220,000 angry investors

China’s biggest Ponzi scheme?

One of the most intriguing questions in China’s financial market is how many exchanges there really are across the country.

There are two major equity bourses, obviously, in Shanghai and Shenzhen. But according to China News Weekly, there were more than 300 exchanges set up by local governments as of September 2011, offering trading services and investment products in everything from gold, stamps, and art pieces to garlic.

Most of these marketplaces are only loosely regulated by local governments. But the stock market watchdog the China Securities Regulatory Commission has been under pressure to do more, as scores of protestors gathered outside its headquarters last month, demanding the CSRC investigate the controversial case of the Fanya Metals Exchange.

Based in Yunnan’s Kunming city, Fanya commenced operation four years ago and according to CBN, quickly rose to become China’s largest trader of minor metals such as indium. Its trading network covered 20 provinces, lured 220,000 investors, and had received monies from those investors totalling Rmb40 billion ($6.2 billion).

The big draw: it has also been offering investment products which promised up to 13.7% returns, as well as unconditional redemption rights.

However, beginning in April, investors have found themselves unable to withdraw funds from their accounts.

This breach has sparked numerous protests across China, most notable of all in August when the CEO of Fanya, Shan Jiuliang, was abducted by a mob of investors from his hotel in Shanghai and dragged to a police station. He was released without charge.

The ongoing protests have led to concerns that Fanya will turn out to be “China’s biggest Ponzi scheme”, reckons China Economic Weekly. A source told China Daily the allegation is not too far-fetched, as Fanya’s business model “did not generate any profits”. Instead, it’s claimed that some of the investment schemes were used to pay back earlier investors.

At the head of this suspected pyramid scheme sits Shan Jiuliang, and his wife, Zhang Peng, who Shan appointed as, amongst other roles, vice-president of the exchange.

An investigation by Futures Daily reveals that Shan and Zhang have a combined annual salary of only Rmb120,000: an income deemed far too low given their positions.

The report elicits further intrigue, revealing that the couple are the founders of another company which, after opening with almost zero cash, managed to acquire Rmb500 million in assets within four months of its launch.

The fiasco now has commentators calling for tighter oversight of the country’s “exchange craze”, although CBN reported that there is still no official figure for the number of exchanges being operated nationwide. (Though the newspaper noted there are over 50 art market exchanges alone.)

A report on Sina Finance blamed Kunming’s local government for promoting “the barbarous growth of the financial sector”. The report also argued that local exchanges need “strict and expert supervision” from central authorities such as the CSRC.

However, the local government does appear to be taking some action. At a conference in Yunnan province in June, Shan Jiuliang requested that a travel ban imposed upon himself and his high-level associates be lifted, which suggested that an investigation into their dealings was already underway.

Furthermore, Kunming city government stated last week that it had ordered Fanya to “reform” on multiple occasions. That said, this does raise the question of why local authorities failed to intervene each time the metals exchange failed to comply.

Protestors who gathered outside the CSRC accused the commission of ignoring the Fanya scandal. But having raised the profile of the scandal with their demonstration in Beijing, it seems unlikely the regulator will still be able to claim that Fanya is merely a problem for the local authorities to sort out.

Keeping Track: At the time this scandal was unfolding,  Fanya claimed that its cash crisis was the result of others shorting the metals market, but at the end of March 2016 Kunming’s public security bureau announced that investigators had determined that the exchange was involved in illegal activity itself. Investigations are continuing before further action is taken.

A report by state broadcaster CCTV suggests that investors have until the end of June 2016 to register their own information for inclusion in the case. So it appears that the matter is still a long way from being settled.

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