There are hundred of thousands, if not millions of these kind of investment ponzi schemes in China (for more stories please go to the China Shark Loan Ponzi Finance section ). They often involve fake projects and offer unrealistically high return guarantees.
This gold mine project ( Hui Xing Project ) is based in inner Mongolian. The local government gave all the approval papers needed to start the fund rising. The powerful Development and Reform Committee , along with a top party leader actively promoted the ponzi scheme. (See attached pictures of government approval documents, investment contracts and protest of investors on the streets)
In Guangzhou city alone, 1,500 elders lost a total of 150 million Yuan in this “Gold mine investment project”
The Ring leader took the money, and vanished without any trace. Up until this day it is not clear if a mine ever existed. What is clear that the investment fund paid high interest payments to the investors, until he couldn't raise enough cash and ran away.
Unlike the Madoff scheme, where the SEC only closed their eyes to the scheme, in this case government officials' activity promoted the fund and profited from it.
As we explained in The Secret Engine Behind China’s Housing Bubble- The Ponzi Shark Loan Finance:
This is how this Ponzi scheme works:
Local governmental officials that are demanded from the government to produce double digit GDP growth numbers give real estate developers permits to build housing projects in return for bribes. They also get bribes in return for allowing the shark loan companies to operate under their jurisdiction. Some of them are active partners in shark loan businesses. For example, a party secretary of legal affairs, that controls the public security bureau, which is a court and prosecutor division of government in Yanking city, in She Kiang province tired to run abroad using a passport in 2009 after he found out he can’t repay 60million Yuan. Every scheme has a ring leader whose job is to collect money from all the participants in the ponzi scheme. When some of these ponzi schemes blow up, the party leaders always get bailed out first, and some even ask local business owners to lend them money, and then bail out their own personal fund. After that the ring leader turns himself in and gets protection from the local government.
Most of the funds that are collected in this classic ponzi finance go to local land purchases and real estate development. Part of the funds are used in order to pay back the rolling loan. The short term interest rate in this black market is very high and ranges between 20%-150% annual rate. The sources of the ponzi funds are diverse, as ordinary citizens, banks with corrupted bank officials, and state enterprises play the game.
As happens many time in China, all the relevant media exposure of this ponzi scheme was censored and deleted. The only trace of evidence can be found in blogs and internet forums.
For the full story (in Mandarin), please check this bbs link
You can read more about potential for civil unrest resulting from collapsing ponzi schemes at China’s Shark Loan Ponzi Finance- As Ponzi Schemes Collapse the Chinese Government Fears Civil Unrest
Elderly Chinese demanding their lost money back
Local government approval of the "investment fund"
Another approval from a different government agency
A contract between the "investment fund" and the local government
Investors protest
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