Fanya Exchange’s 36 billion yuan default ‘tip of iceberg’ in China
PUBLISHED : Friday, 25 September, 2015, 12:00am
Xie Yu yu.xie@scmp.com
Exchanges featuring products from garlic to rhodium are under scrutiny after Fanya metals case
Rhodium and steel to garlic and onion, you name it, they trade it. Hundreds of these so-called commodity exchanges, which have mushroomed across the mainland in a regulatory void and attracted 1 trillion yuan in investments, are now under the microscope.Beijing this week was treated to a rare sight of protesting investors wielding banners outside the office of the country’s top securities authority, complaining they were duped by the Fanya Metals Exchange in Yunnan province.
But Fanya, say industry insiders, is only the tip of the iceberg.
“There are at least 400 such exchange platforms in China, managing roughly one trillion yuan of assets,” said Wang Hongying, head of the China Financial Derivatives Investment Research Institute. “Local governments have been very supportive of these exchanges as their turnover adds to the local GDP data.”
The angry investors, wearing T-shirts calling Fanya a “scam”, demanded the central government investigate Fanya for defaulting on 36 billion yuan it owed investors. The exchange had promised double-digit returns on a punt on metal prices increasing, a bet that went horribly wrong as commodity prices collapsed worldwide.
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At a time when the property sector – once the cash cow for local governments – continues to struggle, local governments’ tolerance for the dodgy business practices of these exchanges is not hard to fathom. But the main reason why these supposed spot trading markets flourished even as allegations abound of them manipulating prices and swindling investors, is the regulatory grey area in which they operate.
“The China Securities Regulatory Commission [CSRC] does not have the power to regulate regional exchanges,” said a CSRC source who did not want to be identified.
Geng Shuang, a senior lawyer based in Guangzhou, said: “Spot markets come under the ambit of the Ministry of Commerce while securities and futures markets are under the CSRC. These so-called spot-trading exchanges are structuring contracts and complicated financial products based on commodity spot prices, creating a regulatory uncertainty. As a result, neither the ministry nor the CSRC minds them at present.”
China Financial Trading, an industry data provider, has identified 653 commodities exchange houses on the mainland, trading more than 200 commodities on their platforms.
The Fanya exchange, which claims to trade 14 minor and rare metals, including indium, bismuth, tungsten, antimony and cobalt, is an example of the risks that such exchanges present.
“Fanya has developed curious financial products. Investors were told they were lending to rare metal producers and traders while the collateral turned out to be rare metal warrants heavily inflated by the company itself,” said Wen Jian, a Tianjin-based senior analyst at First Futures. “Every province in China has at least 10 such exchange houses.”
Reuters [3]
The CSRC official told the South China Morning Post that the regulator had been trying to clean-up regional exchange platforms. “Fanya didn’t pass the latest CSRC inspection but has continued to operate because of the local government’s support,” the official said.
The protesters calling for a probe into the Fanya exchange also accused the Yunnan government of abetting Fanya. The exchange, located in Kunming , claimed to be “the biggest rare metal exchange in world” and was “carrying on a national mission to compete for pricing rights for China’s rare metal”.
The products, named ri jin bao, promised an annual return of 13.68 per cent, guaranteed principal and instant redemption. These could be bought online by retail investors all over the nation.
Fanya yesterday posted an announcement on its website saying 80,000 investors nationwide bought its products, with the outstanding balance at 36 billion yuan.
A Fanya staff member, who refused to give her name, told the Post that the company was planning a “restructuring” and investors were being offered the option of selling their products. The exchange has since July barred investors from encashing their investment products.
So far no government probe has been announced into the exchange. Investors said local police bureaus were hearing their complaints but ha yet to lodge a case.
“These cases are always difficult as we can’t find an authority actually supervising these organisations. Many exchange houses are manipulating product prices in the small market they have created. Investors who get trapped by such exchanges are usually ignored because these schemes do not pose such a great threat to the nation’s economy or financial stability. Plus, almost every exchange is politically protected,” said a lawyer in Guangzhou who has been fighting for justice for victims of exchange platforms.
Failed China financial products drew investors for their ‘low’ returns [5]
“These exchange houses will let you make money at first and then when you invest more, you will suddenly find you have lost everything,” added the lawyer, who spoke on condition of anonymity.
