The China metal exchange at center of investment scandal

Sun Dec 13, 2015 9:01pm EST
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By David Stanway

KUNMING, China (Reuters) - The plain four-storey Fanya exchange building in this southern Chinese city is teeming with investigators trying to understand how an obscure metal trading business turned into one of China's most audacious investment schemes.

Tucked behind an upmarket shopping mall, the Fanya Exchange was founded in 2011 with the aim of giving China greater global control over the supply and price of 14 strategic and rare metals. It also offered an investment product promising annual returns as high as 13.68 percent and the flexibility to deposit and withdraw money at will.

It almost seemed too good to be true. And it was.

In July, hundreds of citizens gathered outside the exchange building in Kunming, demanding to know what had happened to more than 40 billion yuan ($6.6 billion) they had invested in a Fanya-backed product known as "Rijinbao" or "Daily Golden Jewel". Five months later, they are still waiting for answers.

Government investigators and independent auditors are trying to get to grips with yet another wealth management product (WMP) gone awry in China, one that the government itself had promoted.

Fears are rising about the underlying risks to China's financial system from the $2.6 trillion WMP industry and the challenges it pose to Chinese regulators. Many of these products are being sold on a plethora of privately run exchanges, which have come under increasing scrutiny from the state securities regulator, who is worried illegal behavior was putting billions of yuan at risk.

The scandal also highlights the political and social risks for the ruling Communist Party as China's growing class of retail investors, with limited investment opportunities, become outraged over the disappearance of their life-savings into schemes they thought the government had endorsed as safe.

"We do see that Chinese regulators tend to be a bit more behind the curve," said Zhou Hao, senior emerging markets economist at Commerzbank in Singapore. "We’ve seen it with stocks, in forex, and in the futures markets. It’s kind of a policeman and thief problem."   Continued...

Workers direct a crane lifting newly-made steel bars at a factory of Dongbei Special Steel Group Co., Ltd., in Dalian, Liaoning province, China, October 13, 2015.  REUTERS/China Daily