Fanya Metal Exchange

Last updated

The Fanya Metal Exchange fraud was a notorious financial scam in China (also known as China's Ponzi Scheme) that was operational from 2011 to 2015. The collapse of the exchange sparked a series of nationwide protests against the involvement of Chinese local governments in supporting fraudulent fundraising schemes.

Contents

The exchange was established in 2011 as a global trading platform for rare metals and promoted by Yunnan government officials. It advertised returns as high as 13.7% and zero risk for investors. In the three years after it was set up, the exchange raised up to $6.4 billion from 220,000 investors across the country.

In 2015, the exchange blocked the withdrawal of funds and froze its accounts, triggering large-scale protests by defrauded creditors in Shanghai, Beijing and other major cities. [1] Victims gathered outside the China Securities Regulatory Commission (CSRC) to accuse the Fanya exchange and CSRC government officials of supporting financial fraud. [2] Twenty-one Yunnan executives, including the founder, Shan Jiuliang, were charged with embezzlement and of sabotaging financial markets in the Kunming Intermediate People's Court in 2018. [3] The company was fined 1 billion yuan ($149.04 million) for illegal fundraising, and Shan was sentenced to 18 years in jail. [4]

Background

The Fanya Metal Exchange was a state-backed exchange that claimed to be the world's largest trading platform of rare metals, located in Kunming, Yunnan Province. The exchange focused on metals used in technologies promoted in the official Chinese strategic plan, including liquid crystal display (LCD) screens and solar panels. [1] Its goal was to emulate the success of the London Metal Exchange and create an exchange dedicated solely to trading rare earths and other minor metals. [5] It dealt in 14 rare nonferrous metals including indium, bismuth, antimony, and terbium, purchasing and storing them for resale. The exchange promised investors a fixed return of up to 13.7% per annum with the right to withdraw the principal at any time without penalty.[ citation needed ]

At its launch, Fanya was designated a "cooperation enterprise" of the National Bureau of Statistics of China. It was advertised on television as a government-endorsed and regulated safe investment product. A key product called "ri jin bao" (daily golden jewel) collected investors' money to be loaned to a third-party agency and invested in other rare metal products. [2] The company's brochures claimed that major state-owned banks served as custodians for these investments. [6] Because of ri jin bao's high returns and seemingly low risks, it rapidly became popular especially among middle-class investors. [7] [8]

Business model and collapse

The exchange announced early on that it held the world's largest stores of bismuth, iridium, and rare earth metals. However, demand for these metals is low, making the funds invested in the stores illiquid. For example, by 2014 the exchange held more than 3,400 tonnes of indium[ citation needed ] and 19,000 tonnes of bismuth, [2] in each case enough to meet global annual demand for several years. Since only small amounts of the stockpiles could be sold in a short period, Fanya would inevitably face a liquidity crisis if any sizeable request for cash withdrawal was made. In addition, the promise of a 13.7% interest rate could only be met with rapidly increasing rare metal prices.[ citation needed ] The exchange inevitably started to cover the interest and principal owed to existing investors using funds from new investors, the definition of a Ponzi scheme. When global rare metal prices declined the exchange started to collapse. [5]

In April 2015, Fanya stopped withdrawals and froze assets nominally worth approximately 43 billion yuan ($6.7 billion) belonging to 220,000 creditors across the country. [1] In July 2015 all assets were frozen.[ citation needed ] A complaint filed with the Yunnan financial authorities was rebuffed. [2] In late 2015, the exchange ceased operations. [9]

Aftermath

The collapse of the Fanya Metal Exchange sparked months of nationwide protests, including protests in front of the Beijing and Shanghai offices of the CSRC that accused the regulator of "ignoring Fanya fraud". [2] [10] Hundreds of furious investors gathered outside the exchange in Kunming. [11]

On July 15, 2015, Fanya announced that it would buy back 5 billion yuan's worth of metals from investors with funds from its partners. [12]

On September 24, 2015, the exchange claimed that its liquidity problem was due to fluctuations in stock and commodity markets, as well as regulatory changes. [2] It also attempted to blame the media for spreading "malicious rumors" and "deliberately inciting panic" in investors. [2] [13] The exchange proposed to sell its stocks of 6 rare metals and undergo extensive debt restructuring to resolve the crisis. [13]

