(Minghui.org) Chinese people have been offered more and more wealth management products in recent years. The interest rate paid by banks on saving accounts won't compensate for inflation and the government has a strong grip on capital markets. Therefore, the Chinese can avail themselves to only a very few investment channels. This is why wealth management products have taken off and attracted many investors.

I have worked and done research in the Chinese economy and finance sector for the past 20 years.

My purpose for writing this article is to analyze the basics of financial scams and remind fellow practitioners not to be deceived by these scams.

All scams are designed and developed because of people's greed and can cause the victims to lose all their money and assets.

Explaining the Ponzi Scheme

The Ponzi scheme, a most notorious investment scheme, is named after Charles Ponzi, who enticed investors with a 50 percent profit rate and used the new money to pay the old investors and himself. Ponzi cheated 30,000 investors within a short period of seven months.

Looking at investment vehicles, we understand that the economy has its own laws. The economy in China has been rather weak over the past years. Even real estate is becoming weaker year after year. The companies in the real economy have low returns on investment. Therefore, they cannot afford a high return rate, no matter if they are private or state-owned companies.

Let's use the real estate industry as an example. Usually, the minimum investment to a real estate trust starts between three and five million yuan.

Real estate development requires big capital. If a developer needs a loan, he will approach a trust company and probably negotiate a 20 percent interest rate. The trust company bundles the project and divided it into small bundles. Sold through layers of companies and agents, who always keep a certain percentage as commission, the end investor may earn between 8 and 10 percent interest if he or she is lucky.

It looks like everyone in the process makes some money, however, all the risks are held by the investors. In the past 2 years, some of the real estate developers couldn't pay back their loan, so the end investors lost their investment money.

If the most profitable real estate industry could only afford an 8 to 10 percent return rate to investors, how can other wealth management products afford to pay a 15 to 40 percent return rate?

Government Run Ponzi Schemes Are Dangerous

Even local governments are creating Ponzi schemes. For example, the Kunming Fanya Metal Exchange used a 14 percent return rate to sell an investment called “Rijinbao” (meaning daily gold jewel) and attracted 43 billion yuan from 220,000 investors.

When Fanya failed to pay the principal and interest last July, some investors went to the Economic Investigation Department of Kunming City Police. Some investors recorded the reply from the police department.

“The high-ups didn't allow us to investigate,” replied the investigation department officers. “Anyone who investigates Fanya will die. So we can't do anything.”

This is a clear indication that the local government is behind the Fanya Metal Exchange.

Fellow practitioners, who do you want to give your hard-earned money to? Do you want to support the Chinese Communist Party?

Neither Participate Nor Promote Scams

There are a lot of scams in China, such as e-Zubao. More than a million investors got gypped by more than 70 billion yuan. Others that defraud investors are the P2P, MMM Platform, virtual electronic currency and so on.

No matter what names the scams use, the fundamentals are always the same: using a high rate of return to attract investors and use new investment money to pay interest and themselves.

Those scams often carry slogans like “Principals guaranteed” and “Zero Risk.”

However, fellow practitioners, don't let greed put your head in the sand. To participate in these scams is wrong, to promote the scam among practitioners is even worse.