Selective Investigation
Authorities in China were quicker to investigate fraud involving the Ezubao online investment scheme than illegal activities by Kunming Fanya Metal Exchange because the latter was closely tied to local government, according to financial experts. Chinese police shut down online broker Ezubao in December 2015, and authorities charged the company with bilking some 900,000 investors out of more than 50 billion yuan (U.S. $7.6 billion) as part of a Ponzi scheme.
Fanya collapsed five months earlier, in July of the same year, leaving 240,000 investors short around 43 billion yuan (U.S. $6.5 billion), and authorities have since announced that the company—which received backing by officials in Yunnan province—had engaged in unlawful activities to draw investment.
But while state media reported in February last year that 21 people involved in the Ezubao scheme had been arrested after a police investigation, only Fanya chairman Shan Jiuliang is facing charges for his role in the exchange scandal.
None of the government officials who comprised a “Promotional Work Leadership Group” to popularize Fanya as an investment vehicle ahead of the launch of the metal exchange have been excused from their positions or stripped of their membership in the ruling Chinese Communist Party (CCP).
Zou Tao, an independent financial analyst based in Shenzhen, told RFA’s Mandarin Service that authorities handled the Ezubao fallout quickly because it was a private enterprise that attracted investment through huge expenditures on advertising and wasn’t tied to politics.
“Since Ezubao didn’t involve the government or officials, it was filed for investigation and processed right away,” he said, noting that the investigation into the case was closed by mid-June last year.
“The handling of the Ezubao case also didn’t involve internal pressure from senior officials.”
In contrast, Zou said, the involvement of local officials had injected politics into the Fanya exchange disputes, making the aftermath “tricky to deal with.”
“If there was an in-depth investigation into the Fanya event and the truth was made publicly available, it would very likely implicate officials of certain ranks and affect the stability of local politics,” he said.
Additionally, new government officials were appointed in Kunming after the scandal broke, but Zou said they “ignored the problems” left by their predecessors—a practice he called “common” in China.
Fanya chairman Shan said before his arrest in December 2015 that he had provided the Kunming municipal and Yunnan provincial governments with a list of 100 private companies that were lent 90 percent of money raised in the scheme and 400 individuals who were lent the remaining 10 percent. Authorities have not made any information public related to the purported list.
Investors are demanding that authorities return their capital because government support led them to trust the scheme, which was also promoted by state-owned banks and the official media, but experts say the money is almost certainly unrecoverable.
Stalling for time
Other observers suggested that the government has deliberately stalled the Fanya investigation in the hope that the public will simply forget the issue.
Financial expert Duan Shaoyi told RFA that officials routinely protect their peers from being implicated in scandals by setting up roadblocks to investigations in China, where “rule of law doesn’t exist.”
“[Local government] wants to minimize the issue because Fanya involved a lot of officials,” he said.
“The best way for them to solve the issue is though time—if they drag things out, it’ll no longer be a problem anymore. China's official way of dealing with very complicated matters is simply to procrastinate.”
Duan said that authorities should have conducted investigations into Fanya and brought criminal charges against those responsible for the scam as efficiently as they did for Ezubao because the cases are so similar.
“Fanya and Ezubao are both classic examples of premeditated fraud and their characteristics are the same,” he said.
State-owned monopolies
Regardless of how legal proceedings against Fanya and Ezubao play out, some experts told RFA that Ponzi schemes will continue in China if the government does not break up state-owned enterprise monopolies on fundraising in the country’s financial markets and allow a more competitive fundraising environment.
Hu Xingtou, a Beijing-based economist, told RFA that in order to compete with heavily subsidized state-owned enterprises, private firms must aggressively raise funds from the public and sometimes use unscrupulous methods to do so.
“State-owned financial monopolies create financing difficulties and high financing costs for private enterprises, and really do stifle business innovation and sales innovation,” he said.
Instead of providing state-owned enterprises with an unfair advantage, Hu said, the government should level the playing field and introduce alternative channels of fundraising.
“If you really want to effectively handle problems like Fanya and Ezubao, break up today's financial monopoly, develop a multilevel capital market system, and vigorously develop private banks and other loan companies,” he said.
“This would not only inject vitality into China's economic development, it would stop tens of thousands of people from investing in vehicles like Fanya and Ezubao, which were innovative but violated the law. It would prevent investors from being taken advantage of and deceived.”
Reported by Wen Jian for RFA’s Mandarin Service. Written in English by Joshua Lipes.