April 23, 2013
Translated by Li Jing

Provincial auditing departments in China are hoping to clean up the country’s bond market. The investigations of abnormal transactions are going further and deeper than those in the past.

According to an official from a local auditing department, the National Audit Office (國家審計署), Ministry of Public Security (公安部), National Development and Reform Commission (發(fā)改委) and The People’s Bank of China (中國人民銀行) are working together with no end to the investigation in sight. Provincial auditing departments have been barred from accepting unauthorized interviews on this topic.

The investigation aims to rectify a complex practice fund managers use to cheat their clients known as “substitute holding,” which enables them to illegally skim profits on bond trades. The auditing official said that the current investigation came as a result of a case involving a Shanghai Auditing Bureau (上海審計局) official. Several financial industry executives have already been arrested.

According to China Securities Journal (中國證券報), a Beijing brokerage firm confirmed that its supervising authority had issued a notice for it to conduct an in-house audit of its bond holdings. A number of banks and investment companies are similarly checking their accounts and taking extra precautions.  

The investigation is focusing on Class C accounts, which remain loosely regulated and easily exploited. “Class C accounts are very active and conduct transactions with both Class A and Class B accounts, so it’s hard to discover the illegal activities that have happened in the process,” a bank dealer told the China Securities Journal. “Additionally, the professionals in this circle all know that bond holdings cover a wide field involving many people. So who can say they’re outside?”

A bond market expert explained that city commercial banks and rural credit cooperatives have enough capital, but they can’t obtain bonds as easily as major banks and fund management companies. So both sides work together, leaving many opportunities for bribery and skimming off the top in the process.

Links & Sources
China Securities Journal - 債市審計大撒網(wǎng) 更大級別徹查風(fēng)暴將至