But Fanya’s case goes beyond the standard irregularities of such exchanges.
Wang Guoqing, a sales manager for chemical products in Zhejiang province, said he invested more than 600,000 yuan in ri jin baos in the past two years, but both the principal and returns were suddenly frozen in July.
“I followed the company for two years before putting in money. Fanya says it is fighting for China’s pricing power over its rare metal. Its advertisements run on China Central Television and local party newspapers, giving the company an aura of credibility,” he said, adding that he made profits in the first year of his investment on the exchange.
Fanya said in its latest announcements that the exchange had been caught in a liquidity crunch as a result of the economic slowdown on the mainland and policy changes.
“Some overseas forces colluded with domestic institutions and maliciously shorted China’s rare metals. They want to crush Fanya and then grab China’s precious rare metals for cheap,” it said in an announcement.
The Fanya exchange advertised returns of 13.68 per cent. [6]Georgi Slavov, head of research at London-based commodities brokerage Marex Spectron, said: “I don’t understand how an exchange can be responsible for a price collapse because the metal should be owned by investors, not by the exchange. The exchange is only a marketplace where buyers and sellers meet and agree on a price. It is clearly a conflict of interest if the exchange is also a trader.”
A column in Zhengzhou-based Commodities Daily had called Fanya’s business model a Ponzi scheme as early as last year.
“The rare metal products have always been moving one way in Fanya. It has been pricing the products 25 to 30 per cent higher than other market players,” the author, named Tan Na, wrote, adding Fanya was using the investment from new investors to pay off the old ones and maintain a 20 per cent annual growth in capital.
Commodities analyst Wen Jian described Fanya’s statement as “ridiculous”.
“To me it seems Fanya had been piling up inventories of some rare metals like indium and inflating their prices intentionally. This is market manipulation and should be punished,” he said.
According to its official website, 90 per cent of global indium transactions take place on Fanya’s platform and the inventory in the exchange’s warehouse exceeds 3,600 tonnes – close to eight years of China’s output and five years of global output.
“One thing that keeps bugging me is, where are the financing parties? If they defaulted, why isn’t Fanya after them?” said Stephen Chen, an electronic devices sales manager in Shenzhen. His 300,000 yuan of investment was frozen by the exchange.
“We were told that the money goes to companies in need of capital but I was never told where the money went. In any case, 13 per cent annual return is not that high in China, which is why I trusted Fanya.”
Fanya’s official website had listed more than 40 companies as “cooperation partners”. Sales managers of its products used to claim big state-owned companies like China Minmetals Corporation and Yunnan Lincang Xinyuan Germanium Industrial were among the financiers. These two, however, disappeared from the list after the crisis broke out, with the current list showing only 17 companies.
Failed China financial products drew investors for their ‘low’ returns
PUBLISHED : Friday, 25 September, 2015, 12:00am
Xie Yu Yu.xie@scmp.com
If you can’t even trust an investment that returns “only” 13 per cent, what can you trust?
The low returns on the financial products offered by Fanya Metals Exchange ironically attracted investors as, unlike typical scams, Fanya was not promising the moon.
“For years, I have invested in trust loans, where it’s easy to get more than 15 per cent. Never thought something that yields less could be dangerous,” said Vivian Jiang, who works at the Shanghai Jiaotong University.
Jiang invested more than 800,000 yuan in ri jin bao, an investment product issued by Fanya Metals Exchange that promised to return 13.7 per cent with principal and redemption assured, but has frozen redemptions since July.
“I had kept that investment for my son’s education in the UK and it is gone now. What do I do now? Why aren’t police on them yet? This is fraud,” she said between sobs.
Investors are venting their ire at Fanya’s political patrons in the provincial and central governments though many of them had put their money into the exchange because of its political connections.
Fanya’s advertisements called itself a “government platform”, complete with photos of senior executives with local and national government officials. Big state-owned companies listed as partners on its website and organisations like China Central Television listed as media partners helped Fanya’s salespeople to convince investors of the exchange’s state backing.
Convinced of Fanya’s “strong background”, 51-year-old Jiangsu businessman Wang Yu put the 80,000 yuan he had made from the stock market this year into ri jin bao.
“I will go to Beijing and attend every protest meet until I get my money back. The government should not underwrite these companies,” he said.
