# Ezubao

Ezubao (Chinese: e租宝) was a peer-to-peer lending scheme based in the eastern Chinese province of Anhui. It was set up as an online scheme in July 2014, attracted funds of about 50 billion yuan ($7.6 billion) from 900,000 investors, and ceased to trade in December 2015. On 1 February 2016, the scheme was closed down and 21 involved people were arrested. Zhang Min, the president of the parent company, Yucheng Global, told investigators that the company operated as a Ponzi scheme. Following its establishment, Ezubao grew rapidly, masquerading as a legitimate investment opportunity while operating under the guise of peer-to-peer lending. Revelations about the fraudulent nature of Ezubao’s operations emerged after an exposé in late 2015, leading to public outcry and intensified scrutiny by regulatory authorities. The scale of Ezubao’s Ponzi scheme, which orchestrated a sophisticated ruse involving fake projects and returns, was unprecedented in China, contributing to an estimated loss of billions of yuan for investors. The scandal not only devastated the finances of nearly a million individuals but also prompted a nationwide tightening of regulations on the peer-to-peer lending industry, aiming to close loopholes and restore investor confidence.

## Background

Ezubao, initiated in July 2014 in Anhui Province, was designed to be a digital facilitator in the peer-to-peer lending sector. It distinguished itself by enabling individuals to directly lend to and borrow from one another via an online platform. The allure of Ezubao was rooted in its proposition of high-yield returns, far outstripping traditional banking interest rates, which captured the attention of a vast number of investors. The company's operational strategy was predicated on an accessible investment model, with minimal entry thresholds, enticing a wide demographic of investors. This accessibility, coupled with high promised returns, was pivotal in its rapid customer base expansion. Ezubao’s growth trajectory was heavily bolstered by its sophisticated marketing campaigns. The company's sponsorship of significant national events and strategic advertisement placements lent it an aura of credibility and reliability.
A key aspect of Ezubao's expansion strategy was targeting financially underserved populations. The company smartly positioned itself as an alternative financial solution for individuals and small enterprises who found themselves excluded from conventional banking services. This approach resonated particularly in rural areas, where traditional credit access was limited, and Ezubao's offerings appeared as a potentially lucrative opportunity.
Ezubao adeptly cultivated an image of legitimacy and state endorsement. This perception was reinforced by its visible presence at notable national events and the strategic placement of its advertisements in high-profile media outlets. Such tactics successfully misled many into believing in the scheme’s authenticity and government approval. Notwithstanding its initial success, signs of operational irregularities and potential unsustainability began to surface. Reports of payment delays and challenges in fund withdrawals started emerging, raising red flags about the viability of Ezubao's business model.

## Ponzi scheme

Individuals who wanted to take part in the scheme invested their money in the expectation that the money would be lent to borrowers and repaid, with interest, over time. Investors would be matched with borrowers over the Internet. The scheme promised to pay investors around seven times the interest rates that could be obtained by depositing the money with a bank in the normal way, with interest rates of between 9% and 14.6% being promised. Additionally, the investment threshold was remarkably low, requiring only a minimum of 1 RMB to invest in any of its six financial products. Ezubao offered short holding periods of 3, 6, or 12 months, with a notably swift withdrawal process, allowing investors to access their funds within just 2 to 10 days after submitting a withdrawal notice.
The company sponsored the online broadcasts of the National People's Congress and placed advertisements on the state-run China Central Television, both of which gave people confidence in the scheme. Over a thousand sales agencies were established across the country to promote the scheme to the general public, and tens of thousands of customers were joining each week. Many of its customers were small investors from rural areas.
Ezubao capitalized on the financial vulnerability of these small investors. In a financial landscape where individuals, households, and SMEs often find themselves sidelined due to a lack of connections for credit access, Ezubao's peer-to-peer lending platform emerged as an appealing solution. These groups, traditionally underrepresented in bank credit allocations and receiving less than a third of all credits despite their substantial role in the economy, saw Ezubao as a viable option to address their capital needs.
Several factors encouraged people to think the scheme was "approved" by the authorities: the prominent positioning of its ads just before the main evening CCTV news bulletin, its participation in the 12th China-Association of Southeast Asian Nations Expo, its announcement of the formation of a militia at an event attended by senior officials of the People's Liberation Army, and it's doing business nationwide across China and in neighboring Burma.

## Economic overview

In the early to mid-2010s, China's economy was characterized by robust growth and a surge in investment, particularly in emerging financial sectors such as peer-to-peer (P2P) lending. This period saw a rapid expansion of the P2P market, driven by the lack of stringent regulations and the banking sector's focus on larger enterprises, leaving a gap in the market for small and medium-sized businesses and individual borrowers. The traditional banks' preference for financing large-scale projects created an opportunity for P2P platforms to cater to underserved groups, particularly middle and lower-income individuals and small businesses. This growth, however, was accompanied by regulatory challenges, as the swift expansion of the P2P industry outpaced the development of a comprehensive regulatory framework, leading to increased risks associated with these new financial models.
Ezubao emerged as a key player in this rapidly evolving landscape, offering an attractive proposition with high annual percentage yields (APYs) of 9-15% and various holding periods, significantly higher than those offered by conventional banks. The platform's approach included extensive advertising campaigns and the portrayal of government affiliations, which enhanced its appeal and perceived legitimacy. These tactics were successful in attracting a large number of investors, capitalizing on the broader economic environment and the public's growing interest in innovative financial products. However, the lack of strict oversight and the platform's aggressive growth strategy ultimately exposed investors to significant risks, exemplifying the challenges and potential pitfalls of the burgeoning P2P lending sector during this period.

