* Regulatory crackdown on corrupt bond trading intensifies
* No new interbank bond accounts for non-bank institutions
* Brokerages, fund companies, and trusts affected
* May prevent sale of wealth management products
By Yong Xu and Gabriel Wildau
SHANGHAI, April 25 Chinese bond market authorities will suspend new account openings by non-bank financial institutions, the latest move in a growing crackdown on self-dealing in China's fast-growing bond market, multiple sources told Reuters on Thursday.
The move could effectively bar brokerages, fund companies, trusts, and possibly even banks from issuing new bond-based products to investors.
China's main bond clearinghouse, the China Central Depository & Clearing Co Ltd, will suspend applications from trust plans, brokerages, and fund companies to establish special-purpose accounts they use to manage funds for bond-based wealth management products (WMPs), bond mutual funds, and other bond-based investment products.
The clearinghouse is overseen by the People's Bank of China. The sources did not know how long the suspension would last.
China's interbank bond market has exploded in recent years, with the blessing of regulators keen to reduce the economy's reliance on bank lending.
Much of the funds invested in the bond market come from the sale of WMPs, which retail investors have welcomed as alternatives to low-yielding bank deposits and a volatile stock market.
While commercial banks are still the largest investors in the Chinese bond market, the share held by WMPs, funds, and trusts has steadily grown.
The suspension applies directly to bond accounts established by non-bank institutions. But it could also hit banks, which partner with brokerages and trusts who serve as passive custodians for funds raised from banks' own WMPs in what is known as "passageway business."
The suspension follows the arrest of four senior bond-market executives have been in recent weeks for alleged profit skimming in China's interbank bond market.
The recent arrests are related to the alleged use of a complex trading practice known as "substitute holding" in which fund managers temporarily sell a portion of their portfolio to a third party.
Market participants say the practice -- which is not illegal -- can be used to disguise profits or losses, increase leverage, or skirt limits on the types of instruments a fund is allowed to hold.
The arrested traders allegedly used the practice to skim client profits into personal accounts.
On Wednesday the PBOC held a meeting with major banks, instructing them to strengthen internal controls against corrupt trading practices and self-report any problems.
The central bank said it is also preparing new regulations to increase transparency and clarify rules regarding substitute holding.
The Beijing bureau of the China Securities Regulatory Commission has also asked brokerages to examine their practices and provide details of their use of substitute holding.
Policymakers and analysts have raised concerns about the explosive rise of so-called "shadow banking" in recent years, highlighting how banks have used WMPs to evade lending quotas and other regulatory checks such as capital adequacy requirements. (Editing by Kim Coghill)