"Chinese junk bonds: The red badge of investing courage"

Suntech, anyone?

"The combination of factors that have brought Kaisa's offshore bonds to the brink of disaster are shared, at least in part, by all of China's dollar-denominated debt.

First among those is the lack of security that debt holders have as a result of China's restrictions on foreign currency borrowing, which largely prevent private companies from directly borrowing from foreigners. The workaround for would-be dollar bond issuers is relatively simple. Chinese companies, unable to issue foreign currency bonds themselves, create offshore subsidiaries that issue debt then invest the funds in their domestic parent as equity. The upshot of this arrangement is that bondholders don't lend money to the operating company.

"In the event of a default, offshore bondholders may take control of an offshore holding company, but they have no direct security over the underlying onshore assets and it would be difficult for them to enforce control of onshore operations," said Sandra Chow, an Asian high yield analyst at CreditSights Ltd. "They would also be excluded from any onshore bankruptcy proceedings. [...]

As recently as early 2014, such risks seemed largely technical. Until then Chinese corporate bonds, including offshore debt, were thought to be tacitly underwritten by Beijing -- part of a policy designed to facilitate Chinese companies' access to debt. It was a state of affairs that effectively gave all Chinese corporate bonds the equivalent of a sovereign rating and made investors reckless."

Why do the Chinese need a law that makes it so that foreign creditors recover nothing in a restructuring? Any guesses?