Shanghai Hefirst Investment Management Co., Ltd. (hereinafter referred to as “Hefirst”) was involved in a scandal when its controlling shareholder Lin Qiang fled in April last year. It has been reported that Lin Qiang has been arrested, shedding light on the Ponzi scheme within the “Hefirst Group”.
The “Hefirst Group” includes Hefirst Investment Management directly chaired by Lin Qiang, as well as Hefirst Futures and its subsidiary Hefirst Asset Management (Shanghai) Co., Ltd., Shangzhi Fengyuan (Beijing) Fund Sales Co., Ltd., and Ruizhao Leasing (Tianjin) Co., Ltd., among other related companies.
According to a report by Caixin on June 19, Lin Qiang used multiple licensed financial institutions as a cover, extending his reach from P2P lending, real estate financing, and bill market to bond market, and eventually into private equity funds and even public funds.
From 2019 to 2023, Lin Qiang rolled over fundraising through the “Hefirst Group”, accumulating a total of 103 billion yuan. Most of the funds raised were used for refinancing existing debts, but the total size of the debt hole remains unknown. Currently, the total amount involved in the case that remains unpaid is approximately 30 billion yuan, with the assets under Lin Qiang’s name tracked by the investors’ rights committee amounting to less than 100 million yuan.
Earlier reports indicated that Lin Qiang fled on August 28, 2023, and on April 9, 2024, Hefirst issued an announcement stating that the company and related enterprises were heavily indebted and at significant operational risk, unable to meet their obligations. Lin Qiang was arrested in Bali, Indonesia on October 10, 2024, and was brought back to China at the end of November of the same year.
Current reports reveal that Lin Qiang, Wang Hongliang, E Changjun, Liang Jiaming, Wu Xiaobo, Zhang Chun, and others from the “Hefirst Group” who have been arrested, have been transferred to the Second Branch of the Shanghai Municipal Procuratorate, and are expected to be prosecuted by the end of June this year. Among them, Zhang Chun was Lin Qiang’s secretary, and financial director Liang Jiaming was a close associate of Lin Qiang.
Several banks have recently been fined after being reported by investors for their involvement in the illicit operations of the “Hefirst Group”. This includes the Zhengzhou Branch of Shanghai Pudong Development Bank, which was fined 1 million yuan on June 5 for failing to fulfill customer identification obligations as required. There were also complaints from investors against the West Lake Branch of Zhejiang Commercial Bank’s Hangzhou Branch.
Over the years, the “Hefirst Group” has changed hands multiple times and was already in significant debt when taken over by Lin Qiang. According to recent leaks of Lin Qiang’s testimony, the debt hole he inherited amounted to 14 billion yuan. Lin Qiang continued the practice of the previous controlling shareholders of using licensed shell companies under Hefirst to continue fundraising, keeping the funds circulating to temporarily cover up the previous debts.
A senior capital market professional, Xu Zhen, stated to Dajiyuan that in recent years, the third-party wealth management sector in China has experienced numerous scandalous incidents related to P2P lending, gold exchanges, and real estate. The Ponzi scheme within the “Hefirst Group” may be the longest-lasting and largest in scale.
Sun Guoxiang, a professor of international affairs and business at Nanhua University in Taiwan, explained to Dajiyuan that the recurrence of Ponzi schemes like the “Hefirst Group” is primarily due to the lure of high income or high returns, coupled with weak risk awareness among investors. The lagging official supervision by the Chinese authorities, lack of transparency in information, and blurred compliance of some investment channels have provided a favorable environment for such scams to thrive.
He further pointed out, “Local governments, in pursuit of economic growth or stability, may turn a blind eye to high-risk financial activities, leading to situations of local protectionism where financial chaos becomes difficult to promptly contain.”
Sun Guoxiang believes that limited public opinion and information disclosure in mainland China, coupled with the difficulty of victims in seeking justice, have further fueled such criminal activities.
Discussing the unique form of fundraising through internet finance in China, Xu Zhen mentioned that P2P lending is distinctive, and the defaults are a result of the overall economic downturn pressure, similar to the peak and subsequent downturn of the real estate market in 2021.
He analyzed that with the opening up of private equity licenses in China some time ago, many people engaged in fund financing, equity investments, and real estate investments. The lack of public awareness of investment risks at the time left them unprepared. When real estate investments began to decline, and real estate funds collapsed, it dragged down a significant portion of P2P financing. In reality, the so-called rapid development in China in the past years was driven by debt financing for GDP growth, which was ultimately unsustainable. When the real estate market cooled down, all these underlying issues were exposed.