China crackdowns on illegal Bond Trading
Grete Chan, 27 April 2013
Chinese Authorities began a major crackdown on illegal bond trading that compromised China’s $3.7 trillion interbank bond market. Authorities arrested Zou Yu, a fund manager at Wanjia Asset Management Co. in Shanghai’s downtown financial district, and his alleged accomplice analyst Xu Dazhu of Shandong-based Qilu Bank. for their alleged involvement in an illegal bond trading scheme.
The crackdown prompted a surge in bond sales in Shanghai, with companies reportedly underselling their holdings.
Further detainees include Yang Hui, executive director of fixed-income trading at CITIC Securities Co. Ltd., for allegedly colluding with commercial banks to illegally profit from bond sales, and Zhang Shougang, deputy general manager of the fixed-income department at Jianghai Securities.
Tighter Trading Controls
The People’s Bank of China (PBOC) held a meeting last week with participants including the China Foreign Exchange Trade System and the National Association of Financial Market Institutional Investors to discuss possible measures for tighter control over trading. They are seeking to clean up the market which has rapidly grown in the last five years, as they push companies to cut reliance on state-bank lending and increase use of the bond market to finance expansion. PBOC Governor Zhou Xiaochuan said in November the country will “vigorously” develop the bond market.
Earlier this month however, ratings agency Fitch cut China’s long-term local-currency debt rating citing transparency concerns.
Chinese regulators are investigating illegal fixed-income transactions in accounts typically used by senior traders at financial institutions. Unnamed companies in the Shanghai, Beijing and Jiangsu provinces have been greeted by inspection teams to review their historic trading records.
Some financial institutions are alleged to be moving bonds off their balance sheets to be held by other companies for a period of time in return for a fee. Interest payments, gains due to price appreciation will be paid to the original owner of the bond, leaving the transaction completely off market and open to abuses such as insider trading, and use of client funds for personal gains.
Regulators and the Interbank Market
The PBOC regulates the interbank bond market, while the China Securities Regulatory Commission and the National Development and Reform Commission oversee areas of the domestic debt market. The interbank market trades government bonds, enterprise bonds issued by state-owned companies, as well as short-term financing bills and company medium-term notes issued by companies. It doesn’t handle corporate bonds issued by private companies.
The China Foreign Exchange Trade System provides systems for foreign exchange and fixed-income trading in China. NAFMII is an industry group that regulates the interbank market. Both operate under the auspices of the central bank. NAFMII does not require companies to obtain approval to issue debt.