The First Signs of Trouble

Signs that China’s Yunnan Kunming Fanya Nonferrous Metal Exchange was headed for trouble initially appeared in early 2015 – too late, it turned out, to avert a full-blown crisis by mid-year as investors lost billions of yuan and investigations revealed official negligence and collusion, if not outright corruption.

The Fanya default has had a far-reaching impact on the country, involving 43 billion yuan (U.S. $6.54 billion) in funds from nearly 240,000 investors across 28 provinces.

Investors from across China have since banded together, setting up online communities to inform each other of their rights and demanding answers from relevant government departments.

Meanwhile, investigators are uncovering evidence of lax oversight by the provincial government, censored reports warning of grave problems and even indications of fake trades and illegal business dealings that suggest that Fanya, briefly the world’s largest rare earth metals exchange, may have been set up to cheat investors from the start.

In the first part of an investigative series, RFA’s Mandarin Service has examined and assembled the sequence of events that led to Fanya’s collapse to determine whether the company, which traded in rare earth metals, had deliberately engaged in fraudulent fundraising.

On Dec. 22, 2015, the municipal government of Kunming—the capital of southwestern China’s Yunnan province—released a bulletin entitled the “Relevant Situation Regarding Kunming Fanya Nonferrous Metal Exchange Co., Ltd.,” stating that the provincial government had ordered the establishment of a special team to investigate the company after it froze investors’ funds earlier last year.

After conducting a probe, the Kunming municipal government said it had found indications that Fanya may have engaged in illegal criminal activities through its business operations, and the public security bureau opened its own investigation.

Following protests by investors at various state agencies, the Yunnan provincial government announced in earlier this month that the Kunming Municipal People's Procuratorate had arrested Fanya chairman Shan Jiuliang and 15 other company executives on suspicion of “illegally absorbing public savings.”

But the government, which initially played a role in Fanya’s rise, has yet to address shareholders’ concerns over frozen funds, or the wider issue of loose regulation in China’s booming financial system.

Pyramid and other types of get-rich-quick investment schemes exploded in China during the go-go years of rapid growth. These schemes, when they inevitably crashed, bilked tens of thousands of investors, leading to angry street protests from Tibet in the far west to Tianjin in the east.

Metal exchange

According to public records, Fanya was registered in Kunming on Feb. 16, 2011 with 100 million yuan (U.S. $15.2 million) in capital. On April 21 the same year, it launched a metal exchange as the first spot-trading platform of nonferrous metal in China.

But while Fanya had government approval to oversee trade in metals, it was never given permission to engage in its so-called “rijinbao” financing scheme—selling products to retail investors which allowed them to lend money to metal traders and promising them annual returns of up to 14 percent. Several analysts in China have referred to the practice as an “illegal” or “fraudulent” form of fundraising.

As a metal exchange headquartered in Kunming, Fanya’s establishment, operations, and authorized spot trading activities were overseen by local state agencies including the Yunnan Provincial People’s Government and Kunming Municipal People’s Government.

But some experts assert that “collective cheating” or “collective corruption” by several provincial and municipal government departments in Yunnan and Kunming led to Fanya’s default, which has been described as the equivalent of a “financial nuclear bomb.”

China’s State Council issued a document in 2011 ordering local governments to “clean up” the country’s exchange markets, many of which were operating opaquely in unregulated environment.

Fanya’s operations were deemed acceptable in a report filed by the Yunnan Finance Office, the Securities Regulatory Commission, the Banking Regulatory Commission, and the Kunming Municipal Government at the time.

Suspected corruption

In an article published online last year, analyst Guo Yiping wrote that “the many secrets involved in the shocking Fanya incident are enough to fill a thick book.”

“If we use two words to summarize this book, it would be ‘fu bai [corruption],’” he said.

According to Guo, plenty of evidence suggests Fanya was operating illegally and had been designed to swindle investors from the time the company was registered.

A November 2014 article entitled “Yunnan Provincial Government Steps up the Implementation of Tidying and Reorganizing Project,” published on the official website of the Yunnan Securities Regulatory Bureau, stated that Yunnan deputy governor He Duanqi was in charge of overseeing a steering team charged with investigating various types of trading floors in Yunnan.

In the article, Yunnan Securities Regulatory Bureau chief Wang Guangyou explained that based on spot inspections, irregularities were discovered in several exchanges and the associated risk from trading through Fanya was substantial.

However, the article was deleted on the same day it was published.

Rise and fall

Fanya was known as the largest rare metal trading platform in the world, listing indium, germanium, cobalt, tungsten, bismuth, gallium, silver, vanadium, antimony, tellurium, selenium, rhodium, dysprosium, and terbium on its exchange. Investors engaged in spot trading through the platform and were required to shoulder any risks associated with price fluctuation.

By the end of July 2015, the company’s exchange had traded more than 326.3 billion yuan (U.S. $49.6 billion) worth of metals in the four years since its launch and attracted more than 230,000 traders across China. The total trade volume of rare metal had reached more than 440,000 tons and had injected more than 36.7 billion yuan (U.S. $5.6 billion) into the economy.

Fanya’s huge amount of capital and ability to manage such massive transactions came from sales of its “rijinbao” financial management product, despite never having received approval from the government to provide such services.

Fanya described the rijinbao product as an “exclusive investment plan that suits regular investors,” guaranteeing a return of between 12 and 14 percent annually and that the principle could be withdrawn at any time. Investors flocked to the seemingly low-risk and high-reward offering.

Fundraising questioned

But in April 2015, stakeholders were suddenly told that they could no longer reclaim their principle or the profits they had made from their investment, and metal trading became gradually restricted. In July, all personal funds deposited into accounts with the Fanya exchange were also frozen.

After Fanya froze its investors’ funds, the company denied that it had ever provided a financial management product and chairman Shan Jiuliang issued an Oct. 8 statement through the Hong Kong media saying “rijinbao” was merely an internally circulated sales strategy.

According to the ongoing police investigation, not only is Fanya suspected of having illegally obtained funding, the company is believed to have faked buy and sell orders to control the metal prices on its exchange.

Fanya is also suspected of colluding with several banks to use investors’ capital without their permission, in addition to using funding from later investors to pay earlier stakeholders and shell trading organizations to line its own pockets.

Reported by Wen Jian for RFA’s Mandarin Service. Written in English by Joshua Lipes.