One Monday last month, Yang Baoyu joined about 200 people in front of the city offices here for a familiar ritual, waving protest banners and demanding help from the government to recoup their lost investments.

As with many of the other demonstrators, the engineer, 45 years old, had been coming to protest nearly every week since he lost his nest egg of about $37,000 to a company named Henan Tengfei Investment Wealth Management, which collapsed in 2014.

City officials emerged and promised to resolve the investors’ concerns, Mr. Yang says. Then about 600 police officers descended and herded them off the plaza, shoving several protesters into police cars.

To Mr. Yang, the parley was a reminder of what he considers an official betrayal. “Without the government’s assurance” during better times, he says, “no one would have dared to believe Tengfei.”

Small investors, angry over lost savings, are emerging as a new security threat to Chinese authorities, who are watching warily as investors around the country hit the streets in protest and picket government offices to demand their money back.

Protests have flared from Shanghai to the southwestern hub of Kunming to the ancient former capital of Xi’an. Crowds gathered outside the securities regulator’s Beijing offices after equity markets collapsed last summer. Others have demonstrated over their losses from financial products linked to insurance, trusts and metal trading.

These indignant investors add to unrest among a broader swath of Chinese who are openly challenging authorities, including migrant workers, coal miners and demobilized soldiers angered by job losses. A common thread: Protesters are convinced government officials and the ruling Communist Party encouraged their investment of money and labor in ways that helped build modern China, and now they feel betrayed.

“Since the People’s Republic of China was established in 1949, the Communist Party has always been something that the people viewed as trustworthy,” says retired army Lt. Col. Guo Bojin, 72, who says he lost about $120,000 to Tengfei and believes the government condoned the business. “Who can you trust, if you can’t trust the government?”

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China’s Ministry of Public Security, the China Banking Regulatory Commission and Xinxiang city officials didn’t respond to inquiries. Xinxiang’s government has said it is “going through the legal process” in dealing with Tengfei, whose chairman and some other staff are in government custody and couldn’t be reached for comment.

Tengfei was typical of a new class of investment company that drew in millions of Chinese small investors. These companies—part of China’s “shadow banking” industry, a broad term for a range of loosely regulated lenders—touted what are called “wealth-management products” in China, usually repackaged corporate debt, and offered annual returns of sometimes 18% or more.

The products became widely popular after China’s property market began to cool around 2012. The outstanding balance in wealth-management products was 18.4 trillion yuan ($2.8 trillion) at the end of the first half of 2015, according to Moody’s Investors Service—about the size of the U.S. money-market-fund industry.

As economic growth faltered, corporations defaulted on loans at the core of these products. Some firms offering the products failed, leaving investors in the lurch.

The government hasn’t provided a count of the losses to investors. A Wall Street Journal tally of cases reported over the past year shows at least $24.3 billion owed to 1.6 million investors in wealth-management products, about $15,000 each on average. Tengfei collapsed with about $400 million owed to 37,000 investors, about $10,800 each on average.

Stamp of approval

Many small investors the Journal interviewed say they hadn’t understood the nature of their investments. They considered it a government stamp of approval that state media ran advertisements by Tengfei and other such companies, and that government officials attended some of the companies’ public gatherings.

Investors say they have resorted to protests because government officials haven’t helped recoup losses. Investors have coordinated multicity protests via instant-messaging groups. In Xinxiang, investors say electronic word-of-mouth can quickly transform a quiet gathering of a few score people into a near-riot of a thousand.

Through the second half of last year, hundreds staged protests in southern China over $6.6 billion of failed investment products sold by Fanya Metal Exchange, which ceased operations and is under investigation by the local government. Calls to Fanya went to an automated system that appeared untended.

In October, investors protested at the offices of asset-management firm Global Wealth Investment (Beijing) Co., blaming it for loans it extended to companies in China’s ailing rust belt that later soured. Global Wealth didn’t respond to inquiries.

Protesters outside Ping An Insurance’s Beijing headquarters in October held signs saying: ‘Ping An cheats! Ping An, return the money!’

When some 200 investors, many of them retirees, protested outside financial-services giant Ping An Insurance Group Co.’s Beijing headquarters in October, more than 100 police were on the scene. Officers ordered the crowd to disperse as protesters, some in white bandannas, a Chinese symbol of death, chanted accusations the company had sold them wealth-management products that soured.

Ping An said in response to queries that it didn’t issue such products, although it acknowledged some staff had illegally sold or recommended “unauthorized products.” It said it would help investors seek restitution. Investors say it hasn’t done so. Beijing police didn’t respond to inquiries.

The central government has tried to tighten regulation of these wealth-management firms, and police have stepped in to shut down some and arrest their executives. The national banking regulator, addressing online-lending and wealth-management concerns, in December vowed to “cleanse the market.”

Authorities have also sought to forestall protests, say investors, who contend they have been followed and threatened by police, and sometimes beaten and detained. Police and public-security officials have told some journalists not to report on the collapsed lenders.

Investors in one of the highest-profile failures, of Internet-based Ezubo Ltd. last year, say they believe police infiltrated their online groups to monitor protest plans.

Ezubo offered investments in a related finance-leasing business, promising returns up to 15%. Prosecutors have called it a Ponzi scheme that defrauded 900,000 investors of more than $7.6 billion. Ezubo’s senior executives are in custody and couldn’t be reached for comment.

