Obscure China Bond Trades With Returns Exceeding Official Rates Enters Hong Kong

China’s cash-strapped local governments are caught in a bind. The financing vehicles they’ve used for decades need to roll over a mountain of debt. Investors are demanding high interest rates, but openly offering them risks making future borrowings far more expensive. To get around the dilemma, some of the local government financing vehicles, commonly known as LGFVs, are making extra undocumented payments to investors when selling bonds. The practice, which regulators cracked down on in mainland China, has migrated to Hong Kong. During the second quarter, dozens of LGFVs sold $3.3 billion of bonds in the city by offering returns…