(Bloomberg) — Little-known private investment firms have been popping up all over China, luring pensioners' savings by promising annual returns of more than 10 percent, and sometimes as high 60 percent, to fund cash-thirsty projects unable to get bank loans.
Distributing fliers outside supermarkets and drawing on word-of-mouth, the private firms — part of China's unregulated network of shadow financing-— typically lure retirees with the offer of free lunch. A recent feast of radish soup, spare ribs, red-cooked pork, fried vegetables and a yogurt cup at a downtown Beijing restaurant drew about 100 mostly elderly people to hear a passionate lecture on the importance of investing.
Attendees were treated to a magic show in which a magician chopped off the hand of his assistant in a bloody flourish, a bamboo flute concert, a whirling acrobat, and lucky drawings — as well as the promise of 12 percent annual returns to lend their money to a real estate project in Chengdu.
"The project sounds not bad, just the return is a bit low," said Fan, a blasé 62-year-old attendee who only gave her surname. She does this all the time and normally expects higher rates, no less than 15 percent on average, she said.
That's low compared with other investments being touted to Beijing's elderly. A typical supermarket flier will list several offers with returns in the low double-digits. When potential investors phone up, they're offered higher rates for even riskier products. A recent one, to fund the acquisition of a small oil pipe company in Jilin province, promised 5 percent a month, or 60 percent annually.
Be Wary
The risk that some will turn out to be Ponzi schemes and never pay back the principal propels the wisest of the elderly investors to be wary. They advise each other to attend only investment pitches with lower returns, eat the free lunch on offer and take their money out relatively quickly before any signs of repayment difficulties emerge.
Another lunch attendee who only gave her surname as Wang said her self-imposed cutoff for investments is a 20 percent annual return, and that she makes site trips to see projects herself whenever possible. She knows two people who put money into a product offering more than 30 percent last year, only to see their investments sour after receiving just two monthly payments, she said.
"My experience is, don't stick with any company for too long," Wang said, as the emcee loudly read out names of people who he proclaimed had just collectively pledged more than 2 million yuan (about $313,800) to fund the Chengdu project.
While it's possible for experienced investors to make money from investments that turn out to be Ponzi schemes, the risk is like "pulling chestnuts out of the fire," said Liao Qiang, a Beijing-based analyst for Standard & Poor's.
Least Transparent
China's 147 million pensioners are plowing more of their money into investments other than deposits. Net inflows into open-end mutual funds jumped 32-fold from a year earlier to 1 trillion yuan last year, according to a June report from the Asset Management Association of China. While investors older than 60 accounted for only 9 percent of all such accounts, their average investment of 42,800 yuan as of Dec. 31 was the highest among all age groups, compared to 8,100 yuan among people younger than 30, according to the report.
As China's massive market selloff leaves many Chinese jittery about stocks, little-known investment companies have proliferated, prompting authorities to try to crack down with little result. China's lowering of interest rates paid by banks four times this year, as well as a tightening of lending to riskier projects, is also fueling growth.
'Informal lending'
"This informal lending segment of the shadow banking system is one of the least transparent and regulated, and is likely to be among the most risky for investors," said Stephen Schwartz, a Hong Kong-based senior vice president at Moody's Investors Service. "Based on anecdotal information, we understand that this activity has become more widespread in the past year or two."
Demand for loans is unrequited in a country where the shadow banking system, which includes all lending outside banks, has already grown to an estimated 41 trillion yuan at the end of last year, equivalent to 65 percent of gross domestic product, according to Moody's. Small businesses and unrated property developers are likely "encountering tighter financing conditions" as increased government scrutiny slows the growth of core channels such as trust loans, the rating firm said in a July report
Violating Rules
While many of the investment companies are registered asset managers with offices in high-rise downtown buildings, they risk violating a government rule banning any marketing of private products to the general public.