“We were all rushing to buy ri jin bao last year. It was so popular that if you invested 10,000 yuan, you could probably subscribe to 5,000 yuan of the product. Such was the demand,” said Zhou Sisi, a housewife in Shanghai. “I don’t know how I’ll tell my husband. The money I put into Fanya was to be used as down payment for a home near my son’s school.”
She invested more than 200,000 yuan this January, bringing her total investment in Fanya to 470,000 yuan, before being told in July that she could not withdraw any money from the account.
Zhou does not even have a contract of her investments. She said she signed “something” online and that she thought she held some rare metal warrants as collateral.
She has no idea what indium or bismuth is, neither did she ever find out what they are worth.
http://english.caixin.com/2015-09-22/100854899.html
Commodities Exchange in Yunnan Ran 43 Bln Yuan Scam, Investors Say; Fanya Metal Exchange in Kunming accused of selling some 220,000 investors high-yield products that cannot be cashed in
By staff reporters Liu Caiping and Jia Huajie
Protestors fearful they have lost investments sold to them by a commodities exchange hold up banners in front of the securities regulator’s offices in Beijing on September 21
(Beijing) – A protest in front of the securities regulator’s office in the capital by more than 100 investors who felt they had been the victims of a scam that one analyst says resembles a Ponzi scheme has put the spotlight on a government-backed nonferrous metals exchange in the southwestern province of Yunnan.
The crowd gathered in front of the offices of the China Securities Regulatory Commission (CSRC) on September 21 to demand regulators intervene in what investors said was a 43 billion yuan fraud involving the Fanya Metal Exchange, a four-and-half-year-old trading platform for nonferrous metals in Kunming, Yunnan’s capital.
The protesters held banners saying that the exchange had cheated them. They want the CSRC to get involved and the police to investigate.
However, a person close to the regulator said the CSRC does not have jurisdiction over commodities exchanges. The best it can do is tell the CSRC branch in Yunnan to urge local authorities to sort out the matter, he added.
An investigation by Caixin has found that the local government was aware of Fanya’s troubles as early as November and took measures to address the problem. However, its official attitude on whether the bourse was engaging in shady dealings is mixed.
A protester who declined to be named said investors were lured into buying products offered by the bourse that are linked to metals traded on its platform. A typical product promised an annual return of 13.68 percent with interest paid daily, he said.
Investors were required to deposit their money with Fanya and then use it to buy products. The mechanism was designed so that the exchange would pocket the excess in returns above the level investors agreed to, and make up for the loss if the price fell below a set limit, he said.
The demonstrators said some 220,000 investors were still locked into products sold by the exchange. They said they had been having trouble withdrawing money from their accounts with Fanya since April and withdrawals stopped altogether in July.
Fanya did not comment on the matter or the claim that the investments were in peril.
Ponzi Scheme?
Fanya’s business model amounts to letting investors lend to nonferrous metal traders with the commodity as collateral, an industry analyst with a futures trading company said.
Indium, a metal used in liquid crystal displays, is the main product traded in Fanya.
The biggest problem with Fanya – and what makes it different from other metals exchanges – is that “indium has always flown only one way from the market to Fanya and never the other way round,” he said. Fanya’s stock of indium had reached 3,400 tons, exceeding the amount needed globally for many years combined, the analyst said.
An investment product linked to a metal like this is essentially a Ponzi scheme, in the sense that the payments to old investors are sustained only by the money from new investors, he said.
Once the flow of money is cut off, or even so much as slows, he said, the trading companies that borrowed money are unlikely to be able to keep up with the interest payments that investors were promised. A default would leave the old investors with piles of metal that are worth much less than their prices in the exchange – and they cannot dump the metals for cash without triggering a collapse in price.
People close to the matter say the Yunnan government has known about Fanya’s activities for a while, but it is unclear when officials in the provincial government’s financial regulatory unit concluded that the exchange created a “huge risk.”
Officials from the government met on November 13 to discuss how to speed up the clean-up and consolidation of all sorts of exchanges in the province, following an order of the State Council, the sources said.
The cabinet tapped the CSRC in 2011 with the task of leading a working group to clean up the country’s many regional exchanges for securities and commodities. By November, only the governments of Yunnan and Tianjin had not completed the task, the people close to the matter said.