## Utilization of capital by beneficiaries

To understand Ding Ning's later extravagant spending, it's important to consider his humble beginnings. Raised in Bengbu City, Anhui, a largely unknown city with over a million residents, Ding Ning was perceived as unremarkable, both intellectually and emotionally, by those around him. His lack of interest in traditional industrial businesses which his parents started, foreshadowed his future financial decisions.
Ding Ning's lavish lifestyle included spending $150 million on luxury items, gifts, and properties. He gifted Zhang Min, Yucheng's president, a $20 million Singapore villa, a $1.8 million pink diamond ring, luxury limousines, watches, and over $83 million in cash. Additionally, he spent an estimated 1.5 billion yuan of Ezubao funds on personal expenses, including mandating his staff to wear only luxury brands and instructing Zhang Min to aggressively purchase from high-end stores like Louis Vuitton and Hermès across China and overseas.
Ezubao was infamous for its excessive financial practices, including paying overqualified salaries of more than $100 million yearly. A notable example was Ding Dian, the younger brother of the founder, who, despite being new to the firm, earned a monthly salary of $146,000, significantly higher than his previous $2,600. This trend of hefty paychecks, often to inexperienced executives, was a hallmark of the company's management strategy. Additionally, Ezubao's extravagant spending extended to marketing, with monthly expenses of $3.6 million for CCTV ads, and leasing a luxurious 10,000 square meter Beijing office at an estimated $52 million per year.
In Myanmar, Ding Ning and Yucheng Group reportedly transferred $1.5 billion to territories controlled by the United Wa State Army near the Chinese border. The group had plans for a significant investment of $6.1 billion to develop a free trade zone in Panghsang, the UWSA headquarters, and to operate a commercial bank in the area.

## Downfall

Ezubao unexpectedly stopped trading in December 2015. Worried customers started complaining and the police started investigating. The official Xinhua News Agency reported on 1 February 2016 that 21 people involved in the scheme had been arrested, including Ding Ning, chairman of the Yucheng Group. Chinese police reported that they were investigating the peer-to-peer lending company and had frozen and seized its assets, and those of the companies linked to it. The president of the parent company, Zhang Min, had told them that the company operated as a Ponzi scheme, with money from new investors used to pay money due to earlier investors; it is reported that about 50 billion yuan ($7.6 billion) had been invested in the scheme by about 900,000 investors. The authorities announced in early February that Ezubao clients could register their grievances on the website of the Ministry of Public Security.
Xinhua reported that Ezubao had been under scrutiny since December 2015. An investigation into the company by local authorities had found that about 95% of the investments made were fake and that the purpose of the lending platform was to enrich senior executives. The perpetrators had concealed 1,200 documents in 80 bags, and had buried these 6 m (20 ft) underground on the edge of the provincial capital, Hefei. The police had managed to unearth the documents after twenty hours of work with two excavators.

## News coverage

After a further investigation was done to reveal the truth behind the Ponzi scheme antics, Ding Ning and other executives were arrested and were seen cooperating with investigators as they would admit the company structure of Ezubao and explain it as a "typical Ponzi scheme". Ding Ning perhaps under duress would confess all the wrongdoings of the company including the luxury purchases that were made with the investor's money as well as where some of the evidence was hidden. Some of the notable purchases were a mansion in Singapore that he gifted his wife as well as all the luxury groups that he gifted the executives with the goal in mind that if they wore more expensive clothes they would give off more of a reliable aura. In a state-broadcast news report by CCTV, excavators dug up evidence from the online financial company that was suitcases full of cash that was from their money laundering practices. According to the Xinhua report, individuals involved in the scheme concealed approximately 1,200 documents and related evidence in 80 bags, burying them at a depth of six meters, or almost 20 feet, in an area on the outskirts of Hefei, the capital of Anhui Province. Unearthing the evidence proved challenging, requiring 20 hours and two excavators, with the police characterizing the case as "extremely difficult."
A victim of the Ezubao scandal explained her personal experiences with the company and expressed her rationality in trusting and investing in the investment company that she believed had her interests as their priority. Her first experience with Ezubao was when she saw the advertisement on state-run CCTV at a prime time which gave her the impression that this company must be a large conglomerate that was approved by the government. With the advertised return rates from 9% to 14.6% the victim was quick to invest into the competitive company. Although most of the money that she invested came from her husband's parents, it was still a hefty amount equivalent to around USD 31,000. In December 2015, Ezubao abruptly shut down all doors and communication sources and tried to escape from the media. However, they were unsuccessful as the CEO was arrested and eventually confessed about how the entire operation was just a simple Ponzi scheme. After investors were alerted that this investment firm was just a disguised Ponzi scheme, they were furious and lined up outside the State Bureau for Petitions in late December with hopes of recovering their lost money. Protestors were detained by police officers to discourage demonstrations and there were censors applied online to try to ease the distress of the public. Chinese officials promised that clients could register their grievances on the Ministry of Public Security's website and have their cases dealt with on a personal level.

