As explained rather frequently here on ChinaFund.com, it is difficult to find even one metric based on which China is not dominating. For example, at this point in time, the world’s largest banks are Chinese and on a similar note, China has the world’s number two equity market, let’s not even talk about “the usual suspects” such as GDP (position #2 worldwide) or PPP GDP (position #1 worldwide). Moving on to the topic at hand, the exact same principle is valid with respect to the bond market, with China’s $1.2 trillion+ market enabling it to occupy a more than respectable third place globally.
Does this mean China excels in all of these departments?
Simply put… no.
Time and time again, another aspect we have explained revolves around the fact that in pretty much all cases, China’s dominance is to a significant degree a function of its 1.4 billion population. We have actually dedicated an article to just that, a proper explanation of the phenomenon in question, an article which can be accessed by clicking HERE.
The bottom line is that as impressive as China’s dominance may be and while there has indeed been tremendous progress across every imaginable economic dimension, this status quo should not mislead us into thinking that “cutting edge” is the operative term when it comes to pretty much anything China-related.
When it comes to the GDP dominance argument and the idea that it can be used to paint a picture of a China at parity with the West, it is easy to combat it by looking at the less than impressive GDP per capita numbers, which place China much closer to poorer nations than the US (with the Chinese GDP per capita roughly 6.5 times lower than the US one). The same way, China’s immature equity market is overly dependent on unsophisticated retail investors and has under-performed in recent years… the list could go on and on.
Does the “immaturity” framework also apply to the Chinese bond market?
In a nutshell, yes.
As large as China’s bond market may be, we need to understand that on the one hand, as mentioned previously, this is to a significant degree a sheer function of China’s size. On the other hand, we need to take a look under the proverbial hood of China’s financial system and we will quickly realize that it tends to be bank-based rather than capital market-based. As an example of a primarily capital market-oriented system, we have… of course, the elephant in the room, the United States.
Does China have becoming a primarily capital market-based economy as well as its goal?
As Premier Li Keqiang pointed out, China does have every intention of putting together a multi-tiered and competitive capital market as well as promote bond/future markets in an effort to maximize results when it comes to the funding dimension but this doesn’t mean China’s financial system will cease being bank-oriented anytime soon. It simply means that in our case, the bond market will play a more important role than in the present.
The end goal is, as some readers might have guessed by now, a more and more meaningful inclusion of Chinese bonds in the global ecosystem. From the RMB sovereign and policy bank bonds which have been included in the 2019 Bloomberg Barclays Global Aggregate Bond Index to goals which involve taking this beginning of a trend to the next level, there is a noteworthy amount of capital at stake and China knows this all too well.
Furthermore, we need to understand that the stakes are higher than just aspects pertaining to capital generation. A goal of Beijing’s has been enabling China to become a genuine safe haven destination so that in the event of let’s say a global financial calamity, investors seek refuge in Chinese bonds the same way they do when it comes to US Treasuries. Needless to say, this is easier said than done and in the absence of a remarkably liquid bond market, the goal in question represents nothing more than a dream. For now, Chinese bonds are most definitely not perceived as safe haven assets. On the contrary, investors tend to seek other jurisdictions whenever they notice global storm clouds gathering and as such, China itself still represents a risk-off jurisdiction.
All in all, despite the fact that the very first Chinese sovereign bonds were issued all the way back in 1954, we can safely state that its bond market is still in the “growing pains” stages, with a wide range of issues which need to be tackled before parity with the proverbial West can even be discussed: default rates, legislative predictability, competent as opposed to overly-optimistic rating agencies and the list could go on and on.
Furthermore, it is worth noting that discussions pertaining to China’s bond market are taking place in an international context which revolves around interest rates being at record lows in the West, with them even having ventured in negative territory over in Japan and the European Union. On top of the issues that have been discussed on this article, potential exogenous shocks such as interest rate normalization across the board in the West need to also be taken into consideration (as far-fetched as they may seem in the context of 2020’s realities).
Still, in light of how high the stakes are, we have every reason to believe that the Chinese bond market represents a top priority for the authorities, with the many opportunities this inevitably brings about. Should you require assistance when it comes to being on the receiving end of just that, we would be more than happy to put our collective expertise at your disposal. For more information about our company, visit ChinaFund.com’s About Us section or head on over to our Consulting section to find out what we can do for you and/or your organization. Or, of course, get in touch right away by sending a message through the Contact section of our website.