The Fanya exchange was discussed at the meeting, the sources said. They did not say what problems the government officials thought must be fixed.
However, soon afterward some Fanya employees learned they had been barred from leaving the country, the sources said. No official announcement was made, and they only found out at the airport.
Fanya lodged a formal complaint with the province’s financial regulatory office on January 5. The complaint document, which Caixin has read, says the exchange believed that the ban on Fanya employees traveling abroad “not only will not help control and eliminate risks, but will trigger greater liquidity risks and create unnecessary panic.”
The person close to the CSRC said the regulator has repeatedly sent orders to the CSRC branch in Yunnan to urge the local government to solve the problem, but little progress had been made.
It’s All Good
As an added twist to the drama, a top local official reportedly spoke highly of Fanya and its chairman in public, even though the exchange has received a great deal of negative publicity.
According to PR Newswire, a U.S. news agency, Liu Guangxi, head of Yunnan’s financial regulatory office, said at a reception on July 8 that “we will, as always, continue to support Fanya.”
“The Fanya brand is worth a fortune,” he said. “According to our government statistics, Fanya has directly contributed 360 million yuan in taxes to the country and another 670 million yuan indirectly.”
Liu was also quoted as saying that Fanya’s chairman Shan Jiuliang, who was at the reception, is an exceptional entrepreneur and a talent that is in short supply in Yunnan.
Fanya appears to be taking measures to assuage the angry investors. It has proposed negotiating with investors to solve the dispute and a meeting is scheduled for September 28.
http://www.reuters.com/article/2015/09/21/china-fanya-protests-idUSL4N11R2U620150921
Mon Sep 21, 2015 6:25am EDT
China investors in rare protest accuse regulators of “ignoring fraud”
BEIJING, SEPT 21
Hundreds of investors gathered outside the headquarters of China’s securities watchdog on Monday to protest against a metals exchange in a southwest province they accuse of defrauding them of billions of yuan.
Carrying banners emblazoned with the words “ignoring Fanya fraud”, the protestors were eventually dispersed by police from the main gates of the China Securities Regulatory Commission (CSRC) in Beijing’s financial district after more than two hours.
“We were protesting today because we have no other option and no one has responded to our complaints,” an investor surnamed Fang told Reuters outside the CSRC’s headquarters.
The Fanya Metal Exchange, located in the city of Kunming in Yunnan province and authorised by the local government, trades 14 minor and rare metals, including indium, bismuth, tungsten, antimony and cobalt.
It attracted billions of yuan from investors who bet on higher prices, building up huge stocks of metals in its authorised warehouses. That also helped support prices in the exchange and helped provide financing to some firms.
As many as 220,000 investors nationwide were enticed by rising prices to buy metals on the exchange, but demand for the metals has been falling this year as a result of the slowing economy, and Fanya’s warehouses are now bulging with stock. The collapse in equity markets also prompted some investors to try to cash in their bets on Fanya in July.
“Their propaganda never mentioned anything about risks,” said Fang. She added that in some regions, local banks had encouraged clients to invest in products linked to Fanya’s metals. She said as much as 45 billion yuan ($7 billion) had been invested in the exchange and had not been repaid.
In an “open letter” to Premier Li Keqiang handed to Reuters outside the CSRC building, another protester said he had invested as much as 392,000 yuan on the exchange and now had no way of retrieving it.
Fanya said in a statement in July that it was experiencing liquidity problems after large numbers of investors tried to withdraw their cash at the same time, with a spokeswoman noting that investors were wanting to switch their cash into the equities markets.
An employee at Fanya’s corporate clients department who declined to be identified told Reuters on Monday that there was a “run” on the company, but she declined to acknowledge that they had any problems with cash flow. She said the exchange was still running smoothly.
Last month, investors apprehended Fanya chairman Shan Jiuliang at a hotel in Shanghai and handed him over to police, according to media reports. He was subsequently released.
Shan and his wife Zhang Peng, also a vice president and director of Fanya, bought 20.95 percent of the Hong Kong-listed film production company, Imagi International Holdings Limited , for 543 million Hong Kong dollars in September 2014.
