A commenter asked me to elaborate on the billion-dollar investment scandal and subsequent mass protests in Jishou, Hunan, China, where I have been living since Sept. 1. Here is what I know, based on several sources.
Six years ago, several real estate development firms here needed capital, but had no credit with any of the commercial banks. So, they convinced local government officials to allow the firms to market high-interest loans to investors -- what we would call bonds in the States. Except these were bonds with no visible means of support, other than a bet that the real estate market would continue to boom.
By all accounts, this kind of scheme is illegal under national law, but government officials in China have a reputation of being somewhat corrupt, or at least corruptible. Greed is a universal human condition, so the officials looked the other way, and in many cases invested in the schemes themselves.
Then, the process snowballed. The real estate firms --now numbering 30 -- had offices throughout Xiangxi county, of which Jishou is the seat. Their officers, government officials and many local businessmen (bankers included, reportedly) pushed this new investment vehicle on everyone, rich or poor, promising fantastic yields from the quasi-official 5% to 8% to the more imaginary 50% and 100%.
Before long, at least 75% -- perhaps as high as 95% -- of the Xiangxi county population had bought into this real estate bubble. That's at least 200,000 people, including government muckeymucks and little old ladies living on meagre pensions. Several of my students' families are among the investors caught up in this mess, and are now bankrupt or close to it as a result.
At least $2 billion of investors' funds -- life savings, for many -- ended up in the hands of the real estate firms, which of course banked the money.
All was well for the next few years. People were getting their interest payments on schedule and the real estate market seemed to be in a perpetual bull cycle.
Here is where I speculate, not being an economist, that the 2006-07 bust in the US real estate market and the meltdown of the subprime mortgage racket .. I mean, business .. sent ripples that reached far into China's interior. It's not just AIG, Merrill Lynch, Goldman Sachs and big firms that are hurting, after all.
Whatever the reason, the boom cycle in Hunan fizzled out, too. Not immediately, but it had to happen. As one student told me (and which I have read about elsewhere), a Chinese granny went to her local real estate office in early August this year to collect her interest money -- in cash since bank checks are not common here at all.
They told her, sorry we don't have any money to give you. Then the shit hit the fan. Word spread quickly. Government officials ran to the banks to pull their money out. Some local citizens managed to do so as well. The run on the banks left the firms involved completely insolvent by early September.
Once it became painfully obvious that most of the hundreds of thousands of investors had now lost all of their money, disgruntled citizens took to the streets. Fed by rumors that their bank accounts would be frozen, 100,000 people -- about a third of the population -- filled Jishou's streets on Sept. 4, blocking traffic and halting train service. Police were called in to quell the mob. Officials also brought in 20,000 SWAT officers and part of the provincial army batallion, which remained barracked at the local sports arena for most of September.
About 40 protestors were arrested. An unknown number were beaten by police. We do know from official sources that several police were injured, however.
Provincial officials promised the investors that the government would investigate the companies involved, promising investors would recover their money within three months.
Meanwhile, people were still pulling money from their bank accounts. Reportedly, the run on the banks stopped after authorities posted police outside local banks on Sept. 9. Police were still patrolling the train station in force as well.
As the investigation continues, the full extent of the scandal seems to increase. The totals lost have ballooned from an initial estimate of $1 billion to perhaps three times that amount. Residents of neighboring counties were also sucked into the scheme, so it has become a problem for most of western Hunan.
Another mass protest planned for Sept. 13 fizzled out, after more soldiers arrived the night before with close to 20 battle-ready armored trucks. Police were also patrolling the streets. Since the sports arena is next to the university where I teach, I could see and hear the soldiers drilling everyday for most of September.
Things cooled off until Sept. 24, when a group of citizens tried to present a petition to the mayor and the city council to demand their money back. The mayor made the mistake of saying he didn't have the time to talk about it right then, and the mob went wild. They overturned his car and went after him and his assistant.
This week has been China National Holiday, celebrating the foundation of the republic in 1949. While people are still hurting from the scandal, there have been no mobs in the streets since the week before. The university has not had to lock its gates, and I have been free to move about the city.
Beijing clearly knows about this mess, which put the spotlight on both government corruption and crooks who dupe an unwary public out of its hard earned cash. It's a major embarrassment on top of the tainted Chinese milk scandal, now spreading throughout the Asia Pacific region, and that little trouble with Tibet. How it all plays out is hard to say, but I doubt the government is going to be terribly keen on returning $2 billion to the unfortunate many who got swindled. People may get part of their money back, but most will have learned the hard way that get-rich-quick schemes just don't work. Only a very few made any dough out of this deal.
NOTE: Some of my information I was able to get from my students and a few blogs. The best source was The Epoch Times, which had several detailed stories on the Jishou fracas. Needless to say, it's hard for me to gain access to these sites from behind the Great Firewall of China; I had to use the Tor proxy network to glean what information I did find. In fact, I considered crossposting this entry on my own blog, but I figured the post would either be firewalled or my entire blog would. So I'm just going to risk putting a link on my site and see what happens.