Huatai Fixed Income: Rapidly growing Hong Kong convertible bond market

Huatai Fixed Income pointed out that Hong Kong convertible bonds have advantages such as low financing costs, high issuance efficiency, flexible regulatory environment, and the ability to meet foreign currency demand. Therefore, in recent years, many large Chinese enterprises have issued convertible bonds in Hong Kong, leading to a rapid rise in the Hong Kong market. Although the Hong Kong convertible bond market started early, its expansion relative to A shares is relatively late. In addition, its highly institutionalized and primarily private placement mechanism characteristics have led to a relatively small stock size and significantly lower liquidity than A shares. In terms of pricing, some Hong Kong convertible bonds can be directly compared with the same underlying stock options. In addition, Hong Kong's market trading mechanism is completed, allowing investors to engage in various strategies such as pure long, Delta-neutral arbitrage, and credit hedging. In terms of terms, most Hong Kong convertible bonds do not have downward revision clauses, redemptions and puts are highly flexible, the coupon rates are also low, ultimately resulting in Hong Kong convertible bonds being more debt-like and having a relatively higher default rate.