LOURDES GARCIA-NAVARRO, HOST:
Now let's report on a country Donald Trump often criticizes. China is stumbling through economic trouble, and here's a symptom. In recent months, Chinese police have raided three financial firms. Together, all three companies took billions from small investors. And now they're all accused of fraud. When one firm collapsed in Shanghai, the investors did not take the news quietly. NPR's Frank Langfitt reports on their protests.
(SOUNDBITE OF PROTEST)
UNIDENTIFIED PROTESTERS: (Yelling in foreign language).
FRANK LANGFITT, BYLINE: The protesters descended on Shanghai TV, the city's government-run station, demanding compensation and answers. They said Shanghai TV provided the financial firm, known as Zhongjin Capital Management, its stamp of approval by giving it plumb advertising space on one of its most popular shows.
As seen in this cell phone video, police responded by detaining five protesters, grabbing one by the throat and chasing off the rest. Among them was a 65-year-old investor named Zhao, who fears she's lost her life savings.
ZHAO: (Through interpreter) The police are just like thugs. They hit us. We are all human beings. How can they treat us, who are real victims, like that?
LANGFITT: Police have accused Zhongjin of illegal fundraising. In interrogations, they've also told low-level employees it was a massive Ponzi scheme. But Zhao, a retired state-owned factory worker, says she put more than $150,000 into the company because the state sanctioned it. She asked NPR not to use her full name. She's afraid the government will punish her for criticizing it.
ZHAO: (Through interpreter) If they were illegally fundraising, why would you give them so many licenses? The government was backing them. That's why we trusted the company and invested the money. When we were signing investment contracts, we saw celebrities and local police officers also signing them.
LANGFITT: Wealth management firms like Zhongjin emerged in China to provide more financing for private businesses and better returns for Chinese investors, who were frustrated by the low interest rates at government banks. But as China's economy has weakened in recent years, lending has continue to boom. And Logan Wright says that's a dangerous formula. Wright oversees China markets research for Rhodium Group in New York.
LOGAN WRIGHT: You have slowing real economy, growing financial services sector, and as a result, there's an increasing use of speculative strategies and riskier and riskier instruments. And in some cases outright...
LANGFITT: Ponzi schemes. Zhongjin lured in investors with the promises of whopping 15 percent returns. But police say Zhongjin was just a shell company, and money was siphoned off. Iris Pang says Shanghai now has more than 100,000 wealth management companies, and the country more than a million.
Pang is senior economist for Greater China with Natixis, a French investment bank. She says China's government hasn't been able to keep up with the explosion in the number of firms.
IRIS PANG: The wealth management sectors is very new in China. They are kind of regulated. But the regulations are quite loose and not very well-defined.
LANGFITT: Pang says if the government doesn't step in, she doubts the firm's more than 11,000 investors will get much money back. Remy Xu is another one of those investors. He's sitting outside a Starbucks across from a fountain in Xintiandi, a pedestrian shopping area in Shanghai.
Xu and his family poured more than $150,000 others into Zhongjin. He offers another explanation for why the government shut it down. He thinks it's because firms like it were drawing away customers from state-run banks.
REMY XU: (Through interpreter) Initially, the government supported this industry because it wanted financial innovation. Financial companies like this sprung up like flowers all over the place. What's the result? Banks don't get as much money.
LANGFITT: Xu blames his family's financial losses on Chinese officials.
XU: (Through interpreter) From the time this happened, I have absolutely stopped trusting the government. I don't even trust the renminbi. Now I'm going to convert my future earnings into U.S. dollars or precious metals.
LANGFITT: Xu says there's little else he can do.
XU: (Through interpreter) Ordinary Chinese people aren't like you Americans. If you're dissatisfied with the government, you can sue it or even ask the mayor to talk with you about it. That doesn't work in China.
LANGFITT: As China's economic growth continues to slow, pressure could mount on more wealth management companies, legitimate or otherwise. And as the year unfolds, Iris Pang expects more firms to collapse. Frank Langfitt, NPR News, Shanghai.
NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.