China's Stock Bubble

Analysts have told RFA’s Mandarin Service that the Fanya investors’ money is almost certainly gone. They cautioned that few secure options still exist within the stock, real estate, private lending and peer-to-peer (P2P) loan markets in China—investment channels through which many people earned wealth in the past. According to analyst Liu Guangyu, real estate—one of China’s biggest money earners in recent years—will never again be the “cash cow” it once was for investors as the market is in the midst of a massive bubble.

“The government is thinking about how to break away from its economic dependence on real estate ... but [this] will not be easily altered in the short term,” he said.

“To be honest, real estate has held China’s sustainable growth back for a long time. For many years, China's economy has relied on the development of real estate, causing economic development in other areas to be delayed.”

If China’s government cannot put a stop to its economic reliance on real estate, the market is sure to collapse, Liu said. Instead, it must find a way to gradually cool down the sector and return it to sustainable growth levels.

The bursting of China’s stock bubble in 2015 and a lack of regulation in the private lending and P2P sectors has also caused potential investors to shy away from those markets, he added.

Government influence

Other experts stressed the importance of government influence on investment in China, and suggested that the safest way to speculate is to anticipate the direction of national policy.

Zou Tao, an independent Chinese financial expert, outlined four key opportunities since the founding of the People’s Republic of China in 1949 that led to wealth generation for investors and said all were directly linked to government regulation.

The first opportunity came after China’s government introduced its “Reform and Opening” policy in 1978, allowing individuals to enter into business privately. Smugglers made a fortune selling home appliances from Hong Kong in the Mainland soon after, he said.

In the early 1990s, China launched its stock exchange and those who bought stocks early on earned significant dividends. Additionally, people sold their identification cards—which were necessary to purchase stocks—for tens of thousands of yuan (thousands of U.S. dollars) on the black market.

When China initiated housing reforms in the late 1990s, many people became wealthy by investing in real estate development, and today many others are earning returns on assets they purchased amid ongoing state-owned enterprise reforms, Zou said.

“People who anticipate government policy can eat meat; people who make policy eat soup … people who learn of policies afterwards bear the cost of money making in general; [and] people who are ignorant of policy await their death,” he said.

“In China, you have to rely on policies ironed out by those in power to become rich … National policies give you opportunities to get rich, but they only come around once every 10 to 15 years, and it will be like this in the future as well.”

Taking responsibility

Guangzhou-based financial writer Xu Lin said that while government policy influences the investment climate for certain sectors in China, individuals must conduct their own research into the risk of specific products.

But he added that the government is obligated to step in with regulation when the investment climate becomes rife with scams.

“If you’ve really been fooled in personal investments, it’s true that you have to look at yourself for the reason,” Xu said.

“But when a society has too many incidents of fraud, people can't help but ask whether the government is acting as it is supposed to.”

Xu suggested that the government’s failure to act effectively on behalf of the people points to problems within the country’s social system and by extension its political structure.

“If the fundamental issues within the political system aren’t addressed, but only judged on a case-to-case basis and changed cosmetically, similar incidents and crises will occur again in the future,” he said, referring to the Fanya scandal.

Forest through the trees

Netizens in China have expressed similar concerns, suggesting Fanya is indicative of a larger issue with investment in the country.

One commenter likened investors in China to the inhabitants of a river ecosystem, saying that “if a river has a few dead fish, it’s probably an issue with the fish, but if most of the fish are dead, it’s definitely a problem with the river.”

Others have said that the Fanya investors “can’t see the forest through the trees” because they blame the Yunnan and Kunming governments for the loss of their money, rather than the central government for failing to regulate the sector.

According to Zou Tao, anyone who avoided being cheated or retained his or her principal while investing in China this year was relatively lucky, and called on speculators to temper their expectations for returns.

“If your money wasn't lost in the stock market or other investments, that's already pretty good because, after all, you've preserved your principal and are better positioned than hundreds of thousands of Fanya victims,” he said.

Reported by Wen Jian for RFA’s Mandarin Service. Written in English by Joshua Lipes.