(Yicai Global) March 7 -- China's record-high number of convertible bond subscribers should be cautious as conversion premiums are becoming excessively high amid low stock prices, according to an industry insider. 

China has not yet had a convertible bond default but that does not mean that it could not happen in the future, a manager of a fixed-income fund in eastern China said to Yicai Global.

The number of subscribers of new convertible bonds worth CNY8 billion (USD1.3 billion) issued by Bank of Chengdu reached 12.1 million, the highest ever for any mainland issuer of such debt instrument that can be converted into equity, according to recent data from the southwestern lender and the Shanghai Stock Exchange. The resulting total value was CNY11.94 trillion (USD1.89 trillion).

Currently, no convertible bond is trading below face value, said the fund manager. Investors are rushing to buy these notes to avoid risks caused by the stock market downturn, the source added.

Enthusiasm is showing no signs of fading. Each convertible bond issuance has exceeded 11 million subscribers this month while the baseline was over 10 million last November, according to data from Wind.

This year has been awful for Chinese stocks. The SSE Composite Index has dropped more than 6 percent to 3 396,73 since early January. The SZSE Component Index has slumped more than 14 percent to 12 673,46. Shenzhen's ChiNext Price Index is more than 18 percent down at 2 654,40. The SSE Star 50 Index has declined by over 8 percent.

But shape-shifting securities are becoming costly for their issuers. Bond prices are exceeding the corresponding equity prices so conversion premiums are rising. For an investor, the difference in value, including the conversion cost, was already 27 percent as of March 4, remaining at a relatively high level since 2018, according to public data.

Prices of all of the 17 convertible bonds that have been publicly issued in 2022 have risen, Yicai Global learned. The top gainer is Ningbo-based auto parts manufacturer Kbe Electrical Technology whose bond prices have climbed 92 percent. But some increases are milder. Industrial Bank's note has edged up less than 20 percent in value.

Investors should be looking at convertible bonds that have relatively moderate premiums and issuers whose performance shows proof of recovery or is beyond expectations, the fund manager suggested.

Editors: Xu Wei, Emmi Laine, Xiao Yi