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To highlight the influence the bond markets often have on the economy, American political pundit James Carville once famously said he wanted to be reborn as a bond market.

For it is a ridiculously influential market. It has its own jargon, its own mysterious rules and colorful characters. Not everyone knows how the bond market works. Even fewer know how the "junk bond" market - its much riskier, volatile cousin - functions.

Yet over the past few years, the mainland-based property companies have found in Hong Kong a haven to issue such bonds.

Since it was much harder to issue such debt in mainland domestic markets for various reasons, including tighter restrictions and higher borrowing costs, these companies went offshore. They are sometimes known as "non-investment grade", also as "high-yield", to emphasize their higher risk and higher returns.

The sale of such speculative-grade bonds - mostly to international investors such as hedge funds - became a thriving business, thereby helping companies finance their expansion on the mainland. Everyone was happy. Investors got high returns, and companies obtained the necessary capital.

Generally speaking, however, most investors abstain from junk bonds. And some such as pension funds, insurance companies and major banks are banned from investing in them because they are deemed to be not really worth the risk.

But fortune favors the bold as they say. And for those willing to stomach the risk and looking for a high return, these bonds - what with their up to 10 percent or so return - looked very appealing. Thus, they were quickly snapped up by the fund managers.

All was going fine until the sentiment in the otherwise gung-ho market changed abruptly last winter when a scandal befell a Shenzhen-based property developer, the Kaisa Group. The company became the first mainland real estate company to default on its offshore bonds. It gave investors the first taste of a real default.

It also highlighted the risk and unpredictability of such bonds. One lesson that investors also must have learnt from the crisis was that Kaisa, in retrospect, did not seem any more vulnerable than the other companies that were issuing bonds in Hong Kong, at least if their credit ratings were any indication. The company was rated as B1 by Moody's, though it was pushed up a notch by the rating agency to Ba3 in May, 2014.

That is still a non-investment grade rating, which means there was always the likelihood of a trouble. Yet nobody paid much attention, not least the professionals inside the arcane world of the junk bond market.

Of course, when the implosion did take place and the news spilled over into the media, even the public was also subjected to such fancy jargon as "yield-to-maturity", "covenant breach", and even a "hair-cut". (Well, if there is one unintended benefit of financial crises, it is that they offer everyone from taxi drivers to Shaolin monks a course or two in banking - for free, of course.)

Do not sign up for business school yet, because even the savviest of investors were spooked when Kaisa went kaput, with some of them - supposedly at the top of their game - losing their shirts and, with it, their jobs as well.

Yet as they say, time heals everything. And so, it seems, it has done with Kaisa, too. Having since recovered from the incident, it was later acquired by a rival, Sunac China Holdings.

In the meantime, the mainland's real estate industry has also been showing some signs of recovery after years of oversupply and price declines. This indicates that the government's stimulus measures, including rate cuts, are finally working.

So is all well for the Hong Kong high-yield market then? Not really, it seems. Last winter's Kaisa implosion apparently left an indelible scar on the market.

Add to this the slowdown in land acquisitions by the mainland real estate companies and the gradual opening up of domestic fund-raising avenues, which combined have led to a dramatic slowdown in Hong Kong's high-yield bond market. A total amount of offshore bonds issued by 12 major real estate companies in the first half of this year has more than halved year-on-year to $6.7 billion, according to Moody's.

With the mainland opening up its own domestic bond market, a move that would clearly make it easier for the companies to raise funds there, things are not looking particularly promising for the junk bond market in Hong Kong. And it seems all but given that the market will continue to shrink in the second half of this year.

If James Carville were asked for a comment on the offshore bond market in Hong Kong now, he would probably have revised his quote about wanting to be reborn as a domestic bond market.

(HK Edition 08/13/2015 page10)