Rare metals investment blow-up shows risks lurking in China's financial system

By Nathaniel Taplin and David Stanway SHANGHAI/BEIJING (Reuters) - The promise of risk-free, double-digit returns made the "Daily Golden Jewel" investment offered by an obscure commodities exchange in China hard to resist. Advertisements on Chinese state TV implied government backing. Now Beijing faces a political headache after the Fanya Metal Exchange in southwest China said it cannot pay investors their principle. Just as Beijing is scrambling to restore foreign investment confidence in its major markets following a tumultuous summer, its own citizens have hit the streets in protest, underlining the dangers that lurk in China's byzantine financial system. The exchange in rare metals has become the focus of wrath by Chinese investors who feel duped by an investment they thought was state backed – an assumption that is not rare in a country where the lines between private and public enterprise are often blurred. "We just hope the government can face up to this problem," said a 35-year-old man surnamed Wang, who said he had invested 500,000 yuan ($79,000) in the product. He was among about 150 protesters in front of the Shanghai office of China's banking regulator. Similar demonstrations have been held in recent weeks in Beijing and Shanghai. "President Xi and Premier Li said we should build our ‘China Dream’, but now even our basic rights, our property rights, can't be protected. How can we achieve the ‘China Dream?’" said the man, referring to the leadership's slogan that adorns propaganda posters nationwide. Fanya did not return calls requesting comment. The exchange, regulated by the local government in Yunnan province, trades 14 minor and rare metals and offered a range of investment products based on the metal stored in its warehouses. The "Daily Golden Jewel" investment promised annualised returns as high as 13.7 percent and the right to withdraw funds at anytime. Fanya guaranteed the product, which was based on rising metal prices and interest earned on financing deals. But in July, the exchange said it had experienced liquidity problems since April after investors tried to withdraw their holdings. Demand for the metals has been falling this year and Fanya's warehouses are now bulging with stock. It holds more than 19,000 tonnes of bismuth – used in alloys, flame retardants, castings among others – enough to meet global annual consumption more than twice over according to 2012 figures. Fanya has said 80,000 investors are involved and the outstanding investment was 36 billion yuan ($5.7 billion). This is not the first time defaults on so-called wealth management products and similar investments - marketed by banks but often backed by high-risk or speculative projects - have sparked protests in China. Investors often assume that banks or the government will cover any investment losses, leading to conflicts when banks baulk. It is unusual though for investors to protest in Beijing and Shanghai in front of government offices, such as the securities regulator - the China Securities Regulatory Commission (CSRC). Many investors cited apparent support from Yunnan government officials and major commercial banks as a key reason they invested. "The ad was playing on China Central Television for a month in 2014," said one Shanghai retiree investor, who declined to give his name, referring to the state broadcaster. "Our losses are not only in money but also in our trust in local governments like the one in Yunnan," added another investor surnamed Fang. The Fanya exchange describes itself as government-backed and government regulated. Its website also provides examples of government support for the exchange, including a note that it is a "cooperation enterprise" of the National Bureau of Statistics. The investor protests started in Yunnan and spread to Beijing and Shanghai after efforts to be heard through official channels were frustrated. While Beijing sees all public protests as potentially destabilising, it treats them differently depending on their issue. It would crack down quickly and decisively on any that smacked of overt opposition to one-party rule. A complaint filed with Yunnan's finance authorities was rebuffed in August, a copy of the decision shows. Police in different jurisdictions accepted the case but there has been no follow-up, two investors said. Lawyers say the chances of successfully suing the exchange are low, so they are reluctant to take on the case, one investor said. "If we sue by civil law, it will be difficult for us to get back the money. But when we try to sue through the criminal system, we are not even accepted," said a 36-year-old woman from Shanghai, who declined to give her name. Anne Stevenson-Yang, research director at J Capital Research, said in many cases investors assume a product is government guaranteed/backed and so they fail to read the fine print. "There are very few that are explicitly guaranteed and for which the issuing bank would indisputably have to pay. So instead we get a push and pull that essentially satisfies no one," she said. "That the government cannot fully dimension the problem is the key issue creating policy paralysis." LOSING TRUST In August, investors tracked down and apprehended Fanya chairman Shan at a Shanghai hotel and handed him over to police, according to media reports. He was later released. On Sept 24, Fanya blamed the liquidity problems on fluctuations in stock and commodity markets and regulatory changes and said some media had deliberately incited panic among investors. It has proposed selling its stocks of six metals listed on the exchange to resolve the crisis. That may not satisfy all investors. "We want not only our principal and interest income back, as well as a judgment and punishment of the culprits," said the 36-year-old Shanghai investor. "The officials who neglected their duty, the financial criminals, even some collusion between government and business, should all be investigated and punished." ($1=6.36 yuan) (Additional reporting by SHANGHAI NEWSROOM and John Ruwitch; Editing by Neil Fullick)