In October 2015 it was revealed that the "ri jin bao" financing scheme was never approved by the government. Fanya issued a statement claiming that ri jin bao was merely an internally circulated sales strategy. [14]

Late in 2015 the exchange ceased operations and its building was taken over by "dozens" of investigators, following months of protests by investors outside government buildings in Kunming, Shanghai and Beijing. [9] [15] Early in 2016 Shan was arrested with 15 other suspects, and in March 2016 Kunming police announced that they had determined that the exchange acted illegally in its use of investors' funds. [9] Investigators blamed regulatory failures for allowing the exchange to operate without proper supervision, but local authorities insisted they had done their job well. [9] In June 2016 police announced that they had impounded more than 70,000 tonnes of rare metals and other assets of the exchange. [15]

In August 2016, after a 7-month long investigation, the Kunming government announced 21 Fanya executives would be prosecuted for "illegal fundraising". [7] Investors continued to seek to increase the visibility of the case, crowdfunding funds to support civil prosecution. A group of Fanya investors sent an open letter with 300 signatures and fingerprints to Cao Jianming, China's top prosecutor. Fanya investors organized to break out from behind the "Great Firewall" to protest on Twitter and press for attention from foreign media. [7] [16]

In July 2018, 21 executives involved in the exchange were charged in the Kunming Intermediate People's Court with embezzlement and sabotaging financial markets. Investors were not allowed to attend the trial, and some investors were asked to leave town before the trial began. [3] The company was fined 1 billion yuan ($149.04 million) for illegal fundraising, and Shan was sentenced to 18 years in jail for crimes including embezzlement. [4] Shan was also fined 500,000 yuan and had 50 million yuan of his personal property confiscated. Other executives charged included Yang Guohong, the former vice president of the exchange, who was accused of illegally appropriating property. [4]

The Kunming Intermediate People's Court began selling off Fanya's assets in 2019. [17] After initially attracting no bids on Fanya's indium stockpile, [18] the sellers were forced to lower prices to complete the sale. [19] Vital Materials eventually purchased the indium. [20]

Analysis

Regulatory failings

Both the Kunming and the Yunnan local governments approved the establishment of the exchange in 2011, although they had no right to do so, in a bid to draw investment to the province. [21] Experts have argued that unless China undertakes sweeping regulatory reform, scams of this type are almost certain to occur. [22]

Allegations of corruption

Analysts have suggested that Fanya was designed to swindle investors from its inception. [14] At the time of Shan's arrest, he was reported to have given investigators a list of 400 individuals and companies who had "borrowed" from Fanya's funds. [3] Defrauded investors have alleged that these individuals include government officials or people with ties to the government, and that the list has disappeared. [21] It has also been alleged that the investigation of Fanya's collapse was delayed because local government officials who were members of the ruling Chinese Communist Party were involved in a "Promotional Work Leadership Group" that popularized Fanya as an investment vehicle. [23]

Protests

The scale and scope of protests against the government resulting from Fanya's collapse have been unusual, fueled both by the scale of the losses suffered by investors and by outrage at the apparent support of a financial scam by local governments. [2] [7] Protestors are consciously risking jail to draw attention to their losses, and thousands of petitioners have been detained by the Chinese government. [6] [7] Many of Fanya's creditors came from the well-educated middle class. [7] They have used social media extensively to organize their protests, and have collaborated to break through China's "Great Firewall" to flood Twitter with protest messages. More than 300 Fanya investors have become active Twitter users. [16]

Related Research Articles

<span class="mw-page-title-main">Yunnan</span> Province in Southwest China

Yunnan is an inland province in Southwestern China. The province spans approximately 394,000 km2 (152,000 sq mi) and has a population of 48.3 million. The capital of the province is Kunming. The province borders the Chinese provinces of Guizhou, Sichuan, autonomous regions of Guangxi and Tibet, as well as Southeast Asian countries Myanmar (Burma), Vietnam, and Laos. Yunnan is China's fourth least developed province based on disposable income per capita in 2014.

