killing me slowly”. His wife Ruth, who once had four homes and three boats, was photographed late last year furnishing a two-bedroom Connecticut apartment with items bought at Ikea.
Little wonder the Madoff saga is being depicted this week on US television in a two-part miniseries starring actors Richard Dreyfuss and Blythe Danner as Bernie and Ruth. Next year, Robert de Niro and Michelle Pfieffer will take on the same roles in a film version of the saga called The Wizard of Lies.
Bernie Madoff
But, while the fascination with that Ponzi scheme is undiminished almost eight years on, the spotlight on a similar fraud has dimmed after just a few days.
This is despite the fact that the Ezubao scheme, which has been uncovered in China, could have far bigger ramifications than anything Madoff did.
The 34-year-old Ding Ning only founded Ezubao in 2014. But he was quick to manoeuvre his business into the heart of Chinese society.
Last year, Ezubao, a peer-to-peer lending platform which claimed to match investors with companies looking for finance, sponsored the online broadcasts of the National People’s Congress by a subsidiary of state-owned news agency Xinhua.
With its logo adorning the Great Hall of the People in Beijing, how could savers doubt it was a trustworthy brand? Ding also managed to secure advertising slots on state-owned CCTV.
He also encouraged employees to make ostentatious displays of opulence. In November, some 800m RMB (£83.5m) was distributed to staff, in part to ensure they wore designer clothes and jewellery to work and made the company look more successful.
But Ding’s “perp’” walk on Chinese state television this week – following his arrest along with 20 fellow executives – suggests Ezubao was nothing more than a financial house of cards.
Ding Ning
One of the company’s executives has since been reported as saying that 95pc of the projects it claimed to invest in were fake. Reports suggest that some 880,000 people have collectively lost £5.3bn after falling for Ding’s hype.
The lessons of Ezubao are far more important than those of the Madoff fraud. This wasn’t wealthy individuals taking advantage of the greed of other wealthy individuals; this was a near-state sponsored company capitalising on Chinese citizens who could least afford to lose their money.
Ezubao’s customers appear to have been from rural areas. More than 1,000 sales agencies were opened across the country to promote the company in local communities.
It is these investors who began protesting in December after the business’s activities were first suspended – protests which went largely unreported in Western media.
Angry investors protest in Nanjing, Jiangsu
And Ezubao might just be the tip of the proverbial iceberg when it comes to fraud among China’s burgeoning wave of financial technology players.
Last March, Dagong, China’s credit rating agency, warned that some 1,250 online financial platforms were at risk of going bankrupt. Its president, Xu Zhipeng, cautioned that “a storm of credit risks is brewing in the peer-to-peer lending industry”, which had grown threefold the previous year to $17bn.
In November, a Chinese financial website reported some 79 online lenders had problematic business activities, up from 32 a month earlier.
That same month, and not before time, the Chinese government acknowledged internet finance for the first time in its 13th five-year plan. This followed attempts by the People's Bank of China to begin regulating the sector.
The padlocked door of peer-to-peer lender Ezubao in Hangzhou in China's eastern Zhejiang province
Some of those who have studied the rapid rise and fall of Ezubao believe its demise may stem from growing discomfort among Chinese banks about the power of a largely unregulated yet hugely popular sector. Perhaps Ding was chosen as a suitable fall guy and example.
It is just the latest convulsion to emanate from China’s growing shadow banking economy and is unlikely to be the last
Others note that it is just the latest convulsion to emanate from China’s growing shadow banking economy and is unlikely to be the last. The growth of peer-to-peer lending, trust companies, securities firms and credit guarantors in China is poorly understood. Its inevitable growing pains add to the nervousness engendered by Chinese markets, which have been the root cause of the volatile markets around the world in the past few months.
As the Chinese economy shifts from a state-led industrial system to a more consumption-led market economy, we can expect more nasty surprises like the one sprung by the Ezubao collapse.
And their destabilising ripples won’t just be felt by those poor farmers who believed China’s own financial Wizard of Oz.
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