Two Years, $280 Billion in Trades – China’s Bond Connect Celebrates Second Anniversary with Record Volumes and New Features on Tradeweb

Bond Connect, the mutual bond access programme developed by the People’s Bank of China (PBC) and the Hong Kong Monetary Authority (HKMA) to facilitate increased foreign participation in the Chinese Interbank Bond Market, celebrated its second anniversary yesterday amid record trading volumes on the Tradeweb platform.

That the two milestones are occurring at the same time is not a surprise. Interest among foreign investors in the world’s second largest bond market has been growing steadily. This is mainly thanks to a combination of increased appetite for exposure to Chinese markets, the inclusion of Chinese government and policy bank securities in the industry benchmark Bloomberg Barclays Global Aggregate Index, and rapid-fire growth of new trading technologies that make it possible to enter the Chinese bond market at scale.

Tradeweb has had a front row seat to this growth since day one, when it became the first offshore trading venue to link to Bond Connect in July 2017. Since then, $280 billion in total volume has been traded on our platform from institutions representing a total of 19 different jurisdictions. Trading activity reached record levels in June of 2019, when an average of $1.1 billion in Bond Connect trades were processed each day of the month on Tradeweb.

Within that total volume, offshore investors are snapping up a mix of policy bank bonds, certificates of deposit, government bonds and commercial paper, with an average tenor of 6.5 years.

But this is still just the beginning. There is roughly $12.9 trillion outstanding in Chinese bonds in the marketplace, according to Q4 2018 data from the Bank for International Settlements, but only about 2.4% of domestic debt is held by overseas investors. However, based on the momentum and the trends we’ve seen so far, that percentage could change quickly.

The allure of access to Chinese bonds is an obvious factor driving that change. Both in terms of diversification and growth potential, China’s bond market promises a host of unique asset allocation opportunities.

But the key driver of this growth is coming from technological development that creates a more attractive and efficient access channel to China’s bond market. This includes operational efficiencies that allow international investors to trade Chinese bonds using familiar, standardised, and automated protocols and workflows.

For example, Tradeweb offers its multi-dealer request-for-quote mechanism for effective price discovery, a streamlined onboarding process that incorporates required due diligence and operational infrastructure directly into the platform, and block trading capabilities, which make it possible for offshore investors to trade on behalf of multiple funds in one block trade. Buy-side firms trading Chinese bonds on Tradeweb also benefit from access to a deep pool of liquidity, and efficiency thanks to end-to-end electronic workflows.

Moreover, Tradeweb continues to innovate on the Bond Connect platform. Our Automated Intelligent Execution (AiEX) technology, which empowers traders with rules-based, data-driven logic to systematically send, receive, execute, and process trades automatically, was introduced on Bond Connect in September of 2018 and continues to see greater adoption among investors in Chinese bonds. In fact, just this week, we’ve introduced two new enhancements that promise to improve workflows even further.

The first is to include live streaming liquidity from onshore dealers. With this new release, all Bond Connect participating dealers will be able to stream indicative prices on Tradeweb via the China Foreign Exchange Trade System (CFETS). This will optimise pre-trade transparency and better inform counterparty selection.

We’ve also introduced single sign-on access to iDeal, the official messaging service developed by CFETS, which now allows clients to communicate directly with onshore dealers prior to sending requests-for-quote from the platform.

Ultimately, what this all adds up to is a seamless workflow across Tradeweb, enabling market participants to use the same tools and automated protocols they are familiar with from other institutional asset classes, when accessing the Chinese bond market. That level of familiarity and ease-of-access has been a significant factor in the growth of the platform thus far, and will spur new adoption as investors continue to look east for new sources of liquidity.

Together, this focus on seamless, familiar workflow and simplified regulatory approval processes has allowed Bond Connect to rapidly instigate growth in overseas investing in China’s bond market. Though it was not the first initiative to market, it has become one of the most popular access channels for international investors, because it was built with a level of institutional scalability that allows it to support large scale trading activity now and into the future.

It is a privilege we do not take lightly at Tradeweb to have been able to work so closely with the PBC, HKMA, CFETS and Hong Kong Exchanges and Clearing – both before and after the creation of Bond Connect – to develop a solution that has truly revolutionised access to new pools of liquidity for global investors. The opportunity to work on the ground floor of this project, from the initial blueprinting and design stage to the current phase of widespread growth, has enabled us to form a deep understanding of China’s bond market and amass a level of localised expertise that would have been impossible to acquire any other way.

We remain committed to that same spirit of constant innovation and process improvement, as we turn the corner to many new milestone achievements ahead for Bond Connect and the Tradeweb platform.