China Opens Up Bond Market with Tradeweb
Tradeweb is offering international investors a gateway to China’s onshore bond market as the authorities aim for domestic issues to be included in global bond indexes.
Last week in the equities market, index provider MSCI said it would include the first set of China mainland companies in its MSCI Emerging Market benchmark from next year. Most overseas investors cannot buy China A-shares, which trade on the Shanghai and Shenzhen Stock Exchanges, and are about two-thirds of the market capitalization of the Chinese market.
Jan Dehn, head of research at emerging markets specialist Ashmore Investment Management, said in a note that as a result investors should assign a larger probability to China’s bond market, the third largest in the world, being included in the main global and emerging market fixed income indices. The onshore Chinese bond market has a market value of approximately $9 trillion according to the Bank for International Settlements.
“Prospects of greater international participation in onshore markets will improve further once global bond index providers finally include Chinese local currency government bonds in their own index products,” added Dehn. “This remains a key strategic objective for the Chinese authorities and will hopefully happen in the next year or so.”
Tradeweb Markets, the electronic fixed income, derivatives and exchange-traded fund platform, said today it had become the first offshore trading platform to connect with China Foreign Exchange Trade System, and give offshore investors access to Bond Connect.
Last year in equities the Chinese authorities launched the long-awaited link between the Hong Kong and Shenzhen stock exchanges allowing any investors to trade mainland Chinese stocks via Hong Kong, and vice versa, without needing a license or an approved quota, following on from Shanghai-Hong Kong, and opened up the China Interbank Bond Market. BNP Paribas said at the time that the removal of aggregate quotas from the two Stock Connect schemes and access to CIBM resulted in 85% of China’s capital markets becoming quota-free.
In May this year the People’s Bank of China and the Hong Kong Monetary Authority announced the launch of Bond Connect, which is similar to the Stock Connect schemes.
Today, Tradeweb said it is the first trading platform to offer a gateway for the Bond Connect initiative. Investors will be able to send requests to the market for all CIBM cash bonds, removing the need to execute though an agent bank. In addition, investors can settle trades via global custodians thanks to an arrangement provided by Hong Kong regulators. Tradeweb said this will make it easier and more convenient to access onshore liquidity providers, and allow for greater pre-trade price transparency.
The first phase of Bond Connect will be Northbound trading, allowing overseas investors to trade Chinese bonds electronically through Tradeweb, and is slated to begin next month.
Lee Olesky, chief executive of Tradeweb Markets, said in a statement: “We believe the liberalization of the Chinese bond market is a landmark event, and Tradeweb is excited to be acting as the first access link for this initiative”
Ashmore’s Dehn said MSCI’s inclusion of Chinese stocks and the future inclusion into debt indexes should ensure that hundreds of billions of dollars flow into the China over the next few years.
Dehn believes China’s economy will be two to three times larger than the United States by 2050 and therefore, Chinese financial markets will also become much larger than US markets.
“Given China’s likely rise to dominant status in both economic and financial terms over the next couple of decades it is clear to us that markets will eventually have to benchmark their global fixed income and currency exposures against Chinese government bonds and the renminbi,” added Dehn. “Long-term investors such as pension funds, insurance companies and sovereign wealth funds should already be building positions in the Chinese markets, regardless of the pace of index inclusion.”
Nicholas Borst, an analyst in the Federal Reserve Bank of San Francisco’s Country Analysis Unit, said in a report in March that China’s central government bond market is expected to grow due to continuing economic development, financial deepening, and ongoing government deficit spending.
“The combination of a large market with a variety high quality sovereign and quasi-sovereign issuers means that China should be a good match for institutional investors seeking to diversify,” he added.
However Chinese bonds have not been added to benchmark indices due to capital controls, restrictions on foreign investors, poor hedging tools, lack of liquidity, and a nascent domestic ratings industry. Bloomberg has launched two modified versions of its indices that include China, and Citi has added Chinese bonds to three existing indices, but not the bank’s World Government Bond Index.
Borst said analysts have projected that full inclusion in the above indices could lead to as much as $250bn in new inflows.
“The current half measures may result in fewer inflows as investors wait for China to be added to the main indices,” he said. “Nonetheless, it’s clear that the Chinese government bond market is becoming more connected to the global debt market and will play an increasingly important role in global bond benchmarks in the future.”
The priority should be to ensure continuity of cross-border services and avoid market fragmentation.
The order book was the largest for a sovereign green transaction.
RBC Capital Markets paid more than $800,000 to resolve charges that it engaged in unfair dealing in munis.
Electronification of the municipal bond market also presents a large opportunity.
The success of Northbound trading showed electronic execution is way forward for the bond market.