Beijing-based fixed-income analyst Li Xiao (pseudonym) expressed surprise at the rapid contraction of the convertible bond market, noting that the outstanding balance has decreased by more than 50 billion yuan in the first five months of the year. As a key instrument bridging the stock and bond markets, convertible bonds have long been favored by institutional and individual investors for their unique "downside protection and upside potential" characteristics. However, this market is currently experiencing a significant wave of contraction.
According to Wind data, as of May 18, the total outstanding balance of convertible bonds in the market was only 5031.53 billion yuan, a substantial decrease of over 50 billion yuan from the beginning of the year. Compared to the peak of 8758.59 billion yuan at the end of 2023, the market has shrunk by more than 42%, with a cumulative reduction exceeding 3700 billion yuan. Overall, 72 convertible bonds have been delisted so far this year, with 57 exiting due to forced redemption and 15 due to maturity settlement.
The wave of forced redemptions is closely linked to the strength of the equity market. When the underlying stock price meets predetermined conditions, issuers forcibly redeem unconverted bonds at an agreed price, prompting most investors to convert their bonds into shares to realize profits, thereby removing the bonds from the market. Among the 57 delisted convertible bonds, those linked to stocks in the basic chemicals sector were the most numerous, totaling 13 and accounting for 22.8%. The electronics sector followed with 11, representing 19.3%. These two sectors together accounted for 24 bonds, or approximately 42.1% of the total. Combined with 7 from the machinery and equipment sector and 6 from the pharmaceuticals and biotechnology sector, these four industries contributed 37 bonds, or about 64.9% of the total, forming the main force behind this round of forced redemptions.
Several industry sources indicated that the contraction in the convertible bond market is not accidental but results from the combined effects of issuer actions, investor behavior, and market mechanisms driven by structural trends in the equity market. The accelerated pace of convertible bond exits this year has been particularly notable, while a lag in new supply has further intensified market contraction pressures. This structural gap has pushed convertible bond valuations to historically high levels, with the trend of high volatility expected to continue.
The core driver of this exit wave is the structural strength of the equity market. Zhai Tiantian, Deputy Director of the Research and Development Department at Orient Jincheng, stated that convertible bonds are highly correlated with their underlying stocks. The sustained recovery of the equity market this year, especially the strong rally in the tech sector, has caused the underlying stock prices of many convertible bonds to trigger forced redemption clauses, directly accelerating their exit.
Zhai further analyzed that, supported by policies, China's technology industry has seen a significant recovery in sentiment. The equity market has exhibited a structural trend centered on technology growth, with sectors like the AI industry chain, humanoid robots, and semiconductors gaining momentum. This has led to related convertible bonds meeting forced redemption conditions and subsequently delisting. Issuers facilitate conversion through forced redemptions, completing financing at low cost, which reflects market mechanisms and underscores the convertible bond market's role in supporting technological industry development.
For instance, several A-share listed companies, including Si Te Qi, Jialian Technology, Ruifeng High-Tech, Yingfeng Environment, Wanshun New Material, and Wangneng Environment, have recently announced that due to their issued convertible bonds triggering forced redemption clauses, they will exercise early redemption rights. They will redeem all bonds not converted by the close of the redemption registration date at the bond's face value plus accrued interest.
The mechanism of forced redemption is straightforward: when the underlying stock price remains above 130% of the conversion price for a sustained period, the issuer has the right to forcibly redeem unconverted bonds at face value plus interest. Listed companies generally welcome this clause because the coupon rate of convertible bonds is much lower than that of ordinary bonds. Forced redemption helps companies eliminate debt repayment pressure, optimize financial statements, and achieve low-cost equity financing by leveraging stock market enthusiasm.
Li Yong, Chief Fixed-Income Analyst at Soochow Securities, pointed out that the decline in the outstanding balance of convertible bonds is not merely due to a contraction in issuance volume. The deeper logic lies in listed companies actively seizing market opportunities to implement debt-to-equity conversions through forced redemptions, thereby achieving deleveraging. For listed companies, convertible bonds are essentially a debt financing tool. Implementing forced redemptions during periods of rising valuations and favorable market conditions allows companies to systematically convert existing debt into equity capital within a golden valuation window, optimizing their capital structure and debt levels.
