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The dangers of investing in private finance firms
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Yang Ying, an art teacher in northeastern China, entrusted 480,000 yuan (US$76,000) to a major Internet-based lender, Ezubo, after seeing advertisements on state television, which she took as a sign it was safe.
Just a week later, she was horrified to see news reports that Ezubo, which collected billions of dollars in deposits, had been raided by police who froze a bank account and detained executives. She called city hall in her hometown of Changchun and was told to hire a lawyer, but she says she cannot afford that while her money is tied up in Ezubo.
Yang, 31, said she saw Ezubo’s advertising on state broadcaster CCTV right before the evening news, but “what really persuaded me is the advertising on the variety show on Anhui Satellite TV,” a prominent regional broadcaster.
“Pretty famous stars are on that program,” she said.
The seizure of Ezubo has added to tensions over private finance companies that have been battered by defaults due to an economic slump in China.
Regulators allowed private sector lending to flourish over the past decade to support entrepreneurs who create new jobs and wealth but are largely shut out of lending by the state-owned banking industry.
Regulators tightened controls after economic growth slowed. The finance industry has come under tougher scrutiny after a plunge in stock prices in June led to accusations of insider trading and other offenses.
Ezubo was raided on December 8 on suspicion of raising money without the required licenses, according to Xinhua news agency.
Ezubo collected 74.7 billion yuan (US$11.8 billion) in deposits since its founding on February 25, 2014, according to Xincainet, a financial information website. Other news reports gave similar figures but none said how much the company owed to depositors at the time it was seized.
Yin Jun, 22, an employee of a solar power company in the province of Jiangsu, said he deposited 60,000 yuan (US$10,000) in Ezubo.
“We contacted a lawyer, and the lawyer said there are too many things involved in this case, and because it is under investigation now, it is better to wait to see the authorities’ decision,” said Yin.
Private finance companies attract money by paying more than state-owned banks. The benchmark interest rate of 1.5 percent on a one-year deposit is less than inflation. The Internet has helped draw in deposits from working class or rural depositors, many of them financial novices who have little knowledge of the risks involved.
The industry’s popularity reflects the Chinese public’s urgent search for an alternative to low interest paid by banks. It propelled the flood of money from novice investors that fueled this year’s explosive rise of Chinese stock prices, which peaked in June and have plunged since then.
Peer-to-peer lenders allows small loans from one individual to another. The lenders started out putting savers in touch with borrowers.
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