Shan is now chairman and executive director and Zhang executive director of Imagi. A spokeswoman at Imagi said operations at the company were normal, as were communications with the chairman. ($1 = 6.3676 Chinese yuan) (Reporting by David Stanway and the Beijing newsroom, Additional reporting by Polly Yam in HONG KONG; Editing by Simon Cameron-Moore)
http://www.ft.com/intl/cms/s/0/02a129cc-4995-11e5-9b5d-89a026fda5c9.html#axzz3jh3RShZ2
Angry Chinese Investors Capture Head Of Metals Exchange In Predawn Hotel Raid
Tyler Durden on 08/23/2015 20:30 -0400
Meet Shan Jiuliang. He’s the head of Fanya Metals Exchange and he was captured in a daring predawn raid in Shanghai on Saturday.
As FT notes, “Fanya is a forum for trading minor metals like indium and bismuth that has also functioned as a shadow banking conduit — not only leveraging metal deposited with the exchange as collateral for loans, but offering high interest investment products to retail investors.”
If that sounds familiar to you, it should. Just last week in “The 8 Trillion Black Swan: Is China’s Shadow Banking System About To Collapse?,” we took a fresh look at the dizzying array of wealth management products and collective trust products that are, together, a CNY17.2 trillion industry in China. Summarizing a (very) long and convoluted story, WMPs are marketed to investors through banks as a high yielding alternative to savings deposits. Investors aren’t often aware of exactly what they’re investing in or how risky it might be or that in many cases, issuers borrow short to lend long resulting in a perpetual case of maturity mismatch.
“A key issue is whether the presumption of implicit guarantees is upheld or the authorities allow failing WMPs to default and investors to experience losses arising from these products,” the RBA said in a report, to which we responded that in the event investors are forced to take losses, “the key issue is what those investors will do next.”
Well, now we know.
First they will stage angry protests and then, if their money is not returned to them in about a month, they will travel from all corners of the country, stake out a hotel, kidnap the issuer of the WMP and haul him away to jail. Here’s FT with the story:
The head of a Chinese exchange that trades minor metals was captured by angry investors in a dawn raid and turned over to Shanghai police, as the investors attempted to force the authorities to investigate why their funds have been frozen.
Investors have been protesting for weeks after the Fanya Metals Exchange in July ceased making payments on financial investment products. The exchange, based in the southwestern city of Kunming, bought and stockpiled minor metals such as indium and bismuth, while also offering high interest, highly-liquid investment products from its offices in Shanghai and its financing branch in Kunming.
Some investors flew in from faraway cities to join hundreds more surrounding a luxury hotel in Shanghai before dawn on Saturday. When Fanya founder Shan Jiuliang attempted to check out, they manhandled him into a car before delivering him to the nearest police station. Shanghai police took Mr Shan into custody and promised to work with local authorities in Yunnan province to investigate what has happened to investors’ money. They later released him without charge.
The demonstrations in Shanghai and Kunming and the exchange’s unusual accumulation of several years’ supply of some metals have so far failed to attract much public attention from regulators. A report by the local regulator identifying the exchange as one of the bigger investment risks in Yunnan was redacted to remove reference to Fanya late last year.
The exchange began to experience liquidity problems this spring. Fanya is estimated to hold several years’ supply of minor metals used in some high-tech and military applications, which it purchased at above-market prices. The exchange’s travails are pressuring prices for some of these metals, as traders anticipate it will have to sell its stockpile.
The exchange, which has acknowledged it has problems, is backed by several of China’s minor metals miners. It has said it has found a buyer but won’t identify the company. Mr Shan “was deceiving us. He admitted to us that there is no buyout group,” said one disgruntled investor surnamed Gu, who participated in the rainy early morning raid.
Mr Shan has been holding regular meetings with exchange backers since problems first surfaced this spring and was on the way to Guangzhou for a business trip when captured.
As you can see, we are not at all joking when we contend that any move by China to allow for defaults and permit market forces to play a larger role in determining which investments eventually sour is likely to be met with a severe public backlash, especially for something like WMPs where investors believe they may have been deceived.
If Shan Jiuliang’s bad weekend is any indication of what’s in store for the Politburo once the PBoC loses complete control of the stock market, managing the yuan and restoring economic growth may be the least of Xi Jinping’s worries.
