China’s government has a “moral responsibility” to victims of a scam that bilked some 240,000 people out of their investments, financial analysts said, though they differed on whether authorities should provide compensation for failing in their oversight of the market.
On Feb. 5, authorities in southwestern China’s Yunnan province announced that an investigation had uncovered criminal activities by the Kunming Fanya Metal Exchange that led to massive financial loss by investors across the country after the company defaulted last year.
The governments of Yunnan province and its capital Kunming had both backed the founding of Fanya, which was also promoted by state-owned banks and the official media, leading investors to trust that the scheme had been thoroughly vetted.
But Fanya carried out unauthorized changes to trading platform regulations that allowed it to artificially inflate prices and draw investment, and subsequent government inspections found nothing amiss, leading many of the company’s 240,000 investors to cry foul and demand that authorities take responsibility for the loss of their assets.
Financial expert Duan Shaoyi told RFA’s Mandarin Service that the government should be held at least partially responsible for the crisis, though he believes that the lion’s share of the blame lies with Fanya, which he said launched the exchange “with ill intentions from the very beginning.”
“Moreover, the media and the government should bear about 15 percent of the responsibility because government officials supported Fanya and media promotions misled the victims,” he said.
“Fanya would never have swindled so much money if it lacked the support of government officials and the media.”
Duan said victims of the scam should bear only four to five percent of the responsibility because they were “ignorant” and were “unable to determine that it was a scam.”
He downplayed the government’s role in the issue, saying officials who initially backed Fanya may not have realized that the company was cheating investors, adding that there is no legal basis for the victims to demand compensation from the authorities.
“In other words, the government has a moral responsibility,” he said.
“[But] if there was no written promise and guarantee, the victims cannot make the government compensate them. Additionally, there will be many other scams like Fanya in the future, so the government will not set a precedent for compensation.”
According to Duan, the government might provide victims whose basic living standards have been affected by the loss of their investments with subsidies for relief, “if they make a lot of noise.”
But he said he expects only 10-20 percent of victims’ money will be recovered and that the case “will likely be shelved in the end” after the people who ran the scam are sentenced for their crimes.
Economist Gong Shengli agreed that the government bears some responsibility for the Fanya scandal because it issued the documents that gave the company and its exchange legal status and should compensate victims for their principal investment.
“If Fanya operated illegally, where was the government oversight,” he asked.
“Who will believe that government agencies can play their roles in the future if the government does not accept some blame for the Fanya crisis? The government has an inescapable legal liability [if it wants to prove that it is doing its job].”
Gong noted that Fanya operated for several years before it was shut down, suggesting “there is a blind spot in the market oversight mechanism in China.”
He questioned how businesses and stock exchanges could continue to operate in China if the government ignores problems like the Fanya scam.
“The government should at least compensate [victims] for their principal; otherwise, how can we talk about rule of law in China,” he questioned.
Gong also suggested that some government officials might have allowed the scam to continue because of incompetence, rather than complicity.
“The government officials involved in the case might not have seen through Fanya’s scam—they just pretended they knew when in fact they didn’t, which led to the eventual crisis in the end [when the company defaulted],” he said.
He added that he did not expect the issue to be resolved in a way that would satisfy investors.
“Despite my belief that the government should at least compensate the victimized investors with their principal, the government won’t because it has become a robber and will not reason with the people,” he said.
“Moreover, subsequent generations of government officials refuse to bear responsibility for the problems that their predecessors left unresolved … [so] if the Fanya problem is not resolved today, it will be even harder tomorrow.”
Time to reflect
Zou Tao, an independent investment and wealth management specialist based in Shenzhen, told RFA that even though ordinary people became victims after the state promoted Fanya, the government has neither the authority nor the money to compensate them.
“All the government is required to do is to handle the incident in a professional manner by determining the nature of the Fanya incident according to the relevant state laws and punish the people who deserve to be punished afterwards,” he said.
“No matter how the victims uphold their rights and protest, it is insignificant because the government cannot use taxpayer money to pay back their losses.”
Zou said that instead of protesting, the victims should “calm down and reflect” on why they chose to invest in Fanya without conducting due diligence so they can avoid making the same mistake in the future.
“Besides, the money is lost,” he said, noting that Fanya no longer has any assets to return to the investors.
“If [the investors] defend their rights too vigorously now, not only will they possibly break the laws, they may also hurt themselves physically. In a nutshell, they bought a lesson paid for with blood—they should accept and face that reality, and refrain from making similar mistakes in the future.”
Reported by Wen Jian for RFA’s Mandarin Service. Written in English by Joshua Lipes.