Ponzi Scheme Uncovered in China; Sign of Things to Come?

As reported by Xinhua News Agency, fourteen people have been arrested in China's Zheijang Province for "unscrupulous speculative practices" and later charged with illegally absorbing public deposits in association with investment in a supposed tea company.

According to prosecutors, from June 2007 to May 2011, the suspects solicited what investors thought were initial offerings of a listed company in the hopes of realizing substantial returns, eventually raising almost twenty million dollars.  Prosecutors say that nearly 1,000 investors were duped into investing with the suspects, who used several companies including the Hongru Tea Industry Co. Ltd. and the Hongru Cultural Development Holding Group to raise the money.

 While this scheme pales in comparison to the much larger Ponzi Schemes uncovered lately in the United States, it raises an important question: will a slowdown in the Chinese economy result in the unmasking of Ponzi Schemes as happened in the United States?  As a result of the slowing of the US economy from 2007 to 2009, a large number of Ponzi Schemes imploded due to the drying up of new investors needed to sustain the distributions.  Yet, while the US economy sustained negative GDP growth during this period, Chinese GDP growth remained positive, dipping to a low of 6% GDP growth in early 2009.  As the global economy has recovered, the Chinese economy has rocketed back to double-digit GDP growth.

While economic growth has remained constant in China, a deflating bubble in real estate prices that have increased substantially in the past two decades presents serious implications for future growth.  In the United States, the uncovering of numerous Ponzi Schemes began occurring towards the last half of the Great Recession, presumably when new investor funds began drying up and preventing investors from receiving regularly scheduled distributions.  Common sense dictates that such a situation could certainly occur in China should a similar economic slowdown occur, especially in light of the incredible growth in the Chinese economy over the past decade.