What bothers me about the following article from Lex/Financial Times is the conclusion "If this is an omen for the Asian high-yield market to come, it is an encouraging one." This is a typical example of viewing something black and calling it white. The reason why this is going on is that the Chinese bankruptcy system simply will not work. The banks and well connected, probably government owned, firms are using Chinese bank loans to bail out their troubled companies in order to protect China's bond ratings. Perhaps in the short run this helps foreign bond holders, but it keeps alive zombie companies and increases the NPLs on the books of China's banks. This is exactly what happened last time. After the collapse of GITIC, the government bailed out all the other ITICs because international bank lending froze. This is just an attempt to keep up the illusion that Chinese bonds are safe investments. They are only safe investments if the government encourages (forces) banks to bail out these companies at the eventual cost to the banking system and its depositors. At some point in time when the debts get to large, the banks will no longer lend and foreign bond holders will get nothing

Published: June 10 2009 09:29 | Last updated: June 10 2009 12:05

Offshore investors in Asian corporate bonds have always had a masochistic streak. Because they are typically lending to the holding company, rather than the operating company – where the assets are – they have never been in any doubt they would come off much worse than onshore creditors if push comes to shove.

And they would be prepared for pretty rough treatment along the way. One landmark case was Asia Pulp & Paper. When it hit the skids eight years ago, the Indonesian-controlled firm kept paying interest to local investors while freezing payments to foreign creditors. Free-roaming hedge funds seeking tremendous yields have got used to this uneven treatment, and tried to price it in.

As troubles mount for issuers this time round, the usual inequalities are surfacing. Take Asia Aluminum, the housing-frame maker that entered voluntary liquidation in March. According to liquidator Ferrier Hodgson, bondholders may get 19 cents on the dollar, while Chinese banks will probably recoup all they are owed.

But what is different now is that issuers are using public market tenders to try to resolve situations before default. APP simply shut off foreign bondholders, leaving lawyers to fight it out; in Asia Al’s case, it launched a tender offer to buy back the debt. The offer may have been a low one – 27 cents in the dollar, when the market bid-offer spread was 20-30 – but the fact it was made at all was a step forward. Two other mainland Chinese bond issuers – Shanghai Real Estate and China Glass – have followed suit with tender offers at big discounts to face value. Dealers across Asia are sifting about a dozen standing orders from issuers in varying states of distress. If this is an omen for the Asian high-yield market to come, it is an encouraging one.