<span class="mw-page-title-main">BlackRock</span> American investment company

BlackRock, Inc. is an American multinational investment company. Founded in 1988, initially as an enterprise risk management and fixed income institutional asset manager, BlackRock is the world's largest asset manager, with US$10 trillion in assets under management as of December 31, 2023. Headquartered at 50 Hudson Yards in Midtown Manhattan, New York City, BlackRock has 78 offices in 38 countries, and clients in 100 countries. BlackRock is the manager of the iShares group of exchange-traded funds, and along with The Vanguard Group and State Street, it is considered to be one of the Big Three index fund managers. Its Aladdin software keeps track of investment portfolios for many major financial institutions and its BlackRock Solutions division provides financial risk management services. As of 2023, BlackRock was ranked 229th on the Fortune 500 list of the largest United States corporations by revenue.

<span class="mw-page-title-main">Citadel LLC</span> American hedge fund and financial services provider

Citadel LLC is an American multinational hedge fund and financial services company. Founded in 1990 by Ken Griffin, it has more than $63 billion in assets under management as of June 2024. The company has over 2,800 employees, with corporate headquarters in Miami, Florida, and offices throughout North America, Asia, and Europe. Founder, CEO and Co-CIO Griffin owns approximately 85% of the firm. As of December 2022, Citadel is one of the most profitable hedge funds in the world, posting $74 billion in net gains since its inception in 1990, making it the most successful hedge fund in history, according to CNBC.

<span class="mw-page-title-main">Evergrande Group</span> Chinese property development company

The China Evergrande Group was a Chinese property developer, and it was the second largest in China by sales. It was founded in 1996 by Hui Ka Yan. It sold apartments mostly to upper- and middle-income dwellers.

The Kunming High-tech Industrial Development Zone is a state-level high-tech industrial zone established in 1992 in Northwest Kunming, Yunnan Province, China. It is administratively under Kunming Prefecture. It covers an area of 9 square kilometers. The zone is located in the northwest part of Kunming city, four kilometers from Kunming Railway Station and five kilometers from Kunming International Airport.

Kunming International Trust Co, established in 1993, is a Chinese trust company based in Kunming, Yunnan. It is a relatively small firm in China which has several billion yuan of assets under management but is the largest in the southwest province of Yunnan. Kunming Trust is currently controlled by the financial authority of the Kunming municipal government, which has agreed to clear the trust firm's debt.

<span class="mw-page-title-main">Chinese economic stimulus program</span> Government Plan

The 2008–09 Chinese economic stimulus plan was a RMB¥ 4 trillion stimulus package aiming to minimize the impact of the Great Recession on the economy of China. It was announced by the State Council of the People's Republic of China on 9 November 2008. The economic stimulus plan was seen as a success: While China's economic growth fell to almost 6% by the end of 2008, it had recovered to over 10% by in mid-2009. Critics of China's stimulus package have blamed it for causing a surge in Chinese debt since 2009, particularly among local governments and state-owned enterprises. The World Bank subsequently went on to recommend similar public works spending campaigns to western governments experiencing the effects of the Great Recession, but the US and EU instead decided to pursue long-term policies of quantitative easing.

The Qualified Foreign Institutional Investor program, one of the first efforts to internationalize the RMB, represents China's effort to allow, on a selective basis, global institutional investors to invest in its RMB denominated capital market. Once licensed, foreign investors are permitted to buy RMB-denominated "A shares" in China's mainland Shanghai and Shenzhen stock exchanges. Thus foreign investors benefit from an opportunity to invest onshore, which is otherwise often insulated from the rest of the world, and subject to capital controls governing the movement of assets in-and-out of the country.

<span class="mw-page-title-main">Russian Direct Investment Fund</span> Fund established by the Russian government in June 2011

The Russian Direct Investment Fund is Russia's sovereign wealth fund established in 2011 by the Russian government to make investments in companies of high-growth sectors of the Russian economy. Its mandate is to co-invest alongside the world's largest institutional investors, direct investment funds, sovereign wealth funds and leading companies.

Since the late-2000s, the People's Republic of China (PRC) has sought to internationalize its official currency, the Renminbi (RMB). RMB internationalization accelerated in 2009 when China established the dim sum bond market and expanded Cross-Border Trade RMB Settlement Pilot Project, which helps establish pools of offshore RMB liquidity. The RMB was the 8th-most-traded currency in the world in 2013 and the 7th-most-traded in early 2014.

