Hong Kong-Shanghai Bourse Link Spurs Convertibles: China Credit

China Premier Li Keqiang
Li Keqiang, China's premier, is seen on a camera viewfinder as he delivers a speech in Boao, China. Premier Li Keqiang’s policies to stimulate growth and strengthen market forces in the world’s second-largest economy are laying the groundwork for Chinese shares to rally, according to ING Groep NV. Photographer: Brent Lewin/Bloomberg

April 23 (Bloomberg) -- China’s convertible bonds are rising at the fastest pace in 11 months as the linking of stock exchanges in Hong Kong and Shanghai fuels speculation that shares will advance.

The S&P China Convertible Bond Index rose 2.1 percent in April, set for the biggest monthly gain since May 2013, as debt that can be exchanged for stock fell 0.6 percent in the U.S., a Bank of America Merrill Lynch index shows. The Shanghai Composite Index of equities has rebounded 5 percent from this year’s low on March 12, bolstered by a plan to allow a combined 23.5 billion yuan ($3.8 billion) of daily cross-border trading in the two exchanges.

“The rally in Chinese shares is driven by ample liquidity and market expectations on policies to spur economic growth,” said Qin Han, a Beijing-based bond analyst at Guotai Junan Securities Co., China’s third-largest brokerage by assets. “The Shanghai-Hong Kong program is another catalyst that may fuel the rebound of China’s stock markets, which will in turn trigger demand for convertible bonds.”

Premier Li Keqiang’s policies to stimulate growth and strengthen market forces in the world’s second-largest economy are laying the groundwork for Chinese shares to rally, according to ING Groep NV. Credit Agricole CIB said now is a good time to invest in the Shanghai market, trading 66 percent below its 2007 peak, before an economic rebound kicks in later in the year.

Issuance Falls

Limited supply is also increasing the allure of convertible bonds, according to Dorian Carrell, a Singapore-based fund manager who invests in Asian convertibles at Schroder Investment Management Ltd. Issuance of the securities in China declined by 22 percent this year from the same period of 2013, in line with a 23 percent slump in overall corporate debt sales, according to data compiled by Bloomberg

Guotai Junan forecast the Shanghai Composite will rise 400 points, or 19 percent, in the second quarter from April 10, when the China Securities Regulatory Commission said investors could trade 10.5 billion yuan of Hong Kong-listed stocks a day through the Shanghai exchange, and 13 billion yuan of mainland shares through Hong Kong. The program is due to start in about six months and the flows are subject to caps of 250 billion yuan and 300 billion yuan, respectively.

“Increased volumes will clearly benefit the underlying equities and therefore the convertibles,” Schroder’s Carrell said. “The move should increase the attractiveness of a Hong Kong listing for non-Chinese, potentially boosting the number of convertible issuers over time.”

ICBC, Sinopec

China LotSynergy Holdings Ltd. plans to issue HK$580 million ($75 million) of 5 percent convertible bonds due 2019, according to an April 9 filing to the Hong Kong stock exchange. Zhejiang Zheneng Electric Power Co. got board approval to sell as much as 10 billion yuan of six-year convertibles, according to a March 31 statement to the Shanghai stock exchange.

Guotai Junan favors convertibles sold by Ping An Insurance Group Co., Industrial & Commercial Bank of China Ltd., Bank of China and China Petroleum & Chemical Corp., Qin said.

The yield on Sinopec’s 1.3 percent convertible bonds due Feburary 2017 slumped 107 basis points this month to 1.52 percent, Shanghai exchange data show. The stock traded today at at 5.26 yuan, above the conversion price of 5.13. The yield on Ping An Insurance’s 0.8 percent notes due November 2019 slid 93 basis points to 1.84 percent. The shares trade at 39.06, compared with a conversion price of 41.33 yuan.

Slowdown, Defaults

The yield on five-year government bonds declined nine basis points this month to 4.07 percent yesterday in Shanghai, the yuan weakened 0.4 percent in the period to 6.2437 per dollar and the Shanghai Composite Index rose 1.7 percent to 2,067.16.

Concern policy makers will miss 2014’s 7.5 percent economic growth target, coupled with the aftermath of the nation’s first onshore default in March, have dragged down the China stock gauge by 2 percent this year while comparable indices in India and Indonesia rallied more than 7 percent. Gross domestic product increased 7.4 percent in the January-March period from a year earlier, the weakest pace in six quarters, official data show.

Chinese policy makers accelerated construction projects, boosted spending on railways and eased funding restrictions for financial companies as part of efforts to counter the slowdown and there are signs of a pickup in capital inflows.

Yuan positions at domestic financial institutions accumulated from foreign-exchange sales, a gauge of incoming investment, rose 189.2 billion yuan in March following a 128.2 billion yuan increase in February that was the smallest since September, central bank data showed on April 18.

“There are overhyped concerns in China,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole. “We are bottoming out now and the economy will be growing even faster than the 7.7 percent at the end of the year. Equities follow a trend in GDP one or two quarters in advance so it’s a good time to buy.”

To contact the reporters on this story: Kyoungwha Kim in Singapore at kkim19@bloomberg.net; Yanping Li in Singapore at yli16@bloomberg.net

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; James Regan at jregan19@bloomberg.net James Regan