At the risk of skipping a lot of (extremely entertaining - a highly recommended read about the innards of corporate shell structures amd shareholder rights) detail, the story boils down to 1) the common observation that laws are only as useful to you as your ability to get them enforced, 2) sometimes even very rich and able people can have a lot of trouble enforcing laws, in a rightful case, against someone determined who knows to cleverly play the legal system.
"Local-currency emerging-market bonds sound like they’d be pretty illiquid. Packaging them into an exchange-traded fund might make them seem more liquid, but if someone wanted to get out of a big ETF position all at once, they might find that the liquidity isn’t there. By selling the ETF they’ll cause a fire sale of the underlying bonds. Right?<p>And every actual event undermines it! The bond index underlying EMLC was … um … up 0.45 percent yesterday. Obviously a $321 million bond trade is not a particularly big one, but still, it’s a record for this ETF, and it just didn't have a whisper of an impact on bond market liquidity."<p>Only if you are assuming that who ever is holding the bonds now will want to just outright dump it and thus exacerbating the 3 month trend on that particular ETF… not to mention you have to ignore that there could be liquidations in portfolios (FX/Cash/Swaps/Equities/ other derivative contracts) going on to re-balance/cover losses as well as ignoring how central banks from India to Indonesia have been quite vocal in their worries…
Or can you? If they ignored the suit so far, then there's probably a good chance they'll just stop travelling the the U.S., and then we'll see if Chinese courts enforce this or not...