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Money Game: Rotating illusion of getting wealthy
By Raymond Zhou (China Daily)
Updated: 2004-06-30 08:35

Four years ago, the Internet boom went bust, with billions of dollars evaporating from the stock market in a matter of weeks. In a coastal city in Southeast China, a similar bubble was pricked last month.

Biaohui fever once gripped the entire city of Fu'an in East China's Fujian Province. [China Daily]

Proportionally, this bust was more catastrophic as it affected 80 per cent of the households in a city of only 650,000 people, which is small by Chinese standards. The doom and gloom in Fu'an, Fujian Province, is palpable. Everywhere there are posters that read: "Ban any form of threat, kidnapping or other illegal means of getting to the debtors."

Yet the city has recorded dozens of incidents of violence in the aftermath of the crash.

How it started

The first domino fell on May 16 when a woman called Li Zhu turned herself in to the authorities.

Li was the head of a grassroots organization that plays with money, to put it bluntly. Called biaohui in Chinese, it is sometimes translated as "rotating savings and credit association."

According to Zheng Chengwen, director of the Finance Institute of the Guangzhou Academy of Social Sciences, biaohui is nothing new and by no means limited to China, let alone one city in Fujian. It dates back hundreds of years, and can be found in various forms in other Asian countries. The origin is quite clear: a number of friends and relatives pool their money together so that one of them can use the fund for purposes such as family emergencies or business startups. In turn, all members of the group become recipients of the funding, which comes from everyone in the group.

"At first, nobody charged any interest for lending money on a rotating basis, which is what biaohui essentially does. It was all done in the spirit of mutual help," explains Zheng. "That (interest) came much later."

In Fu'an 10 years ago, biaohui did involve interest payment, but everything was built on a small scale of familiarity. One typical group might have a few dozen members. Each contribution was somewhere between 100 and 1,000 yuan (US$12-120). Meetings would take place on a monthly basis.

A list of participants in a 1,000-yuan (US$120) biaohui. [newsphoto]
Here is how it operated: For the sake of simplicity, let's assume we have a 1,000-yuan (US$120) biaohui of 12 members. Each time they meet, everyone chips in 1,000 yuan (US$120), accumulating a total of 12,000 yuan (US$1,440). Then, auction-style, everyone bids for this sum, and the one who offers the highest interest rate gets it.

If 12 per cent is the highest bid for the first meeting, during the next 11 monthly meetings, when everyone else has their chance of winning, the first winner will have to put in 110 yuan (US$13), which is the monthly interest payment on 11,000 yuan (US$1,300), the sum he borrowed. In addition, he has to shell out the monthly 1,000 yuan (US$120).

The mechanism of biaohui is heavily skewed towards late winners. While the first winner has to pay the highest number of times, the last one gets the money interest-free. At that time, he will be the only remaining bidder and wins the loan by default.

In an ideal world, people would bid according to their specific needs. For example, someone who has to pay a medical bill for an expensive operation for his daughter would be more eager to win the money; and someone running a business with a 30 per cent profit margin would be willing to bid a 20 per cent rate if they needed operating capital.

Money madness

However, things are not that simple. The early winners, sensing that normal businesses would not yield such good returns, turn around and form bigger biaohuis. For example, if you are in a 1,000-yuan (US$120) group and get the winning bid, you may use the 1,000 yuan (US$120) in your hand as the first payment in a 10,000 yuan (US$1,200) group.

As long as more and more people join in, the game can be played like any pyramid game, creating the illusion of abundant wealth. But in reality, no wealth whatsoever is being created because it is a zero-sum game. When nobody is using the money as capital, the whole thing is nothing but a gamble.

The Fu'an people were aware of the nature of their game. Unlike the Internet bubble, where fabulous prospects and astronomical sales projections were touted, Fu'anese in their hearts knew it was not sustainable. But everyone kept their fingers crossed, hoping it would not crash down on them.

Biaohuis snowballed in the city. Group sizes grew from a dozen members to over 100. By some estimates, there were 2,000 biaohuis of various sizes operating in the city. Contributions ballooned from 100 yuan (US$12) for each member to 100,000 yuan (US$12,048) or even higher. The frequency of meetings shot up from monthly to weekly, and then daily.

The city was teeming with so much cash that, earlier this year, all upmarket hotel rooms and restaurants were booked solid. People were spending money like there was no tomorrow. In the underground gambling dens, a stake of 9,000 yuan (US$1,084) was brushed aside by the dealer as inadmissible "small change", according to a popular story.

