Rusted Metal An Investigative Report

The lion’s share of investors’ money lost amid a default by the Kunming Fanya Metal Exchange in southwestern China’s Yunnan province is unrecoverable, financial analysts said, despite government claims that authorities will do everything in their power to track down the funds.

Nearly a year after Fanya’s collapse, and eight months since authorities announced that the company had engaged in unlawful activities to cheat some 240,000 people out of around 43 billion yuan (U.S. $6.5 billion), investors are demanding that the government return their money.

They claim that authorities should compensate them because 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 despite declarations by police in Kunming that they will “spare no effort in tracing and recovering investors’ lost funds,” and the launch of an official website in April that allowed investors to register information about their losses, analysts told RFA’s Mandarin Service that the money is almost certainly gone.

Financial expert Duan Shaoyi called the majority of funds invested in Fanya “simply unrecoverable.”

“Most of this money, after it was invested, was spent or squandered … on setting up offices across the country, buying office equipment, hiring employees, promotions and advertising, rent, etc.,” he said.

“As a result, the most that could be recovered at the end of the day would be just the tip of the financial iceberg. I would say that if [authorities] could recover even 20 percent of the funds, that would be pretty impressive.”

According to Duan, even if authorities manage to recover 20 percent of the funds, that money would likely be spent covering the cost of the investigation and “other state waste,” so investors might not see any of it in the end.

Other analysts suggested that the majority of the 43 billion yuan might have already been distributed as part of a Ponzi scheme that paid dividends to earlier investors to create the appearance of profits and draw in additional investment.

Fanya also held a private auction of its holdings in Shanghai earlier this year before police could seize them, further complicating recovery of investors’ money.

William F. Mei, an American expert on the Chinese economy, told RFA that the 43 billion yuan had already been lost through a complex web of stock and real estate market investments that is impossible to untangle at this point.

Mei said the police in Kunming only announced that they would work to track down the money in a bid to calm frustrated investors.

“Based upon past experiences, if they are able to recover even 10 percent of the losses, that would be quite impressive,” he said.

“Tracing and recovering investments is a complex and expensive process. A significant amount of the funds may have already been transferred overseas into personal accounts, making it essentially impossible to recover. And on top of that, some of Fanya’s funds have been invested in state-owned enterprises.”

According to Mei, the Chinese government “will stop at nothing to protect its state-owned enterprises,” and investors are generally considered responsible for their own losses, so they are unlikely to receive any government support.

“Basically, the Chinese government’s promise that it will trace and recover investors’ lost funds is just an attempt to calm them down and regain their confidence—there isn’t much that can actually be done,” he said.

“But this way, with the passage of time, people might just gradually come to accept their losses. There’s really no way the police could recover any more than just 10 percent of the funds.”

Learning from mistakes

Zou Tao, an independent Chinese financial expert, told RFA that the government can’t spend taxpayers’ money to compensate investors’ losses and that those who lost money in the scheme should use the experience to avoid making similar mistakes in the future.

He urged would-be investors in China to maintain control over their money instead of handing it over to fund managers, and to keep their investments “realizable,” or easy to withdraw without having to go through a third party.

Zou said investment platforms should be set up and authorized by the state, and that investors should avoid schemes launched by individuals or private enterprises.

“Some personal investment platforms may perform very well sometimes, but they have high levels of risk,” he said.

“If any management issues arise or if the overall economic environment changes for the worse, everything can fall apart very quickly.”

He advised investors to seek out products that have a risk management mechanism that allows the platform to continue operating even in a difficult economic environment and provides some return on investment, regardless of how it performs.

According to Zou, the only platforms worthy of long-term investments in China are state-managed stock and bond markets. He also cautioned investors against being seduced by claims that they could become rich overnight.

Lack of opportunities

Mei told RFA, however, that even in China’s relatively mature stock market, there are few safe opportunities for amateur investors—as evidenced by the Fanya scandal.

“Even if the average Chinese citizen has some extra money on hand, it is not easy to find a healthy investment opportunity,” he said.

“If you put your money in the bank, you run the risk of inflation on account of the government continually printing money. Banks’ interest rates are pathetic, and don’t even begin to compare to inflation.”

Additionally, Mei said, there are several risks associated with China’s banking industry, including the possibility that banks could collapse.

Meanwhile, the stock market is “manipulated by various interest groups, resulting in really wild fluctuations,” he said, while China’s real estate market is in the midst of a massive bubble.

“In this context, the Chinese government simply has no way to reassure investors that their money is safe,” he said.

“Changing your yuan to U.S. dollars might be the only safe investment choice, because there is absolutely no way that the yuan can avoid a devaluation at this point.”

In April, the Wall Street Journal reported that the total value of money lost to fraudulent schemes in China last year had reached at least U.S. $24.3 billion (162 billion yuan), affecting more than 1.6 million investors. Of this total, Fanya represented nearly one-fourth of the investments.

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