Convertible Bonds Leading Market Amid Gains in Yuan, Stocks: China Credit
China’s convertible debt is outperforming the rest of the bond market, rising 11 percent this quarter, as stocks rally and the yuan strengthens.
The S&P China Convertible Bond Index gained 2.9 percent this month and 8.3 percent in October, the most in a year. Benchmark measures tracking conventional corporate and government notes declined since the end of September, while the Shanghai Composite Index of shares surged 17 percent. The yuan jumped yesterday the most since a dollar peg ended in July 2005 on speculation faster appreciation will be tolerated before Group of 20 leaders meet this week in Seoul.
The fastest growth among the world’s major economies is helping attract funds, with the Shanghai index posting the biggest gain in Asia the past month and the yuan advancing. Fullgoal Fund Management Co. is among investment firms setting up funds for convertible bonds, debt that can be exchanged for shares, even as the government steps up efforts to limit the amount of speculative capital entering the country.
“If I was an overseas fund manager, I would find all possible ways to put money into yuan assets,” Yang Guibin, a portfolio manager at Fullgoal, which has 58.6 billion yuan ($8.8 billion) of assets under management, said in a Nov. 8 interview in Shanghai. “There is huge pressure for yuan appreciation. With such a severe crackdown in the property market, the inflows will have no choice but to go to the stock market, benefiting convertible debt.”
Debt Quotas
The State Administration of Foreign Exchange will tighten management of banks’ foreign-debt quotas and introduce new rules on their currency provisioning, the regulator said yesterday in a statement on its website. The government tightened down- payment requirements this year for real-estate buyers, suspended loans for third-home purchases and pledged to speed trials of a property tax that may be rolled out nationwide.
The S&P China Convertible Bond Index advanced 6 percent in the third quarter, beating gains of 1.6 percent for corporate debt and 0.8 percent for government notes. Shanghai’s benchmark stock index rose 11 percent and the yuan appreciated 1.4 percent.
The nation’s convertible bonds returned 3.57 percent last month, compared to a total return of 2.17 percent offered by Indian convertible bonds, according to indexes compiled by UBS AG. This was the first time since May that China’s monthly returns for these securities have beaten India’s, the data show.
The yuan climbed 0.06 percent to 6.6403 per dollar as of 2:25 p.m. in Shanghai, following yesterday’s gain of 0.51 percent, after U.S. Treasury Secretary Timothy F. Geithner said Nov. 8 in New Delhi that it’s “overwhelmingly” in China’s interest to allow appreciation. Non-deliverable forwards reflect bets the currency will strengthen 3 percent in the coming 12 months.
Higher Rates
The central bank boosted the yield of its one-year bills yesterday for the second time since raising benchmark interest rates last month, furthering efforts to stem price increases by draining funds from the financial system.
The People’s Bank of China raised its benchmark one-year lending and deposit rates for the first time since 2007 on Oct. 19. Government data will show inflation accelerated to a two- year high of 4 percent in October, according to the median estimate of 28 economists surveyed by Bloomberg.
The yield on China’s 3.28 percent bond due in August 2020 was little changed at 3.65 percent, according to the National Interbank Funding Center.
The extra yield investors demand to hold China’s 10-year bonds rather than similar-maturity U.S. government debt narrowed 2 basis points to 1.17 percentage points, according to data compiled by Bloomberg.
Credit-Default Swaps
Five-year credit-default swap contracts for top-rated yuan- denominated bonds slid 4 basis points yesterday to 86. Credit- default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Demand for convertibles is proving robust amid record issuance. The amount of the securities sold in China should reach 100 billion yuan this year, up from 5.4 billion yuan in 2009, according to Citic Securities Co., China’s largest brokerage.
China’s two largest banks, Industrial & Commercial Bank of China Ltd. and Bank of China Ltd., issued 65 billion yuan of convertibles to shore up equity on their balance sheets. Investors placed a record total of 2.6 trillion yuan in bids for ICBC’s 25 billion yuan offering in September. Bank of China’s 40 billion yuan sale took place in June.
Fullgoal will open a convertible bond fund to investors on Nov. 18. Bosera Fund Management Co., the nation’s fourth-largest asset-management firm which oversees around 190 billion yuan in assets, opened its Bosera Enhanced Convertible Bond Fund on Oct. 28.
Bright Outlook
“Based on the outlook for money supply and the economic recovery, we think convertible bonds are worth investing in,” Guo Jun, a fixed-income fund manager at Bosera, said. He favors convertibles with “relatively low” valuations, such as those sold by banks.
China’s first fund for convertible debt, Xingye Convertible Bond Fund, has returned 10 percent this year, outperforming a 5 percent drop in the Shanghai Composite Index.
“The performance of convertible bonds this year has been phenomenal,” said Tan Weisi, who oversees about 400 million yuan as head of Fortune SGAM Fund Management Co.’s fixed-income department in Shanghai. Valuations are at “a historically low level,” he said.
--Henry Sanderson, Judy Chen. With assistance from David Yong in Singapore. Editors: Garfield Reynolds, James Regan
To contact Bloomberg News staff on this story: Henry Sanderson in Beijing at 86-10-6649-7548 or hsanderson@bloomberg.net Judy Chen in Shanghai at +86-21-6104-3043 or xchen45@bloomberg.net.
To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net Sandy Hendry at shendry@bloomberg.net.
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