<span class="mw-page-title-main">Harvest Fund Management</span> Chinese Asset Management Company

Harvest Fund Management is a Chinese asset management company that invests in financial services.

HTX is a Seychelles-based cryptocurrency exchange. Founded in China as Huobi, the company now has offices in Hong Kong, South Korea, Japan and the United States. In August 2018 it became a publicly listed Hong Kong company.

The 2015-2016 Chinese stock market turbulence began with the popping of a stock market bubble on 12 June 2015 and ended in early February 2016. A third of the value of A-shares on the Shanghai Stock Exchange was lost within one month of the event. Major aftershocks occurred around 27 July and 24 August's "Black Monday". By 8–9 July 2015, the Shanghai stock market had fallen 30 percent over three weeks as 1,400 companies, or more than half listed, filed for a trading halt in an attempt to prevent further losses. Values of Chinese stock markets continued to drop despite efforts by the government to reduce the fall. After three stable weeks the Shanghai index fell again by 8.48 percent on 24 August, marking the largest fall since 2007.

Ezubao was a peer-to-peer lending scheme based in the eastern Chinese province of Anhui. It was set up as an online scheme in July 2014, attracted funds of about 50 billion yuan from 900,000 investors, and ceased to trade in December 2015. On 1 February 2016, the scheme was closed down and 21 involved people were arrested. Zhang Min, the president of the parent company, Yucheng Global, told investigators that the company operated as a Ponzi scheme. Following its establishment, Ezubao grew rapidly, masquerading as a legitimate investment opportunity while operating under the guise of peer-to-peer lending. Revelations about the fraudulent nature of Ezubao’s operations emerged after an exposé in late 2015, leading to public outcry and intensified scrutiny by regulatory authorities. The scale of Ezubao’s Ponzi scheme, which orchestrated a sophisticated ruse involving fake projects and returns, was unprecedented in China, contributing to an estimated loss of billions of yuan for investors. The scandal not only devastated the finances of nearly a million individuals but also prompted a nationwide tightening of regulations on the peer-to-peer lending industry, aiming to close loopholes and restore investor confidence.

<span class="mw-page-title-main">China Hongqiao Group</span> Chinese company specializing in producing aluminum

China Hongqiao Group Limited is a company founded in 1994 that specializes in the production of aluminium. Hongqiao is currently the second largest aluminium producer in the world after Chinalco. It is listed on the Hong Kong Stock Exchange with stock code 1378, and is incorporated in George Town, Cayman Islands.

Kangmei Pharmaceutical Co., Ltd is a large pharmaceutical company based in Guangdong with headquarters in Puning and Shenzhen. Kangmei Pharmaceutical produces medication and medical equipment, with a focus on traditional Chinese medicine. It is traded on the Shanghai Stock Exchange and had a market capitalization of more than 47 billion RMB in 2019.

<span class="mw-page-title-main">Chinese property sector crisis (2020–present)</span> Financial crisis

The Chinese property sector crisis is a current financial crisis sparked by the 2021 default of Evergrande Group. Evergrande, and other Chinese property developers, experienced financial stress in the wake of overbuilding and subsequent new Chinese regulations on these companies' debt limits. The crisis spread beyond Evergrande in 2021 to such major property developers as Country Garden, Kaisa Group, Fantasia Holdings, Sunac, Sinic Holdings, and Modern Land.

<span class="mw-page-title-main">2022 Henan banks protests</span> 2022 protests in Peoples Republic of China

2022 Henan banks protests are series of demonstrations against four regional lenders of Henan province over alleged financial corruption. Over the course of the previous two months, depositors have held multiple protests in the city of Zhengzhou, which serves as the capital of the province of Henan.

<span class="mw-page-title-main">HongShan</span> China venture capital firm

HongShan is a Chinese venture capital firm founded in 2005. It was previously the China investment arm of Sequoia Capital (Sequoia) and was known as Sequoia Capital China and Sequoia China before it was rebranded and spun-off as an separate entity.

