Reports of Irregularities & Risk at the Fanya Metal Exchange All Just a "Careless Mistake"?

As originally reported here on SM Report, concern about risk associated with irregular operations at the Fanya Metal Exchange arose last week following a report published on the Chinese Securities Regulatory Department's official website.

The report was quickly deleted from the official government website and summaries of the report published by local media were subsequently edited to remove any reference to the Fanya Metal Exchange. Questions about what exactly is happening at the exchange, however, have begun to swirl.

Is the Fanya Metal Exchange, which has become a topic of debate amongst participants in the industry since it began purchasing large stocks of indium in 2013, under investigation by authorities in China?

And will the exchange be able to continue operating, as it currently claims to, by selling millions of dollars worth of minor metals to individual investors each week? (Note: Based on current market prices, Fanya's published purchases, last week alone, totalled more than US$ 50 million).

As always seems the case with the Fanya Metal Exchange, there are more questions than answers.

While there has obviously been censorship of the original report, discussions about its contents have continued on a number of Chinese business and investment websites, forcing Fanya to respond.

Articles published last Friday on news sites, including Caixin.com and Gucheng.com, quoted Zhang Zinuo (Scarlett Zhang), Assistant General Manager at the Fanya Metal Exchange, as describing the report being published online as a "careless mistake" by personnel at the Yunnan Securities Regulatory Department (articles have now been removed).

For those who are interested, a complete translation of the article is provided below:

Very Large Risk at the Fanya Metal Exchange Just a "Mistake"?
Published: November 21, 2014 16:08:34 Edited by: Gucheng.com / Financial Channel

An article recently published on the Yunnan Securities Regulatory Department official website advised of large risk related to the Fanya Metal Exchange. The Securities Regulatory Commission identifying and naming a specific exchange as high concern is extremely rare in China.

The statement was made in a working report by the Yunnan Securities Regulatory Department entitled "Yunnan Provincial Government Convenes Special Meeting to Advance the All Types of Stock Exchange Tidying and Reorganization Completion Project". While the working report is searchable on the government page, it can no longer be opened.

Quotes from the working report that were published on Caixin.com have already been deleted but, as of November 13th, read as below:

Assistant Governor He Duanqi convened and presided over the Yunnan Stock Exchange Tidying and Reorganization Small Group Meeting, and has made recommendations to implement, advance and carry out the work of Yunnan Stock Exchange Tidying and Reorganization Project. Leaders of the units participated in the meeting. Yunnan Securities Regulatory Department head Wang Guangyou reported related details, while other participating leaders discussed the topics at hand.

Wang Guangyou reported that the Yunnan Securities Regulatory Department and the Inter-Ministry Joint Committee's joint spot inspections showed that Yunnan market exchanges still exhibited irregular behavior. Risk at the Fanya Metal Exchange was noted as very large. A proactive response and corrective actions are required immediately. It is suggested to follow the principle of "whoever approves, supervises and takes responsibility". Strict adherence to the State Council regulations and feedback to the Inter-Ministry Joint Committee, with suggestions to fix the problem and clear obstacles for faster rectification and resolution of the problem, are requested.

That the Fanya Metal Exchange was mentioned by name caused surprise throughout the industry. Caixin.com's website quoted Fanya Metal Exchange's Assistant General Manager Zhang Zinuo describing the incident as a "careless mistake" on the part of an employee at the Yunnan Securities Regulatory Department. She advised that the Department has already ordered the report to be deleted along with the related webpages, including mobile and PC versions.

Ms. Zhang continued, "The Yunnan Securities Regulatory Department is in the process of providing supplementary assistance to the Yunnan Provincial Tidying and Reorganization Leaders Small Group, Yunnan Internet Regulation Department and related departments to correct this careless mistake. Fanya Metal Exchange will continue working to ensure the trust of its 160,000 individual and industrial clients, as well as make plans to steadily move forward."

According to the Fanya Metal Exchange webpage, the Exchange is the world's largest minor metals exchange as well as China's largest commodities trading exchange by value. As of October 2014, gross transactions at the Fanya Metal Exchange are reported to have exceeded 290 billion yuan, there are nearly 160,000 registered investors, more than 350,000 metric tonnes of minor metals have been traded on the exchange and it oversees more than 42.5 billion yuan in assets.

Caixin.com reports that Fanya Metal Exchange began operations following the Yunnan Provincial Financial Authority taking responsibility for oversight and supervision of the exchange.

However, according to the 2011 State Council resolution entitled "State Council Resolution Regarding All Types of Stock Exchange Tidying and Reorganization to Guard Against Financial Risk", the clean-up and reorganization of stock exchanges should be led by the Securities Regulatory Commission. Moreover, the Securities Regulatory Commission, along with related departments attending the All Types of Stock Exchange Tidying and Reorganization Inter-Ministry Meeting, will directly oversee establishment of a regulation and supervision system for stock and commodity exchanges.

As of September 5, 2014, the Securities Regulatory Commission's micro-blog advised that 29 provinces and five municipalities have already completed tidying and reorganization work, as confirmed by the Inter-Ministry Conference. Tianjin and Yunnan are the only two regions that have yet to complete work. Tianjin's progress is classified as "in process", while Yunnan's progress is classified as "almost complete".

According to the Securities Regulatory Commission, Yunnan is scheduled to complete inspection by years end.

Source: http://finance.gucheng.com/201411/2882405.shtml (now deleted)