(Yicai Global) July 6 -- Chinese property developer Yango Group has a submitted document to interbank market regulators after the company’s bonds faced short selling, people familiar with the matter told Yicai Global.

Yango suspects the parties involved in the transactions of manipulating the market and tunneling the benefits, the people said. The Shanghai-based company declined to comment.

The document, stamped with Yango’s company seal, that alleges the bond price manipulation has been circulating on social media this week. It showed abnormal transactions related to the yuan-denominated bond 17 Yango Group MTN001 traded in China’s interbank market at 5.23 p.m. on June 28. The transaction yield reached 15.5 percent, deviating by 756.99 basis points from the previous deal.

Four minutes later, another deal with a transaction yield of 7.94 percent took place. The total turnover of the two transactions was CNY80 million (USD12.4 million). Prior to the unusual trade, the coupon rate of 17 Yango Group MTN001 was 7.4 percent.

The deals triggered fluctuations in the Yango’s US dollar bonds issued overseas, which slumped USD1 to USD2. It was not until June 30 when the company announced a USD10 million buyback of the principal debt that prices eased.

The document showed that Yango suspects parties involved in the transactions of manipulating the market and transmitting the benefits. But several traders and analysts said “malicious shorting” or profit transmission is hard to define.

Bond traders who spoke to Yicai Global speculated about the so-called short selling and arbitrage, saying that institutional investors may first conduct short selling (borrow US dollar bonds to sell them) in the overseas market and deliberately sell the bonds of the same issuer in China at a lower price, causing market panic. That would lead to a decline in the US dollar bond market, so they can profit from the previous short-selling transactions.

“If this is real, the short sellers have already achieved their target judging from the market’s performance,” one trader noted. “But there is no clear evidence and there is no regulation regarding such deals.”

“The company is adopting a ‘wait-and-see’ approach and its reaction will depend on the regulators’ findings,” a person familiar with the matter told Yicai Global.

Cross-border arbitrage is rare. Because of the different liquidity of the offshore and onshore markets, and the different structure of investors and their diverse understanding of the same news or policies, there is often a spread in pricing. When a risk event strikes, the spread may widen, leading to an opportunity for arbitrage, according to traders.

Editors: Liao Shumin, Peter Thomas