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Finance

Shady practices in China lure unwary investors

Give-away deals prey on financial illiteracy

Promises of "free gifts" is one technique used to tempt an uninformed investor.

SHANGHAI -- Hawkers of wealth management products in China are using gifts and other gimmicks to draw customers with little understanding of the risks involved.

Shoppers on JD.com, China's No. 2 online retailer, may be attracted to a page trumpeting "free" items for buyers of investment products. In one deal, a customer purchasing 75,000 yuan ($10,882) worth of wealth management products receives a Panasonic microwave oven with a price tag of 1,800 yuan. The wealth management products may be canceled after four months with a full refund of the principal, but they do not yield a dividend during that period, the page states.

Simply put, the microwave is the yield -- which would amount to roughly 7% per annum. 

Appliances are not the only products offered as inducements. A consumer investing 182,000 yuan for one year will get Microsoft's Surface tablet, one product promises. Gome Electrical Appliances Holding, a big electronics retailer, has similar products.

The problem is that these wealth management products are presented as if they were risk-free, and they provide virtually no information on where the customer's investment money is going. More details may be found after an extensive online search, but it is not easy to discover such information from the web pages selling wealth management products. In other words, customers are not being offered a return-enhancing investment product based on their risk tolerance.

The balance of China's wealth management products stands above 27 trillion yuan, just counting those offered by banks. The number is quadruple Japan's investment trust market. Like Japan, where the elderly often buy investment products despite their poor grasp of risks, China has a plenty of consumers with little financial literacy.

Wealth management products are also used for multi-level marketing. A recently uncovered scheme required purchases of thousands of yuan worth of investment products for membership. Members who bring in a dozen or so new recruits are promised promotion to senior membership and a higher dividend.

Unlike traditional multi-level marketing strategies involving health foods or cosmetics, the schemes with wealth management products have more appeal to prospective members as the money can "work" for them.

More than 10,000 Chinese consumers have apparently been lured by such enticements as "the principal will multiply in just three months!"

JD.com withdrew one product after a statement thought to be from the authorities surfaced online, warning consumers about the risks of the company's "free" products. Gome no longer offers the products either. Still, much room for improvement remains for consumer protection and financial literacy education in China.

(Nikkei)

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