Mystery Surrounding Collapse Of Hong Kong Mercantile Exchange Deepens; Four Arrested

Mystery Surrounding Collapse Of Hong Kong Mercantile Exchange Deepens; Four Arrested

Tyler Durden on 05/25/2013 22:30 -0400


A week ago, when the brand new Hong Kong Mercantile Exchange suddenly shuttered after being in operation for only two years, urgently settling what little contracts were outstanding, many questions were left unanswered. Such as: how it was possible that the exchange, expected by many to become the new preferred trading venue for Asian precious metals and to steal the CME’s crown, could close on such short notice, without barely having been given a fair chance at being profitable, let alone dominating Pacific rim metals trading. This mystery deepened further after reports that the exchange barely had seen any volume, with allegedly only a tiny 200 open contractsremaining to be settled upon shuttering. Now, the confusion surrounding the HKMex closure has taken another big step for bizarrokind following news that not only have at least four HKMex senior executive have been arrested having been found to be in possession of false bank docs for nearly half a billion in dollars, but that government itself was forced to “shore up confidence” in CY Leung, Hong Kong’s 3rd Chief Executive, whose former top aide was none other Barry Cheung Chun-yuen, founder of the HKMex.

Yet another major geopolitical scandal centered around gold: how original.From the South China Morning PostThree mainland men charged in a scandal over the failed Hong Kong Mercantile Exchange (HKMEx) were found in their hotel rooms with false bank documents purporting to be worth hundreds of millions of dollars, a court heard yesterday. Dai Linyi, 65; Li Shanrong, 49, and Lian Chunyan, 50, who were arrested on Tuesday, appeared in Kowloon City Court charged with “possessing false instruments with intent”. The men were detained after the Securities and Futures Commission found serious irregularities with the finances of the exchange – chaired by executive councillor Barry Cheung Chun-yuen – and handed the details of its inquiry to the police. 

Specifically, among the confiscated false documents were an acknowledgment letter, two letters of guarantee and three proofs of funds allegedly issued by HSBC and Standard Chartered Bank. There were also time deposits and at least one telegraphic transfer. “The acknowledgement letter, which was found among Dai’s papers, was dated April 23 and allegedly issued by Standard Chartered in relation to a cheque for US$460 million (HK$3.57 billion). He also had a letter of guarantee from the same bank undertaking to pay US$460 million to a Zhang Jisheng.” Just as “surprising” is that HSBC is involved in another potential money-laundering scheme:

Dai also had a proof of funds dated May 8 and allegedly issued by HSBC confirming that US$11 million had been deposited into an account held by Lian. Both Li and Lian also held two other such “proofs” with the same descriptions. In addition, Dai and Lian had two documents dated May 7 proving the existence of two separate deposits of US$11 million each in another account held by Lian, the court heard.

However that is just the beginning:the scandal over the failed exchange threatens to go to the very top of Hong Kong’s political ladder, following Friday’s resignation of HKMEx founder Barry Cheung Chun-yuen, from all his public duties – including executive councillor and head of the Urban Renewal Authority – on Friday and is himself under police investigation over the collapse, the government has said.

The probe into the collapse of the Hong Kong Mercantile Exchange has widened, with police questioning three senior executives of the failed commodities agency. Separate sources confirmed yesterday that detectives from the commercial crime bureau had talked to a total of four staff from the exchange.

Where things get truly bizarre is the news that the head of Hong Kong itself and the founder of the HKMEx were very close.

The probe into the collapse of the Hong Kong Mercantile Exchange has widened, with police questioning three senior executives of the failed commodities agency. Separate sources confirmed yesterday that detectives from the commercial crime bureau had talked to a total of four staff from the exchange. Meanwhile, government officials moved to shore up confidence in Leung Chun-ying’s administration amid the growing controversy surrounding HKMEx founder Barry Cheung Chun-yuen, who was formerly his top aide. Cheung resigned from all his public duties – including executive councillor and head of the Urban Renewal Authority – on Friday and is himself under police investigation over the collapse, the government has said. Speaking to the Sunday Morning Post yesterday, Cheung, 54, would say only: “Sorry, I am not taking calls today. I am at home with friends and family.”

How long before there is a connection between Cheung and Hong Kong’s top man CY Leung? Probably not very. In the meantime, we don’t hold much hope for the resurrection of the now shuttered mercantile exchange:

Meanwhile, Ben Kwong Man-bun, one of the 37 broker members of the HKMEx, said the exchange’s business model would make it difficult for any would-be investor, or “white knight”, to consider rebuilding the exchange. If you look at the exchange’s record, not too many members were actively using the platform,” he said. “[The exchange] needs a lot of capital and infrastructure.”

So… what was the HKMEx being used for? Well, one explanation is that it was nothing more than a highly structured gold financing vehicle? Huh? Recall our lengthy article about China’s Copper Financing Deals, and how China is cracking down on the practice: something which will likely unencumber 500,000 tons of copper as Letter of Credit collateral, and force its market liquidation, further crushing the spot price. The opposite process can also be just as true: while in China copper has long been the preferred financing-creation asset of choice, in Hong Kong it may well have been gold. Which ostensibly would make the previously discussed CCFDs convert into HKGFDs. And with the recent collapse in the price of paper gold, suddenly the infinite rehypothection chain that whatever gold was at the HKMEx was used for, found itself in jeopardy, with margin funding pressure forcing collateral chains to break, as counterparties suddenly demanded excess margin on existing arrangements. The subsequent escalation in the serial failure of assorted “HKGF” deals may have been the ultimate reason why suddenly not only the very exchange – which may have been nothing than a glorified bonded warehouse for tons of LC collateral – was forced to promptly shutdown, but all those associated with it had to scramble to procure fake financial documents on short notice to avoid someone else’s wrath, while the found a way to ride into the sunset. Naturally, all of the above is still speculation, and much can change in the coming hours and days as more information is disclosed, however, if indeed this is a scandal about (multiple times) encumbered gold, if it reaches the very top of HK’s power structure, one can be assured that there will be some very angry counterparties on the losing side of whatever gold-financing deals Hong Kong’s top politicians had engaged in over the past two years.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

<span>%d</span> bloggers like this: