The story of a rampant form of capitalism governed by personal connections, not regulation

The old woman hunched forward on her wooden chair, smoking anxiously. "I can't sleep at night," she said. "I get sick from thinking about this all day long. I'm going crazy. When I'm alone, I cry. All my pension, all my money to pay hospital bills, is gone. I have nothing left."

She had placed on the floor between us the cause of her troubles: a cardboard box, twice the size of a shoebox. A small, square window had been crudely cut into one side, next to a larger, mesh-covered opening.

The box was full of dead ants.

The ruined ant farmers of Shenyang are angry. Theirs is a story of naivety and greed, of misplaced faith in a government that claims to be omnipotent, and - above all - of a rampant form of capitalism governed by personal connections, not regulation, in which corrupt officials are left to draw the line between a legitimate enterprise and a scam.

At this time of year the temperature dips below -20° in Shenyang, a bleak city in China's north-eastern rust belt, where state-owned heavy industry has collapsed, leaving tens of thousands of ordinary people unemployed. The young may find work in the private sector, but the middle-aged and old rely on dwindling redundancy pay-offs or meagre compensation for land they used to farm.

Eight years ago, a charismatic businessman called Wang Fengyou made an offer that seemed too good to be true. He said he was manufacturing health products and aphrodisiacs from the black mountain ant, an ingredient in traditional Chinese medicine. His Yilishen Tianxi group would provide boxes of ants in return for a fee. The insects had to be sprayed with sugar water, and fed egg yolk and cake. After 74 days, the box of now dead ants would be collected and the ant farmers would get 32 per cent return on their initial investment.

"In the beginning we didn't dare participate because we didn't know what was going on," said a middle-aged woman in a frozen village just outside Shenyang. "But the government gave Wang Fengyou four million yuan [roughly £300,000] for being a major taxpayer, and an award for being one of the top ten entrepreneurs. Since he was trusted by the government, we all began farming ants for him."

Wang's publicity machine was phenomenal. He had himself filmed and photographed with local and national leaders, including Bo Xilai, the former commerce minister. One of China's most popular comedians advertised his products. He appeared in the front row at the annual New Year TV special, a sign of official favour. He had his own talk show. Documentaries were broadcast about his acts of charity, the "scientific" underpinnings of ant products, and his rags-to-riches personal story, rising from humble tofu salesman to multimillionaire.

More than a million people succumbed. Some borrowed money. Others sold their homes, investing their returns in ever more boxes of ants.

Last May, when the pyramid began to wobble, Wang Fengyou contacted business consultants in Beijing, including Zhong Dajun.

"He was like an opium addict, needing a constant supply of funds," said Zhong. "Countless government officials benefited from Yilishen, which greatly increased the company's overheads. It had to spend lots of money in bribes. It couldn't make enough money from its products, so it had to collect more from the ant farmers."

In November, Yilishen failed to pay out, and rumours circulated that Wang Fengyou was bankrupt. Some 200,000 desperate investors protested and were beaten back by riot police. Wang was arrested, not for fraud, but for "disrupting public order and interrupting the traffic". He was shown on Shenyang TV in handcuffs and making a public confession.

In China, the Communist Party and the central government monopolise power, so it is scarcely surprising that citizens blame them, not the businessman, for the debacle. "We were not cheated by Wang Fengyou. We were tricked by the government," said one ant farmer who has lost her family's life savings.

Ant farmers have been told to register by next month, but the government has hinted that there will be no compensation. Some who have tried to take their case to Beijing say they have been arrested and beaten at Shenyang station. One who reached the capital set fire to himself in Tiananmen Square. Those we spoke to were briefly arrested the next day; all were terrified of being caught talking to journalists.

Zhong Dajun sees the demise of Yilishen as an indicator of what's wrong with China's new capitalism. "Chinese companies operate under a completely unregulated capitalist system and are oblivious to the public interest," he said. "Only listed companies have their books open, but half the listed companies publish false financial data, too."

The ant farmers of Shenyang are threatening to disrupt the Olympic Games in August. Their phone calls and movements are constantly monitored, and government threats grow harsher by the day. There is nothing that the authorities in China fear more than a million angry ant farmers with nothing left to lose.

Lindsey Hilsum is China correspondent for Channel 4 News

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