## Regulatory response

Following the closure of Ezubao and street protests, Chinese authorities recognized the imperative to promote financial stability, safeguard investor interests, and uphold market integrity. This realization prompted the implementation of stricter regulations in the fintech sector. Notably, the regulatory framework for P2P lending had been established by Chinese financial authorities as early as 2011, albeit with lax enforcement. Especially because of incidents like Ezubao, the regulatory measures now encompass directives "prohibiting P2P lending platforms from accepting investor deposits, ensuring borrowers' loans, securitizing assets, or participating in Ponzi schemes."

### Timeline

* Notice of the General Office of China Banking Regulatory Commission on Warning of Risks Associated with Peer-to-Peer Lending. 2011
* The Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security on Several Issues concerning the Application of Law in the Handling of Illegal Fund-raising Criminal Cases 2014
* Guiding Opinions on Enhancing Positive Development of Internet Finance (here- after Guiding Opinions) July 2015
* Interim Measures for the Administration of the Business Activities of Online Lending Information Intermediary Institutions Aug 2016
Chronologically, the China Banking Regulatory Commission (CBRC) issued the draft of the P2P lending regulation in December 2015, with the official announcement following in August 2016. Industry associations self-regulated the P2P lending sector, and there was the possibility of regulation by credit rating agencies (CRAs) specializing in P2P lending. “For example, the National Internet Finance Association (NIFA) was established to ensure transparency and the disclosure duty of the Internet finance industry, including P2P lending.”
By doing so, these enforcements made an effort to enhance market transparency and had an overall quasi-regulatory impact on all platforms. “In 2014, the Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security in China issued joint opinions, the Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security on Several Issues concerning the Application of Law in the Handling of Illegal Fund-raising Criminal Cases. These three authorities identified several risk factors associated with P2P platforms and set four rules to ensure that a P2P lending platform is (1) an intermediary agency, (2) not providing guaranteed service, (3) not keeping any funding pool, and (4) not engaging in a Ponzi scheme. The business scope of P2P lending was, however, gradually expanded, rather than merely being controlled by the Chinese authorities.”
Subsequently, the Chinese central government introduced another set of regulatory measures known as the Guiding Opinions on Enhancing Positive Development of Internet Finance (hereafter Guiding Opinions) in July 2015. Six months later, a public consultation on interim measures for P2P lending was initiated in December 2015.
The Interim Measures for the Administration of the Business Activities of Online Lending Information Intermediary Institutions (hereafter Interim Measures) were officially announced on August 24, 2016, consisting of eight chapters with 47 articles.

## Future of P2P lending in china

In 2016, the P2P lending industry underwent the implementation of rigorous governance measures. Subsequently, numerous significant policies focusing on information disclosure were enforced. The macroeconomy experienced a downturn, and the process of financial deleveraging persisted. Within this timeframe, there was a notable rise in credit risk, accompanied by an increase in the overdue rate. Thus, many P2P lending platforms "went out of business: 1,071 in 2018 and a further 344 in 2019."
As of March 31, 2020, there were “139 online lending institutions that were continuing their operations nationwide, which represents a decrease of 86% compared to the beginning of 2019. “The loan balance fell by 75%, the number of lenders fell by 80% and the number of borrowers fell by 62%. Moreover, the number of institutions, the scale of loans, as well as the number of participants have declined continuously in the past 21 months. Since the regulation and rectification of the “cash loan” business have begun, a total of nearly 5,000 institutions have withdrawn from the industry."
The regulatory authorities are actively addressing risks associated with internet asset management, virtual currency speculation, and illegal foreign exchange transactions. In 12 provinces and cities, namely Shandong, Hunan, Sichuan, Chongqing, Henan, Hebei, Yunnan, Gansu, Shanxi, Jilin, Inner Mongolia, and Shanxi, P2P firms have been officially prohibited. This indicates a halt in potential growth avenues for the P2P industry in these regions. As a result, P2P lending entities within these areas are obligated to undergo a shift towards becoming small lending companies or opt for a complete exit from the industry. While the prospects for the P2P sector may not be optimistic in China, online lending at large is increasingly garnering attention and is influenced by distinct trends.

## Analytical commentary

Victor Shih, political scientist at the University of California, San Diego, commented: "The awkward truth is that Chinese regulators either knew about the scam and did nothing, or they completely missed the massive fraud". He added "Did provincial regulators know? They had to know".