Rhodium and steel to garlic and onion, you name it, they trade it. Hundreds of these so-called commodity exchanges, which have mushroomed across the mainland in a regulatory void and attracted 1 trillion yuan in investments, are now under the microscope. Beijing this week was treated to a rare sight of protesting investors wielding banners outside the office of the country's top securities authority, complaining they were duped by the Fanya Metals Exchange in Yunnan province. But Fanya, say industry insiders, is only the tip of the iceberg. "There are at least 400 such exchange platforms in China, managing roughly one trillion yuan of assets," said Wang Hongying, head of the China Financial Derivatives Investment Research Institute. "Local governments have been very supportive of these exchanges as their turnover adds to the local GDP data." The angry investors, wearing T-shirts calling Fanya a "scam", demanded the central government investigate Fanya for defaulting on 36 billion yuan it owed investors. The exchange had promised double-digit returns on a punt on metal prices increasing, a bet that went horribly wrong as commodity prices collapsed worldwide. At a time when the property sector - once the cash cow for local governments - continues to struggle, local governments' tolerance for the dodgy business practices of these exchanges is not hard to fathom. But the main reason why these supposed spot trading markets flourished even as allegations abound of them manipulating prices and swindling investors, is the regulatory grey area in which they operate. "The China Securities Regulatory Commission [CSRC] does not have the power to regulate regional exchanges," said a CSRC source who did not want to be identified. Geng Shuang, a senior lawyer based in Guangzhou, said: "Spot markets come under the ambit of the Ministry of Commerce while securities and futures markets are under the CSRC. These so-called spot-trading exchanges are structuring contracts and complicated financial products based on commodity spot prices, creating a regulatory uncertainty. As a result, neither the ministry nor the CSRC minds them at present." China Financial Trading, an industry data provider, has identified 653 commodities exchange houses on the mainland, trading more than 200 commodities on their platforms. The Fanya exchange, which claims to trade 14 minor and rare metals, including indium, bismuth, tungsten, antimony and cobalt, is an example of the risks that such exchanges present. "Fanya has developed curious financial products. Investors were told they were lending to rare metal producers and traders while the collateral turned out to be rare metal warrants heavily inflated by the company itself," said Wen Jian, a Tianjin-based senior analyst at First Futures. "Every province in China has at least 10 such exchange houses." The CSRC official told the South China Morning Post that the regulator had been trying to clean-up regional exchange platforms. "Fanya didn't pass the latest CSRC inspection but has continued to operate because of the local government's support," the official said. The protesters calling for a probe into the Fanya exchange also accused the Yunnan government of abetting Fanya. The exchange, located in Kunming , claimed to be "the biggest rare metal exchange in world" and was "carrying on a national mission to compete for pricing rights for China's rare metal". The products, named ri jin bao , promised an annual return of 13.68 per cent, guaranteed principal and instant redemption. These could be bought online by retail investors all over the nation. Fanya yesterday posted an announcement on its website saying 80,000 investors nationwide bought its products, with the outstanding balance at 36 billion yuan. A Fanya staff member, who refused to give her name, told the Post that the company was planning a "restructuring" and investors were being offered the option of selling their products. The exchange has since July barred investors from encashing their investment products. So far no government probe has been announced into the exchange. Investors said local police bureaus were hearing their complaints but ha yet to lodge a case. "These cases are always difficult as we can't find an authority actually supervising these organisations. Many exchange houses are manipulating product prices in the small market they have created. Investors who get trapped by such exchanges are usually ignored because these schemes do not pose such a great threat to the nation's economy or financial stability. Plus, almost every exchange is politically protected," said a lawyer in Guangzhou who has been fighting for justice for victims of exchange platforms. Failed China financial products drew investors for their 'low' returns "These exchange houses will let you make money at first and then when you invest more, you will suddenly find you have lost everything," added the lawyer, who spoke on condition of anonymity. But Fanya's case goes beyond the standard irregularities of such exchanges. Wang Guoqing, a sales manager for chemical products in Zhejiang province, said he invested more than 600,000 yuan in ri jin bao s in the past two years, but both the principal and returns were suddenly frozen in July. "I followed the company for two years before putting in money. Fanya says it is fighting for China's pricing power over its rare metal. Its advertisements run on China Central Television and local party newspapers, giving the company an aura of credibility," he said, adding that he made profits in the first year of his investment on the exchange. Fanya said in its latest announcements that the exchange had been caught in a liquidity crunch as a result of the economic slowdown on the mainland and policy changes. "Some overseas forces colluded with domestic institutions and maliciously shorted China's rare metals. They want to crush Fanya and then grab China's precious rare metals for cheap," it said in an announcement. Georgi Slavov, head of research at London-based commodities brokerage Marex Spectron, said: "I don't understand how an exchange can be responsible for a price collapse because the metal should be owned by investors, not by the exchange. The exchange is only a marketplace where buyers and sellers meet and agree on a price. It is clearly a conflict of interest if the exchange is also a trader." A column in Zhengzhou-based Commodities Daily had called Fanya's business model a Ponzi scheme as early as last year. "The rare metal products have always been moving one way in Fanya. It has been pricing the products 25 to 30 per cent higher than other market players," the author, named Tan Na, wrote, adding Fanya was using the investment from new investors to pay off the old ones and maintain a 20 per cent annual growth in capital. Commodities analyst Wen Jian described Fanya's statement as "ridiculous". "To me it seems Fanya had been piling up inventories of some rare metals like indium and inflating their prices intentionally. This is market manipulation and should be punished," he said. According to its official website, 90 per cent of global indium transactions take place on Fanya's platform and the inventory in the exchange's warehouse exceeds 3,600 tonnes - close to eight years of China's output and five years of global output. "One thing that keeps bugging me is, where are the financing parties? If they defaulted, why isn't Fanya after them?" said Stephen Chen, an electronic devices sales manager in Shenzhen. His 300,000 yuan of investment was frozen by the exchange. "We were told that the money goes to companies in need of capital but I was never told where the money went. In any case, 13 per cent annual return is not that high in China, which is why I trusted Fanya." Fanya's official website had listed more than 40 companies as "cooperation partners". Sales managers of its products used to claim big state-owned companies like China Minmetals Corporation and Yunnan Lincang Xinyuan Germanium Industrial were among the financiers. These two, however, disappeared from the list after the crisis broke out, with the current list showing only 17 companies.