China Is Said to Probe Funds' Risk Controls as Defaults Rise

(Bloomberg) -- With corporate-debt defaults on the rise, China’s securities regulator will probe bond funds to ensure that they have proper risk controls in place, according to people familiar with the matter.

The China Securities Regulatory Commission’s investigation will include whether individual firms’ funds are shuffling high-risk bonds between them, said the people who asked not to be named as the discussions aren’t public. One suspicion is mutual-fund companies may be motivated to beautify their holdings to avoid a mass withdrawal by investors, the people said.

The checks will include ensuring that bond funds’ investments are being disclosed in a timely and accurate manner, the people said. Officials are alert to signs some funds may be at risk for having a concentration of troubled securities, according to the people. The CSRC didn’t immediately reply to questions sent by Bloomberg via fax.

As China embraces reforms to its near-$10 trillion bond market, including the roll-back of implicit government backing, officials are allowing more defaults. In the past two weeks, at least two companies missed bond payments and two others ran into liquidity trouble. The rising credit risks have roiled investors amid an increase in borrowing costs spurred by a broader push by policy makers to rein in financial leverage.

At least nine publicly-issued local bonds have defaulted so far this year, compared with 11 in the same period of 2017. China began permitting defaults in 2014, and the move has gradually helped differentiate pricing -- in at least some pockets of the bond market -- to better align with the issuers’ credit quality.

--With assistance from Lianting Tu

To contact Bloomberg News staff for this story: Steven Yang in Beijing at kyang74@bloomberg.net, Judy Chen in Shanghai at xchen45@bloomberg.net.

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Neha D'silva at ndsilva1@bloomberg.net, Jessica Zhou at jzhou75@bloomberg.net.

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With assistance from Steven Yang, Judy Chen