China’s fixed income market has continued to thrive and flourish despite recent volatility in global fixed income markets. Relative to other Emerging Markets, investors and traders have been benefitting from the People’s Bank of China (PBOC)’s accommodating policy stance, reaping gains from onshore RMB-denominated Chinese government bonds.

 

To establish foreign investor access and capital flows, the Chinese bond market has undergone significant, structural transformation in the past years. In addition to harnessing Hong Kong as a strategic hub to connect international and Chinese bond markets, fixed income experts attending a recent China Bond Market Forum stressed the necessity of data to form the foundational infrastructure for fixed income markets.

 

A key establishment that blends these two strategies together was the Bond Connect in 2017: a breakthrough development that has allowed international investors to invest in the CIBM through mutual access arrangements for trading, custody & settlement where they would not have been able to before.

 

During our Trader’s Table in Hong Kong, a roundtable series this time jointly organized by MarketAxess and Bond Connect Company Limited (BCCL), we explored the evolution of the Chinese fixed income market and discussed how market participants are creating financial infrastructure to support this transformation.

 

Access to China for offshore investors
 
MarketAxess has been a BCCL partner since 2021 to offer a seamless trading channel that allows market participants—including market makers, investors and traders—access to the China Interbank Bond Market (CIBM), and for them to trade in China’s $17-trillion onshore bond market efficiently on a single interface.

 

Supporting this structural transformation is the partnership between PBOC and the Hong Kong Monetary Authority (HKMA) who together plan to widen foreign institutional investor access to the onshore repurchase agreement (repo) market.

 

When looking at the evolution of China’s bond market over the years, the partnership between MarketAxess and BCCL plays a key role in helping investors and traders stay on top of the latest fixed income trends and developments.

 

Increased trading volumes
 
Armed with the ability to trade in 28 local currencies, including Chinese Yuan Renminbi, Hong Kong Dollar, South Korean Won and more, the average daily trading volume of Emerging Markets on the MarketAxess platform topped US$2.9 billion in 2023, almost double from 2018. Meanwhile, the momentum on Bond Connect continues to reach new heights. The official inclusion of the RMB into the IMF SDR basket, the inclusion of Chinese bonds into all three major global bond indices and the increasing convenience of investing and trading in CIBM, have all spurred growth in trading activity. In fact, the 822 investors trading in the Northbound Bond Connect scheme had boosted yearly trading volume by 24% to RMB 9.97 trillion in 2023, representing an average of RMB 40 billion traded daily. 

 

Overcoming the challenges
 
Market makers, bond traders and investors are observing increasing momentum in onshore Chinese Government Bonds, especially short-term ones at 1 – 1.5-year tenor, who are starting to be bought by overseas investors. As traditional trading behaviors change rapidly, where buying and holding are no longer the only strategies deployed by market participants, Trader’s Table attendees shared that they are looking for a one-stop trading and data platform to help them make better decisions. This comes from the fact that in a low-yielding market like China, where every 10 basis points count, traders need to see better settlement efficiency and more favorable trading costs. Attendees also welcomed the introduction of repo collateralization and deemed that as an important breakthrough for the market to mature.