27 October 2016
Investors throng Fanya Exchange in Kunming, demanding to know what happened to their money. They are still waiting for answers. Photo:
Investors throng Fanya Exchange in Kunming, demanding to know what happened to their money. They are still waiting for answers. Photo:

Probers stumped over US$40 bln China wealth product gone awry

It seemed too good to be true.

It was. And now investigators are trying to figure out how an obscure metal trading business turned into one of China’s most audacious investment schemes. 

Tucked behind an upmarket shopping mall, the Fanya Exchange in Kunming was founded in 2011 with the aim of giving China greater global control over the supply and price of 14 strategic and rare metals, Reuters reports.

It also offered an investment product promising annual returns as high as 13.68 percent and the flexibility to deposit and withdraw money at will.

In July, hundreds of citizens gathered outside the exchange building, demanding to know what had happened to more than 40 billion yuan (US$6.6 billion) they had invested in a Fanya-backed product known as “rijinbao (日金寶)” or “daily golden jewel”.

Five months later, they are still waiting for answers.

Government investigators and independent auditors are trying to get to grips with yet another wealth management product (WMP) gone awry in China, one that the government itself had promoted.

Fears are rising about the underlying risks to China’s financial system from the US$2.6 trillion WMP industry and the challenges it pose to Chinese regulators.

Many of these products are being sold on a plethora of privately run exchanges which have come under increasing scrutiny from the state securities regulator, who is worried illegal behaviour was putting billions of yuan at risk.

The scandal also highlights the political and social risks for the ruling Communist Party as China’s growing class of retail investors, with limited investment opportunities, become outraged over the disappearance of their life-savings into schemes they thought the government had endorsed as safe.

“We do see that Chinese regulators tend to be a bit more behind the curve,” said Zhou Hao, senior emerging markets economist at Commerzbank in Singapore.

“We’ve seen it with stocks, in forex, and in the futures markets. It’s kind of a policeman and thief problem.”

As the Fanya scandal unfolded, a group of investors tracked down the chairman of the exchange, Shan Jiuliang, and hustled him off to a police station.

Other groups of investors have descended on government bodies in Beijing and Shanghai to stage protests.

Security guards blocked Reuters from entering the Fanya exchange building. But in an interview outside, a Fanya manager who identified himself only by his surname Liao said the current investigations were expected to conclude within two months.

“We urge investors to show patience,” he said.

In a sign that Beijing has finally taken notice, the Kunming city government has said it is investigating illegal behaviour at the exchange and that it had set up a “clean and rectify” team. It has promised to take action if illegal activity is uncovered.

A new Communist Party head has been appointed in Kunming and the vice mayor was dismissed in October on corruption charges.

Still, after waiting so many months for action, investors are skeptical they will recover their money.

“If the government had taken just 10 percent of the energy it used to stop us and spent it on trying to deal with Shan Jiuliang, then the Fanya situation would have been resolved immediately,” said a Shanghai-based investor who gave his name as Wang.

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