China, Risk, Investing and Financial Literacy

This story just floored me: several thousand rubes investors in China lost their shirts investing in ant farms. The ants were going to be harvested to create an aphrodisiac potion. It’s not clear whether the venture was a complete ruse or just a Ponzi scheme, since it had paid out dividends in the past. But a couple of interesting ideas do come out of this story:

  • Chinese investors are currently prohibited from buying foreign stocks, which make abuses like this easier to perpetrate. Mr. Paulson, are you speaking to this point?
  • Clearly the level of financial literacy in China is quite low; can a business be created to address this? Is this an opportunity for American firms? Mr. Paulson, are you using this argument to help US firms get a foot in the door?
  • Government complicity in schemes like this is a well known fact:

    Investors said the group’s good relations with the government and its commercials on state television had convinced them Yilishen was legitimate.

    “It has been out there for eight years and the government has given the company and the manager so many honors. We thought there mustn’t be any problem,” investor Li Dechun told Reuters.

  • So which comes first: the cleanup of government or a popular uprising? The current system appears unsustainable.