August 23, 2015 4:42 pm
Angry investors capture head of China metals exchange
Lucy Hornby in Beijing
Shan Jiuliang is manhandled by investors
The head of a Chinese exchange that trades minor metals was captured by angry investors in a dawn raid and turned over to Shanghai police, as the investors attempted to force the authorities to investigate why their funds have been frozen.
Investors have been protesting for weeks after the Fanya Metals Exchange in July ceased making payments on financial investment products. The exchange, based in the southwestern city of Kunming, bought and stockpiled minor metals such as indium and bismuth, while also offering high interest, highly-liquid investment products from its offices in Shanghai and its financing branch in Kunming.
Troubles at the exchange are one of many factors contributing to turbulence in China’s financial markets, as a slowing economy exposes the weaknesses of the country’s debt-driven growth.
Some investors flew in from faraway cities to join hundreds more surrounding a luxury hotel in Shanghai before dawn on Saturday. When Fanya founder Shan Jiuliang attempted to check out, they manhandled him into a car before delivering him to the nearest police station. Shanghai police took Mr Shan into custody and promised to work with local authorities in Yunnan province to investigate what has happened to investors’ money. They later released him without charge.
The demonstrations in Shanghai and Kunming and the exchange’s unusual accumulation of several years’ supply of some metals have so far failed to attract much public attention from regulators. A report by the local regulator identifying the exchange as one of the bigger investment risks in Yunnan was redacted to remove reference to Fanya late last year.
The exchange began to experience liquidity problems this spring. Fanya is estimated to hold several years’ supply of minor metals used in some high-tech and military applications, which it purchased at above-market prices. The exchange’s travails are pressuring prices for some of these metals, as traders anticipate it will have to sell its stockpile.
The exchange, which has acknowledged it has problems, is backed by several of China’s minor metals miners. It has said it has found a buyer but won’t identify the company. Mr Shan “was deceiving us. He admitted to us that there is no buyout group,” said one disgruntled investor surnamed Gu, who participated in the rainy early morning raid.
Mr Shan has been holding regular meetings with exchange backers since problems first surfaced this spring and was on the way to Guangzhou for a business trip when captured. Among other businesses he heads the Hong Kong-listed animation studio Imagi International Holdings. He formerly led the Bohai Commodity Exchange, which traded iron ore among other products.
Fanya denounced the weekend’s raid. “Violent acts against president Shan and our employees or the disturbance of our work are destructive of our work around solving the crisis. This will only allow forces behind the scenes to profit and will greatly harm interests of all members,” it said on its website after Mr Shan’s capture.
Mr Shan has not responded to FT attempts to contact him. Many investors told the FT they were attracted to Fanya financial products because it advertised on CCTV, the national broadcaster. Despite its current problems its financial products are still promoted on the high-speed train from coastal city Tianjin to Beijing.
http://www.ft.com/intl/cms/s/0/05e1d638-3502-11e5-b05b-b01debd57852.html#axzz3hG1hkEN0
July 29, 2015 3:57 am
Liquidity freeze at China metals exchange highlights fragility in financial sector
Lucy Hornby in Beijing
A liquidity freeze in a regional metals exchange has highlighted the underlying fragility of China’s wider financial sector and the potential for broader social unrest.
Investors in financial products sold by the Fanya Metal Exchange have taken their protests to some bank branches, after a week of escalating protests in the southwestern city of Kunming to demand the return of their money and against the backdrop of renewed turmoil in the Chinese equity markets.
Some retail investors told the Financial Times that Fanya products were sold through bank branches around the country.
The Fanya Metal Exchange is a forum for trading rare earth metals that analysts say also functioned as a shadow banking conduit — not only extending loans to borrowers depositing metal on the exchange, but also offering high interest money market products to retail investors. The minor metals exchange in Kunming stopped disbursing funds this month to depositors. About $6.4bn in investments is frozen, according to estimates by Chinese media.
A man who gave only his family name, Lin, said his mother invested Rmb1.5m ($242,000) in Fanya products purchased through her local Bank of China branch in Xinjiang, near the frontier with Central Asia. “We’ve tried to report the case to the police’s economic investigation bureau, but they said it’s not under their jurisdiction. We also approached Bank of China, they also said they can’t do much,” Mr Lin said.