When a biaohui head or member could not come up with the requisite payment, he or she would pen a promissory note. Many of the notes that surfaced after the crash were denominated in millions of yuan. The smallest amount, in one survey, was 400,000 yuan (US$48,192).

The biggest known biaohui head in Fu'an was Chen Lixuan, a 27-year-old woman. She became a people's representative (a local congresswoman) after she footed the bill for the building of a 80,000-yuan (US$9,638) public toilet. That was peanuts to her when she controlled a 300 million yuan (US$36 million) biaohui.

Many blamed Li Zhu for "disrupting the chain of the biaohui game" when she turned herself in. But Li had no way out, she said. Early in May, one of her members ran off with his winning bid. That person was the head of another group. As the scheme evolved over the years, it was no longer one pyramid game, but thousands of games interconnected with one another.

Zheng Chengwen, the Guangzhou financial expert, believes that it was probably a smart move for Li to put herself in jail. "It is much safer there," he says. Police found an IOU in her home showing that she owed 15.6 million yuan (US$1.9 million).

In the days after Li put herself behind bars, more biaohui heads and members disappeared with whatever money they had in their hands. Suddenly the banks, which had been bleeding cash, had a daily injection of deposits that exceeded 100 million yuan (US$12 million).

Members of Li Zhu's biaohui stormed her million-yuan house, taking away anything of value, and smashing whatever they could not remove. The place looked like it had been razed by a twister.

However, Li's husband and kids are safe. They were sent abroad before she knocked on the door of the local police.

Examining the ruins

"Nine out of 10 people here are in shock or even disbelief at what has happened," says Chen Yan, an erstwhile garment retailer who gave up her business to jump into the get-rich-quick scheme. She lost 130,000 yuan (US$15,662) in "membership dues" plus 61,000 yuan (US$7,349) in interest. She considers herself lucky because she did not borrow from one group to play in another.

Former biaohui members gather in front of Fu'an Public Security Bureau to learn the latest progress of the case after the money game crashed overnight. [newsphoto]

"I lost my own money, but I do not owe anybody. Many people have to go into hiding because they are afraid that creditors may use extreme measures," she sighs. She has decided to open another garment shop and do some "regular business".

Media reports claim that the bubble was fuelled by the local electric machinery industry, which brought in 3 billion yuan (US$361 million) in revenue last year and kept the city awash with money. But Zheng Chengwen suspects that human smuggling rings are behind it. Normal businesses would not turn to the loan-shark rates of biaohui, he told China Daily. But families who send members overseas through snakeheads have to pay roughly US$40,000 per head and biaohui is the only place to go.

On a deeper level, the close-knit nature of the small-town community in Fu'an made it possible. "Biaohui can only flourish in places where people know one another and feel the mutual trust," says Zheng. "When you lend money to a relative or good friend, you won't ask for collateral. You know where they live and their reputation. By the same token, big cities are not the ideal breeding ground, what with the closed-door habits of neighbours."

Even if the money raised from biaohui is not used for gambling and everyone plays strictly by the rules, it is still illegal in China. However, the local government had turned a blind eye to it as long as there was no violence. This is because it has been a traditional source of funding for individuals and small businesses, and also, lending between individuals is totally legal, argues Zheng Chengwen.

Biaohuis operate in this grey area because the cost of a government crackdown would be quite high. But Zheng points out that a similar model of fundraising popular in Wenzhou, Zhejiang Province, where businesses pool their financial resources to form larger entities to compete in the national and world markets, is perfectly legal and has yielded great results. "It doesn't have to be like Fu'an," he says.

The Fu'an biaohui crash is said to have sucked up 2.5 billion yuan (US$301 million) in a town where the total revenue for 2003 was only 230 million yuan (US$27.7 million). Even though the figure is debatable, it shows the huge amount of money in private hands. Given a well-organized financial system, this could be channeled into law-abiding and profit-yielding businesses.

The root cause is the lack of a credit system in China. Biaohui can exist because people feel they can trust their neighbours, and then they get carried away when the sum grows exponentially," says Zheng. "Before long, this trust gets abused when people start seeing it as a chance for gambling rather than for investment."

But when the irrational exuberance of minting overnight millionaires takes over, even a sound financial system is not much of a dampener. Just ask anyone in Silicon Valley.

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