Chinese securities regulators have started an investigation into suspected bond fraud involving Sealand Securities. That's after the brokerage claimed two former employees created bond deals using counterfeited company seals.

The fraud was uncovered after the company defaulted on the bond transactions. Analysts believe it is time for regulators to enhance supervision of the bond market.

"The demand for bond issuance is huge in China but only a few brokerages are granted licenses to carry out such businesses,"said Li Yang, member, Chinese Academy of Social Sciences.

"So for those brokerages, they usually loosen their risk management once they get the license. But they should be aware that bond issuance is always with risks and the brokerages are not free from such risks."

"The fraudulence of Sealand Securities is typically carried out through entrusted bond holding agreements. But those agreements are very risky which could lead to defaults. We should enhance supervision in such agreement making and to lower risks," said Shui Ruqing, Chairman, China Central Depository & Clearing Co..

"Another lesson we draw from the Sealand Securities case is that supervision is becoming more complicated as more non-financial institutions are engaging in the debt issuance process. How to supervise such behavior has become an urgent issue for us to attend to," said Yin Jianfeng, Vice Director, Finance Research Inst., CASS.