Changpeng Wan
Summary of Regulatory Enforcement Actions
- Chinese regulators disclosed five simultaneous disciplinary measures against entities engaged in bond market manipulation
- Crackdown specifically targets ‘self-financing’ schemes where issuers buy their own debt securities through proxies
- Penalties issued for ‘fee-return’ arrangements where underwriters secretly compensate investors to distort pricing
- Unprecedented regulatory coordination signals prioritization of bond market transparency and standardization
The Regulatory Landscape Shift
Chinese financial markets witnessed unusual coordination among regulators during mid-2025, when the National Association of Financial Market Institutional Investors (NAFMII) launched five separate disciplinary actions simultaneously. This intensive regulatory action targeted four major investment firms and an individual trader – a move hailed by analysts as signaling renewed commitment to cleansing malpractice from China’s $21 trillion bond market. With such synchronized sanctions being unprecedented in frequency and scope, market participants immediately recognized a paradigm shift toward stricter oversight.
The Unfolding Enforcement Sequence
On July 14, 2025, NAFMII published detailed findings revealing widespread collusion between issuers and investment entities to manipulate pricing mechanics. Through weeks of investigation, regulators documented sophisticated schemes designed to bypass disclosure requirements while artificially suppressing yields. The abrupt sanctions reflect regulators’ diminished tolerance for practices undermining Beijing’s decade-long push toward market standardization.
Targeted Violations and Sanctions Profile
The disciplinary actions specifically addressed two manipulation techniques that regulators determined infiltrated primary issuance channels:
The Anatomy of ‘Self-Financing’ Schemes
Authorities discovered Shanghai-based Liangmu Investment Management (上海良牧投资) acting as conduit for issuers seeking to purchase their own bonds – prohibited practice termed ‘self-financing’. Through layered asset management products, Liangmu created nominal separation allowing issuers to repurchase debt post-listing while camoufluring true ownership. Investigators found issuers transferring significant ‘service fees’ (£4.3 million average per transaction) through offshore vehicles as disguised kickbacks.
The mechanics work simply: Company A issues bonds → Creates offshore investment vehicle → Vehicle buys Company A’s bonds using intermediary (here, Liangmu) → Company A provides financing guarantee/repurchase commitment → Funds circulate internally while creating artificial market demand.
‘Fee-Return’ Compensation Mechanics
Parallel investigations revealed Beijing Hengrui Huida Investment (恒瑞惠达) orchestrating ‘fee-return’ arrangements where undisclosed side-payments compensated investors for accepting below-market yields. Regulators exposed legally-binding compensation contracts ensuring certain return thresholds regardless of coupon rates – directly contravening transparent price discovery.
Violative mechanics involved: Coordinating affiliated parties → Establishing withdrawal agreements → Booking non-disclosed yield supplements → Securing investor commitment → Charging layered ‘consultancy fees’.
Documented Violators Overview
Penalized Institutions
- Shanghai Liangmu Investment Management (严重警告/Severe warning): Primary facilitator of self-financing loops
- Beijing Hengrui Huida Investment (严重警告/Severe warning): Orchestrated fee-return payment channels
- Mengsen (Shanghai) Investment (警告/Warning): Structured layered trusts supporting illicit issuances
- Qianhai Jiuying Asset Management (警告/Warning): Facilitated proxy bond holdings bypassing ownership disclosures
Individual Accountability
Private fund manager Zhao Jian (赵戬) received formal warnings for coordinating multi-party bond acquisition chains. His activities included procuring ‘purchase surrogates’ which created phantom demand signals pre-issuance plus arranging multi-institution ‘bond parking’ arrangements post-listing.
Regulatory Evolution Timeline
This intensive regulatory action builds upon incremental policy upgrades since 2022:
- 2022: Initial prohibition against sub-cost pricing services
- 2023: Explicit ban on third-party yield supplements and fee-return schemes
- June 2025: Six-point enforcement notice requiring transaction-level disclosure completeness
The June Enforcement Blueprint
NAFMII’s preemptive document outlined specific prohibitions including Article 2 banning yield-distorting offsets (‘returned fees’), Article 4 forbidding proxy holdings parking arrangements, and Article 6 requiring segregated operations between discretionary asset management and underwriting functions.
Market Distortion Mechanics
The exposed manipulations create three systemic harms according to Standard Chartered’s Asia bond analysis:
Capital Allocation Distortion
Artificially compressed yields prevent proper risk-based pricing, starving healthier enterprises of proper financing while enabling distressed issuers to secure unsustainable funding.
Secondary Liquidity Contamination
Transactions where beneficial ownership remains obscured prevent accurate price discovery, creating misleading benchmarks used throughout investment portfolios globally.
Compliance Arbitrage Breeding
The profitability gap between compliant market-making versus manipulation fosters migration of capital toward jurisdictions with weaker oversight frameworks.
Industry Response
Reacting to regulators’ intensive actions, UBS head of fixed income trading Asia commented: ‘Coherent enforcement incentivizes standardization. Market participants now see deterrence probabilities increasing substantially – fundamentally recalibrating risk-reward calculus toward transparent structuring.’ The disciplinary actions aligned closely with IOSCO guidance on Sovereign Debt Market Infrastructures regarding integrated monitoring frameworks.
Broader Implications
The timing signals deeper alignment among Beijing’s administrative bodies after State Council reforms streamlining financial oversight functions. This coordination manifests in reduced arbitrage windows between bond, banking, and securities violation treatment.
Implementation Optimization Guide
For firms navigating the new regime, analysts recommend:
Operational Prioritization
- Immediately segregate underwriting/asset management personnel and systems
- Implement automated transaction pattern surveillance monitoring proxy holdings
- Develop centralized fee acceptance/reconciliation platforms
Governance Modifications
- Appoint separate committees reviewing affiliated-party transactions
- Institute mandatory trade reconstruction testing
- Create secondary certifications verifying arm’s-length pricing provenance
Contrasting Global Regulatory Frameworks
While US/EU guidance prohibits manipulative tenders through SEC Rule 10b-5 and MAR respectively, China’s intensive regulatory action provides targeting specificity lacking in western counterparts:
US Framework: Primarily prosecutes illicit gains causation
EU Approach: Focuses on transaction-level reporting completeness
Chinese Measures: Preemptively defines structural violations by transaction anatomy
Forward Trajectory
The intensive regulatory action demonstrates Beijing’s priority shift toward standardization sovereignty – ensuring domestic benchmarks reflect genuine fundamentals rather than transactional distortions. Market participants anticipating persistent enforcement discipline should accelerate compliance machinery upgrades prioritizing transaction transparency infrastructure.
For financial analysts, implementing IOSCO-aligned market monitoring frameworks becomes imperative when assessing Chinese securities. Fund managers should immediately audit holdings for concentrated exposures to sanctioned networks and restructure advisory mandates to ensure servicing entities have implemented June Notice compliance protocols. Financial engineers must prioritize verifying bond pricing mechanisms’ transparency through transaction forensic specialists.
