China’s Bond Traders Battle 1-in-5,500 Odds to Boost Returns

Demand for Chinese convertible bonds rises as fixed income investors look to boost returns

Source: Bloomberg

Shut out of a world-beating rally in equities, China’s fixed income investors are chasing the next closest thing.

The battle for equity-like returns is driving up interest in the country’s nascent convertible bond market. Showing just how coveted the securities have become, an offering from Citic Bank Corp. this month saw orders outstrip supply by 5,500 times. Issuers have raised $13 billion from the debt this year, surpassing the value of initial public offerings more than four times over.

That’s because fixed-income investors — restricted by their mandates — are struggling to match the performance of funds that are allowed to buy into China’s stock rally. The Shanghai Composite Index is up 23 percent since January, putting equity investors on track for their best quarterly return since 2014. That compares to a 3.3 percent gain for a gauge tracking credit, and 16 percent for convertible bonds.

“It’s a good time to buy convertibles,” said Zhongliang Tuo, a Beijing-based investment manager at Cinda Securities Ltd. whose funds aren’t permitted to own equities. “Returns will be much higher than traditional fixed-income products in the medium to long-term.”

The crisis of confidence that defined Chinese equity markets last year has been replaced by optimism as investors cheer the arrival of a new head at the securities regulator who’s seen as more supportive. Policy makers are endorsing a focus on growth and stimulating demand, as opposed to deleveraging the economy. Prospects for a resolution to the country’s trade war with the U.S. and a stable yuan are also helping.

Bookbuilding for Bank of Jiangsu Co.’s 20 billion yuan ($3 billion) convertible bond starts Wednesday, according to an exchange filing. Institutional bidders will know by Friday how much they are allocated, while retail investors will find out Monday. Ping An Bank Co.’s 26 billion yuan sale in February was about 1,400 times oversubscribed.

The next big test of investor appetite is Bank of Communications Co.’s planned 60 billion yuan convertible issue, which could be the largest such offering China’s domestic market has ever seen.

The China Securities Regulatory Commission has given the green light to about 60 companies to sell convertible bonds by the end of June, which would take the tally of upcoming issuance as high as 200 billion yuan, according to data from Northeast Securities Co. as of Jan. 7. That would be twice the amount raised in all of 2018.
“The regulator, investors and issuers are all positive toward convertible bonds now,” said Hao Deng, chief executive officer at Beijing GEC Asset Management Ltd.

Demand will remain robust as long as China’s equity rally continues, according to Cinda’s Tuo. While signs that authorities may want the gains to slow down triggered one of the worst sell-offs in years last week, Chinese stocks bounced back above a key level on Monday and added another 1.1 percent by Tuesday’s close.

“The atmosphere in the stock market is good at the moment,” said Tuo. “This all means it’s worth paying close attention to the convertible-bond market.”