Back in August, angry investors captured [10] Shan Jiuliang, the head of Fanya Metals Exchange, in a daring predawn raid on a luxury hotel in Shanghai.
The citizen's arrest (depicted in the rather dramatic image shown below) came after Fanya stopped making payments on WMPs it issued. As we reminded readers at the time, WMPs are marketed to investors through as a high yielding alternative to savings deposits. Investors aren’t often aware of exactly what they’re investing in or how risky it might be or that in many cases, issuers borrow short to lend long resulting in a perpetual case of maturity mismatch.
[11]
“Fanya, based in the southwestern city of Kunming, bought and stockpiled minor metals such as indium and bismuth, while also offering high interest, highly-liquid WMPs from its offices in Shanghai and its financing branch in Kunming,” FT explained [12]. Over the summer, the exchange ran into “liquidity problems” at which point those who had bought the company’s financial products had their funds (billions worth) frozen. Investors began to protest.
The situation began to deteriorate rapidly after that, and within a month, investors decided to take matters into their own hands by flying in from all corners of the country to ambush Shan and deliver him to local authorities. He was later released.
As the RBA put it in a report out earlier this year, "a key issue is whether the presumption of implicit [state] guarantees is upheld or the authorities allow failing WMPs to default and investors to experience losses arising from these products." That may indeed be a key issue, but as we noted in "The 8 Trillion Black Swan: Is China's Shadow Banking System About To Collapse?, [13]" in the event investors are forced to take losses, the key issue is what those investors will do next.
Similarly, FT says [14] that "one of the risks posed by high interest rate shadow banking in China is the possibility that it will erode support for the Communist party among the urban middle classes who have benefited most from China’s increasing prosperity."
In other words: if China's multi-trillion dollar WMP market implodes and the state doesn't step in to bail investors out, there's a very real risk of social upheaval as evidenced by what happened to Shan in August.
Well, if Xi and his attack dog Fu Zhenghua are serious about rooting out corruption in China's financial markets, you'd think they'd spend a little more time getting to the bottom of things like $6.4 billion in missing funds tied to WMPs issued by an indium exchange than on arresting securities officials for frontrunning the national team.
Sure enough, Imagi Animation Studies (another company run by Shan) now says it can't locate its leader. "In a filing to the Hong Kong stock exchange, Imagi Animation Studies, a company controlled by Shan Jiuliang, said it had “lost contact” with the Fanya founder. It said he last attended a board meeting on October 15 but did not turn up for a meeting on December 11 and had not been reachable," FT reports, adding that "announcements that a company has 'lost contact' with its leader are usually the first and sometimes only sign that a Chinese executive has become ensnared in the country’s three-year anti-corruption campaign."
Party officials have reportedly occupied Fanya's offices and are now rummaging through files and documents presumably in an effort to figure out where the money is and what happened over the summer that forced Shan to freeze the WMP payouts.
As noted above, the Politburo isn't particularly keen on the witnessing a popular revolt triggered by some kind of dramatic meltdown in financial markets. Indeed, the main reason the PBoC spent CNY1.5 trillion in Q3 propping up the SHCOMP was to keep the legions of farmers and housewives-turned day traders (who China encouraged to leverage their life savings by buying grossly overvalued stocks on margin) from losing their minds in the midst of the summer selloff.
Given that, it seems likely that Beijing will end up bailing out Fanya's disgruntled investors rather than risk ongoing protests - or worse. As for Shan, we imagine Xi will be none to pleased about having to shell out CNY36 billion to fix a problem that very well might have arisen from mismanagement, greed, or both. On that note, we'll close with a quote from an attorney who helps foreign firms ensnared by Xi's anti-corruption probe:
"The best thing you can do is establish processes for who is likely to be taken away, and how to make sure they aren't disappeared forever."
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Full Imagi filing
Imagi Filing [15]