References

  1. 1 2 3 Guilford, Gwynn; Timmons, Heather (2015-07-16). "Bamboozled Chinese investors may have lost billions on a mysterious metals-trading scheme". Quartz. Retrieved 2019-03-11.
  2. 1 2 3 4 5 6 7 8 Taplin, Nathaniel; Stanway, David (2015-10-09). "Rare metals investment blow-up shows risks lurking in China's financial system". Reuters. Archived from the original on February 1, 2016. Retrieved 2019-03-11.
  3. 1 2 3 "China completes trial of 21 over scandal-hit Fanya exchange". Reuters. 2018-07-02. Retrieved 2019-03-11.
  4. 1 2 3 Daly, Tom; Stanway, David (2019-03-22). "China court jails scandal-hit Fanya metals exchange founder for 18 years: Xinhua". Reuters. Archived from the original on March 23, 2019. Retrieved 2019-07-12.
  5. 1 2 Commodities; Mining (2015-09-01). "Collapsing Fanya Metal Exchange in China raises concerns about minor metals | Financial Post" . Retrieved 2019-03-11.
  6. 1 2 Ming, Li (2016-06-10). "I Lost My Savings in a Massive Chinese Investment Scam". Foreign Policy. Retrieved 2019-07-13.
  7. 1 2 3 4 5 6 Huang, Zheping (2017-02-13). "Middle-class Chinese are risking jail to recoup billions lost in a "zero-risk" government-backed investment scheme". Quartz. Retrieved 2019-03-11.
  8. ↑ Gui, Zhengqing; Huang, Yangguang; Zhao, Xiaojian (2017). "Whom to Educate? Financial Fraud and Investor Awareness". SSRN Working Paper Series. doi:10.2139/ssrn.3025400. ISSN   1556-5068.
  9. 1 2 3 4 Stanway, David (2016-04-01). "Kunming police say Fanya Exchange used investor savings illegally". Reuters. Retrieved 2019-07-13.
  10. ↑ Stanway, David (2015-09-21). "China investors in rare protest accuse regulators of 'ignoring fraud'". Reuters. Retrieved 2019-07-13.
  11. ↑ "Hundreds in China investors' protest". BBC News. 2015-09-21. Retrieved 2019-03-11.
  12. ↑ Lin, Linda; Gu, Rena (2015-07-15). "Fanya says it plans to buy back investors' metal with funds from producers". Metal Bulletin. Retrieved 2019-07-13.
  13. 1 2 Yam, Polly; Stanway, David (2015-09-24). "China's Fanya exchange lambasts media, proposes rescue measures". Reuters. Retrieved 2019-07-13.
  14. 1 2 Jian, Wen (2016-12-20). "Fools Gold: An Investigative Report (The First Signs of Trouble)". Radio Free Asia. Retrieved 2019-07-13.
  15. 1 2 Blanchard, Ben (2016-08-01). "China to prosecute 20 involved in troubled metal exchange". Reuters. Retrieved 2019-07-13.
  16. 1 2 Huang, Zheping. "China's angry investors leap the Great Firewall—and are shocked by what they learn of Beijing". Quartz. Retrieved 2019-07-12.
  17. ↑ "China's scandal-hit Fanya exchange to begin metals sell-off". Reuters. 2019-01-25. Retrieved 2019-07-12.
  18. ↑ Daly, Tom; Stanway, David (2019-01-28). "Fanya Flop: China's Indium Metal Auction Attracts No Bids". U.S. News & World Report. Retrieved 2019-07-12.
  19. ↑ "China court sells Fanya metal exchange indium in cut-price auction". Reuters. 2019-04-25. Retrieved 2019-07-12.
  20. ↑ Burton, Mark; Farchy, Jack (23 January 2020). "Obscure Chinese Company Buys Vast Stock of Metals U.S. Labels 'Critical' to Industry". Bloomberg.com. Retrieved 25 July 2023.
  21. 1 2 Jian, Wen (2016-12-20). "Fools Gold: An Investigative Report (The Investigation)". Radio Free Asia. Retrieved 2019-07-13.
  22. ↑ Jian, Wen (2016-12-20). "Fools Gold: An Investigative Report (The Tip of the Iceberg)". Radio Free Asia. Retrieved 2019-07-13.
  23. ↑ Jian, Wen (2016-12-20). "Fools Gold: An Investigative Report (Selective Investigation)". Radio Free Asia. Retrieved 2019-07-13.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.