What Seems Too Good To Be True Usually Is

— Special Report on Ezubao Spam Case in China

Cheng
5 min readDec 16, 2015
Doors are locked at one of Ezubao’s Shanghai offices on the 14th floor of Shanghai Stock Exchange Building on December 8. The notice on the door says the company is under investigation by the police and customers may go to the nearby economic investigation bureau for more information.

Li Genshu, who is in his 70s, would call himself a simple, honest man. He lives in his hometown of Baotou in Inner Mongolia and had a retirement savings of 500,000 yuan (US$77,382) so he wouldn’t have to depend on his daughter, who lives in Shanghai.

Peaceful scenario? Yes. So you can imagine his daughter’s surprise to find her father on her doorstep after a 24-hour train journey. He was in a state of distress.

It seems back in August, Li invested a large chunk of his savings in a wealth management product sold by Ezubao, an online peer-to-peer lending platform that offered higher return rates than bank deposits.

Admittedly, Li had never heard of peer-to-peer lending. But he was tempted into it by promises of more than a 10 percent annual return, company advertisements on China Central Television, and video clips featuring Ezubao’s comely 33-year-old President, Zhang Min, meeting with Premier Li Keqiang.

Li figured he couldn’t go wrong with something that seemed to have the backing of the government, so he initially invested 150,000 yuan and then later added almost the rest of his savings.

Earlier this month, the platform went belly up, amid accusations of possible illegal fund-raising, Xinhua News Agency reported. Li felt betrayed.

When he arrived in Shanghai, he rushed to the 14th floor of the Shanghai Stock Exchange Building where the company had an office. The doors were locked and nobody was around except for another investor in tears. Li’s heart sank.

He jumped on a bus and headed for Lingshan Road to report the case to the economic investigation bureau of the police. He waved the 30-page contract with Ezubao in front of the faces of officials.

“How could they break the contract?” he asked. ““If investors can lose their money like this, the government should do something about it. If we can’t trust the government, whom can we trust?”

Li wasn’t the only one besieging the lobby of the police bureau. From others there, he learned that nearly 114 QQ chat groups had been set up online to share information about investors’ legal rights.

But as an older man not versant with online messaging applications, Li felt isolated and morose.

Ezubao’s office in a mess at 4th floor of Shanghai China Merchants Tower, December 11.

Fake Platform

Across China, Li’s story has been repeated. Some 880,000 investors are in the same boat. When Ezubao went under, it took with it investments of 72.6 billion yuan, according to data compiled by Online Lending House, a portal site that tracks China’s peer-to-peer sector.

Ezubao, a relative upstart in the sector, grew quickly. Its assets surpassed many platforms like Lufax and Renrendai, which have been around for years. Before its demise, the declared assets of two-year-old Ezubao ranking fourth among 2,612 platforms that were still operating at the end of November.

These platforms typically field large numbers of investors and borrowers, but Ezubao had only 331 borrowers when it went under, according to its website. Among them were dozens of the companies, including subsidiaries of Anhui Yucheng Group Co, operator of the platform itself.

“It’s a fake P2P platform,” Xu Hongwei, chief executive officer of research firm Yingcan Group, told Shanghai Daily. “It’s raising funds offline from elderly people and then pretending to invest the money on behalf of those clients. It might also be using new funds to pay the interest on older contracts — a classic Ponzi scheme.”

Xu said peer-to-peer platforms should have their transactions transparent online and should have a professional team controlling risk. Ezubao had neither, he said.

Many market watchers warned investors months ago that Ezubao was not a wise place to invest money, but investors either shrugged off the advice or never got it at all.

According to files seen by Shanghai Daily, the company’s in-house evaluation system for staff showed that each subsidiary in a Tier 1 city had to generate at least 27 million yuan as a monthly target. There were also benchmarks set for new client enrollment and a lower redemption rates.

Grab Customers

The company declined a Shanghai Daily request to provide details of its so-called “finance and leasing solutions.”

One staff member named Cheng Juan is sitting at home waiting to hear the results of the police investigation to clarify whether Ezubao was engaged in criminal activity or civil malpractices.

“I just did what I told to do, grab customers.” Cheng told Shanghai Daily. “I personally invested 600,000 in the platform, and I believed the group’s operations were all in order.”

Hundreds of name card cases were thrown aside in the corner of Ezubao’s office in Shanghai China Merchants Tower, December 11.

Cases like these are unsettling in an industry that had 133.1 billion yuan in investments at the end of November. That was up about 4.2 percent from a year earlier, Online Lending House said.

It’s always been a risky place to invest, especially for the uninitiated. Cases of fraud and improper operations resulted in 79 platforms ordered to close last month. That brought the number of problematic platforms to 1,157 by the end of November.

The sector is facing sweeping changes in the aftermath of the July 18 guidelines issued by the People’s Bank of China. The new rules limit the role of peer-to-peer lending platforms to intermediaries between lenders and borrowers and ban them from raising funds on their own to lend out.

Up to 90 percent of the platforms may have to change their business models or shut down altogether, one market watcher said.

Liu Shengjun, executive deputy director of the China Europe International Business School, said at a forum on Sunday in Shanghai that Ezubao is a victim of tighter government regulation and he expects even larger failures to occur in 2016.

“It’s both good way and bad,” Liu said. “Such big frauds will damp investor enthusiasm for P2P platforms, but at least the publicity will prompt people to take a closer look at where they invest.”

Timeline of the Ezubao case:

February 2, 2014:
Jinyirong (Beijing) Internet Technology Co, a subsidiary of Anhui Yucheng Group Co, is established to operate Ezubao.

June, 2014:
Rong360, an online tracker of the peer-to-peer lending industry, gives Ezubao a “C-minus“ rating and warns investors about risks related to the vagueness of its stated business model description and possible illegitimate money pooling.

June 21, 2014:
Ezubao defends itself in an announcement, saying there is no evidence to support Rong360’s assessment.

December 3, 2015:
Rumors circulate that about 40 Ezubao staff in Shenzhen are under investigation by police.

December 4, 2015:
Ezubao denies the rumors and accuses critics of scare-mongering.

December 8, 2015:
Ezubao shuts down its website and dismisses staff, saying it will cooperate with a police investigation.

December 12, 2015:
Xinhua News Agency reports that police authorities are accusing Ezubao of illegal practices.

December 14, 2015:
Protesters who claim to be investors of Ezubao assemble in front of the Beijing headquarters of CCTV, accusing the state broadcaster of misleading the public by airing Ezubao ads.

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