China’s Pyramids Promise Riches but Deliver Curse as Economy Slows

Over the last couple of months, pyramid schemes have captured an unprecedented amount of national attention in China. Three people have died violently, seemingly at the hands of members of pyramid schemes they were involved in. And at the end of July hundreds of members of an investment scheme labeled a pyramid by the government, took to the streets in Beijing to protest the arrest of their leader.

Coverage has been narrowly focused. The foreign media has mainly written about the security implications of so many people protesting in Beijing only months before the 19th Party Congress. The Chinese media has directed their energies toward exhorting online employment agencies to do a better job vetting their clients, after it was exposed that a pyramid used fake job advertisements to attract unsuspecting young people who were then lured into the scheme. A few months after responding to such an ad, a young man died following an alleged altercation with pyramid members. However, both narratives miss the much bigger picture.

China has a huge, nationwide pyramid problem, the result of new technologies allowing such schemes to spread their reach, a highly innovative financial system that has given them a place to hide in plain sight, and most importantly, a slowing economy that has made China’s most vulnerable citizens more susceptible to economic snake oil.

Anecdotally, pyramid activity last increased with the onset of the global financial crisis. In 2010, the China Anti-Pyramid Selling Association published a report in which it estimated that there were 40 million people across the country caught up in pyramid schemes. It now believes at least 50 million people are involved—and that there could be far more. Certainly, the police have been more active, opening cases against almost 3,000 pyramid schemes in 2016, 19% more than the year before.

In large part, the growth of pyramids has been made possible by the internet, with a new generation of pyramids disguising themselves in such as way so as to be indistinguishable from the myriad other investment products available online in China’s huge and diverse financial ecosystem. Beyond the formal institutions of shadow banking that the foreign press generally focuses on – wealth management products, trusts, securities companies – there is an entire sub-tier of wealth management-style investment products being sold by investment companies, internet finance platforms, and financial exchanges, all promising high returns with low risk, normalizing investment behavior that is potentially quite dangerous.

To the unsuspecting, the outrageous returns delivered by pyramid schemes don’t seem altogether unrealistic given what else is on offer. According to the Communist Party-sanctioned Legal Weekly, Shanxinhui, the alleged pyramid that held the protest in Beijing, promised returns upwards of 30% and accumulated five million new members in the space of a year.

But the real strength of China’s pyramids comes from their appeal to the most vulnerable groups in Chinese society. Shanxinhui became a nationwide juggernaut in a very short period of time by specifically targeting people in poor neighborhoods. Other pyramids target recent university graduates, a group that increasingly finds it difficult to find work, routinely ends up accepting wages well below what they expected, and often carries the shame of letting down families who invested heavily in their education. One of the people who died at the hands of pyramid members was lured in by the promise of a job, having failed to find work almost a year after finishing his degree.

Beijing has again announced a campaign to rein in pyramids. But since such schemes first appeared in the mid-1990s, it has repeatedly launched similar actions, with little to show for it. What makes cracking down so difficult is that pyramids prey on China’s entrenched income inequality, and the sense that many people have that the prosperity that has seemingly blessed everyone else has passed them by. The slowing economy is making the wealth promised by pyramids all the more appealing.

China’s pyramids are very different from those in the United States, where they are synonymous with multi-level marketers like Herbalife and NuSkin. Those are high-profile public companies that trade on the New York Stock Exchange, but are dogged by claims from the media and activist investors that their sales networks amount to illegal pyramids. In China, pyramids take a few different forms. The internet-based version is probably the most benign, but others involve people uprooting their lives and moving across the country to live in communes where they run the risk of violence at the hands of more senior pyramid members if they show signs of independent thought. The latter are best thought of as ‘business cults,’ as Hu Shuli, the editor of Caixin, recently described them.

That’s the model of pyramid that I tangentially came in contact with.

In 2012, a friend came to visit me in Beijing. I knew him from Shanghai, where he and his girlfriend worked in a café where I was a regular, but they were both migrants—he was from Inner Mongolia, she was from Anhui province. He and I became friends, and when I moved to Beijing, we kept in touch. When he came to visit, he had just left Zhangjiakou, an industrial city in Hebei, just three hours’ drive away. He’d followed his girlfriend, who had gone to check out a job opportunity there. She’d called to tell him that she’d found employment, and that there was work for him as well. But soon after he arrived, she told him there wasn’t actually a job. Instead, there was a much better opportunity.

