PBOC to crack down on illegal bond trading

The People's Bank of China (PBOC) held a meeting Wednesday with the country's commercial lenders in a new effort to crack down on illegal bond trading in the fast-growing interbank market, Chinese media reported.

The meeting was focused on the rectification of illegal bond transactions, with the possibility of reforms in primary bond issuance and secondary trading, the China Business News reported, citing anonymous sources.

"After a series of (illegal) bond trading cases uncovered recently, the central bank may now be seeking opinions and suggestions from commercial banks on reforms in Class C accounts, which are used by non-financial enterprises and individuals," a bond trader at a State-owned bank in Shanghai, who wished to remain anonymous, told the Global Times Wednesday.

Several executives from financial institutions like CITIC Securities, Wanjia Asset Management and Qilu Bank are reported to have been detained for illegal substitute holding through Class C accounts.

Substitute holding is a kind of bond trading practice that allows an institution to temporarily transfer a portion of its portfolio to another party's account. It has become common among Chinese institutions, but it can be used for hiding losses or avoiding limits on investment.

It can also be used to steal clients' profits, Zhou Hao, an economist at ANZ Bank in Shanghai, told the Global Times Wednesday.

A nationwide clampdown on such irregularities in the country's interbank bond market has been carried out by the National Audit Office, the Ministry of Public Security, the National Development and Reform Commission and the PBC, according to the official China Securities Journal.

"But it is very hard to detect illegal Class C accounts, so the central bank's meeting may also have looked into more efficient methods of investigation," Zhou said.

The crackdown campaign could also be a good opportunity for regulators to improve their supervision and close loopholes, the Shanghai-based bond analyst said.