The Investigation

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.

Recent analysis shows that in 2012 Fanya carried out unauthorized changes to trading platform regulations that allowed it to work with Yunnan Tianhao Rare and Precious Metal Co., and other associated companies, to artificially inflate prices and draw investment.

A 2014 inspection by the governments of Yunnan province and its capital city Kunming found nothing amiss despite the changes, leading many of the company’s 240,000 investors to cry foul and demand that authorities take responsibility for the loss of their assets.

During recent protests, investors carried signs calling on “those who approve, who monitor, who are accountable, need to pay back the hard-earned money of the country’s citizens.”

Some observers have criticized the demand, saying investors must bear the risks associated with high-yield investment and should not simply blame the government when a venture goes bad.

Luo Qinman, a Kuming-based art collector, told RFA’s Mandarin Service he had lost his life savings and much of his relatives’ money through the Fanya scheme.

“After I invested, although I saw returns coming in every day, the Kunming news media and [official] CCTV both reported that Fanya was legal and adhered to regulations,” he said.

“A friend who is a manager in a relevant agency … told me that Fanya was run by the Kunming government; when the government is engaged, it is safe—it is to purchase and store the country’s reserves, and is a good thing to do for the country.”

But despite assurances that his investment was not at risk, Luo lost 10 million yuan (U.S. $1.5 million) of his own savings and another 10 million yuan of his relatives’ money, and suddenly found himself in debt when Fanya defaulted in July 2015.

“Because Fanya was government-run—not technically a private enterprise … the government should be responsible for our loss,” he said.

“It is the government’s obligation to compensate us, because people and businesses associated with the government took the money involved with Fanya—more than 40 billion yuan (U.S. $6 billion)—away.”

Luo cited Fanya chairman Shan Jiuliang as saying the company had lent the money to more than 400 individuals and 100 entities, but that the list had “disappeared” after it was handed to the government, and the recipients are “not required to disclose information” about the transactions.

“Those more than 400 individuals are certainly … government officials or people with backgrounds in the government, while the more than 100 companies are either owned by government officials or their relatives, or are companies with ties to the government,” he said.

“No one without that kind of background or relationship could get access to that money.”

Loss of trust

Luo said that while he had always believed in the government and China’s ruling Communist Party, his trust in the two institutions had been shaken “because they stole our money.”

Beginning in June 2015, Fanya’s original pledge that assets could flow freely into and out of the fund suddenly changed to only permit investments, but no withdrawals, despite protests from stakeholders.

When Luo and a few of his fellow investors decided to book flights to Beijing to complain to central authorities about the new policy, he said he was visited at his home several times by local authorities and that the pressure didn’t let up until he returned the tickets.

Another time, after arriving in Beijing, Luo was taken away from his hotel by local police officers who he said forced him to sign a statement that he wouldn’t petition central authorities before they would set him free.

“There are hundreds of thousands of victims who are just like me, and most of them are elderly people who trusted the party and the government—the money they lost was their pension and life insurance money,” he said.

“But the liar is the one we trusted most: the government and banks … we lent money to businesses run by the government out of trust in the government and banks, love for the party and country, and the belief we were contributing to the country’s reserves. We weren’t trading stocks or futures.”

Luo said he and other investors were angered by the government’s response to the Fanya default, and that some had threatened to commit suicide or kill officials they believed responsible for their losses. He said he believed that if central authorities had a better understanding of what happened to investors, they would surely intervene.

Political responsibility

Among the reasons investors believe the authorities are responsible for Fanya’s conduct is that both the Kunming and Yunnan governments approved the establishment of the metal exchange in 2011, despite having no authority to do so, in a bid to draw investment to the province.

In addition to several documents issued by the government bodies pledging support for Fanya through regulation and tax incentives, neither took steps to rein in the company before it defaulted, though both publicly denounced it in the aftermath.

A number of announcements issued by China’s State Council since 2011 had called for reforms to clean up the nation’s trading platforms, but on-site inspections of Fanya conducted in 2013 by the Yunnan Province Securities Regulatory Bureau and other relevant departments approved of the state of the company’s operations.

Xia Ming, a political science professor at the City University of New York, told RFA that while it is unclear whether the Yunnan and Kunming governments should bear financial responsibility for the Fanya default, they certainly bear political responsibility.

“Because the government’s regulation of Fanya had problems, it constitutes a lack of supervision,” he said.

“Most people know nothing about it, and they will never think the problems of government supervision [led to the default].”

However, the government is unlikely to compensate the stakeholders because it does not want to set a precedent of covering investment risk, he said.

“From the government’s point of view, they have no ability to respond to emerging crises such as Fanya. And even if they compensated the loss, they can’t do so indiscriminately, because that would set China on the road from a market economy back to a planned economy.”

Xia said that official support for Fanya misled many stakeholders and caused them to disregard risks associated with high-yield investments.

But he said investors should acknowledge that their own financial motivations were in part to blame for their losses and cautioned them against taking official endorsements as assurances of a risk-free speculation.

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