By staff reporter Zhang Bing, Li Qing and Song Yanhua

“Huaxia Exchange defrauded more than 1 million yuan from us,” said Hu, an employee of the Mongolian based trading firm Pengqiang.

In 1997, Huaxia Spot Commodity Exchange was founded under management of Guo Yuanfeng, Hu told Caijing. Guo Yuanfeng, older than 40, was one of the first in line to work in China's future exchanges. He spent years trading at the Zhengzhou Commodity Exchange. But in 1995, Guo switched to spot commodity trading.

Under Guo, the Huaxia Exchange had achieved a registered capital of 60 million yuan by 2001, serving as a virtual Online trading floor where agricultural foods and steel are traded in bits and bytes. Nationwide, 200,000 clients have appeared. Daily trading volume averages around 2 billion yuan -- about one fifth of China's copper trading volume.

To trade, clients are required to first deposit money into Guo's personal ICBC account. After this, the bank executes transactions between the exchange and clients.

An agent from Hohhot, the capital of Inner Mongalia Autonomous Region, told Caijing that they paid 25 million yuan to the Huaxia Exchange. But in a turn for the worse, on June 20 the company found that the money couldn’t be withdrawn. The situation was immediately reported to the Ministry of Commerce.

Not until July 9 did local policy finally freeze Guo's account, after the last US＄ 800 thousand had been emptied out.

So what allowed this to happen? Spot commodity trading suffers from inadequate supervision, and banks aren't well suited to settle such third party deals.

Spot commodities don't fall under the sight of China Securities Regulatory Commission if bought on more than a 20 percent margin. Instead, such transactions are monitored by the Ministry of Commerce.

Since January 2008, clients found the Huaxia Exchange had been delaying capital repayments. ICBC's role is not to serve as a third party settlement bank for trading.

To obtain legal status, the Huaxia Exchange registered with the Industrial and Commercial Administration Bureau – just as new businesses register with the government in overseas countries.