A Chinese investment bank is under pressure from more than 20 financial institutions to honour a bond financing deal agreed by a rogue employee who allegedly forged the company’s official seal. 

The incident spotlights the risks that leveraged bets on rising Chinese bond prices will inflict losses on financial institutions as a market correction runs its course. Chinese bond prices fell sharply last week after the US Federal Reserve indicated a faster pace of monetary tightening than markets had expected. Capital outflows from China are also pushing up interest rates as liquidity drains out of the mainland banking system. 

Before the recent correction, borrowed money used to buy bonds had been a key factor driving a bull market in Chinese bonds. But the People’s Bank of China has allowed short-term borrowing rates to rise in recent weeks, in what analysts say is an effort to squeeze leverage out of the market.