Chinese Convertible Bonds Entice Investors Extending AI Bets
(Bloomberg) -- Chinese investors' zeal for artificial intelligence-related assets fanned by DeepSeek has spread to convertible bonds, sending a benchmark index to its highest in more than two years.
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The CSI Convertible Bond Index has risen 3.3% this year, hitting its highest since August 2022 on Tuesday and tracking gains in the stock benchmark gauge. Shanghai Runda Medical Technology Co. and Thalys Medical Technology Group, two of the companies expected to benefit from AI integration, have seen their convertibles soar more than 22% and 16%, respectively, this year.
The gains add to the rally convertible bonds have seen since Beijing announced a slew of stimulus measures for economic growth in September. While CBs' lukewarm start to the year portended a stall in the rally, Chinese startup DeepSeek's potential ignited a tech frenzy in late January and changed the landscape on AI bets in China.
'China convertible bonds are still lucrative even with a rebound in recent months,' Liu Yang, a fund manager at HSBC Jintrust Fund Management Co. said, citing 'reasonable' pricing, low government bond yields and AI's impact on the economy that will be sustained. More anticipated government policy support that may spur a recovery will also propel them higher, he said.
A rosier outlook for convertible bonds has rendered something of a haven for fixed-income investors scouring for decent returns in a market with historically low sovereign yields and tepid growth.
Mitigated Risk
The auspicious start to the year follows a string of messy developments for CBs in 2024, including the first-ever default in the onshore debt market and payment warnings. The CSI CB index hit a three-year low in September, while the years-long property crisis in China also loomed over the broader credit market.
But Beijing's stimulus blitz in mid-September that helped revive the stock market also jumpstarted convertibles' rebound that has largely kept up. The CSI CB index ended 2024 about 6% higher, thanks to a rally late in the year.
Some convertibles with riskier ratings also may be looking more attractive given the pool of options for high-yield chasers is narrowing in China. Two issuers rated junk last year — D&O Home Collection Group Co. and Zhangjiagang Guangda Special Material Co. — have seen their bonds nearly double from midyear months in 2024.
'China high yield space has shrunk materially in the past few years,' said Christopher Li, head of Asia credit trading desk analysts at BNP Paribas.
A limited supply of new issues could also help sustain the CB market momentum, Lv Pin, chief fixed income analyst at Topsperity Securities Co., said. Issuance slumped to 38.4 billion yuan ($5.3 billion) in 2024, the lowest in eight years, as authorities began cracking down on who's qualified to issue such debt.
'Credit risk, which triggered a previous selloff across the board, has been mitigated gradually,' Lv said.
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