Mystery Surrounding Collapse Of Hong Kong Mercantile Exchange Deepens; Four Arrested

Tyler Durden's picture

A week ago, when the brand new Hong Kong Mercantile Exchange suddenly shuttered after being in operation for only two years, urgently settling what little contracts were outstanding, many questions were left unanswered.

Such as: how it was possible that the exchange, expected by many to become the new preferred trading venue for Asian precious metals and to steal the CME's crown, could close on such short notice, without barely having been given a fair chance at being profitable, let alone dominating Pacific rim metals trading.

This mystery deepened further after reports that the exchange barely had seen any volume, with allegedly only a tiny 200 open contracts remaining to be settled upon shuttering.

Now, the confusion surrounding the HKMex closure has taken another big step for bizarrokind following news that not only have at least four HKMex senior executive have been arrested having been found to be in possession of false bank docs for nearly half a billion in dollars, but that government itself was forced to "shore up confidence" in CY Leung, Hong Kong's 3rd Chief Executive, whose former top aide was none other Barry Cheung Chun-yuen, founder of the HKMex.

Yet another major geopolitical scandal centered around gold: how original.

From the South China Morning Post:

Three mainland men charged in a scandal over the failed Hong Kong Mercantile Exchange (HKMEx) were found in their hotel rooms with false bank documents purporting to be worth hundreds of millions of dollars, a court heard yesterday.


Dai Linyi, 65; Li Shanrong, 49, and Lian Chunyan, 50, who were arrested on Tuesday, appeared in Kowloon City Court charged with "possessing false instruments with intent".


The men were detained after the Securities and Futures Commission found serious irregularities with the finances of the exchange - chaired by executive councillor Barry Cheung Chun-yuen - and handed the details of its inquiry to the police.

Specifically, among the confiscated false documents were an acknowledgment letter, two letters of guarantee and three proofs of funds allegedly issued by HSBC and Standard Chartered Bank. There were also time deposits and at least one telegraphic transfer. "The acknowledgement letter, which was found among Dai's papers, was dated April 23 and allegedly issued by Standard Chartered in relation to a cheque for US$460 million (HK$3.57 billion). He also had a letter of guarantee from the same bank undertaking to pay US$460 million to a Zhang Jisheng."

Just as "surprising" is that HSBC is involved in another potential money-laundering scheme:

Dai also had a proof of funds dated May 8 and allegedly issued by HSBC confirming that US$11 million had been deposited into an account held by Lian. Both Li and Lian also held two other such "proofs" with the same descriptions. In addition, Dai and Lian had two documents dated May 7 proving the existence of two separate deposits of US$11 million each in another account held by Lian, the court heard.

However that is just the beginning:the scandal over the failed exchange threatens to go to the very top of Hong Kong's political ladder, following Friday's resignation of HKMEx founder Barry Cheung Chun-yuen, from all his public duties - including executive councillor and head of the Urban Renewal Authority - on Friday and is himself under police investigation over the collapse, the government has said.

The probe into the collapse of the Hong Kong Mercantile Exchange has widened, with police questioning three senior executives of the failed commodities agency.


Separate sources confirmed yesterday that detectives from the commercial crime bureau had talked to a total of four staff from the exchange.

Where things get truly bizarre is the news that the head of Hong Kong itself and the founder of the HKMEx were very close.

The probe into the collapse of the Hong Kong Mercantile Exchange has widened, with police questioning three senior executives of the failed commodities agency.


Separate sources confirmed yesterday that detectives from the commercial crime bureau had talked to a total of four staff from the exchange.


Meanwhile, government officials moved to shore up confidence in Leung Chun-ying's administration amid the growing controversy surrounding HKMEx founder Barry Cheung Chun-yuen, who was formerly his top aide.


Cheung resigned from all his public duties - including executive councillor and head of the Urban Renewal Authority - on Friday and is himself under police investigation over the collapse, the government has said.


Speaking to the Sunday Morning Post yesterday, Cheung, 54, would say only: "Sorry, I am not taking calls today. I am at home with friends and family."

How long before there is a connection between Cheung and Hong Kong's top man CY Leung? Probably not very.

In the meantime, we don't hold much hope for the resurrection of the now shuttered mercantile exchange:

Meanwhile, Ben Kwong Man-bun, one of the 37 broker members of the HKMEx, said the exchange's business model would make it difficult for any would-be investor, or "white knight", to consider rebuilding the exchange.


"If you look at the exchange's record, not too many members were actively using the platform," he said. "[The exchange] needs a lot of capital and infrastructure."

So... what was the HKMEx being used for? Well, one explanation is that it was nothing more than a highly structured gold financing vehicle?


