Chinese convertible bonds rally to decade-high on surging demand
The CSI convertible bond index has rallied about 8 per cent in 2025 to trade near a decade high. That easily beats the stock benchmark's 2.1 per cent advance so far this year, while Chinese government bonds have returned just 0.9 per cent in local-currency terms.
Investor appetite for the hybrid notes has surged, thanks to easing credit rating risks on the securities and an equity market rebound. A share price rally in banks and small-caps, the sectors that dominate the convertible bond index, has further buoyed demand for such securities that can be exchanged for equity.
'Non-convertible bond investors can no longer overlook the standout performance of this asset class,' said Wesley Chen, head of fixed income at Ubp Investment Management Shanghai. 'For foreign funds looking to build positions in China but lacking strong conviction in the equity market, these bonds offer a compelling alternative, providing exposure to equity upside with lower volatility and drawdowns.'
Convertibles typically offer investors lower yields than conventional debt, but provide an option to exchange into shares if certain conditions are met. The recent economic backdrop has made such notes appealing to both issuers, who can raise funds at a lower cost, and buyers, who expect stock momentum to continue.
Two exchange-traded funds tracking the CSI convertible bond index saw the biggest monthly inflow last month since January, Bloomberg-compiled data show.
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A drop in supply from early redemptions and maturities has also supported prices. The outstanding amount of such securities in China fell by over 55 billion yuan (S$9.9 billion) in the June quarter to dip below 650 billion yuan, according to Sinolink Securities. That compares with over 730 billion yuan at the end of 2024.
The supply squeeze has been particularly pronounced in banking convertibles, long favoured by investors for their low volatility, strong credit ratings and better liquidity. The surge in the sector's shares has helped fuel early redemptions. The CSI 300 Bank Index has gained 17 per cent this year.
To some, the rally presents an opportune time to realise gains. Convertible bond investors should 'consider locking in some profits', given uncertainties facing the stock market from tariff negotiations and earnings, Ruizhe Yin, a Sinolink Securities analyst, wrote in a note.
Yet the tight supply will likely continue to support the price of convertibles. There has been no new bank convertible issuance onshore since late 2022, according to data compiled by Bloomberg. Shanghai Pudong Development Bank's 50 billion yuan note, which matures in October, will likely exacerbate the situation.
'Market appetite is strong, but supply is tight,' said Wei Li, head of multi-asset investments at BNP Paribas Securities (China). 'Chinese bank convertibles are trading like premium scarcity plays, yet visibility on future issuance remains low. That's keeping valuations elevated.' BLOOMBERG
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