China leads Asia's bond markets' rise in trading volume

China continues to drive growth within its debt market, in spite of the negative image conveyed by property developer, Evergrande Group.
China leads Asia's bond markets' rise in trading volume

A version of this article was first published in FinanceAsia.

Exposure to Asia’s bond markets is now considered crucial by many mainstream global investors.

MarketAxess, a global electronic trading platform for fixed income securities, has seen trading volumes increase 60% year-on-year growth in the region so far. The electronification of Asia’s capital markets has helped drive interest from investors as well as dealers.

“We’re starting to see a huge acceleration in adoption (of electronic platforms) and see this playing out a lot more in Asia, than anywhere else in the world,” Craig McLeod, head of emerging markets at MarketAxess Holdings, told FinanceAsia in an exclusive interview.

The China Connection

In September, MarketAxess was one of the latest platforms to gain access to Northbound trading, China’s interbank bond market. Only two other platforms – Tradeweb and Bloomberg – allow Bond Connect trades. McLeod considers this the missing piece of the firm’s international puzzle.

“I think that this is transformational. Investors who have not had access to China, but trade everything else, get to see, feel and touch China. We can introduce them to the market as well as enable them to trade a whole range of product suites from our single venue, which is just set to increase the velocity of trading into the region,” said McLeod. China’s onshore bond market has grown to approximately $15 trillion in outstanding debt and constitutes the second largest in the world behind the US, according to the International Capital Market Asssociation (ICMA). Fitch Ratings reported that by December 2020, foreign investors had increased their holdings of onshore bonds to Rmb 3.3 trillion ($515 billion), up more than Rmb 1 trillion ($156 billion) year-on-year.

The People’s Bank of China and the Hong Kong Monetary Authority (HKMA) launched the Bond Connect programme in July 2017, giving overseas investors access to the mainland’s fixed income markets. According to Bond Connect data, by the end of August this year, it had onboarded more than 2,700 investor accounts, with an average daily turnover of Rmb 24.25 billion ($3.8 billion).

With reform to China’s capital markets, especially with its electronification and the recent development of Bond Connect, McLeod says that Asia is no longer 15 to 20 years behind global trading. In fact, China is now the fastest growing region for MarketAxess.

Evergrande’s debt debacle

But the financial trouble of Evergrande could jeopardise the appeal of Chinese debt among international investors. Owing more than $300 billion in liabilities, Moody’s downgraded its outlook on China’s property sector to negative on September 1, in order to reflect the worsening liquidity conditions as a result of Evergrande’s distress. Over two months later, the company has been teetering on the edge of default, but has so far avoided bankruptcy. In the past four weeks, Moody’s has taken 32 negative rating actions on developers.

McLeod, however, is unfazed by Evergrande’s troubles and thinks it is “potentially overdramatised”. From his perspective, where volumes are concerned, investors are not turning away from Chinese dollar debt but are instead navigating the market with a more discerning approach, selecting the higher-quality corporate opportunities from those available.

“We're not seeing a flood of money leave. People might try to better understand the circumstances of other developers in China, but it's like anything - it's a default, it's a single entity, and it's just a bump in the road,” said McLeod.

Inflation, inflation, inflation

Asia more broadly, continues to attract interest. MarketAxess data shows 16 consecutive months of debt investment into the Asian region as of September, but this seems to be peaking due to the hawkish tone of central banks and widespread inflationary concerns.

From Australia to the Eurozone, countries around the world are facing price increases.

“I think the key thing with rising inflation is how these (Asian) jurisdictions manage it in terms of policy, given they haven't really had to contend with it for some time. And there's no real there's yardstick for investors to look at. They understand it. They've seen Brazil, Mexico, Brazil, Russia, and others do this, year-in, year out. But in certain jurisdictions, particularly in Asia, they've not seen how the central bank policymakers manage it,” said McLeod.

Inflation has been high on central banks’ agendas for past months. The Bank of England (BoE) surprised investors on November 4 when it decided to hold back on raising its benchmark interest rate, after repeated warnings that it planned to act in order to stem rising inflation expectations.

Federal Reserve Chairman Jerome Powell meanwhile, has blamed supply chain issues for persistent inflation, but expects conditions to level off in the next year. US consumer prices hit 6.2 percent in October, the highest in over 30 year

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