Improved electronic trading diversifies investment into China

Published on 21 January 2021

Appetite for access to Chinese debt markets is well distributed around the rest of the world, and as Chinese bonds are included in more indexes the level of inbound investment activity is increasing significantly.

Accessing the market can be more complex, but as electronic trading grows, a more diverse investor base will be able to gain access to Chinese assets in more efficient ways. Li Renn Tsai managing director and head of Asia at Tradeweb, outlines the different access routes that have opened and what effect these will have for traders.

Dan Barnes Welcome to Trader TV, I’m Dan Barnes. Today we’re speaking with Li Renn Tsai, Head of Asia, and Managing Director at Tradeweb, about the way that both buy-side and sell-side trading desks can access China’s bond markets officially using the latest electronic channels. Li Renn, welcome to the show.

Li Renn Tsai Thank you very much for having me.

Dan Barnes So tell us, what are the different ways that investors can use to access China’s bond market today?

Li Renn Tsai The two main ways are CIBM Direct that was launched in 2016 and Bond Connect, which Tradeweb actually helped design and implement, and that was launched in July 2017. Just for a little bit of context, Dan, trading activity is fairly evenly divided between the two access channels.

Dan Barnes That’s very interesting. And has there been any significant changes over the past 12 months?

Li Renn Tsai When it was launched in 2016, CIBM Direct was a voice only channel and as of August 2020 investors can trade electronically via CIBM Direct Link, which is our electronic offering in CIBM Direct.

Dan Barnes And what sort of appetite is there for access?

Li Renn Tsai There is actually a pretty good appetite for access. For example, from Tradeweb’s perspective, the investor base is spread out across Asia Pacific, Europe and in the Americas. And this investor appetite we’ve observed has really been driven, amongst other things, by the inclusion of Chinese bond markets into some of the major global bond indices. For example, China was included into Bloomberg Barclays Global Agg in April 2019, into JPMorgan’s GBI-EM Index in Feb 2020, and most recently it has been announced that China has conditional inclusion into FTSE’s WGBI starting October 2021.

Dan Barnes I know that there’s a bedding in period for the Bloomberg index as bonds are gradually added; are all of those now completed?

Li Renn Tsai We’re still in the middle of both Bloomberg Barclays and JPMorgan. In terms of Bloomberg Barclays, they had 20 months starting April 2019, in terms of JPMorgan it’s 12 months and in terms of FTSE, the proposal is for 12 months from October 2021.

Dan Barnes We expect to see liquidity in certain bond issues that are included within indexes increase, so we can expect to see the pattern of liquidity growth continue over the next 12 months then?

Li Renn Tsai Oh, absolutely. I think the kind of activity that Tradeweb has seen in our China access channels has grown significantly over the years from when we got involved in July 2017. Back then, you know, we saw on average about two hundred million dollars worth of trades a day in US dollars. And I’m happy to say that as of November 2020, that volume has grown to about one point four billion US dollars a day.

Dan Barnes Wow, that’s fantastic growth. On that point, what role do market operators play in helping investors access China?

Li Renn Tsai Tradeweb’s goal is to make our client’s China bond access experience and workflow similar to their other experience trading G10 goverment bond markets on Tradeweb. Investors can use Tradeweb to access China’s bond market and enjoy the benefits of electronic bond trading, such as operational efficiency for our pre- and post-trade STP, price transparency through dealer indicative streams, and execution certainty from electronic RFQ to multiple onshore dealers. We also actually play an important role as a feedback conduit between our offshore investors and onshore Chinese stakeholders, such as dealers and regulators. To give you one example, Tradeweb worked very hard to introduce the concept of electronic block trading and allocations to the Chinese bond market, which is something that was required for index inclusion.

Dan Barnes Now that’s very good, great evolution. How would you say that Tradeweb’s China fixed income access actually evolved itself?

Li Renn Tsai What Tradeweb is doing continuously is to unify the trading experience in the different Chinese bond market access channels. So, for example, we were the first to introduce electronic bond trading for CIBM Direct in August 2020 so that now investors can trade electronically in a very, very similar fashion in both CIBM Direct and Bond Connect. We continue to roll out new features; for example, we’ve extended the settlement period from T+3 to T+10 to account for holidays, and we’ve also worked to improve our block trading functionality so that the number of allocations can go from 50 to 99 to encourage more investor participation.

Dan Barnes Historically, there were various models that firms had to use, such as the QFII investor model, to access China’s markets. Now that has changed, do you see trading into China becoming much more efficient for the buy-side trading desk?

Li Renn Tsai Oh, absolutely. It has become much more efficient because it has moved from voice to electronic trading. That really started with the introduction of Bond Connect in 2017 and now with CIBM Direct Link. Therefore, we’ve also seen the adoption of electronic trading go up and as a result, our China access channel volumes have increased from two hundred million average daily trading volume in July 2017, to one point four billion average daily trading volume in November 2020.

Dan Barnes And do you think end investors who the buy-side traders are working on behalf of; is that making a difference to their access in terms of the way their portfolios can be constructed using Chinese assets?

Li Renn Tsai I think the real difference has come with the inclusion of China’s bond market in the various different global bond indices: Bloomberg Barclays, JPMorgan’s EM index and now starting October 2021, FTSE’s WGBI. That has really driven investor and asset owner behaviour.

Dan Barnes With more securities within indexes what would be your expectation for potential volume growth and growing investor appetite over the next 12 months?

Li Renn Tsai I think we’ll see continued investor interest in China, continued growth in investor index. For one thing, the inclusion of China into FTSE’s WGBI will start an entire new set of investors – a new pool of money – to come into China. And we’ll also see a more diverse investor base. Because of index inclusion, different types of asset managers will start to allocate into China

Dan Barnes Li Renn, thank you so much, that’s been fantastic.

Li Renn Tsai Thank you, Dan.

Dan Barnes I’d like to thank Li Renn for his expertise and, of course, you for watching. To catch up on our other shows, or to subscribe to our newsletter, go to tradertv.net and etftv.net.