Recall our lengthy article about China's Copper Financing Deals, and how China is cracking down on the practice: something which will likely unencumber 500,000 tons of copper as Letter of Credit collateral, and force its market liquidation, further crushing the spot price.

The opposite process can also be just as true: while in China copper has long been the preferred financing-creation asset of choice, in Hong Kong it may well have been gold. Which ostensibly would make the previously discussed CCFDs convert into HKGFDs.

And with the recent collapse in the price of paper gold, suddenly the infinite rehypothection chain that whatever gold was at the HKMEx was used for, found itself in jeopardy, with margin funding pressure forcing collateral chains to break, as counterparties suddenly demanded excess margin on existing arrangements.

The subsequent escalation in the serial failure of assorted "HKGF" deals may have been the ultimate reason why suddenly not only the very exchange - which may have been nothing than a glorified bonded warehouse for tons of LC collateral - was forced to promptly shutdown, but all those associated with it had to scramble to procure fake financial documents on short notice to avoid someone else's wrath, while the found a way to ride into the sunset.

Naturally, all of the above is still speculation, and much can change in the coming hours and days as more information is disclosed, however, if indeed this is a scandal about (multiple times) encumbered gold, if it reaches the very top of HK's power structure, one can be assured that there will be some very angry counterparties on the losing side of whatever gold-financing deals Hong Kong's top politicians had engaged in over the past two yeas.

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newengland's picture

ZHs very own 'Yen' warned this sort of thing would happen with his comment yesterday.

Prediction: the losing counterparties can huff and pull all they like, like Celente and other clients of MF Global, and politically protected Corzine.

Own it or lose it. This is a game for ruthless force, not munchkins.

NotApplicable's picture

Fractional-reserve gold? Why, whoever heard of such a thing?

DoChenRollingBearing's picture

Like I have said before (but did not invent this...):

"Be your own central bank: buy physical gold!"

knukles's picture

Golly... all these scams involve Gold.
You'd think it might be valuable or something... something other than a traditional, barbarous relic.

'Bout says it all, eh?

Pinto Currency's picture


The failure of the HK exchange fell just as there was a constriction in physical gold availability on the LBMA.

This one will play out and we will see the reasons, however all doors seem to be opening to the physical gold issue right now.

GetZeeGold's picture



Golly... all these scams involve Gold.

I sense a trend developing here.

SWRichmond's picture

Where things get truly bizarre is the news that the head of Hong Kong itself and the founder of the HKMEx were very close.

I object in the strongest terms possible to this characterization.  Please, pray tell me, what is so unusual, let alone bizarre, about politicians being in cahoots with bankers in order to loot the public?

Badabing's picture

Ok i feel better now, thanks for the story

a side note, HSBC is only a name used for rogue british bankers that left Hong kong in 1999 when the 100 year lease was up.

Antifaschistische's picture

Is there a general credibility problem with HK?  At the end of the end of the day.  The underpinning of all exchanges is trust.   The world has considered the US the haven of trustability for the past half a century.   If China wants to dominate the exchange market, and the currency market for that matter...they need to start with how they can be #1 in the world in trust.    In my opinion, this is the single largest constraint on Chinese economic dominance.  And it's true on the streets of China too, as their own citizenry constantly question their own government.   It is fixable...but putting credibility ahead of short term wealth and quick schemes is almost counter cultural.  There's a revolution for you.

Urban Redneck's picture

Barbarous always struck me as an interesting word choice, especially given man's history of co-opting elements of a displaced faith when constructing a new religion.  Rereading Abu Bakri got me thinking- Nixon shuttered the Temple of Mammon, and ever since the central bankers have worshiped at the altar Baal Zebub and his gluttonous printing press.  Gold was worshiped by the heathen Philistines at Ekrom and the priests of paper have never quite figured out how to effectively co-opt or expunge the tradition and practice of the pagans- and now the threat of collapse of their ineffective efforts may lead to their undoing. 

wee-weed up's picture

How much ya wanna bet that blow-hard old-fart, Buffet, has plenty of the "barbarous relic" stashed away for himself...

walküre's picture

He doesn't want to attract any attention to it. He lives in a modest older home, barely noticeable. He's a prepper and a stacker and fits all the criteria. Talks up paper because he's got lots of it as well but quietly stacking and farming.

Do as they do, not as they say.

Urban Redneck's picture

Strip out the finance and media subsidiaries that get all the attention, Warren has all the gold, food, and raw materials (and other "simple/understandable" things) he could possibly need on speed dial, and a network of planes, trains, and trucks to deliver it wherever and whenever he wants...

Rustysilver's picture


Buffett's son is a big farmer, I mean acres and acres of it. 60 minutes had a piece about him one time.