He moved with her to the outskirts of the city where she was living in a spartan dormitory, where people slept side by side on mats on the floor. Everyone had travelled to be there, and were far from family and friends. They attended daily indoctrination classes, during which they were taught they would become rich if only they strictly followed some simple rules. Every few weeks they would join people living in other dormitories around the city for rallies in a hotel ballroom where they heard testimonials from people who had followed the rules and were now living lives of comfort.

My friend knew what his girlfriend had been drawn into—his brother had been sucked into a pyramid scheme a few years earlier—but he stayed in the hope he could convince her to leave. Nominally the scheme was structured like a multi-level marketing company. Members were expected to sell a certain amount of product every month—a homeopathic pad filled with Chinese herbs that, when placed in one’s underwear, was supposed to reinvigorate a person’s qi, one’s life force. My friend wasn’t sure that the product even existed—he didn’t see it during his time at the dormitory—but that hardly mattered. Members were far from the networks of people they might naturally sell to, and they were encouraged not to develop connections outside of the dormitories. With no opportunity to sell the product, but still with sales quotas to meet, my friend’s girlfriend used her own money to ‘buy’ the pads, blowing through her savings and borrowing from family to maintain her place in the pyramid. Meanwhile, she tried to get family and friends to come and join.

The scheme was an archetype of what is referred to as the ‘northern school’ (北派) of Chinese pyramids. The northern school is known for targeting young people, requiring relatively little money up front from its members, and resorting to violence if members refuse to submit to indoctrination. The northern school was traditionally the dominant form of pyramid in China until about 2008, when the southern school started expanding beyond Guangxi province, its starting point, and spreading nationwide. The southern school targeted older, more affluent people as members. They were also expected to live together, but in better quality apartments, typically with only a handful of other people. And instead of having to sell consumer products, they were told they were investing in major construction projects. But it was still key for them to draw in new members.

And then in 2013, internet-based pyramids emerged. Instead of requiring members to live together, the new model uses social media to maintain control over members remotely. Internet-based pyramids typically have nationwide geographical reach, they’re capable of growing far more quickly than traditional pyramids because people don’t need to upend their lives in order to get involved, and subsequently they’re able to promise higher returns.

What makes all pyramids so hard to dismantle is that, until something goes wrong, the members don’t want to be saved. In fact, the victims are invariably a pyramid’s staunchest defenders. For those protesting in Beijing, one of the biggest concerns was that the government may have killed the golden goose. Not willing to believe the scheme was a pyramid, some members blamed the crackdown on government officials lashing out for not having received bribes. In my friend’s case, his girlfriend turned on him for trying to make her miss out on the riches that were surely just around the corner.

After a few of weeks living inside the Zhangjiakou pyramid, my friend had still not been able to convince his girlfriend that she was being exploited, and so he left. Instead, he took the recordings he’d secretly made of the indoctrination classes to the authorities. After months of cajoling, he managed to convince the local branch of the State Administration of Industry and Commerce (SAIC)—the agency responsible for cracking down on pyramids—to launch a joint raid with the police, who had mapped out the location of the other dormitories. The date for the raid was set; my friend was invited to ride along. But then the SAIC and its agents went a day early. And they struck only half the cells, leaving the one with my friend’s girlfriend untouched. Nonetheless, she was incensed at his action, stopped taking his calls, and remained with the pyramid. Resigned that there was nothing more he could do, my friend cut his losses and returned to Shanghai.

Years went by with little contact between my friend and I beyond the occasional Wechat message. But before moving to the United States in mid-2015, I made a point of visiting Shanghai to see him one last time. He’d started his own business—a tiny coffee kiosk downtown. He introduced me to his fiancé who was running the business with him. I thought she looked familiar. It turns out that it was the same girl from the cafe. She’d finally left the pyramid, and had found her way back to my friend.

It’s easy to think of China’s economic slowdown as having no victims. After all, with official growth rates still above 6%, there should be plenty of economic opportunity for everyone. It’s very rare that we get any insight into what the real-world fallout of slower growth might look like. The ability of pyramids to thrive suggests that the slowdown is having real consequences for some of China’s most vulnerable.