Multi-Level Marketing, a Hidden Peril in China

By Lin Yuguo, Central News Agency
October 12, 2007 12:00 am Last Updated: October 12, 2007 12:00 am

HONG KONG–Multi-level marketing (MLM) 1 , also know as pyramid schemes ( chuanxiao ), has become prevalent again in China in the past two years 2 .

Millions of people, including students and farmers, are involved in this sector, drawing 50 billion yuan (US$6.66 billion) into the scheme. Chinese authorities continue, however, to be wary of direct sales on a number of grounds, among them pyramid scheme frauds, strong networking capabilities and loss of social stability.

With such a large and well-organized sales force, MLM has caused panic on the authorities. In July and August of this year, the authorities significantly strengthened the co-operation with related departments in fighting illegal pyramid selling.

According to Oriental Daily News in Hong Kong, MLM salespeople, dissatisfied with the authority's bans, often gather a crowd to attack governmental agencies. The public security department of Guangxi Province recently claimed to have cracked down on an MLM case with one billion yuan ($133 million) involved.

However, this attracted more than 1,000 MLM proprietors to protest outside the Guangxi Zhuang Autonomous Regional government building. They wanted to overturn the cases and asked for the release of the 14 arrested MLM sales managers, from whom they could get a return of their “hard-earned money.”

The authorities deployed hundreds of special police officers to disperse the demonstrators. In the conflict, two people were injured, and hundreds of others were detained for investigation.

The authorities are increasingly worried about the massive sums of money and the cult-like devotion among members in these networks. According to China's Ministry of Public Security, since last year public security organs have cracked 1,552 MLM cases and 620 million yuan ($82.62 million) have been seized in connection with these cases.

Officials in charge pointed out that MLM programs may present great social risks: a huge number of MLM direct sellers can easily threaten public stability and security; last year alone, 815,000 people were involved with crime.

Officials said that farmers, unemployed people, housewives, the elderly and other vulnerable groups are a main sales force in the sector, in which resolved capital has reached as high as 50 billion yuan. MLM has become a major hidden peril to China's economic and social security.

[1] Multi-level marketing is a sub-set of the “Direct Sales” method of marketing products to end consumers, in which salespeople are paid not only on their own personal sales, but also on the sales of other salespeople whom they recruit and train through up-line and down-line relationships.
[2] In mid-April 1998, China's State Council outright banned chuanxiao. The Authorities on 1 December 2005 lifted a ban imposed in 1998 to wipe out pyramid schemes that caused individuals millions of yuan of losses.