Hundreds of frustrated Chinese investors protested this week outside a rare earth metals exchange in the south after it was unable to return their money, highlighting the risk of shadow lending in the country.

Investors said the Fanya Metal Exchange gradually refused to pay out on investment products — that had promised annual returns of 10 per cent or more — following a collapse in the price of rare metals, which were used as collateral against the customers’ funds.

The fallout is an indication of the number of high-return products in China that are at risk of default, hurting individual investors.

It also follows a collapse in the prices of many rare metals, which are used in electronics, including indium, tungsten and bismuth.

Fanya’s troubles also comes on the heels of a sharp fall in Shanghai stock markets last week after a rally fuelled by debt-funded margin trading.

The exchange is based in the southwestern city of Kunming with other operations in the southern port city of Xiamen.

It has about 200,000 clients with a total investment of Rmb40bn ($6.4bn) but began experiencing liquidity problems in April, it said. It blamed “foreign forces” for betting against the rare metals market.

Fanya said it would suspend payouts on some funds from July 13 to the end of August. From September, it will allow only spot trading of minor metals.

Producers had also agreed to repurchase metals from investors, it said.

“This year, some foreign forces got in touch with domestic institutions to maliciously go short China’s rare metals markets,” it said in a statement. “Facing these problems, the exchange has been working to co-ordinate various parties to carry out their trading responsibilities.”

A Beijing office worker from Kunming told the FT she had put about Rmb1m money into Fanya products paying about 10 per cent interest because the money could be withdrawn at any time.

“In the beginning of this year, I felt something was up. Around April, they said we would only be able to withdraw Rmb10,000 yuan at a time. Later they said only Rmb200 or Rmb300 could be withdrawn at a time. At that point I began to withdraw money. I still have around Rmb100,000 locked in there,” she said.

The city has run into trouble amid China’s slowdown. It is keeping the largest local property developer on life support amid growing complaints about unfinished apartment blocks.

Smaller developers have gone under and debt collectors are doing a thriving business, residents said during a recent visit. Meanwhile, a string of top city officials have been detained on corruption charges.