The intent of market-driven deleveraging is clearly reflected in the data. Wind data shows that among the 72 convertible bonds delisted this year, 57 exited due to triggering forced redemption clauses, accounting for 79.17% and corresponding to an issuance scale of 53.677 billion yuan. The remaining 15 exited due to bond maturity, accounting for 20.83% and corresponding to an issuance scale of 18.716 billion yuan. Thus, among the two main exit methods, forced redemption currently dominates. However, bond maturity remains a non-negligible factor in the scale contraction.
Zhai Tiantian noted that 2019 to 2021 were peak years for convertible bond issuance, and with typical issuance terms of six years, more bonds will enter their maturity windows in the next two years. The maturity scale for 2026 has already reached 85.582 billion yuan, further expanding from 2025, and is expected to exceed 100 billion yuan in 2027 and 2028. In contrast, insufficient new convertible bond supply struggles to fill the gap left by exits.
On the supply side, as of May 18, there were 41 new convertible bond proposals involving a scale of 52.008 billion yuan. This not only fails to cover the maturity volume for the year but also cannot fill the void created by forced redemptions. Additionally, the process from proposal to listing typically takes about six months, indicating a significant lag in new supply. Under the dual pressures of "accelerated exits and slowed supply," several institutions predict that the convertible bond market's contraction scale could exceed 100 billion yuan in 2026.
The ongoing exit wave has not only significantly reduced the scale of the convertible bond market but also profoundly altered its internal structure and pricing logic. Many industry observers believe that convertible bond valuations have entered a new phase dominated by supply contraction and enhanced equity characteristics.
Yang Yewei, Chief Fixed-Income Analyst at Guosheng Securities, stated that behind the convertible bond exit wave is primarily the promotion of conversions by a strong stock market, coupled with limited new issuance—a phenomenon observed in previous bull markets. If the stock market continues its bullish trend, the contraction trend will persist. He also cautioned that as the outstanding balance of convertible bonds decreases and demand for allocation increases, valuations may remain elevated.
Zhai Tiantian also believes that with resilient demand and continuous supply contraction, convertible bond valuations will remain high. The underlying reason is the strong demand for allocating bond market funds to equity assets amid expectations of a positive long-term equity market outlook. As an instrument combining offensive and defensive attributes, convertible bonds have solid support on the demand side.
However, Zhai also warned that the structural gap caused by continuous supply contraction has already pushed convertible bond valuations to historically high levels, implying limited room for further upside. The market is likely to maintain volatility within a high range. She also observed that as convertible bond valuations rise, their relative attractiveness compared to equities declines, prompting some flexible funds to shift towards equities. However, constrained by asset category requirements, some funds can only access the market through convertible bonds, forming a supportive force.
Li Yong further noted that this exit wave essentially represents a supply-side structural reform in the convertible bond market. Although the total volume of convertible bonds is decreasing, new issuances are increasingly concentrated in manufacturing and hard technology sectors. This "replacement of old with new" has marginally improved the market ecosystem.
Since the implementation of new refinancing regulations, the popularity of new convertible bond proposal tracks has diverged significantly, with the automotive parts and semiconductor industries being the most active, involving 5 and 4 companies, respectively. For example, several hard technology companies, such as Sugon and Zhongchuang Zhiling, have launched large-scale refinancing plans, with funds directed towards cutting-edge areas like AI computing power construction, new energy vehicle parts R&D, and high-end intelligent manufacturing.
Li Yong acknowledged that frequent forced redemptions have made investors aware that conversion opportunities for convertible bonds have clear time windows. This helps curb irrational high premiums and encourages convertible bond prices to realign with the fundamentals of the underlying stocks. Although short-term pain may occur, in the long run, convertible bonds will return to their essence of "downside bond protection and upside elastic returns." The key to future convertible bond investment lies in in-depth research into the fundamentals of the underlying stocks and precise mastery of the博弈 surrounding convertible bond terms.
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