Caixin
POLICY & REGULATION

Why Stamp Exchanges Might Find Their Business Stamped Out

By Yu Bokun, Li Mingming, Zhang Yu, Liu Caiping
A stamp inspired by the Chinese literary classic “Dream of the Red Chamber,” with a face value of 2 yuan (30 U.S. cents), has fetched a price as high as 1,000 yuan at a stamp market in Beijing. Unregulated stamp exchanges that allowed speculators to push up the value of stamps has led to price inflation, even at brick-and-mortar stores. Photo: Yu Bokun/Caixin
A stamp inspired by the Chinese literary classic “Dream of the Red Chamber,” with a face value of 2 yuan (30 U.S. cents), has fetched a price as high as 1,000 yuan at a stamp market in Beijing. Unregulated stamp exchanges that allowed speculators to push up the value of stamps has led to price inflation, even at brick-and-mortar stores. Photo: Yu Bokun/Caixin

Beijing is a city for speculators. Its home prices today are six times higher than a decade earlier, and even the price of garlic is three times higher than two years ago. But nothing compares to the “astronomical rise” of the value of stamps traded in the city’s exchanges before an August ban temporarily halted transactions.

An investor, who has dabbled in this “stock-exchange style market” for years, said the sale price of a Spring Festival stamp issued in 2006 rose from 24 yuan ($3.63) to 5,800 yuan over 100 days when it was listed on a stamp exchange. That’s because exchanges that started off as a way for philately enthusiasts to trade stamps have turned into venues for speculation, said the investor, a member of the Beijing Philatelic Association.

In August, a group of national ministries responsible for monitoring regional markets ordered all stamps, coins and collectible card exchanges across the country to “halt trading and alter their transaction rules,” following a string of scandals involving price manipulation and even theft of investor funds. This follows a January warning by the central government to all provincial-level exchanges, including those for stamps, to “clean up their act or shut down.”

“After the January warning, most of the trading has stopped,” said the head of a stamp exchange in South China. “Now these exchanges have zero income.”

By the end of 2016, there were 125 stamp, coin and collectible card exchanges in China, with a combined annual trading volume of nearly 3.9 trillion yuan, according to the nongovernment research institute Stamp and Coin World. As for the geographical distribution of these exchanges, Shanghai ranked first with 12 platforms, while Beijing and Liaoning province tied for second place with 10 each.

“Without proper supervision and regulation, stamp trading venues had become a way for exchange operators and big investors to swindle money from small players,” said the investor, who wished to remain anonymous. Once the high rollers — who pumped up the price of the Spring Festival stamp — suddenly dumped their stock, prices crashed to 300 yuan within days, he added.

Before the August suspension, these exchanges had operated in a legal gray zone for years.

“It is hard to say that these local trading platforms are illegal, because most of them were approved by local governments or operated with their knowledge. But it is also difficult to say their activities are legal, because they have adopted a futures-like trading model,” said Chen Baifeng, an official from the bureau for combating illegal securities and futures trading activities under the China Securities Regulatory Commission (CSRC).

“In accordance with regulations on futures trading, no organization or individual can organize futures trading activities without approval from the CSRC,” he added.

Chinese investors make up one-third of the $3 billion global stamp collecting market, according to British research firm Intelligent Partnership. But most stamps traded on China’s provincial-level exchanges weren’t rare collectibles or limited-edition investment pieces.

Instead, many items traded had a face value of a few fen. “Most people trading on these exchanges come to stamp shops looking for garbage,” said a seller at Beijing’s largest brick-and-mortar stamp market in the city’s Madian neighborhood. “The cheaper it is, the more willing they are to buy such stamps to list on the stamp exchange. Only genuine collectors buy high-value stamps.”

So how did these exchanges turn stamps worth a few cents into a hot financial product? First stamp dealers or individuals would collect a large number of mostly low-priced stamps and submit their collection to a custodian service. This service will check whether the stamps are damaged or fake and then group them into lots. Each lot is then assigned a serial number, similar to a stock ticker, and then listed on the exchange. Investors can buy or sell lots on the exchange or through a broker.

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Several big players with deep pockets, known as “gold masters,” would start buying up certain types of stamps, triggering a rally and tempting small investors to follow, said the investor who wished to remain anonymous. Once the price reached a certain point, the high rollers would suddenly dump the stocks, making the price crash, he said. Although these exchanges have adopted stock-market style rules to contain daily price fluctuations within 10%, on some days prices would plunge beyond this limit very quickly after the market opens, leaving retail investors no time to sell and cut losses, he added.

“Without supervision and regulation, these exchanges had become a way for exchange managers and market movers to swindle money from small players,” the investor said.

Another investor, who traded in the Hunan Zhongnan stamp exchange center, told Caixin that he lost 260,000 yuan in a month in 2015, due to “pump-and-dump” practices by a handful of market movers.

Big players have been luring small investors into stamp trading by promoting these venues as “more reliable than the stock exchange,” or a market “where there was no risk of losing.” Messages on social media apps such as QQ and WeChat claimed trading in stamps was safer because it involved “real physical goods.”

Electronic stamp and coin exchanges started mushrooming in the country after the Nanjing Cultural Property Exchange added stamps to its portfolio in October 2013. Many of them had the same trading hours as a regular stock exchange, with a morning trading session from 9:30 a.m. to 11:30 a.m. and an afternoon session from 1 p.m. to 3 p.m. in the afternoon. After their transaction volume grew, stamp exchanges started trading in commemorative coins and banknotes, phone cards and even Mao-era food coupons.

Big players with the Midas touch could turn these items that had no value in the real world into hot financial bets once listed on the electronic board. And these speculative prices influenced the price at which these items could be later sold in the real world.

For example, a Chinese monkey zodiac stamp with a face value of 8 fen, or 0.08 yuan, issued in 1980, now sells for 12,000 yuan at Beijing’s stamp market in Madian. A stamp inspired by the Chinese literary classic “Dream of the Red Chamber,” with a face value of 2 yuan, now sells for 1,000 yuan.

Zhou Yue, a professor at the Academy of Arts & Design at Tsinghua University, said “the value of the stamps I have designed have all gone up 300% to 400%.”

For example, a dozen stamps he designed in 2013, titled the “Chinese dream,” were priced at 60 yuan a piece, Zhou said, but two years later one of the stamps sold for 3,100 yuan.

After trading on the stamp exchanges was suspended, stamp sellers also started feeling the chill.

“Last year, business was good. Because trading on the exchanges required a large quantity of goods, investors would buy tens of thousands of stamps,” said one stamp merchant from the Madian market.

When Caixin visited the market last week, it was empty and many stores were shuttered. Sellers — who once had their eyes glued to their computer screen tracking how stamp prices fluctuated at exchanges across the country — were seen playing games on their mobile phones.

One seller pointed to the stacks of unsold stamps in her stall and said: “The big ups and downs on the stamp exchanges have damaged the trade. That was just a bubble.”

Beijing authorities have engaged in a long-running but often fruitless effort to tame unruly and often poorly regulated exchanges that are backed by local governments. The August directive by the special task force overseen by the CSRC, suspending trade in stamps, was the opening salvo of a larger cleanup campaign targeting nearly a 1,000 exchanges trading items as diverse as precious metals, wine and donkeys.

“But at present, the biggest difficulty in cleaning up provincial-level exchanges lies in incomplete laws and regulations,” said a deputy director of a local government finance office told Caixin. “The organizers, investors and financial regulators know little about it, so we can’t use current standards to measure and define these exchanges that were already approved by local governments. But there is a need for a clear crackdown on those who have committed obvious crimes or hurt the interests of investors.”

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