Illegal trading of bonds on the interbank market is being targeted by law enforcement authorities and financial regulators on the mainland, a move likely to unearth a clutch of unethical money managers.
The central bank held a meeting with the heads of the mainland's commercial lenders yesterday to discuss the control of illegal bond transactions.
Details of the meeting were not known, but it is believed that the commercial banks, the most powerful participants in the interbank market, were told to step up policing trading activities and examine trading histories as investigations by the authorities deepen.
A source with knowledge of the investigations said the authorities had collected strong evidence on illegal bond deals which involved dozens of financial institutions. The amount of illegal income was "stunning".
Last week, two fund managers, Yang Hui, the head of the fixed-income department at Citic Securities, and Zou Yu, the chief of Wanjia Asset Management's fixed-income businesses, were questioned by regulators.
The companies said the investigations involved only the individuals.
Three fund managers said they believed the probes into the two powerful executives were a prelude to "a storm of heavy-handed regulations" on the interbank bond market.
The investment community has been rife with speculation that Wang Qishan, the head of the Communist Party's anti-corruption body, the Central Commission for Discipline Inspection, was determined to weed out illegal practices in the finance sector. However, it is not known whether Wang, formerly a vice-premier in charge of the financial portfolio, directed this round of investigations into bond transactions.
According to bond traders, illegal transactions involving government and corporate debt at the Shanghai-based China Foreign Exchange Trade System, known as the interbank market, were rampant as unethical fund managers took advantage of regulatory loopholes to make money.
In a typical case, a member of the interbank market would sell bonds to an affiliated institution at an artificially low price before the affiliate resells the bonds to another at a premium based on a fair market price.
The affiliated institutions are normally run by the fund managers' relatives or friends to help pocket illicit gains.
Analysts liken the institutions to "rat-trade" accounts on the stock market, a term given to brokerage accounts opened by fund managers' relatives which are used by the fund managers themselves to trade shares.
One bond trader said: "The problem must be more serious than the stock market's rat trading accounts. A small premium, say one fen for a 100-yuan bond note could eventually amount to a sum of millions of yuan because of active trading. "Those guys are very smart, and have a bag of tricks to make the transactions look reasonable."
However, Gong Zhenhua, a partner with the Shanghai law firm Ronghe, said: "The supreme court might need to clarify what crimes these rogue traders have committed before the prosecutors bring lawsuits against them."