Chinese police hunt boss of commodities trading firm; investors demand money, answers

As demand for soybeans, copper and other raw materials surged, investors flocked to Huaxia Commodities Spot Exchange Co., plunging into the risky world of commodities in search of better profits amid slumping Chinese stock prices.

But now Huaxia's boom has collapsed amid accusations its founder fled to the United States last week with up to US$25 million in customers' money. Police have launched a manhunt for him and say several employees have been detained. Investors who include farmers and entrepreneurs besieged Huaxia's Beijing headquarters last weekend, demanding their money.

The collapse comes at an especially awkward moment for communist leaders, just weeks before the Beijing Olympics open Aug. 8 and at a time when China's stock market is near 16-month lows and investor confidence is weak.

"If it were not for the games, we would all hold rallies around the country. But we love the country. We're considerate," said Chen Yunshan, who said she had 500,000 yuan (US$73,000) invested with Huaxia. "The government should be considerate of us as well."

As the United States grapples with the subprime credit crisis, China faces its own market meltdown. Its main stock index has fallen 50 percent since October, hurting ordinary investors and making a growing number willing to embrace higher-risk alternatives in an economy with few investment options.

Police said they are "making every effort" to find Huaxia founder Guo Yuanfeng, wanted for unspecified "economic crimes." A police statement said several employees were detained but gave no details. Police spokesmen declined to comment further.

There was no indication why Guo fled or whether any of Huaxia's activities were deemed illegal.

Driven by a boom that is expected to see China's economy grow by at least 9 percent this year, commodities trading grew 142 percent to 35 trillion yuan (US$5.1 trillion) in the first half of 2008, compared with the same period last year, according to the China Futures Association.

Small traders are allowed under regulations issued last year, but Huaxia might have been engaged in bigger, longer-term trading than its status allowed, the financial newspaper 21st Century Business Herald said.

The Ministry of Commerce, which oversees commodities trading, did not respond Monday to questions by phone and fax about Huaxia's legal status and trading.

The Chinese newspaper Legal Daily, citing unidentified sources, said 170 million yuan (US$25 million) in investors' money was missing.

Guo founded Huaxia in 2001 and as the firm grew, it expanded to other regions of China, according to police.

According to investors, Huaxia customers used Web-based accounts to trade commodities, with the company charging a percentage on each deal. Chinese markets trade futures in wheat, soybeans, palm oil, sugar, cotton, corn, gold, copper and zinc.

Short-term traders sign contracts to take delivery of commodities and sell them minutes or hours later, trying to profit from price rises. Buyers can include small food processors or other traders who need to fulfill delivery commitments.

Ye Xinying, from the central province of Hubei, said she invested with Huaxia for a number of years, then joined it as a broker in March during an expansion that she said created a nationwide network of sales representatives. Ye said she is part of a group of 69 people who have 1 million yuan (US$130,000) in Huaxia accounts _ a huge sum in China, where despite growing prosperity the average economic output per person is US$2,600 a year.

Police gave no details on Guo's background, but Ye said he grew up in central China and got his start in the 1990s trading bananas from the tropical southern island of Hainan before moving to Beijing.

Ye said she called a Huaxia manager last Thursday after hearing that investors could not get money out of their accounts.

"He told me the company had some problems, and Guo left with the money," she said.

Chen and Ye were among some 200 investors who gathered Saturday in the lobby of the Beijing office tower where Huaxia occupied the 19th floor. Police took down information about their accounts but said they had no answers.

An investor from rural Hubei who refused to give his name said he turned to Huaxia after losing money in the falling stock market.

"If I lose money due to market forces, it's OK," the man said angrily. "But I didn't lose it that way. Someone took my money."

The police statement said Guo's whereabouts were unknown. The 21st Century Business Herald said he flew to Los Angeles last Tuesday.

China has suffered a string of scandals over insider trading on its turbulent stock markets and embezzlement or mismanagement at state banks. But this is the biggest publicly known case of its kind in fast-growing Chinese commodities markets.

Investors are pouring into commodities because few can make money in stocks and interest on bank accounts fails to keep pace with inflation, said Li Zhe, head of research for Beijing China International Futures Co., which has no connection to Huaxia.

"A lot of individual investors are doing commodities futures trading," Li said. "Among our clients, winners and losers are about half and half."