This Bond Shows China Investors Don’t Put Premium on Accounting

Transparent accounting may be one of the topmost concerns of bond investors in developed markets. When it comes to China, well, things aren’t so straightforward.

Take the case of a Chinese textile company that has faced questions on its ownership, troubling foreign observers. When discrepancies arose after Shandong Ruyi Science and Technology Group Co. sold a five-year dollar bond in June, the securities predictably tumbled. But not for long, and they’re now trading a stone’s throw from where they issued. Here’s the sequence of events:

  • Shandong Ruyi in an offering circular for its $200 million of notes indicated it had a link with a state-owned enterprise, which are sometimes assumed to have the government’s backstop. The document said Yinchuan Tonglian Capital Investment Operation Co., a local government financing vehicle, as its No. 2 shareholder as of the end of last year, with a 26 percent stake.
  • When that LGFV, Yinchuan Tonglian, the following month distributed an offering circular for its own dollar bond sale, it said it had no equity interest in Shandong Ruyi as of end-2016.
  • (Yinchuan Tonglian told Bloomberg in a written response to questions that it had transferred the stake in July 2016 to Ningxia Ruyi Ecological Textile Co., an entity 99.5 percent owned by Shandong Ruyi.)
  • Shandong Ruyi’s bonds dropped to as low as 88.6 cents on the dollar on July 18.
  • Days later, the securities rebounded to 92.4 cents, after Shandong Ruyi claimed in a statement that Yinchuan Tonglian remains the “legal owner” of the 26 percent stake, without presenting further documentation. They traded Wednesday at 93.3 cents. Shandong Ruyi declined to comment on questions on the ownership discrepancy in July, and calls this week went unanswered.

“After some initial jolt, its secondary performance shows investors remain unfazed,” Sean Chang, Hong Kong-based head of Asian debt at Barings Asset Management Ltd., said in an interview. The episode serves as a…

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