Wednesday, February 3, 2016

This Is What Central Bankers Think Of Retail Investors

We previously covered the recently burst mega-Ponzi scheme fraud, Ezubao, the biggest in Chinese history which conned more than 900,000 investors out of $7.6 billion in less than two years under the guise of being a P2P lending platform, in this is what happens when "Chinese Investors Find Out They Got Fleeced By A $7 Billion Ponzi Scheme" and in "We Need To Rise Up": Bilked Chinese Investors Call For Nationwide Uprising After Massive Ponzi Uncovered." 
Of course this being China, even the Ponzi schemes are next level: as we noted before, police had to use two excavators and dug for 20 hours to unearth 80 bags of evidence that Ezubo executives had buried six meters underground on the outskirts of Hefei, a city in the eastern province of Anhui.
Then overnight, Reuters added some more juicy details to this epic fraud: executives at Ezubao's parent company, Yucheng Group, now say it was "a complete Ponzi scheme", which used investor funds to support a lavish lifestyle, the official Xinhua News Agency reported this week.
Among gifts that Yucheng Chairman Ding Ning gave his president, Zhang Min, were a $20 million Singapore villa, a $1.8 million pink diamond ring, luxury limousines and watches and more than $83 million in cash, Xinhua stated.
Amazing, but the real question is just how many other Ezubao are lurking. The short answer: many.
China's P2P and the online finance industry also serve as a critical channel for the emerging small business and consumer market, which is often ignored by banks and mainstream financial institutions. iResearch predicts China's unsecured consumer finance market alone will triple in size by 2019, reaching outstanding loans of over $1.7 trillion.

By November, there were over 3,600 P2P platforms as the industry raised more than 400 billion yuan, according to the China Banking Regulatory Commission (CBRC). More than 1,000 of those were problematic, it said.

The consequences when these schemes fail can be devastating, said Yang Dong, vice-dean at Renmin Law School and an expert on finance and securities law. "The harm is obvious. It's going to damage financial reforms, cause social unrest and destabilize the regime to some extent," he told Reuters.
400 billion yuan means as much as $60 billion in investor funds may have been Corzined from millions of soon to be very angry Chinese investors: we eagerly wait to discover their reaction when they learn the news.
But how could China's regulators be so asleep at the wheel? How could they allow such massive Ponzi schemes, which all guaranteed double digit returns and promised investors they would "get rich quick" at a time when the economy is foundering, to proliferate so easily for so long?
The answer brings us to the punchline of this post.
According to Reuters, it all has to do with the utter disdain that China's ruling echelon has for its upwardly mobile middle class, and specifically those tens of million of Chinese retail investors who have now been burned so badly in just the span of one year participating in a market which everyone warned for months is an epic bubble waiting to burst and which, well, burst and has been crashing ever since last summer.
Here it is:
A report on China's stock market crash authored last year by former senior officials, including former central bank vice governor Wu Xiaoling, said Chinese retail investors are short-sighted, have a weak investment philosophy and a herd mentality.
And there it is: central bankers who abuse the naive stupidity and herding of those who are "short-sighted" enough, to put trust in the system.
But the real problem is that this is not just a Chinese issue: this is prevalent across the entire world, in both Emerging and Developing countries, as a result of the hubris, the arrogance and the megalomania of the tenured economist class and its sycophant media enablers, who as a result of centrally-planning the world for the past 7 years, are convinced they can treat those whose money they desperately need to preserve the status quo as cattle.
In China, they are in for a very rude awakening. And soon, once the hypnotic spell of central banker omnipotence finally wears off, the outcome will be the same around the globe, an outcome which anyone who lived through even a few years of Soviet central planning, knows how it ends.