Chinese Convertible Bonds Rocked by Once-Unthinkable Defaults

Jimmy Yang believed he was making a boring but safe investment when he bought convertible bonds of China Grand Automotive Services Group Co. in May. The country’s 801 billion yuan ($119 billion) convertible debt market was long an oasis of small but sound returns, providing shelter even during last year’s brutal market downturn.

But by mid-July, the 38-year-old lost half of his 1 million yuan investment as tighter capital market rules led to panic selling in small-cap stocks and their related bonds, including Grand Auto’s.

“I’d told myself it’s safe because it had an AA+ rating,” said Yang, a finance ...