Chaffinch's picture

Can anyone here explain that logo? It looks to like a cave drawing of someone shitting bricks... ; )

Urban Redneck's picture

methinks Chinese for "Commodity/Goods Trade/Mercantile" - Asiatic languages aren't my thing, but if you strip out "Hong Kong" and "Exchange" from the Chinese name and juxtapose the two characters...

TraderTimm's picture

Of course when the very same thing happens with Bitcoin, you bobble-heads take an opposite view. Why am I not surprised?

smlbizman's picture

what side of the wall is this hoping on the side that treats these guy right...i guess it would be the eastside saheeb...where they dont feed them long...

newengland's picture

James Sinclair, a voice in the wind, always says be your own bank.

The Chinese encourage it. The Indian politicians are trying to discourage it.

The Western politicians are ignorant.

Spitzer's picture

Remeber that PAGE just disappeared too ?

The much awaited China-based Pan Asia Gold Exchange (PAGE) was scheduled to start trading this June after a ‘soft’ launch at the end of 2011. This exchange that could potentially bring down the Ponzi bullion banking system has been killed before it could see the light of day, according to recent disclosures by Ned Naylor-Leyland and London whistleblower Andrew Maguire.

So “dangerous” was this exchange to the status quo that it faced interference from “a New York based entity with very strong Chinese relationships” soon after the much publicized soft launch. Another factor that helped derail PAGE was the People’s Bank of China’s (PBoC) announcement about control over domestic Gold trading outside of Shanghai.

Before we go into the details of this news, let’s revisit why PAGE managed to send chills down the spine of the powers that be. Consider the following:-


Enter PAGE…
  • PAGE was designed to trade in 100% allocated gold & silver contracts with metals backing paper contracts on a 1:1 ratio.
  • The contracts would be denominated in RMB
What could have happened had PAGE gone “live”
  • Investors would switch from COMEX/LBMA to PAGE because of the 1:1 ratio. When they enter into a long (buy) contract, they can be sure there’s physical metals available when they want to take delivery. This is especially so after the MF Global failure. That’s loss of business from the former to the later.
  • The price discovery mechanism will no longer be a monopoly. Your bullion dealers would most likely peg their prices closer to the 1:1 contract price than the 350:1 contract price. After all, they are dealing with the real stuff – physical bullion. Without a monopoly in price discovery, the bullion banks will be less effective in their interventions of the gold & silver markets. The decades long price suppression of these political metals may finally come to an end.
  • Investors need to sell USD to buy RMB when entering into these RMB denominated contracts. Another “commodity” bites the dust as far as dependence on the USD is concerned (after Japan, China, Russia, India and Iran joins the Asian Dollar Exclusion Zone to trade using their national currencies).
Pinto Currency's picture


Ultimately, we will have price discovery with or without HKMex.

The price premia above the pretend price for bars will be posted on the web.

The various major trading platforms will be pushed to the side when the c.b. gold flows stop.

Thisson's picture

I don't see how you can have 1:1 in a futures market.  If it's 1:1 it's a de facto spot market.

Marco's picture

Don't be getting logic in a perfectly good conspiracy theory.

Spitzer's picture

That is the point. Fucking idiot.


Sorry but jesus christ does this get aggravating.

Pinto Currency's picture


I think the idea is that if you write a gold futures contract you have to put up a bar so that it is not naked.

walküre's picture

Isn't the proper definition of a "future(s) contract" to trade on a commodity that is yet to be mined?

We know its in the ground in proven reserves. CME, CBs and "economists" have distorted the real definition of what a "future(s) contract" should be based on.

There is speculation involved because the cost of mining as well as the contents are variables. But that doesn't allow for a 350:1 leveraged spec play. That's pure nonsense. The price of gold is higher next year simply because of costs, scarcity and demand.

That is what a real price discovery and free market mechanism would identify.

Whatever, I'm buying more gold next week. An old geezer who couldn't make money in the market if his life depended on it told me to keep my powder dry because prices were dropping. That's a "buy" signal for me.

Buckaroo Banzai's picture

What you fail to grasp is that the vast majority of gold that has ever been mined in human history is available in relatively tradable form within, say, 30 days.

Gold is not consumed, it is hoarded.

The amount of gold that is mined every year is a relatively trifling amount compared to the amount of gold that can be readily mobilized into the market from above ground hoards.

Futures markets are for pricing commodities that are largely wiped out every 12 months. That includes base metals, because those are transformed into things that are difficult and costly to recycle; consequently, new mine supply is a meaningful factor in making a price for this years industrial needs.

What the futures market for gold should rightly produce is an INTEREST RATE, not a gold price. That is its function, in any economy that makes sense.

