The central bank has barred funds collected for asset management products issued by trust firms, brokerages and mutual fund houses from being invested in bonds on the interbank market, after Beijing increased efforts to weed out illegal trading practices in the debt market.
The decision, coming after a high-profile meeting to discuss curbing illegal bond trading on Wednesday, reflects growing concerns among financial regulators about the health of the market.
The China Central Depository and Clearing, the clearing house for the Shanghai-based interbank market, notified the companies yesterday morning of the decision, according to bond traders.
It was believed to be an initial step taken by the authorities to police the interbank bond market after a clutch of powerful asset managers were interviewed by police and regulators in the past week.
The People's Bank of China, which oversees the interbank market, convened all heads of mainland commercial lenders on Wednesday, telling them to conduct an investigation into their trading records before filing reports to the central bank.
Yu Yali, chief financial officer at Bank of Communications, said: "Had it not been for the irregularities, the bond market could have developed very well. The market must learn a hard lesson from the scandals and all players must do their utmost to prevent those problems from taking place again."
According to traders, illegal practices were rampant on the interbank market, as unethical fund managers took advantage of regulatory loopholes to make money for their own accounts.
A bondholder could sell debt worth multiple millions of yuan to an affiliated institution at an artificially low price, after which the affiliate resold the bonds to another at a premium based on a fair market price.
The affiliates, most of which are non-financial institutions, pocketed the illicit gains for the fund managers.
The illegal practices have increased amid soaring debt issuances as the central government became fully aware of the importance of the bond market.
By the end of the first quarter of this year, the mainland bond market, including bonds traded on the interbank and the stock exchanges, was valued at 27 trillion yuan (HK$33.6 trillion), equal to more than half of the country's gross domestic product in 2012.
The move to crack down on illegal bond trading would slow down the growth of the bond market, analysts said.
It was speculated that Wang Qishan, head of the Communist Party's Central Commission for Discipline Inspection, directed the so-called "storm of heavy regulation" on the bond market in an attempt to clean up the finance sector.
Several executives including Yang Hui, head of the fixed-income department at the mainland's largest brokerage, Citic Securities, were questioned by regulators.