China's regulators tighten grip on amortized bond funds - sources

SHANGHAI, Jan 13 (Reuters) - China’s securities watchdog has tightened its grip on the issuance of so-called amortized bond funds, popular instruments used by investors including banks to legitimately evade taxes, according to two people with knowledge of the situation.

Amortized bonds, in which the principal on the debt is paid down regularly along with its interest expense over the life of the securities, have caught on among institutions such as banks in China.

Regulators, which have previously limited the number of such funds to a maximum of two for each mutual fund house, recently also set a cap of 8 billion yuan ($1.16 billion) for each amortized bond fund at launch, said the sources.

Such bond funds require that investors hold the assets until maturity, potentially locking in liquidity and distorting prices, said a fund manager who declined to be identified. ($1 = 6.8998 Chinese yuan renminbi) (Reporting by Hongwei Li, Steven Bian and Andrew Galbraith ; Writing by Samuel Shen; Editing by Kim Coghill)