Donghai Fund Probed in Relation to Yongcheng Coal’s Structured Bond Issuance

Another Chinese financial institution came under investigation in relation to the bond default of state-owned Yongcheng Coal and Electricity Holding Group Co. Ltd.

The National Association of Financial Market Institutional Investors (NAFMII), China’s interbank bond market regulator, said Monday it launched a “self-disciplinary” investigation of Donghai Fund Management Co. Ltd. on suspicion that the fund manager facilitated the issuance of debt financing instruments in violation of rules and engaged in market manipulation.

Caixin learned from exclusive sources that the probe might be related to Haitong Securities Co. Ltd.’s role in Yongcheng’s structured bond issuance. Donghai’s fund accounts were used as a channel through which Haitong operated structured bond issuance for clients, several market participants told Caixin.

Founded in 2013, Donghai Fund is 45% owned by Donghai Securities Co. As of the end of September, the fund manager had 1.8 billion yuan of assets under management, ranking 125th among 141 Chinese fund firms.

Haitong, a major underwriter of bonds issued by state-owned enterprises (SOEs), is already under probe by NAFMII on suspicion of aiding Yongcheng in the illegal issuance of bonds and market manipulation.

Yongcheng’s abrupt default on 1 billion yuan ($151 million) of bonds earlier this month shed light on the company’s structured bond issuance, a shady fundraising practice in which a company buys a portion of its own offerings to inflate borrowing sizes and create a better image to attract investors. Financial regulators are clamping down on the behavior as industry insiders regard it as a threat to the stability of the bond market because it helps financially weak, poorly rated companies increase their risk of default.

Yongcheng and its parent company have outstanding bonds with a combined value of 50 billion yuan, including 13 billion yuan of notes involving structured issuances, Caixin learned. Haitong, one of China’s biggest brokerages, helped with many of Yongcheng’s structured issuances. The brokerage is also involved in structured issuances by recent defaulters Founder Group and Brilliance Auto Group Holdings Co.

Donghai’s cooperation with Haitong in structured issuances was first exposed in the state takeover of Baoshang Bank Co. last year. The regional bank used to be a big player in structured bond issuances.

Haitong appeared on a list of financial institutions involved in Baoshang’s structured bond issuances that circulated on the market, but the brokerage said it didn’t have any accounts designated for such issuance. Caixin learned from multiple sources that Haitong used accounts with several fund managers to conduct structured bond issuances.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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