China Deepens Bank Investigation After Failed Bond Deal

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(Bloomberg) – China’s market regulator has widened its investigation into the bond sales of a state-backed coal miner who defaulted last week, resulting in a number of banks, corporations rating and accountants.

Industrial Bank Co., China Everbright (OTC 🙂 Bank Co., Zhongyuan Bank Co., China Chengxin International Credit Rating and Xigema Certified Public Accountants are being investigated for alleged irregularities, the National Association of institutional investors in financial markets in a press release. Haitong Securities Co. was also investigated earlier this week.

The investigation focuses on the deals with Yongcheng Coal & Electricity Holding Group Co., whose missed payment last week rocked the Chinese credit market. This default was followed by other state-linked companies, long considered immune to such credit events due to their implicit backing from the government. The turmoil prompted a sale of bonds and the cancellation of some transactions.

Amid the growing stress, officials from the Chinese State Council have asked government departments to conduct a risk assessment, people familiar with the matter said. The objective is to ensure the stability of financial markets and prevent any overflow that could lead to systemic risks, according to the populations.

All parties under investigation declined to comment immediately. Industrial Bank fell 1.7% and Everbright Bank fell 2.5% at 10:42 a.m. in Shanghai.

Yongcheng Coal is being probed for possible violations, including the disclosure of false information, after failing to make payment on a 1 billion yuan ($ 152 million) short-term note. The firm, which had been rated AAA by a local rating firm and since demoted to junk, cited “tight liquidity” for the default. Other missing payments include Tsinghua Unigroup Co. and Brilliance Auto Group Holdings Co., a Chinese automaker linked to BMW AG.

NAFMII is an interbank market watchdog overseen by the Chinese central bank.

The probes made by the watchdog on irregularities are not unusual. For example, NAFMII opened an investigation at the end of April into two investment banks involved in a deal with unusually low fees. Sanctions range from warning to banning underwriting or debt financing activities.

© 2020 Bloomberg L.P.

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