Caixin
Feb 20, 2017 06:03 PM
FINANCE

Shenzhen Police Raid Four Companies in Futures-Fraud Probe

(Shenzhen) — Shenzhen police raided at least four companies suspected of engaging in illegal trading on local commodities exchanges across the country, as the central government intensified efforts to clean up hundreds of poorly regulated local over-the-counter (OTC) markets.

Police took several employees into custody on Friday, and the companies are being investigated for fraud and for trading precious metals and crude oil futures, sources close to the local police and the financial markets regulation bureau told Caixin.

The companies are all based in Shenzhen, the southern Chinese city that borders Hong Kong, but the companies are registered in places as far away as Lanzhou, capital of the northwestern province of Gansu. These entities trade, or used to trade, commodities on OTC markets in cities around the country.

The raids were carried out against the backdrop of a renewed campaign by the central government to clean up hundreds of OTC markets backed by local governments that trade commodities as diverse as precious metals, stamps and wine.

Futures trading of commodities is rife even though under current regulations, only spot trading is allowed. Transgressions include trading standard contracts without physical delivery of the underlying commodity, failing to have custodian accounts for client funds, and manipulating prices.

One of the companies raided last week is a member of the Guangdong Precious Metals Exchange, which was approved by the provincial government and established in the city of Guangzhou in 2010. Since 2014, the provincial Commerce Department, which supervises the market, has received dozens of complaints from investors who say they were swindled.

Another company, registered in the eastern city of Hangzhou, was a member of the Zhejiang Xinhua Bulk Commodities Exchange Center, an OTC market partly owned by a subsidiary of the state-owned Xinhua News Agency. In April, the center suspended the company’s operations, and in December, the Xinhua Merchandise Exchange in Daqing, also partly owned by the Xinhua subsidiary, was closed down. CSRC Chairman Liu Shiyu singled out the exchange at a briefing in December, saying that “in three years, it raked in tens of billions of yuan.”

Member companies of local OTC markets have long benefited from being in a regulatory vacuum, a finance market regulator in Guangzhou told Caixin. Even though markets have been approved by local governments, supervision of member companies is hampered by the absence of appropriate laws, so local regulators have little power to bring them into line. “So usually it’s only right at the last minute, when these issues threaten to become a big risk, that they are dealt with,” he said.

Central authorities’ efforts to rein in illegal and unscrupulous activities on local government-backed OTC markets date back to 2011, when the State Council, China’s cabinet, decided to form a task force led by the China Securities Regulatory Commission (CSRC) to investigate and clean up the markets, a move that followed a string of scandals involving embezzlement and theft of investor funds.

In January, the commission said a resurgence of banned or illicit trading had forced the authorities to launch yet another nationwide clean-up campaign which will last for several months. A report prepared by the task force showed that more than 300 local OTC markets were still engaged in illegal activities.

CSRC spokesman Deng Ge warned at a Feb. 10 briefing that time is running out for these rogue local markets. Those who fail to take corrective action or pass the task force’s inspections by June 30 will be shut down, he said.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)

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