Bernie Maodoff: The million-man ponzi

If you can’t trust high-yield wealth management products based on peer-to-peer lending in China, what can you trust?

— Downtown Josh Brown (@ReformedBroker) February 1, 2016

There’s a ponzi scheme unraveling in China that may have caught close to a million people and over $7 billion in its jaws.

In China, you don’t have unlimited options for earning income on the money you want to save. You can own Chinese equities on local exchanges, but the volatility has got to be off-putting, even for a culture in which gambling is so deeply ingrained.

But because of demographics, people are being forced to reach for high income given the amount of single children trying to support the lifestyles of both their parents. Just earning the interest in a bank account may not be enough. Stuck between the high-octane shares market and the restrictive income on offer from bank interest rates, many Chinese investors have opted for a third course for their savings.

This has given rise to a massive complex of “wealth management” products that are based on infrastructure investment – where a pooled fund of retail investor money is directed toward building power plants or hydroelectric dams or toll roads or what have you.

This incredible story, about a wealth management fund’s admission that they were sharing details with investors about phony projects that never existed, has the potential to lead to another leg down in Chinese consumer confidence and the willingness of the world to deploy capital in their markets.

Chinese stocks are down another 20% since the start of this year, placing them among the worst asset classes in the world so far in 2016. I can’t imagine this kind of headline risk making things any better.

Read it here: