The Fanya Metal Exchange fraud was a notorious financial scam in China (also known as China's Ponzi Scheme) that was operational from 2011 to 2015. The collapse of the exchange sparked a series of nationwide protests against the involvement of Chinese local governments in supporting fraudulent fundraising schemes.
The exchange was established in 2011 as a global trading platform for rare metals and promoted by Yunnan government officials. It advertised returns as high as 13.7% and zero risk for investors. In the three years after it was set up, the exchange raised up to $6.4 billion from 220,000 investors across the country.
In 2015, the exchange blocked the withdrawal of funds and froze its accounts, triggering large-scale protests by defrauded creditors in Shanghai, Beijing and other major cities. Victims gathered outside the China Securities Regulatory Commission (CSRC) to accuse the Fanya exchange and CSRC government officials of supporting financial fraud. Twenty-one Yunnan executives, including the founder, Shan Jiuliang, were charged with embezzlement and of sabotaging financial markets in the Kunming Intermediate People's Court in 2018. The company was fined 1 billion yuan ($149.04 million) for illegal fundraising, and Shan was sentenced to 18 years in jail.
Background
The Fanya Metal Exchange was a state-backed exchange that claimed to be the world's largest trading platform of rare metals, located in Kunming, Yunnan Province. The exchange focused on metals used in technologies promoted in the official Chinese strategic plan, including liquid crystal display (LCD) screens and solar panels. Its goal was to emulate the success of the London Metal Exchange and create an exchange dedicated solely to trading rare earths and other minor metals. It dealt in 14 rare nonferrous metals including indium, bismuth, antimony, and terbium, purchasing and storing them for resale. The exchange promised investors a fixed return of up to 13.7% per annum with the right to withdraw the principal at any time without penalty.
At its launch, Fanya was designated a "cooperation enterprise" of the National Bureau of Statistics of China. It was advertised on television as a government-endorsed and regulated safe investment product. A key product called "ri jin bao" (daily golden jewel) collected investors' money to be loaned to a third-party agency and invested in other rare metal products. The company's brochures claimed that major state-owned banks served as custodians for these investments. Because of ri jin bao's high returns and seemingly low risks, it rapidly became popular especially among middle-class investors.
Business model and collapse
The exchange announced early on that it held the world's largest stores of bismuth, iridium, and rare earth metals. However, demand for these metals is low, making the funds invested in the stores illiquid. For example, by 2014 the exchange held more than 3,400 tonnes of indium and 19,000 tonnes of bismuth, in each case enough to meet global annual demand for several years. Since only small amounts of the stockpiles could be sold in a short period, Fanya would inevitably face a liquidity crisis if any sizeable request for cash withdrawal was made. In addition, the promise of a 13.7% interest rate could only be met with rapidly increasing rare metal prices. The exchange inevitably started to cover the interest and principal owed to existing investors using funds from new investors, the definition of a Ponzi scheme. When global rare metal prices declined the exchange started to collapse.
In April 2015, Fanya stopped withdrawals and froze assets nominally worth approximately 43 billion yuan ($6.7 billion) belonging to 220,000 creditors across the country. In July 2015 all assets were frozen. A complaint filed with the Yunnan financial authorities was rebuffed. In late 2015, the exchange ceased operations.
Aftermath
The collapse of the Fanya Metal Exchange sparked months of nationwide protests, including protests in front of the Beijing and Shanghai offices of the CSRC that accused the regulator of "ignoring Fanya fraud". Hundreds of furious investors gathered outside the exchange in Kunming.
On July 15, 2015, Fanya announced that it would buy back 5 billion yuan's worth of metals from investors with funds from its partners.