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Convertible bonds

new focus of

China share market

SHANGHAI: China will in 1996 encourage the issue of convertible bonds as a way to revive its ailing share markets and help companies with long-term projects raise cheap capital, analysts and brokers said on Tuesday.

The bonds, which carry the option of being converted into shares, are attractive to investors as they involve less risk than buying stocks and are a more convenient way for Chinese firms to raise funds than making rights issues, they said.

At a meeting this month, China's State Council (cabinet) said it would choose some companies with the proper conditions to issue convertible bonds this year on a trial basis.

"Convertible bonds are attracting huge interest in the Shanghai securities market," said Wang Chenghe, a broker with the China Securities Co.

"There is a lack of variety of instruments on China's securities market and convertible bonds will be a good choice as a new trading instrument for investors," Wang said.

Only one firm has issued such bonds on China's stock market -- in early 1992 Baoan Enterprise Group Co 0009.SZ issued 500 million yuan ($60.2 million) convertible bonds in Shenzhen.

But only 2.7 percent of the total were converted into stocks by investors because, analysts said, the company had poor management, picked the wrong time to issue and the conversion conditions were inflexible.

In annual reports published last week, two companies said they planned to issue convertible bonds -- Mindong Electric Group Co 0536.SZ and Tonghua Dongbao Medicine Co 600867.SS.

Tonghua Dongbao became the star performer on the news, jumping 1.07 yuan or 14.67 percent to 8.36 yuan, on volume of 5.7 million shares, on the day after the report was issued.

Brokers said there were several factors that make the time ripe for the issue of convertible bonds.

"Companies issuing such bonds can raise funds without a short-term increase in the number of its outstanding shares," said one broker.

"Many firms are interested in such bonds, especially those which have projects that are expected to result in good earnings," he said. "Convertible bonds avoid a reduction in earnings per share in the short term," he said.

"A company will offer a lower interest rate on convertible bonds than on ordinary company bonds," said Zhang Jun, an analyst with the China Guo Tai Securities Co.

"The China Securities Regulatory Commission is expected to approve the issue of convertible bonds by several companies in 1996, but the pace will not be very fast," he said.

Another factor is that investors are increasingly averse to rights issues because they think companies use them to avoid paying cash dividends and because of complicated legal problems arising from the different categories of shares in China, brokers said.

Rights issues also dilute the earnings per share.

The Shanghai-based Business News said last Saturday that it was becoming more and more difficult for listed firms to raise money only by making right issues.

One analyst said that convertible bonds were becoming more attractive on expectations of a cut in bank deposit interest rates in the second half of 1996.-Reuter