China's securities regulator has announced measures to restrict convertible bond subscriptions after surging demand for the instruments, prompted by this year's stock market rally, raised concerns over market liquidity.
Under the new measures, announced by the China Securities Regulatory Commission (CSRC) in a statement late Monday, each investor will be permitted to use only one securities account for convertible bond subscriptions. Previously, there were no such restrictions, and the tightening measures come at a time when demand for the convertible bonds has far outpaced supply.
The state-run Securities Times reported Tuesday that some brokerages had used hundreds of securities accounts each to bid for recent new issuance.
Investors see convertible bonds as a low-risk investment option, and hope that converting the bonds to equity could allow them to catch up with the recent rally in Chinese A-shares.
China's blue-chip CSI300 index has risen nearly 23 percent this year, making it the world's best-performing major index, though the rally has been driven more by investor optimism than fundamentals.
Ming Ming, head of fixed income research at CITIC Securities in Beijing, said the tightening measures are expected to help more investors purchase convertible bonds in the primary market.
"The fever for chasing new issuance when it is listed (on the secondary market) is likely to be brought down," he said.
Earlier this month, a 40-billion-yuan ($5.96 billion), 6-year convertible bond issuance by China CITIC Bank attracted orders of 57 trillion yuan.
Excluding the portion of the deal reserved for existing major shareholders, the 10.4 billion yuan public tranche was 5,497 times oversubscribed.
The official China Securities Journal reported earlier in the year that convertible bonds issued by Ping An Bank in January were 1,400 times oversubscribed, with 10.75 trillion yuan worth of institutional money bidding for about 8 billion yuan of securities on sale.
Convertible bonds are a cheaper funding avenue for issuers, who pay a lower coupon in exchange for giving bondholders the option to convert the debt into shares at a set price in the future.
The bonds give investors fixed returns, while the equity link offers the prospect of profiting from a rise in the issuer's share price.
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