The detention of two bank weights in China due to murky off-balance sheet deals in the interbank market has propped expectations that the country will soon start overhauling the market

April 19, 2013 Leave a comment

China may Soon Start Clean-up in Interbank Bond Market

04-18 15:31 Caijing

The People’s Bank of China is expected to launch a campaign to rectify interbank bond market, as soon in May

The detention of two bank weights in China due to murky off-sheet deals in the interbank market has propped expectations that the country will soon start overhauling the market which has developed at an unconventional speed for nearly two years.

Zou Yu, a Shanghai-based fund manager at Wanjia Asset Management, which oversees three bond funds, was detained and under investigation for alleged holdings of others’ bonds without transferring ownership in the interbank market, Chinese media said.

Fixed-income executive director at CITIC Securities Yang Hui was taken away by authorities after being accused of illegal deals regarding Class C bond custody, also a grey area in interbank market trading.Investment insiders see the kind of bond trusteeship as a disguised leverage, which is frequently used by banks and fund managers to skirt regulations that restrict the development of the pledged-style repos, which are in full compliance with regulations.

Finical institutions, via such irregularities, could achieve multiple goals including embellishing or manipulating financial statements and increasing their bond trading volumes which are essential to their rankings.

The People’s Bank of China is expected to launch a campaign to rectify interbank bond market, as soon in May, according to aastocks.com, citing a source close to the central bank’s financial market department.

The overhaul will last for four to five months, the source said, adding that it will focus on bond buybacks and asset-backed commercial paper.

The interbank bond market has already dominated China’s bond market, with bond trading volumes accounting for over 90 percent of total. Products in the interbank bond market range from government bonds, corporate debts to margin trading and asset-backed securities.

While the market has flourished and contributed much to China’s financial development, the central bank remained tolerant over irregularities in some commercial banks. With the detention of big names in the market, which have created a big splash, the central bank may have begun increasing regulations,analysts say.

Expectations of strengthened regulation will trigger deleveraging in bond managers, according to Pang Aihua, a bond investment strategist at CITIC Bank. As whole, it would be bearish for the bond market, the strategist said.

Filed under Macro Trends

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a comment