China’s Shenzhen cracks down on risky gold trading amid wave of defaults

[SHENZHEN] Financial regulators in Shenzhen moved to curb illegal gold trading activities, targeting speculative schemes that have contributed to a wave of defaults shaking the city’s jewellery hub.The Shenzhen Local Financial Regulatory Bureau, in collaboration with other government departments, issued an order Friday (Feb 20) for companies to halt unauthorised gold trading practices such as “pre-fixed pricing”, leveraged trading and deferred settlements. The crackdown is in response to the surge of shadow banking activities within the Shuibei market, where skyrocketing gold prices have exposed the vulnerabilities of dealers acting as unlicensed futures brokers, leading to substantial losses for retail investors.The notice prohibits businesses from conducting gold trading through online platforms – including WeChat groups, apps and websites – under the pretext of recycling or material sales. The new regulations specifically target schemes where clients pay a deposit to lock in a price for a specific weight of gold, only to settle the difference at a later date based on fluctuating market prices, without any actual delivery of physical gold.In addition, the authorities outlawed “principal-protected” investment schemes related to gold custody or leasing that offer fixed returns. The regulations also include restrictions on the promotion of gold products through livestreaming or unauthorised software. The bureau further warned that violations involving illegal business operations, contract fraud, or illicit fundraising could lead to criminal investigations by the police.The latest move follows a liquidity crisis spreading in the Shuibei jewelry market, where the booming gold market in 2025 lured dealers into creating unregulated derivative products. In conventional transactions, dealers earn a margin between raw material sales and recycling. However, many dealers introduced a “pre-fixed pricing” model to hedge against price volatility. In this model, clients paid a small deposit to secure a price, with the transaction settled later.What began as a hedging strategy evolved into a high-risk speculation. Dealers, acting as market makers, essentially placed bets against their clients by failing to deliver physical gold. As gold prices soared, many dealers who had short positions faced heavy losses. Unlike regulated exchanges that require margin payments to mitigate risk – estimated at about 150,000 yuan (S$27,489) per kilogramme – many Shuibei traders failed to hedge their positions, hoping to profit from market dips or from client losses.The risks materialised in early 2026, when major gold dealer Jieworui experienced a severe liquidity crunch in January. The company, led by Zhang Zhiteng, had drawn individual investors via social media and apps by offering fee waivers and competitive pricing. Known for its previously reliable three-day settlement period, Jieworui allowed clients to trade virtual balances and take short positions on the market using an “empty agreement pricing” model, which involved buying low and selling high without holding physical metal.The scheme collapsed when Jieworui began rejecting withdrawal requests on Jan 19. The following day, the company imposed a daily withdrawal limit of 500 yuan per client, with a total daily payout cap of 10 million yuan. By Jan 25, Jieworui applied for government supervision to liquidate assets, admitting that it could not meet its obligations.Faced with angry investors, Jieworui proposed a restructuring plan on Jan 26: clients could either accept a one-time settlement of 20 per cent of their principal within seven days or a 40 per cent settlement over the course of one year. Many investors have reported the incident to the Shenzhen Economic Crime Investigation Department, though no formal criminal charges have been filed.The crisis spread to other dealers. On Jan 31, Yundiandang, another dealer in Shuibei, suspended withdrawals, citing “compliance violations” on its WeChat platform. The company said it endured three waves of panic-driven withdrawals and offered similar discounted settlement options.Sources familiar with the matter told Caixin that while these companies are licensed for jewelry retail and wholesale, they have expanded beyond physical trading into futures-like transactions without financial licences. The Shenzhen Market Supervision Administration and the Cyberspace Administration are currently conducting inspections of Shuibei platforms for illegal financial activities.Legal experts said that if these companies are found to be insolvent, or if their executives abscond, the cases could be reclassified as illegal fundraising or fraud. Authorities had previously warned in late 2025 that jewelry dealers are not licensed financial institutions and cannot manage assets or offer unauthorised investment products. CAIXIN GLOBAL