When Wang Qishan (left) was made head of the Communist party’s anti-corruption agency, it was expected that he would put his tough-guy reputation to work in taking down high-ranking officials.

Nearly two months into the job, Wang has signed his first publicly reported investigation orders. Contrary to expectations, the targets are not big fish. Instead, they are a series of little-known bond traders. What explains Wang’s focus?

The bond market scandal has shaken China’s financial industry over the past week. Three men, all in their 30s, have been detained over allegations that they were skimming profits from bond trades. The most prominent of those under investigation is Yang Hui, head of the fixed-income department at Citic Securities, the mainland’s top brokerage.

According to reports in Chinese state media, they were engaged in what is known as ‘rat trading’ – that is, taking a bite out of their institutions’ profits. Instead of selling bonds directly to customers, they are alleged to have routed the transactions through their own personal companies and pocketed some of the margin.

In the past when there has been wrongdoing in Chinese capital markets, the financial regulator with oversight of the specific market in question has taken charge of the investigation. For example, in the stock market, the China Securities Regulatory Commission has led the charge against insider trading.

The regulator of the interbank bond market – where the latest allegations of rat trading have surfaced – is the central bank. The central bank is involved in the current investigation, but it is far from alone. The public security ministry, the national audit office and the National Development and Reform Commission (a central planning agency) are all taking part.

For this many government bodies to work together, someone needs to be playing a co-ordinating role. That someone is Wang Qishan, head of the Communist party’s central commission for discipline investigation.

His role has been briefly mentioned in Chinese media reports. “This series of scandals has made high-level authorities furious,” Caixin magazine reported. “Wang Qishan has commented on the cases and demanded that the matter be investigated thoroughly.”

The involvement of Wang and the public security ministry is an indication that there is much more at play than simple profit-skimming by a few traders.

Wang has a background in financial affairs – most famously in the resolution of Guangdong’s debt problems in the late 1990s – and it was long believed that he would take part in economic decision-making under China’s new leaders. There was some surprise when he was given the anti-graft post, which appeared to sideline him from the realm of economic policy.

But under the mantle of his anti-corruption position, he is now playing a role in finance, bringing his powers to bear on the bond market.

The obvious explanation is that the bond market has grown remarkably quickly. From being a marginal element of the economy, it now accounts for about a quarter of all new credit issuance in China. It is necessary to clean up the dirty corners of the bond market to make it a properly functioning channel for the allocation of capital in China – hence Wang’s concern.

However, bond traders have told beyondbrics that there may also be another, more political reason for his involvement. The interbank bond market has been carefully nurtured by the central bank, which has tried to ensure that risk is properly assessed and ultimately borne by market participants.

Over the past two years, though, the NDRC has weighed into the market, pushing it as a venue for local governments to raise financing, even when their credit-worthiness is suspect. That has started to undermine the central bank’s efforts.

According to this version of events, Wang’s main target is not really the few bond traders under investigation. Rather, he is helping shine a strong light on the bond market to check the encroachment of the NDRC and keep the control in the central bank’s hands.

Whatever the explanation, it is a very broad definition of anti-corruption. Wang still has a big hand in China’s financial reforms.

See also:
Below the calm: death and alleged crime in China’s markets
, beyondbrics
China’s new securities regulator: more reformist than you think, beyondbrics

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