Government arrests seven in 1:100 leveraged futures scam

Chinese authorities have arrested seven people who allegedly lured in half a billion dollars from investors by illegally offering huge amounts of leverage as high as lending 100 yuan for every yuan in collateral, a prosecutor said on Friday.

The Longwan district prosecutor in the coastal city of Wenzhou said on its official microblog that Wenzhou Guoding Investment had set up a virtual platform for futures trading, conducting 3.2 billion yuan ($515.4 million) of illegal business.

The Wenzhou prosecutor said it had approved the arrest of seven people after more than six months of investigations.

Police detained 27 people linked to the case earlier this month and media said that the firm's operations had been closed down. Guoding could not be reached for comment.

Leverage enables investors to make a fortune overnight by magnifying any gains on their investment, but also means any losses can be huge and abrupt if an investment turns bad.

The case underscores the casino-like nature of China's futures markets, where retail investors are often willing to take huge gambles with borrowed money, blamed by some for making the country's financial markets vulnerable to destabilising routs.

China's stock exchanges have lost around 30 percent of their value since mid-June, but authorities have been flailing in efforts over the past three weeks to prevent a further sell-off.

Futures markets, both stock index futures and commodities, have also destabilised thanks to heavy leverage.

A Wenzhou businessman who was familiar with Guoding's business said that the head of Guoding was renowned for being capable but fairly aggressive in investment circles.

"There are a lot of firms in Wenzhou that do this type of business... This will probably act as a warning to them," he added, asking not to be identified.

Beijing has been cracking down on riskier investments to try to stabilise the market, as well as stepping up scrutiny of share traders and their clients and launching investigations of "share dumping" and "malicious short-sellers". ($1 = 6.2 yuan)