Photographer: Kevin Lee/Bloomberg

China Warns Asset Managers About 'Ponzi Scheme' Risks

  • Asset Management Association reiterates ban on money pooling
  • China's biggest-ever Ponzi scheme was exposed in December

China’s asset managers were warned of “Ponzi scheme” risks from pooling investor funds intended for different products, as an industry association said a joint venture between Citic Trust and Citic-Prudential Fund Management was being punished for violating restrictions on such practices.

QuickTake China’s Pain Points

Citic-CP Asset Management, known for marketing Uber Technologies Inc. shares in China, has been suspended for six months from issuing new products because of the breaches, according to an Asset Management Association of China statement on its website on Thursday. No one answered at a phone number listed on a website for Citic-CP Asset Management on Friday.

The risk from pooling money is that cash from new investors can be used to repay existing investors, as occurs in the scams named after Charles Ponzi. The association reiterated that funds investing in securities are banned from running cash pools and pledged to work with the China Securities Regulatory Commission to cleanse the industry of the practice.

“Strengthening investor protection has got to be a good thing,” said Keith Pogson, senior partner for Asia-Pacific financial services at Ernst & Young LLP.

Biggest Conglomerate

Citic Trust is part of Citic Ltd., which describes itself as China’s biggest conglomerate. Citic-Prudential Fund Management started its first China fund in 2006, according to a statement on the website of Prudential Plc, a U.K. insurer and international financial services group. No comment was immediately available from spokeswomen in Hong Kong for Citic Ltd. and Prudential.

China is trying to clean up a finance industry troubled by growing failures of investment firms and online lenders. In December, the nation’s biggest-ever Ponzi scheme was exposed after Internet lender Ezubo allegedly defrauded more than 900,000 people out of the equivalent of $7.6 billion in 18 months.

In March, the China Banking Regulatory Commission cited cash pools as one focus as it said it was stepping up monitoring of trust companies.

In Thursday’s statement, the asset-management association urged its industry to abandon the “grey area,” saying cash pools could hide financial risks for long periods, only to create enormous damage when things went wrong.

Wealthy Clients

Citic-CP Asset Management sells wealth management products to wealthy investors. In August last year, an offer sheet circulated to investors showed the venture was marketing Uber shares to Chinese willing to put in a minimum of 3 million yuan ($461,000) each.

In a separate statement on the punishment, the industry association said that the breaches involved pooling money associated with three types of asset-management products. The first could be redeemed daily, the second on a monthly or quarterly basis, and the third had a duration of more than a year.

Talking generally, Ernst & Young’s Pogson said that innovative products designed in China, including some to aid investment overseas, may use “slightly looser structures than you would see in mature markets such as the U.S. or Western Europe.” The many different structures were because of a complex regulatory and policy environment, resulting in investors becoming “numbed” to the issues and risks, he said.

“The authorities in China are on an ongoing journey of educating investors about risk and reward as well as trying to manage the booming wealth management industry,” Pogson said.

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