Government cracks down on pyramid schemes, shares in Herbalife and Nu Skin tumble – China’s latest business and technology news

Business & Technology

A summary of the top news in Chinese business and technology for August 15, 2017. Part of the daily SupChina newsletter, a convenient package of China’s business, political, and cultural news delivered to your inbox for free. Subscribe here.

Multi-level marketing (MLM, 传销 chuánxiāo) is a business model where a company relies on its own customers to sell its products. The customers make a commission not only on their own sales, but also on sales of their own customers who are recruited as salespeople. This is essentially the same business model as pyramid and Ponzi schemes, and indeed, Herbalife — one of the world’s largest MLM companies — has long been called a pyramid scheme by influential investor Bill Ackman.

American, Japanese, and Taiwanese MLM companies first entered the Chinese mainland in the 1980s, but have always had a difficult relationship with the government. A 1998 regulation explicitly banned the MLM business model for economic, social, and tax reasons, but companies found legal workarounds, and revisions to the law have allowed companies to do “direct sales,” which still uses customers as salespeople but restricts the way they can be compensated. However, the laws have not deterred entrepreneurs and con men.

  • This week, China Daily says that “a notice was issued on Monday by four ministries to crack down on gangs operating pyramid schemes.”
  • Reuters reports that shares in American MLM firms Herbalife, Nu Skin Enterprises, and USANA Health Sciences — which all have significant operations in China — “tumbled in high volume” after the announcement.
  • In Caixin, influential editor-in-chief Hu Shuli 胡舒立 writes in support of the crackdown and says that “the recent deaths of three young people allegedly lured into pyramid-sales scams in Tianjin and Hubei Province have shown yet again the evil side of the illegal networks that are essentially ‘business cults.’”
  • Seasoned China-watcher Bill Bishop writes that the “proximate cause” of the crackdown “may be the shocking, to the stability management system at least, public gatherings of angry Shan Xin Hui members, especially on the streets of Beijing.”