China’s Local Governments Boost Oversight of Regional Exchanges

(Beijing) — Local governments appear to be answering the call to increase scrutiny of hundreds of regional exchanges — which trade commodities as diverse as precious metals, stamps and farm products — after the central government said the industry is still rife with regulatory breaches.

Caixin has learned that a handful of governments have started conducting investigations into exchanges on their turfs and shutting down those found engaging in illegal activities.

Regulators in the central province of Hubei closed down the Xin Chu Commodity Trading Center after discovering the trading venue for precious metals did not have an operation license.

In the northeastern province of Jilin, the Jilin Commodity Exchange, a platform mainly for agricultural products, was found violating regulations and has been ordered to correct the problems.

Authorities in the port city of Tianjin have also started a round of investigations into exchanges in the region.

In recent years, local governments have tapped trading platforms in their area for tax revenues. As a result, hundreds of regional trading platforms for products as diverse as fine art, wine and stamps have sprung up across the nation with permission from local governments.

According to an official document that Caixin viewed, more than 300 exchanges, mostly in Liaoning, Hebei and Hunan provinces, have engaged in illegal futures-trading activities.

China’s crackdown came after a task force led by the China Securities Regulatory Commission (CSRC) said during a meeting last week that a series of illegal behavior, including illegal fundraising scandals and manipulating market prices, at local trading venues has surged recently. To rein in the loosely regulated exchange platforms, the task force ordered related government agencies to conduct a round of surveillance together with local governments.

The efforts to crack down on local government-backed exchanges date back to 2011, when the State Council, China’s cabinet, decided to set up the task force. But the results have been mixed as the task force lacks legal teeth and can only provide enforcement recommendations to local governments.

Fanya Metals Exchange, a trading platform for nonferrous metals based in Kunming, Yunnan province, paid 1.1 billion yuan ($161 million) in taxes since it started business in 2011 before it turned into one of China’s most audacious investment schemes. In late 2015, police arrested the company’s founder and his 18 associates after the company failed to pay 43 billion yuan to about 220,000 investors.

In a statement following last week’s meeting, the task force admonished local governments for “blindly” granting approvals to trading platforms. Lax regulations on regional exchanges have led to “a flood of exchanges” and “put investors’ interest at risk, caused numerous petitions and complaints and influenced social stability,” the statement said.

Contact reporter Chen Na (nachen@caixin.com)