Chinese bank branches will sometimes handle deposits for unaffiliated financial products or allow them to be marketed on premises without officially endorsing them. Former salespeople for Fanya investment products described the banks as third-party custodians.
Rare earth protest fuels shadow lending fears
Hundreds of frustrated Chinese investors protested this week outside a rare earth metals exchange in the south after it was unable to return their money, highlighting the risks of shadow lending in the country. Investors said the Fanya Metal Exchange gradually refused to pay out on investment products — that had promised annual returns of 10 per cent or more — following a collapse in the price of rare metals, which were used as collateral against the customers’ funds.
That distinction is not always clear to retail investors. In some past cases of wealth management products gone awry, regulators have insisted that the bank accept some responsibility. A Bank of China spokesperson said she would check on the bank’s role.
The Fanya Metal Exchange’s entanglement with normal banking channels means its troubles could have broader systemic ripples.
The exchange was already on the radar of local regulators nine months ago. The online report of a November 2014 meeting by the Yunnan Provincial government on “tidying and reorganisation” of local exchanges included a warning by the head of the Yunnan Securities Regulatory Department that “risk at the Fanya Metal exchange was noted as very large”.
Shortly after the report was published on the China Securities Regulatory Commission website it was reposted with that sentence removed, according to Strategic Metal Report, a minor metals information service that published the original and the redacted version in a November article.
“We can’t comment on Fanya because they are not under our jurisdiction,” the Yunnan securities regulator said on Tuesday. Asked about the redacted report, the regulator said it was “normal information release by us”.
The troubles at the Fanya Metal Exchange are linked to the broader slowdown in the Chinese economy and in commodity markets.
In Kunming — until recently one of the fastest growing cities in southwest China — the combination of falling coal and minerals prices with a rising inventory of unsold properties is proving toxic.
The largest real estate company is on life-support and a number of smaller companies have failed, setting off a chain reaction of defaults on shadow loans, business owners said recently.
Mr Lin said that once disbursements slowed, the exchange tried to shift them to products marketed through Fanya Financing (known as Fanrong in Chinese), a financial products company whose billboards are prominent throughout Kunming.
Bamboozled Chinese investors may have lost billions on a mysterious metals-trading scheme
China’s volatile stock markets aren’t the only places where retail investors are losing huge amounts of money these days. Thousands of investors may be out billions of dollars they put into a Chinese company that grew to become the world’s largest rare metals trading exchange in just four years.
Earlier today (July 16), nearly 200 investors in Shanghai gathered to demand their money back from officials at Fanya Metals Exchange, a trading platform-turned-asset manager that counts China’s biggest banks and metals companies among its partners. They join the 800 or so people who demonstrated outside Fanya’s Kunming headquarters on July 13, outraged that for months they’ve been unable to access billions of dollars worth of investments, reports Metal Bulletin (paywall).
At issue is an investment calledRi Jin Bao, a financial product guaranteed by Fanya that promises retail investors annualized returns as high as 13.7%, and the right to withdraw funds at any time. Those funds have been frozen since April, when Fanya said it ran into “liquidity problems,”according to Caixin (link in Chinese). A reported 40 billion yuan ($6.4 billion) owed to 220,000 investors nationwide has been frozen.
“I think Fanya breached a unilateral contract when selling Ri Jin Bao,” one of the protesting investors told Metal Bulletin. “It’s unfair for us.”
Why did hundreds of thousands of individual investors sink millions of yuan into a derivative product linked to indium, bismuth, and other metals few have ever heard of? The answer highlights how Chinese government regulations make it hard for middle-class households to safely grow their savings. It also reveals how easily China’s out-of-control borrowing creates wealth from nothing—and how quickly that wealth can collapse.
Betting the farm on bismuth
Chinese middle-class households have long been in a tough spot. To subsidize its investment-driven economy, the Chinese government sets the savings deposit rate artificially low. It also all but bars individuals from investing outside of China, leaving local property and stocks as the most obvious ways of growing their wealth. Investors looking for alternatives to these crowded and incredibly volatile markets throw their cash into everything from pu’er tea to liquor—and, evidently, indium, bismuth, and other “minor metals” that Fanya specialized in.
