28 China The EconomistFebruary 3rd 2018
2 In southern China these interactions
usually take place in small groups, or one
to one. In the north the persuasion is often
done in groups of 30, crammed into a small
room. In both systems victims sometimes
have their mobile phones taken from
them. They say they never have a moment
to themselves. By the end, eight out of ten
will leave but the last two will become con-
verts. Once in the firm, everyone lives and
eats together and sings communal songs.
Some sample lyrics: “The poor shall es-
cape their fate and the rich will gain more
than they dream of.” “Invest once and your
family will be rich for three generations.”
Many perfectly legal companies try to
boost morale by getting staff to sing com-
pany songs or organising awaydays. Chi-
na’s business cults, however, combine
such techniques with violence. Zhang
Chao was a 25-year-old who was trying to
break away from an illegal MLM company
outside the northern port city of Tianjin.
He was found dead from heatstroke,
dumped at the side of a road by colleagues.
In another case, Cheng Cuiying and his
wife walked for two days to Tianjin to res-
cue their son from an MLM business. They
found him drowned in a lake. People were
arrested in connection with both deaths.
But the firms, and the money, disappeared.
Business cults seem to be growing. In
the first nine months of 2017 the police
brought cases against almost 6,000 of
them, twice as many as in the whole of
2016 and three times the average annual
number in 2005-15. Thiswas just scratching
the surface. In July 2017 the police arrested
230 leaders of Shan Xin Hui, a scheme that
was launched in May 2016 and had an esti-
mated 5m investors just 15 months later
(see chart). In August 2017, after the govern-
ment launched its campaign against “die-
hard scams”, police in the southern port of
Beihai, Guangxi province, arrested 1,200
people for defrauding victims of 1.5bn
yuan ($223m). One scheme in Guangxi,known as 1040 Project, was reckoned to
have fleeced its targets of 600m yuan. If Mr
Li’s estimate of tens ofmillions ofvictims
is accurate, they musthave handed over
tens of billions of yuan in total.
The scale of the scams worries the gov-
ernment. Their cultish features make it
even more anxious. The Communist Party
worries about any social organisation that
it does not control. Cults are especially
worrisome because religious and quasi-re-
ligious activities give their followers a fo-
cus of loyalty that competes with the party.
Hence the relentless repression since 1999
of Falun Gong, a spiritual movement
which the government describes as a cult.
Hence, too, new rules on religious activity
that took effect on February 1st. They are
aimed at reinforcing state control over
worship, decreeing that no religion may
imperil the stability of the state. The party
decides what constitutes a threat. Its
threshold is very low.
The case of Shan Xin Hui suggests that,
although business cults are a problem,
people do not blame the authorities for
causing it. Ifanything they want the gov-
ernment to help the schemes. The protest
in Beijing last July was held by thousands
of Shan Xin Hui’sdepositors. The authori-
ties closed off roads in the city centre and
sent the police to break up the demonstra-
tion. Yet the unrest was triggered not by the
scam but by the arrest of the company’s
bosses. “They have accused the company
of pyramid selling, but they did nothing
wrong. They only wanted to help poor
people,” one demonstrator-investor told
the Reuters news agency. “Shan Xin Hui
supports the party’s leadership”, says the
banner pictured on the previouspage.
The authorities will find it hard to curb
the scams for three main reasons. First, in
order to encourage cheap loans for indus-
try, the central bank keeps interest rates
low. For years they were negative, ie, below
inflation. That built up demand amongChina’s savers for better returns. With
gross savings equal to just under half of
GDP, it is not surprising that some of that
pool of money should be attracted to
schemes promising remarkable dividends.
Second, it is often hard for consumers to
spot frauds. In 2005 China legalised direct
selling, arguing that there was a distinction
between that practice and the way that
Ponzi schemes operate. But Qiao Xinsheng
of Zhongnan University of Economics and
Law argues that the difference is often
“blurred” in the eyes of the public. Scam-
mers can easily pass them themselves off
as legitimate. Dodgy companies exploit
government propaganda in order to pre-
tend they have official status. For example,
they may claim to be “new era” compa-
nies, borrowing a catchphrase of China’s
president, Xi Jinping.
Third, arguesMr Li, business cults ma-
nipulate traditional attachments to kin.
Companies in America often appeal to in-
dividual ambition, promising to show in-
vestors how to make money for them-
selves. Those in China offer to help the
family, or a wider group. Shan Xin Hui liter-
ally means Kind Heart Exchange. It pur-
ported to be a charity, offering higher re-
turns to poor investors than to rich ones.
(In reality everyone got scammed.) Busi-
ness cults rely on one family member to re-
cruit another, and upon the obligation that
relatives feel to trust each other. This helps
explain why investors who have lost life
savings continue to support the compa-
nies that defrauded them.Off with their many heads
It also explains why they are hydra-like. As
the authoritiesshut down large business-
cults, smaller ones find new ways to sur-
vive. Experts saythat, increasingly, pyra-
mid schemes are moving onto the internet.
They are often relatively small, usually
with hundreds or thousands of followers,
not millions. They cannot rely on brain-
washing in an isolated location, as face-to-
face schemes do. But they are skilled at us-
ing the closed environment of social-me-
dia chat groups to replicate that kind of
real-world experience. And they appear to
be flourishing.
These new forms could be even more
pernicious than the old because they are
extending their social reach. Previously,
schemes concentrated on pensioners and
migrant workers, the two groups that save
the most in China. The new scammers tar-
get all sorts: from the ultra-rich with mon-
ey to burn; to poor students who face a
tightening job market; to the children of
migrant workers, struggling with poor edu-
cation and falling demand for cheap la-
bour. It was bad enough when the scam-
mers operated mainly on the margins of
society, targeting its most isolated mem-
bers. Now, says Mr Li ominously, “there is a
business cult for everyone.” 7Persistent PonzisSource: State mediaChina, selected pyramid schemesHua Liang
Yilishen ant scheme
Diebeilei
Wanli Dazaolin Group
Yilin Wood Company
Zhejiang Yijia E-Commerce
Ezubao
Online Gold EGD
Wanfubi
Longyan E-Commerce
Xin Huo Cao Yuan
Shan Xin Hui
1040 Project1999-2001
1999-2007
2002-06
2002-07
2004-05
2010-13
2014-15
2014-17
2014-17
2015-16
2015-16
2016-17
2016-170.32.0
1.3
1.759.81.20.2
2.2
0.6200,000
1m
600,000
30,000
20,000
2m
900,000
500,000
120,000
200,000
1.5m
5m
4,00024.010.915.615.0Name Years active Number of investors Damage, yuan bn