(Bloomberg) -- Chinese stock traders have found a new way to get burned: finding ways around limits on how much shares can move each day.
Some traders are hungry for more even after a monster rally pushed up the CSI 300 almost 6 percent on Monday. One method is convertible bonds that pay a regular coupon and can be exchanged for underlying stocks, but aren’t restrained by rules capping daily gains and losses to 10 percent.
“When the stock market is in a good mood, sharp rising and falling of convertibles may happen,” said Zhongliang Tuo, an investment manager at Cinda Securities Ltd, adding that he doesn’t recommend investors join in trading driven by whims of the market.
Take East Money Information Co., a financial data website with the third-biggest weighting in the ChiNext Price Index. While the stock hit the 10 percent limit on Monday, the company’s convertible bonds that had no such strictures jumped 20 percent.
The bonds snapped their three-day streak of gains on Tuesday, falling 7.1 percent as volume surged. The shares rallied 5.1 percent.
Equity-linked notes from Shenzhen SGD Information Co., a maker of communication equipment, tumbled 26 percent on Tuesday, all but reversing a 36 percent rally the previous day. The shares, which had been limit-up the previous three sessions, fell 0.8 percent.
The surge in the convertibles on Monday “priced in expectations of further upside room for the shares,” Cinda’s Tuo said.
There are precedents to such reactions.
“A surge in certain convertible bonds also happened in 2014-2015, in the A-share bull market,” Yu Jingwei, a fixed-income analyst at CITIC Securities in Beijing, said in a phone interview.
Option activity has also surged on exchange-traded funds tracking mainland Chinese stocks, with the volume of contracts tied to the Shanghai-listed China 50 ETF hitting a record high on Tuesday.
--With assistance from Ludi Wang and Qingqi She.
To contact the reporter on this story: Gregor Stuart Hunter in Hong Kong at ghunter21@bloomberg.net
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Joanna Ossinger, Ravil Shirodkar
©2019 Bloomberg L.P.
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