CHINA has launched a national investigation into the financial health of the securities industry, aiming to strengthen financial supervision of the fledgling sector. Analysts said the probe was prompted by the crackdown on treasury bond repurchases, which had given rise to colossal triangular debts among non-bank financial institutions across the country. A Ministry of Finance notice carried in mainland newspapers yesterday said: 'On the basis of the investigation, regional financial departments have to swiftly establish a financial supervision system for securities and futures institutions.' The investigation would cover a wide range of targets, including securities companies, futures brokerages, stock exchanges, commodity exchanges, the securities pricing system and registration companies. It would review their capital and debt, long and short-term securities investment, financial accounts management, cost control and profit distribution. The probe would be completed by the end of the year and the result would lay the foundation for a formulation of financial regulations. Repurchases, or repos, allow bond holders to use debt securities as collateral to raise funds. The bond holders buy back the instruments at an agreed price, which includes interest, at a specified time. The buying and selling of bonds is on a cash basis. As a result of prevailing tight credit, non-bank financial institutions have switched to repos to raise funds because they involve simpler procedures. Problems have occurred because many trading centres breach the regulations by not asking for full bond backing as collateral. In a bid to shore up business volume in the Wuhan and Tianjin securities exchange centres, for example, rules were relaxed by requiring a 10 per cent bond backing for each repo deal. Analysts put the debt figure between 10 billion yuan (about HK$9.2 billion) and 100 billion yuan, but China has not officially announced any details. Treasury bond repos have virtually come to a halt, with trading centres sorting out debts among their members. Shanghai Shenyin Securities analyst Feng Baogen said: 'The investigation will be conducive to the development of the industry as it will force their business to be conducted according to the rules.' A Shenzhen analyst believed the notice was issued to address the severity of the triangular debts caused by repos among non-bank financial institutions. 'The debts have piled up because there are loans made without collateral,' the analyst said. 'The loans will become bad debts when the borrower can't get the money through.' The ministry's aim was to get a better picture of the financial strength of the institutions, instead of immediately taking steps to clean up the market, the analyst said. He would not speculate on what the authorities were likely to do next, but said it was vital they knew what was going on at the brokerages. 'There are brokerages that should go bankrupt because their share capital can no longer support their swelling operations, but no one cares,' he said. He said some brokerages, which had share capital of 100 million yuan, had overstretched themselves to control total assets of seven billion yuan. 'That's overloaded. Of course, you have to take into consideration the proportion of debts in the total assets portfolio,' he said. Non-bank financial institutions have not been subject to controls as stringent as those facing banks in maintaining capital adequacy ratios.