Interbank bond market review expected

Central bank move aimed at cracking down on insider trading and other irregular transactions

Non-financial institution bond trading accounts will be supervised or closed as part of a review of bond trading in China's interbank market, Liu Shiyu, deputy governor of the People's Bank of China, said on Wednesday.

The central bank is expected to release regulations to tighten controls of the interbank bond market, which will require commercial banks to conduct in-house examinations of their bond trading businesses by the end of this week.

Li Jing, a spokeswoman for the National Association of Financial Market Institutional Investors, said it is researching a market monitoring and punishment mechanism to strengthen self-regulation among bond traders.

Analysts said the measures should go some way to cracking down on insider trading and other irregular transactions in China's fast-growing interbank bond market, and send clear message that the central bank governor intended to tighten regulation to prevent soaring risks.

The bond market was rocked last week by the arrest of Zou Yu, the fixed-income department director of Wanjia Asset Management Co Ltd, on suspicion of being involved in insider bond trading.

A spokesman for the China Securities Regulatory Commission said that the case remains under investigation.

Executives in charge of the fixed-income investment departments at E-fund Management Co Ltd and Southwest Securities Co Ltd have also been sued for illegal trading.

Their activities were identified on the 23.1 trillion yuan ($3.74 trillon) interbank market, an over-the-counter trading platform and the biggest component of China's bond market.

"We cannot simply say that those activities are illegal now, due to the lack of specific laws," said Yang Tao, head of the financial market research lab of the Financial Research Institution of the Chinese Academy of Social Sciences.

"It depends on whether the cases relate to illegal transactions and corruption," Yang said.

Corruption occurs when some financial institutions preferentially purchase "hot" bonds from issuers or underwriters, he said.

Some commercial banks sell their bonds to other financial institutions in order to transfer the bond investment risk off its balance sheet temporarily to another party for a fee, and buy back bonds after the accounts are examined.

Another way is that commercial banks can buy bonds from non-financial institutions, in return for higher fund lending rates, which adds leverage.

The two parties agreeing to share profits is considered insider trading, as it can influence bond prices.

An executive manager of fixed-income investments at a major foreign bank said: "Bank investment using capital collected from selling their own wealth management products is actually a separate case with much lower risk.

"Only very few lenders participated in illegal 'cooperation' with non-financial institutions."

In an annual report released on Wednesday, the CBRC said this year it will prioritize the supervision of wealth management products and investments using capital collected from selling such products.

"We will hold firmly to the bottom line of no systemic and regional risks," it said, vowing to prevent risks from off-balance sheet businesses spreading to the core assets of banks.