Donald Trump’s recent visit to China brought with it all the symbolism of the new world order. America, a country in terminal decline, stood in an overcoat in the Forbidden City and gushed failure from every pore. Trump talked up his business deals and lambasted his enemies, but abandoned his anti-China rhetoric and still came away with few real concessions.
No, this was the embodiment of terminal decline. Let’s imagine the acrid smell of decay: however much this self-confessed germaphobe and compulsive hand washer might have tried, and however pleasant the fragrance worn by Mrs Trump, the stench was there for every nostril to pick up.
I recall interviewing former US Treasury Secretary Larry Summers in Singapore a few years back and asking him whether America was in terminal decline. I wanted someone in the know to tell me the prognosis in black and white, as it were.
He demurred, rather aggressively, but all I can recall from his response was that it was defiantly bullish. Mr Summers may yet, though a long shot, end up as chairman of the Federal Reserve, where I suppose that bullish bella figura will translate into an appropriate hawkishness towards US interest rates.
Anyway, to return to the subject of the new world order and China’s place within it, I was focused on the subject front and centre last week when I attended a one-day bond conference in Singapore.
THE LIST OF superlatives around China’s economy and financial markets is still growing. That does not necessarily force submission on its arch rival, but there’s no doubt that China’s debt markets are on track to overtake the US in the years to come.
China’s bond markets currently sit at number three in terms of outstanding volume, behind those of the US and Japan. But just 2% of China’s domestic bonds are held by foreign investors, versus 30% for US debt (China takes up quite a big slice of that thanks to its chunky holdings of US Treasuries) and 10% for Japanese bonds.
The project from China’s point of view is to increase that number, into the low double digits, just using back-of-the-envelope thinking. And the key to that project, which kicked off around four months ago, is the so-called Bond Connect, which allows foreign investors access to China’s domestic bond markets via Hong Kong.
A gentleman who helps facilitate Bond Connect trades described the frenetic pace of trading on the platform at that conference as “miraculous”.
Certainly the Rmb200bn-odd of secondary bond trades put through Bond Connect since it opened for business is eye-catching, as was the Rmb7.5bn clocked up on the day the system kicked off.
Unlike competing forms of access to the Chinese domestic bond markets such as the QFII quota system, where investor must lay out a detailed investment programme and wait up to a year before they are able to buy paper and trade it, participants in Bond Connect can get clearance to trade within 12 days, without having to lay out a detailed plan.
The 24 dealers within the system were rushed off their feet after opening their doors to business, and you can see why. Bond Connect seems likely to be a devastatingly effective propulsion engine for the Chinese bond markets.
AS CHINA’S MARKETS play catchup with their US and Japanese peers, the perennial complaints that they are under-researched and littered with inaccurate data is likely to melt away.
In the meantime, as far as China’s home-grown investors are concerned, there is a growth engine of formidable power onshore as well. Leverage is increasingly used by onshore investors to control vast positions in China’s local bond markets – as well as in G3 bond markets – and that may yet prove to be the markets’ Achilles heel.
But for now one can only gawp at the Chinese financial authorities’ command of their brief, in terms of design, as well as in market participants’ reaction to it.
The truth is that China has built a bond market almost from scratch within the last 20-odd years. Barring catastrophe, it seems a given that China’s debt markets will become the nulli secundus hegemony within the next 10 years. And that achievement will smell rather sweeter.
