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China's bond market calms after the brokerage gets reined in
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THE recent volatility of China's bond market triggered by the default of Sealand Securities has brought to a temporary settlement, as the brokerage accepted responsibility of the scandal after the regulator involved into the probe amid concerns of financial stability.
The brokerage said it will take responsibilities for forged bond agreements, and look into criminal liabilities of its former employees in defending "trust and order of China's bond market," according to companies' announcement filed to Shenzhen Stock Exchange today.
The brokerage, based in southern city Nanning, is involved in a scandal that pointed to two of its former employees, who signed unauthorized bond agreements with Bank of Langfang by forging company's seal. The bond transaction with the lender was defaulted after a recent tumble in bond prices, local media reported last week.
The China Securities Regulatory Commission called up negotiation talks with more than 22 related institutions on Tuesday night, 21st Business Herald reported, adding that the amount involved in the scandal was around 20 billion yuan (US$2.89 billion) and the floating losses stand at one billion yuan.
The negotiation was once in the deadlock as some participants doubted the true motivation of forging seal, since Sealand is the final recipients when bond agreements matures, not the individual. But the meeting has come to the consensus of risk sharing amid pressure from the regulator of “maintaining stability of the bond market,” 21st Business Herald cited participants.
Similar practices, in which a brokerage or bank temporarily holds another party’s bond assets, are prevalent in the industry but remain in a grey area, analysts said. Some worried earlier that Sealand might not take responsibility as the government is thrive to reduce leverage in the bond market.
"This incident has clearly dampened market sentiment and broken the trust between banks and smaller non-bank financial institutions,” OCBC economist Xie Dongming wrote in a note on Monday.
“It may take some time to repair the trust."China’s bond market calmed from previous jitters after the announcement, as China’s 10-year Treasury bond futures rebounded 1.57 percent on Wednesday afternoon, while five-year treasury futures rose to its daily limit of 1.09 percent.
Chinese bond prices fell sharply last week after the US Federal Reserve decided to raise its interest rate for the second time in a decade, and indicated a faster pace of monetary tightening than markets had expected. The market sentiment was hit by year-end liquidity crunch and the chain reaction of Sealand’s scandal.
The Shenzhen-listed Sealand, which manages 50.1 billion yuan of assets, is based in Guangxi Province. The company halted its share trading on December 15, pending announcements and investigation results from The Guangxi branch of China’s securities regulator.
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