Recent incidents highlight the lack of internal risk controls in the nation's bond market

The latest scandals in the Chinese bond market have revealed weak internal risk control at financial institutions, which may help accelerate the reform of China's financial regulation toward a more coordinated regime, analysts said on Monday.

One incident that shook the market was the bond financing scandal involving Sealand Securities Co, a mid-sized securities firm which is facing huge losses for trading bonds through high-risk leveraging tools. The firm later claimed that the trading contracts were fake documents drafted by former employees who forged the firm's official seal.

In a separate incident, a $43 million debt default by Cosun Group, a Chinese telecommunication firm, has left many investors fearing that they will not have their money repaid.

The bonds issued by Cosun Group were sold on a peer-to-peer online lending platform owned by Alibaba-backed Ant Financial Services Group. The default caused a domino effect in the insurance and banking sector as Zheshang Property and Casualty Insurance Co and Guangfa Bank have offered guarantee service for the bond payment.

"The two incidents have exposed serious problems in the corporate governance and internal risk controls of the Chinese financial institutions," said Liu Junhai, a business law professor at Renmin University of China in Beijing.

Liu said that China's financial regulators would probably now tighten their scrutiny on the securities markets in the coming months and would boost regulation on the risk management and compliance side of the financial institutions.

The analysts said that the two incidents occurred in a regulatory vacuum, as they involved cross-market trading in the over-the-counter bond market, the online financing sector, as well as the insurance and banking sector.

"It is necessary for the country to set up a super regulator so that it could help clear some regulatory blind spots," Liu said.

The China Securities Regulatory Commission said last Friday that it would supervise Sealand Securities and other relevant parties to carry out solutions to address the risks.