As FT notes, "Fanya is a forum for trading minor metals like indium and bismuth that has also functioned as a shadow banking conduit — not only leveraging metal deposited with the exchange as collateral for loans, but offering high interest investment products to retail investors."
If that sounds familiar to you, it should. Just last week in "The 8 Trillion Black Swan: Is China's Shadow Banking System About To Collapse?," we took a fresh look at the dizzying array of wealth management products and collective trust products that are, together, a CNY17.2 trillion industry in China. Summarizing a (very) long and convoluted story, WMPs are marketed to investors through banks 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.
"A key issue is whether the presumption of implicit guarantees is upheld or the authorities allow failing WMPs to default and investors to experience losses arising from these products," the RBA said in a report, to which we responded that in the event investors are forced to take losses, "the key issue is what those investors will do next."
Well, now we know.
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