BloombergQuint reported on Feb. 14 that the CSI Convertible Bond Index dropped 5.2% in the week after several popular China bonds collapsed, indicating a significant cooling of China’s convertible bond market. 

Zuo Dayong, an analyst at Industrial Securities, said in a note on Feb. 15 that the values of convertible bonds were “excessively high” in 2021. As a result, the Chinese convertible bond index rose 18% even as the stock market fell last year. He explained that China’s weakening economy and regulatory hurdles had prompted investors to seek refuge.

Convertible bonds allow bondholders to earn interest and have their principle repaid while also having the opportunity to convert their bonds into stocks if stock prices rise. Unlike stocks, they are not subject to daily trading limitations or price ceilings.

The most recent downward trend came after a spike in China’s credit data in January. As a result, investors were concerned that the central bank would be less compelled to ease further, which caused recent drops in the regime’s bond prices. As a result, China’s benchmark CSI 300 index entered a bear market at the end of January.

Zuo said that the conversion premium tumbled by an average of 4% points on Feb. 14, the lowest level this year by far. The index measures how much money investors are willing to pay for the chance to acquire related firms.

Reuters reported on Feb. 9 that the convertible bond index slid to seven-month lows that week, down roughly 7% in just about two weeks due to the drop in the values of these bonds.

Many bonds were trading below their par value of $15.51, indicating a reduction in the underlying stock values. The situation also reflected concerns about default and demand for the bonds.

Li Chao, a retail investor in Hebei province, elaborated, “Falling below the par value means investors have concerns about a company and its current stock price, worrying there could be potential problems for the company.”

BloombergQuint nonetheless indicated that the rapid retreat might provide a decent entry point for confident investors.

Analyst Zuo said, “There is limited downside for bond markets in China given the lack of suitable investment targets in the market. In the mean time, some growth stocks may see their prices bottom in the near term.”

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