China City Deconstruction

Onshore bondholders are running for the exits. What do they know that overseas investors don't?
At Closing, March 16th
8.50 HKD

Offshore bondholders in one Chinese company are showing more faith in implicit government guarantees than investors back home. That should concern anyone with an appreciation for the risks embedded in the nation's opaque bond market.

China City Construction's so-called Dim Sum bonds due in 2017 traded in Hong Kong on Monday at about 94.8, for a yield of 10.3 percent. That might look generous considering a change of control may oblige the company to redeem the debt at a price of 101. Until, that is, one looks at another bond sold by the company that traded in the onshore market last week at a yield of as much as 91.4 percent.

China City Construction was owned by the central government until April, when it was sold to Huinong Fund, a vehicle set up by Citigroup, Industrial & Commercial Bank of China, Bank of China and China Construction Bank, among others. The change of control means bondholders can require the company's debt to be repaid right away. 

On Friday, China City Construction filed with the Hong Kong Stock Exchange a call for holders of 2.5 billion yuan ($383 million) of Dim Sum bonds, offshore debt denominated in yuan, to have a private chat before May 25. The meeting will address whether any bondholders will request immediate repayment.

The prospect of such action prompted China City Construction to take the unusual step of writing to the central bank seeking an explicit statement that the government will continue to support the company and prevent any default, the Financial Times reported. 

The divergence in onshore and offshore prices underlines the importance of perceived government support in China and the confusion that can result when it appears to have been removed. In a May 6 statement, China City Construction insisted it remains healthy, saying its new controlling entity is financially stronger and has higher credit ratings. The company asked bondholders to consider carefully whether to exercise their early redemption rights.

Bond prices suggest investors have doubts. When there is a change of control, debt prices usually move to the level at which they are to be redeemed. That's not happening.

Fear and Loathing in Shanghai

The yield on China City Construction bonds traded onshore breached 91 percent in a trade on May 10

Source: Bloomberg

Trading in China's bond market is thin so investors can't make a definitive judgment based on the onshore price. Given the extreme values at which the bonds traded last week, however, it seems that local investors are the most spooked. 

When you see the guy who lives closest to the nuclear plant packing up his stuff to leave, do you sit idly on your porch, or make haste to do likewise? Global investors may want to take a second look at those Dim Sum bonds.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Christopher Langner in Singapore at

    To contact the editor responsible for this story:
    Matthew Brooker at

    Before it's here, it's on the Bloomberg Terminal.