JISHOU, HUNAN — On my Facebook status I posted a few days ago, I asked the rhetorical question, “Why is there is unrest in the streets?” Today, as a class exercise in speaking, I asked my business English students to help me understand our local economic crisis.
Imagine if 70% or more of a city’s population all invested in the same companies, who were promising 50% to 100% returns on these investments. Imagine if some of those investors, including some city officials and retirees, had put their entire savings in this scheme.
Then imagine what would happen if word got out that all those investments were lost, perhaps forever. We’re talking, say, about US$1 billion in funds.
People might just get a little upset.
Well, that’s what happened in Jishou. It’s why there was enough of a public outcry that this small city in the middle of China actually made it into the Washington Post early this month. It’s also why my ability to leave campus to venture into the city has been somewhat limited from time to time. It’s gotten bad enough for the school to close its gates recently, blocking entry to the campus.
Here’s what I was able to glean today from my class of 12 business management students, three of whose families have lost money in this scandal.
In 2004, real estate developers in Jishou needed cash, so they devised an investment plan whereby investors would recoup 50% to 100% of their investments within several years. It appears the developers were betting that the real estate boom would continue, making such returns almost reasonable (to the unsophisticated investor, anyway).
Retirees put their meagre savings into the scheme. City officials risked their savings. Families put up every penny they had, all with the hope of making a boatload of cash. According to my students, and news reports, maybe 70% or more of Jishou’s population of 300,000 are involved. That’s 210,000 people, all in one place!
You can guess what happened. The real estate boom fizzled (sound familiar, Americans?). The real estate developers could not pony up the interest or the principal, and investors got ticked off. The crowds earlier this month blocked major highways and stopped rail traffic through town as they filled the streets to vent their anger. Police and the provincial contingent of the Chinese army were called in to quiet things down.
While we have not had such a huge uprising since Sept. 5, there have been sporadic demonstrations in Jishou since. My friends here have been very protective, advising me by text messages or cell calls to stay on campus, so that I don’t unwittingly wander into a hornet’s nest.
One of my students, whose family he says is now bankrupt, suggested that the most recent outbreak two days ago did not involve investors at all. Instead, he says, it was just a group of hooligans who were using the financial crisis as an excuse to trash some stores.
The developers are apparently going to auction some of their holdings to repay the investors, and the Chinese government has pledged to help investors recoup at least some of their losses. How soon this is all settled is hard to gauge.
The whole scheme was patently illegal, and from my limited understanding, it’s difficult to say how many investors knew that. Sophisticated investors are wary of get-rick-quick schemes, and are reluctant to put all of their eggs in one basket under any circumstances. But the Jishou scheme did not involve experienced investors; it mostly nailed the little old ladies and Ma and Pa Kettles.
I was curious how the public uncovered the fiasco, because it’s not information that the real estate developers would exactly volunteer. Now this explanation is completely unsubstantiated and third-hand, so right now I’m slipping into National Enquirer mode.
It seems a “granny,” who was living on the interest from her investments, visited the offices of the developers to request a regularly scheduled payment. They told her they could not pay her, because they did not have the money. I can only imagine the scene that transpired. It’s not a good idea to get Chinese grannies riled up.
She told her friends, who told theirs, and the news spread like wildfire. (Everyone has cell phones here.) Crowds mobbed the banks, the real estate development office and city hall, and when they learned their money was gone, the place erupted.
I told my students that this sort of scheme happens in the US, too, and that Americans trying to make big money quickly are often taken in by crooked business deals. Typically, though, these unfortunate souls are spread out over the entire country and are not concentrated in one city or town. I told them the last time entire communities in the States lost that kind of money was in the Stock Market Crash of 1929. (I hope I was correct in saying that.)
And people are hoodwinked even when there are scores of financial experts telling us to be cautious, to be skeptical of high-yield/high-risk investments. “If it’s too good to be true, it probably isn’t,” is the old adage. China, to my knowledge, does not yet have the equivalent of a Suze Orman or Lou Rukeyser to dispense pearls of financial wisdom, so neophytes here have no dispassionate advisors to warn them away from shysters.
So, while you folks in the US have to listen to politicians pontificate about their $700 billion bailout of the economy, I’m here dealing with angry investors in the streets. I bet there would be less pontificating, and more action in D.C. if all the people who have lost their homes and their investments on Wall Street took to the streets and started hurling rocks through shop windows and stopping traffic.
I’d like to see a presidential debate about that.