(Corrects grammar in paragraph 1.)
SHANGHAI, Feb 9 (Reuters) - China’s casino-like convertible bond market is feeling the pressure of regulatory scrutiny and tighter domestic cash conditions, causing bond prices to fall sharply.
Declines in the prices of these bonds, which are hybrid securities with features of both bonds and stocks, have taken the CSI convertible bond index to seven-month lows this week and down nearly 7% in just about two weeks.
Many of the convertible bonds are trading below their 100 yuan ($15.51) par value, reflecting both the drop in the underlying prices of the companies’ stocks as well as worries about default and demand for the bonds.
“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,” said Li Chao, a retail investor in Hebei province.
A convertible bond carries the right to convert the debt into shares in the same company at a certain price, and as such usually offers lower interest payments than normal bonds.
That equity-like nature and the absence of regulation in China for such instruments have led to heavy speculation, particularly from retail investors. Unlike stocks, convertibles are not subject to daily trading restrictions or price limits.
For instance, the listed convertible bond for car dealer China Grand Automotive Services Group traded above its 100 par value for most of the third quarter of 2020 as the stock market surged. But it now trades at 70.59 yuan and has dropped 7% in two weeks, tracking a decline in stocks.
A tightening of regulation has also played a part. The Shanghai and Shenzhen stock exchanges on Friday announced rules to regulate programmed trading in convertible bonds, which come as other rules by the securities regulator took effect.
Some 155 listed convertible bonds, or nearly half of the 342 issues, traded below their 100 yuan issue price on Tuesday, according to data from stock exchanges.
Also spooking investors were emerging worries about a potential convertible bonds default, which would be a first for that market.
Despite tighter regulations, investors still see bargains in convertibles trading below 100 yuan, which they could hold until maturity, receiving both principal and interest payments, provided there is no default.
“If you have some spare money, it’s a definitely good opportunity now to hunt bargains in those bonds trading below 100 yuan,” said Yang Yi, an individual investor from Inner Mongolia.
Reporting by Luoyan Liu, Sam Shen and Brenda Goh Editing by Vidya Ranganathan and Sam Holmes