Chinese bond issue gets whopping bids of $1 trillion

China is witnessing a boom in issuances of convertible bonds, with one such issuance last month shocked the markets as it was oversubscribed a mind-boggling 140 times and received an unprecedented $1 trillion in bids.

The amount received, $1 trillion, is equal to the market capitalisation of Apple or Microsoft — the two most valuable companies in the world.

According to British media reports, Shanghai Pudong Development Bank sold $7 billion in convertible bonds last month and investors placed more than $1 trillion worth of orders, making this 140-time oversubscribed offering.

Analysts said that this is a symptom of liquidity sloshing around the world and fixated investors chasing returns to ridiculous levels.

Signifying a boom in convertible bonds in China, this year to date, Chinese companies have issued a record $40 billion in convertible bonds, up more than 80 per cent from the full-year total in 2018, according to Dealogic.

Analysts said that convertible bonds are the new Chinese bubble as they provide a mix of debt and equity. While new issue oversubscriptions are common in recent years, the latest absurd oversubscription by 140 times reflected a big surge in issuance of such equity-linked instruments in China.

With the stock markets on a roll, the hybrid instrument in China has become more attractive to investors. The reason why the Chinese government is promoting convertible bonds is a way to rein in financing done off-balance sheet, or through a fragile shadow banking sector.

Like all markets, the performance of the bond depends on the quality of the issuer with investors typically preferring large banks and big blue-chip companies over small and mid-sized issuers at a time when China's smaller banks are either hit by bank runs.

Chinese convertible bonds carry special features that set them apart from those in the US or Europe. One differentiating factor is that conversion levels can be reset after a bond is issued, significantly increasing the chances it will switch into stock.

( With inputs from IANS )