Scan­dals may boost re­forms

Re­cent in­ci­dents high­light the lack of in­ter­nal risk con­trols in the na­tion’s bond mar­ket

China Daily (Hong Kong) - - BUSINESS - By LI XIANG lix­i­ang@chi­nadaily.com.cn

The lat­est scan­dals in the Chi­nese bond mar­ket have re­vealed weak in­ter­nal risk con­trol at fi­nan­cial in­sti­tu­tions, which may help ac­cel­er­ate the re­form of China’s fi­nan­cial reg­u­la­tion to­ward a more co­or­di­nated regime, an­a­lysts said on Mon­day.

One in­ci­dent that shook the mar­ket was the bond fi­nanc­ing scan­dal in­volv­ing Sealand Se­cu­ri­ties Co, a mid­sized se­cu­ri­ties firm which is fac­ing huge losses for trad­ing bonds through high-risk lever­ag­ing tools. The firm later claimed that the trad­ing con­tracts were fake doc­u­ments drafted by for­mer em­ploy­ees who forged the firm’s of­fi­cial seal.

In a sep­a­rate in­ci­dent, a $43 mil­lion debt de­fault by Co­sun Group, a Chi­nese telecom­mu­ni­ca­tion firm, has left many in­vestors fear­ing that they will not have their money re­paid.

The bonds is­sued by Co­sun Group were sold on a peer-topeer on­line lend­ing plat­form owned by Alibaba-backed Ant Fi­nan­cial Ser­vices Group. The de­fault caused a domino ef­fect in the in­sur­ance and bank­ing sec­tor as Zhe­shang Prop­erty and Ca­su­alty In­sur­ance Co and Guangfa Bank have of­fered guar­an­tee ser­vice for the bond pay­ment.

“The two in­ci­dents have ex­posed se­ri­ous prob­lems in the cor­po­rate gover­nance and in­ter­nal risk con­trols of the Chi­nese fi­nan­cial in­sti­tu­tions,” said Liu Jun­hai, a busi­ness law pro­fes­sor at Ren­min Univer­sity of China in Bei­jing.

It is nec­es­sary for the coun­try to set up a su­per reg­u­la­tor so that it could help clear some reg­u­la­tory blind spots.” Liu Jun­hai, a busi­ness law pro­fes­sor at Ren­min Univer­sity in Bei­jing

Liu said that China’s fi­nan­cial reg­u­la­tors would prob­a­bly now tighten their scru­tiny on the se­cu­ri­ties mar­kets in the com­ing months and would boost reg­u­la­tion on the risk man­age­ment and com­pli­ance side of the fi­nan­cial in­sti­tu­tions.

The an­a­lysts said that the two in­ci­dents oc­curred in a reg­u­la­tory vac­uum, as they in­volved cross-mar­ket trad­ing in the over-the-counter bond mar­ket, the on­line fi­nanc­ing sec­tor, as well as the in­sur­ance and bank­ing sec­tor.

“It is nec­es­sary for the coun­try to set up a su­per reg­u­la­tor so that it could help clear some reg­u­la­tory blind spots,” Liu said.

The China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion said last Fri­day that it would su­per­vise Sealand Se­cu­ri­ties and other rel­e­vant par­ties to carry out so­lu­tions to ad­dress the risks.

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