China’s bond market becoming ‘too big to ignore’

As regulators line up new products, China is eyeing the introduction of interest rate swaps and repo trading on its Bond Connect platform with foreign participation continuing to soar.

By Jonathan Watkins

Zaiyue Xu, CEO of the China International Payment Service (CIPS), said as of the end of August, 2114 foreign investors had now entered the second largest bond market in the world. “In recent years China’s bond market has accelerated its opening up and we have achieved some remarkable results,” he said.

“We have 988 foreign investors registered in the CIBM direct scheme and 1244 under Bond Connect – an increase of 28% and 147% respectively over the past year.”

Xu added that foreign institutional investors contributed RMB 624.1 billion in transactions in August, a year on year rise of 63%.

China’s Bond Connect programme allowing international investors access to mainland China’s interbank bond market went live in July 2017, with the likes of Deutsche Bank, BNP Paribas and HSBC facilitating trading from the outset.

The initiative was part of widespread market liberalisation strategies including the adoption of international settlement standards and the scrapping of quotas.

“I think maybe we will add more trading products on Bond Connect, including interest rate swaps and repo. Then we will provide more trading functions,” said Wei Wu, deputy general manager and board director of Bond Connect Company and deputy director of the RMB Market Department at China Foreign Exchange Trade System.

“We will also be promoting the integration of Bond Connect RQFII, QFII… and we will introduce competition in the FX hedging solutions for overseas investors.”

Jinyu Zhu, head of agent trading division, global market department at Industrial and Commercial Bank of China (ICBC), said, “China is too big to ignore. This year’s activity is already equal to the whole amount of 2018.”

The speakers at one of the opening panels at Sibos highlighted the Chinese bond market still has room to grow, given that foreign custody holdings remain at 2.5%, lower than the average of 20% in most economies.