Of course, in this clusterfuck of an economy, where interest rates are a complete fiction, it has necessarily produced a gold futures market that is a complete fiction.

just-a-girl's picture

I think they see this is a key competitive difference.  Paper prices would be set by the physical market.  Not the other way around.  It would make a profound impact on the metal market.   The difference being that when you buy spot gold in large quantities today, you are buying unsecured unallocated contracts.  Whereas with the PAGE system you would receive secured allocated contracts.  Those investors who want physical metal will gravitate to the PAGE.

Bay of Pigs's picture

Thanks for posting this. The dots are all connected on this massively over leveraged paper farce. Speaking of that, where are the PM bears to discuss the facts? Oh that's right, they only discuss things after the prices move, and then base their conclusions on that action.

Jon Nadler made a nice living doing that for years at Kitco, without ever addressing these issues. Just lie, distort, obfuscate...SOP for the gold trolls.

Kirk2NCC1701's picture

" faced interference from “a New York based entity with very strong Chinese relationships"

Lemme guess:  GS, right?  They've been selling the US soul (an more) to China, just so they could have a "special" position over there.  In other words, when the US system crashes, they will simply operate from Shanghai.  Which they already do. 

GS is global these days, with allegiance to no country.  How can you, when you "doing God's work"? /s

Bubble's picture

Well wasn't this exchange the love child of Deripaska of oligarch fame and rothchild money?? I don't see this mentioned anywhere...

Bring the Gold's picture

Great catch and absolutely spot on. Few make the Roths connection withDeripaska. There was a great comment awhile ago on ZH that even the Roths are dwarfed by old Italian Black Nobility banking families. Something to research more when I have the time, but it makes a lot of sense. Roths are fairly new to the scene compared to the old italian bankers who crashed european markets many many times during the dark ages and renaissance. Rome fell but the empire persisted through banking and the vatican.

Go Tribe's picture

So the whole exhange from its beginning was nothing more than a scam, a Ponzi aimed at sucking in suckers' money. How rich (or poor).

HungryPorkChop's picture

Looks like another MF Global was playing out.  This time they picked the wrong country.

Confucius say: Criticism is not nearly as effective as sabotage.

Joshua Falken's picture

And all you Bitcoin lovers think Mt. Gox is safe - until - it isn't

tmosley's picture

Hmmm, were these guys PAID OFF by HSBC to "throw the fight" between the HKMEx and the bullion banks?

That is sure what it looks like.  Like finding a boxer after a big and unexpected loss in is hotel room with a big sum of cash.

BobPaulson's picture

I had thoughts along those lines but the article doesn't give enough evidence to tell. Certainly odd that a new vehicle that may have limited the shorting control of the COMEX went horribly wrong at birth.

Bring the Gold's picture

When you combine this with PAGE it's pretty clear the HKmex was meant to fail, was designed to fail and that is the entire point. An attempt to suppress prices in Asia and also confidence in gold. That's why PAGE was killed outright pre-birth and this was up and running scamming out of the gate. The question is will PAGE make a come back? You have to assume some pretty grave threats were made and/or China sees no reason to stop the price suppression as long as they can continue to accumulate.

FeralSerf's picture

Motive, means and opportunity, bitchez.

ACP's picture

Wow, someone was arrested?!? Holy shit! How did that happen??????

Oh yeah, it's not the US.

BobPaulson's picture

You sayin shitloads of people aren't arrested in the US? You mean: a rich guy was arrested.

drdolittle's picture

It would be what would happen if a rich guy ripped off a richer guy. Rich guys can still get arrested in the us, just not for stealing from smaller guys

Rustysilver's picture


In US there is a difference between being arrested and convicted and spending time in jail.

Bring the Gold's picture

I'm pretty sure he meant for a financial crime that wasn't directed at the oligarchs. No doubt we have a vast and thriving prison industrial complex.

HW Bush wasn't kidding when he said "You think there aren't enough prisons to hold all you (non-violent who gives a fuck) pot smokers? Well...we'll build em!" 

Build em they did, public funds used to secure private profits for the ultra expensive housing of non-violent criminals. AWESOME!

Meanwhile at the SEC/CTFC etc. etc.:

"Duuuude Lary check out this midget ladyboy getting a train pulled on him/her!"

FeralSerf's picture

Lots of people are arrested and then never heard from again in the US when someone thinks it's important they become incommunicado. Often they just need a few years of psychiatric observation and treatment in a military hospital before they "get well".

Gringo Viejo's picture

Why do I smell western banking interests?

It's not unlike the stench of death.

BanksterSlayer's picture

I was wondering this too. Isn't Blythe Masters sitting somewhere at the bottom of this morass?