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High noon for regulators in China's Wild West bond market 

July 21, 2016

Nathaniel Taplin & Samuel Shen, Reuters

A dispute between investors and the underwriter of a bond issued by Evergreen Industries is showing up regulatory failings that need fixing if China is to sustain newly robust inflows of foreign capital into local bonds.

As China's economy slows and its currency weakens under pressure from domestic capital flight, policymakers have opened up the country's corporate bond markets to foreign investors to help keep credit flowing.

Foreign holdings of onshore Chinese bonds rose by a record 40.9 billion yuan ($6.12 billion) in June, data from China's main bond clearing house show, surpassing the flow into bonds from commercial bank wealth management products for the first time since the height of the equity bubble in May 2015.

Foreigners still own less than 2 percent of China's bond market, but these rising flows could stall if investors, already nervous about yuan depreciation, fear unruly defaults.

In the past, failing firms were nearly always bailed out, usually with the assistance of local governments, so bondholders got their money in the end. Read more

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