Another Metals Bust in China

Quartz: Amer International might gobble up Fanya Metals Exchange for $5 billion—and placate some angry investors
Amer International Group, a little-known Chinese private company that makes cable and copper products, is in discussions with Fanya Metals Exchange about a $5 billion buyout that could rescue the beleaguered metals exchange—and potentially placate thousands of angry investors.
Chinese investors in Fanya who may have lost over $6 billion have been protesting for days to try to spur the Chinese government to bail them out, as Quartz has previously reported.

Bamboozled Chinese investors may have lost billions on a mysterious metals-trading scheme
At issue is an investment called Ri Jin Bao, a financial product guaranteed by Fanya that promises retail investors annualized returns as high as 13.7%, and the right to withdraw funds at any time. Those funds have been frozen since April, when Fanya said it ran into “liquidity problems,” according to Caixin (link in Chinese). A reported 40 billion yuan ($6.4 billion) owed to 220,000 investors nationwide has been frozen.
“I think Fanya breached a unilateral contract when selling Ri Jin Bao,” one of the protesting investors told Metal Bulletin. “It’s unfair for us.”

Why did hundreds of thousands of individual investors sink millions of yuan into a derivative product linked to indium, bismuth, and other metals few have ever heard of? The answer highlights how Chinese government regulations make it hard for middle-class households to safely grow their savings. It also reveals how easily China’s out-of-control borrowing creates wealth from nothing—and how quickly that wealth can collapse.

...Strangely though, Fanya consistently offered double-digit premiums over prices offered on the Chinese spot market. This became particularly salient after the global financial crisis, when demand for solar applications using indium slowed.

The rise of Fanya appears to have affected prices to the degree that it “became an alternative source of demand for metal that otherwise would largely have been used in high-tech applications,” says Alex Harrison, editor of Metal Bulletin. “Some producers preferred to deliver to Fanya at its prices rather than the levels prevailing in the spot market. In effect producers used the price but consumers didn’t, sticking instead to formulas tied to reporting agencies’ prices.”
Investors paid inflated prices for metals, while consumers of the metals obtained it at spot.
Retail investors aren’t the only ones who profited from Fanya’s scheme. The platform allowed producers to buy and sell simultaneously, according to Metal Bulletin—effectively letting suppliers create their own demand.

This setup did more than just allow canny producers to pocket the difference between the spot price and Fanya’s premium. In the time between the sale to the exchange and the repurchase of that same pile of indium, they could use a warrant guaranteeing their right to buy that indium back in the future as collateral for short-term bank loans.
Where have I heard this before?

Mining.com: Chinese rare earth metals exchange to pay $6.4bn owed to investors
The bourse, which owes investors the equivalent of US$6.4bn, said it plans to pay them off by buying back some metals on a regular basis.
Good plan. Let's look at how rare earth producers are faring.
If there's no buyout, it may take a long time for investors to get their money back.

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