Major money for minor metals
The “minor” moniker is in part because these metals are usually the byproduct of other, more commonly traded metals. Indium, for instance, comes from zinc and lead. More commonly traded minor metals are used in a range of niche technologies—everything from LCD screens and solar panels to makeup and pharmaceuticals. These two factors make them a tricky industry to understand, says Anthony Lipmann, managing director of Lipmann Walton & Co, a UK-based metals trading firm.
“It is a market for trade parties, people like us who spend a lifetime to understand where metals such as rhenium, zirconium, hafnium—or Fanya-listed items such as bismuth, antimony, indium, cadmium, etc.—arise and are used,” he tells Quartz via email. “They are not suitable vehicles for investment by widows and orphans.”
Another reason Fanya’s exchange struck industry insiders as odd is the other defining feature of minor metals: that they trade in relatively low volumes globally.
In theory, metal-trading exchanges allow traders to hedge risk via a forward delivery system, at the same time creating reliable reference prices. Not so with the metals Fanya was dealing in.
“Minor metals are too small in volume to be liquid enough for an exchange,” Lipmann says in his email. “Indium, which was listed on Fanya, is a market of about 1,500 metric tons [1,650 tons] per year supply/demand. Copper, which is listed on the London Metal Exchange, is a market of about 22 million [metric] tons per year.”
Fanya’s mysterious premium
Strangely though, Fanya consistently offered double-digit premiums over prices offered on the Chinese spot market. This became particularly salient after the global financial crisis, when demand for solar applications using indium slowed.
The rise of Fanya appears to have affected prices to the degree that it became an alternative source of demand for metal that otherwise would largely have been used in high-tech applications,” says Alex Harrison, editor of Metal Bulletin. “Some producers preferred to deliver to Fanya at its prices rather than the levels prevailing in the spot market. In effect producers used the price but consumers didn’t, sticking instead to formulas tied to reporting agencies’ prices.”
Creating money from nothing
This premium is probably thanks, indirectly, to the cash rushing in from retail investors. In 2013, this is how Fanya explained that premium to Metal Bulletin (paywall): “Traditional spot market prices are determined by supply and demand. Fanya’s pricing rule is: supply and demand plus capital.”
Fanya declined to elaborate on where that “capital” came from (and didn’t return Quartz’s request for comment). It seems likely it refers to the exchange’s selling of financial products, like Ri Jin Bao, linked to the metals traded.
Retail investors aren’t the only ones who profited from Fanya’s scheme. The platform allowed producers to buy and sell simultaneously, according to Metal Bulletin—effectively letting suppliers create their own demand.
This setup did more than just allow canny producers to pocket the difference between the spot price and Fanya’s premium. In the time between the sale to the exchange and the repurchase of that same pile of indium, they could use the warrant guaranteeing their right to buy that indium in the future as collateral for short-term bank loans.
Shaking up global supply
Using this model, Fanya rose from relative obscurity to become by 2014 the dominant platform, by turnover, for trading metals like iridium—but not without attracting criticism around the world. As Christopher Ecclestone, mining strategist at boutique investment bank Hallgarten & Co., wrote last year:
Originally we had heard that this was going to be a market for trade players. However it would appear that in true Chinese fashion it has morphed into a playground for the notorious Chinese penchant for gambling.
A Chinese government regulator warned online late last year that the exchange was a high-risk investment. But that warning was quickly removed from the regulator’s website. Recent posts on Chinese social media about the Kunming protest and speculation about whether Fanya was still allowed to trade are being quickly removed by China’s censors.
On July 15, in response to the initial protests, Fanya said it would buy back (link in Chinese) 5 billion yuan of metals from investors, using money from its producer partners. But in its announcement, Fanya put the blame firmly on a new favorite scapegoat in China’s topsy-turvy markets, rather than its own highly unusual business model. “Malicious foreign devils” were to blame for “speculating on falls in China’s minor metals prices,” as well as for “slandering” the company, and destroying value for everyone else, according to Fanya’s statement.
It’s not clear what Fanya’s referring to since its licensed traders are almost all domestic. What’s more likely is that the relationship will flow the other way—that Fanya’s distortion of supply and demand might affect global prices.
“Six years’ worth of indium is currently sitting in the Fanya warehouses or warehouses under their auspices,” says Metal Bulletin’s Harrison. “If the exchange were to explode, what would happen to all this indium or bismuth?”
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