China Bank Says Bond Guarantee Forged as Market Mood Worsens

China Guangfa Bank Co. said Monday that documents and seals for a letter claiming to guarantee bond payments by the lender were forged, in the second such incident in the nation this month, raising concern about transparency in the world’s third-biggest bond market.

The revelation by the bank based in the southern province of Guangdong comes after Zheshang Property & Casualty Insurance Co. said on Dec. 23 it’s in touch with Guangfa Bank over payments on Cosun Group’s private bonds guaranteed by a unit of the lender after the notes defaulted on Dec. 20.

“Over the past few years, business growth of financial institutions has outpaced their capability to boost internal controls and also gone beyond the radar of regulators,” said He Xuanlai, a Singapore-based credit analyst at Commerzbank AG. “After the recent incidents, requirements on bolstering compliance and risk management will definitely be tightened.”

A lack of transparency and protection in bond documentation are adding to angst among investors after Sealand Securities Co. said earlier this month a former employee was found to have forged a seal to conduct bond trading. Concern about China’s bond market has been climbing after at least 28 onshore notes defaulted this year amid an economic slowdown, jumping from seven in 2015.

Higher Premium

Investors are demanding a higher reward to park money in the nation’s corporate debt. The yield premium of seven-year AAA corporate bonds over government notes has widened 44 basis points this month, set for the biggest increase since 2007.

“The basics of internal risk controls at many Chinese firms are almost non-existent,” said Oliver Rui, a Shanghai-based professor of finance and accounting at China Europe International Business School. “These incidents also exposed weak regulatory oversight and added to the urgency of setting up a super-regulator which can oversees all financial segments at the same time because financial institutions are evolving.”

The private bonds issued by Cosun Group, a telecommunications firm in Guangdong, were sold on Zhao Cai Bao, a platform operated by an Alibaba Group Holding Ltd. affiliate. Two subsidiaries of Cosun defaulted because of cash shortages, Zhao Cai Bao said Dec. 20, citing information from the Guangdong Equity Exchange. Zhao Cai Bao said on Dec. 21 it will offer money to cover legal expenses if investors want to protect their interests through lawsuits.

Sealand said on Dec. 21 it will fulfill bond contracts that were stamped with a forged seal.

— With assistance by Jun Luo, Judy Chen, and Xize Kang