In at least five cities where Ezubo operated, investors say they gathered for protests to find police already massed in superior numbers. In December, dozens protested at China Central Television’s Beijing headquarters, watched by police who arrived earlier.

Wang Xinling, a 60-year-old retired shoemaker, says when she couldn’t determine whether she would recoup her Ezubo investment of about $4,600, she joined the protests at CCTV, which had carried Ezubo advertisements. “All we are getting now is ridicule and indifference,” she says. “No one is helping us.”

Tengfei’s troubles

People such as Mr. Yang and Mr. Guo, who lost their funds when Tengfei collapsed, were among small investors whose collective assets helped to finance China’s boom, in their case, in Xinxiang. A microcosm of China’s debt-fueled rise, Xinxiang grew from a small market town into a bustling city of six million with an Audi dealership and big-box stores.

Chinese policemen watch as depositors in Ezubo gathered outside government offices in Beijing in January. Prosecutors have called the Internet-based investment concern a Ponzi scheme.

Tengfei, as a nonbank lender in the city, started out guaranteeing loans for local businesses that found it otherwise hard to get bank credit. When Beijing moved to rein in the galloping economy in 2011, credit became scarcer. Tengfei rebranded itself as a wealth-management company and began marketing to small investors.

Tengfei plowed funds it raised into loans to a network of about 42 local companies, lending at annual rates of 33% to 40%, versus about 8% at commercial banks. Within that network, companies also lent to one another and acted as mutual guarantors for bank loans, government documents show.

The small investors’ funds do appear to have helped sustain the local economy. Henan Huanyu Power Source Co., a maker of rechargeable batteries in Xinxiang’s ramshackle industrial fringe, in 2013 saw sputtering overseas demand hurt cash flow, employees say. Huanyu turned to Tengfei for help repaying 30 million yuan in bank loans, company documents show. Tengfei’s funds helped Huanyu hang on, one of the employees says, until a large South Korean order eased cash flow.

Piao’an Group, a medical-equipment supplier in the network, received funds from Tengfei after it began to experience what government documents call a “capital crisis.” Huanyu and Piao’an didn’t respond to inquiries.

For Cao Guojun, 42, Tengfei represented the promise of moving into the urban middle class. Mr. Cao became a Tengfei salesman in early 2013 after moving with his wife and son to Xinxiang, where they hoped to buy an apartment near good schools. He secured 1.3 million yuan, or about $200,000, from investors for Tengfei’s products, mostly from friends and family including his wife and mother.

Every year, local government officials—as in most Chinese cities, Communist Party members—attended Tengfei’s anniversary celebrations, Mr. Cao says, where “they would stand and wave to the crowd when introduced.”

“The most important thing was to see that the government supported it,” he says. “You would think, if anything happened, the government would still support the business.”

Mr. Cao and other investors didn’t know that Tengfei was struggling with souring debt and that its lending among its tight group of companies had begun unraveling.

Tengfei stepped up its marketing to attract more funds, and its sales force prowled the streets in 2013 and 2014. Mr. Guo, the retired army man, invested multiple times during those years after learning of Tengfei from a saleswoman he met sitting on a curbside stool while on his way to his local market.

“They would take me to classes on weekends,” Mr. Guo says, where Tengfei representatives plied prospects with snacks and gifts while urging them to invest to “support local business.”

Spooked investors

Eventually, news that similar firms elsewhere in China were collapsing spooked Tengfei investors, who lined up at the company in November 2014 demanding it return their money.

Tengfei announced it couldn’t repay. A day later, it closed its offices. One Tengfei salesman committed suicide. The city has said it is investigating Tengfei for “exceeding its business remit” and “illegally soliciting funds from the public.”

When investors couldn’t get answers from Tengfei or the city about restitution, some, including Messrs. Yang, Cao and Guo, marched in protest, some of them attempting to block the local rail line to Beijing. Some stripped Tengfei’s offices, carrying away computers and chairs; the three men say they weren’t among the looters.

Tengfei investors have been staging protests ever since, demanding government restitution. Mr. Yang, who intended his $37,000 for his twins’ education, says police called him almost daily on his cellphone for five months to check on his movements after they briefly detained him at an investor protest.

Investors have a pact to meet every Monday outside the Xinxiang city offices, and Mr. Yang says he attends several times a month. The March episode was typical, he says. Before police moved in, city officials “told us they would give us an answer a week later.”

The next week, a lower-ranking city official came out to meet them, he says. Other officials were too busy, the emissary said, adding that “city leaders are paying great attention to the Tengfei issue.”

“It was all nonsense,” Mr. Yang says. “They were only trying to buy time.”

Mr. Cao says police repeatedly came to his home to question his role in protests. They once took him to a police station, where, he says, officers told him: “This money, just think of it as bad luck.”

Caught up in protests, police pressure and their lost funds, Mr. Cao says he and his wife grew estranged and divorced. He moved to his parents’ farmhouse with their son and makes about $300 a month as a deliveryman for a milk-powder distributor.

He rides his scooter home after dark, dreading running into anyone who invested in Tengfei.

“I got tricked, and I took everybody down with me,” he says. “We used to be fine folk in our hometown. Now we are nothing.”

By CHUIN-WEI YAP Apr. 12, 2016 on the Wall Street Journal

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