THE Shanghai Stock Exchange is tightening scrutiny over corporate bond issuance and has punished a brokerage for lax due diligence in bond underwriting.

The move comes after domestic exchanges strengthened inspections on initial public offerings (IPOs), as regulators seek to limit financial risks while promoting growth of China’s capital markets.

China has about US$4.5 trillion in outstanding corporate bonds, traded on the country’s stock exchanges and the interbank market.

The Shanghai Stock Exchange, China’s main exchange for corporate bond trading, has launched onsite inspections on select bond issuance applicants with a focus on robustness of due diligence by underwriters.

The bourse said in a statement Friday it publicly censured metal products maker Ningxia Yuangao Industrial Group Co. for “fake” and inadequate disclosure ahead of its default, and sent warning letters to its underwriter Huaxi Securities Co. and its law firm.

Ningxia Yuangao could not be reached immediately for comment. Huaxi Securities said it had nothing to add to what the Shanghai exchange said.

China is stepping up reforms of its capital markets. It has adopted a U.S.-style registration system for securities issuance on the Nasdaq-style STAR Market of the Shanghai Stock Exchange, as well as the exchange’s corporate bond market.

But signs of lax due diligence by underwriters led to regulators tightening screws on IPOs late last year. More than 100 companies have suspended their IPO process since December, many withdrawing applications voluntarily.

China’s top securities regulator Yi Huiman said last month that the registration-based IPO system doesn’t mean lower bars for listing, vowing to punish those underwriters who try to bring “sick” companies to the IPO market.

The Shanghai Stock Exchange said that its inspectors of bond issuances would take a page from the playbook of those in the IPO market.

Onsite inspections, which last one to two weeks and involve queries, interviews and checking backup materials, are aimed at bolstering the quality of information disclosure and due diligence, the Shanghai Stock Exchange said.

(SD-Agencies)