Bond Traders Blind-Sided in China

Commentary China’s regulators are putting its $21 trillion bond market at risk. The ham-fisted regime is not only centralizing financial power and reshuffling financial regulatory personnel but is also banning the best brokers and data aggregators from selling real-time price data. Screens where China’s bond prices appeared went blank on Wednesday. Managers at the China Banking and Insurance Regulatory Commission (CBIRC), who surprised markets with the ban, cited legal technicalities and data security. Bloomberg claimed the lack of data and overregulation caused “market mayhem.” Blind-sided traders scurried to the best alternatives, the two regular Chinese messaging apps WeChat and Tencent’s QQ. The traders attempted to get price quotes and close sales in chat groups, a method widely used a decade ago. However, in many cases, the time lag was too great and price data expired by the time sales were attempted. Some overseas traders could not trade at all due to compliance issues as trading in chatrooms is against regulations in many countries. Others traded “blind” without much market information. International traders were at a major disadvantage to their counterparts in China, if the latter had better data. “Chat group quotes are in Chinese mostly,” said a hedge fund strategist to the Financial Times. “If they don’t know Chinese, they don’t get quotes.” One Chinese fund manager told the Financial Times, “The market becomes more unpredictable these days, either flat or with huge volatility.” Trading volumes dropped 30–60 percent. These troubles were added to an already difficult bond trading environment in China, where pricing is difficult due to mostly over-the-counter transactions “where identifying counterparties and accessing quotes have long been headaches for traders,” according to Bloomberg. Also on Wednesday, China’s $740 billion offshore credit market stalled in the context of the Silicon Valley Bank failure. A worker (C) tells people that the Silicon Valley Bank (SVB) headquarters is closed in Santa Clara, California, on March 10, 2023. (Justin Sullivan/Getty Images) “Bloomberg’s China Credit Tracker shows stress in such notes rose to 4 in February from 2 in January, which had marked the lowest reading since data compilation began in 2021,” wrote Wei Zhou and Ailing Tan. “The slide toward more stress came as Chinese dollar bonds lost 1.6 percent last month alongside a global pullback on fresh U.S. interest-rate worries.” “We are going backward in terms of trading efficiency because this will lower secondary transaction volume for sure,” a senior China credit analyst in Singapore commented. “This definitely will spark more concerns on the transparency of China’s regulation.” Bond price data feeds disappeared without official comment, which increased market unease. What information was reported about regulators’ reasoning was second-hand from anonymous market actors. The affected data vendors are private companies at risk of state takeover. Indeed, the only bond data service to work in China at the time of the price blackout was affiliated with the central bank. While regime officials have repeatedly attempted to convince overseas investors that “China is open for business” in an attempt to increase investment and trade, the bond blackout is the latest in a long string of the Chinese Communist Party’s (CCP) arbitrary crackdowns against the market. Last month, billionaire tech dealmaker Bao Fan disappeared, as had Jack Ma in 2020 just before cancellation of his Ant Group initial public offering (IPO). At $34 billion, it would have been history’s largest. The Ant Group headquarters in Hangzhou, eastern China’s Zhejiang Province, on Oct. 13, 2020. (STR/AFP via Getty Images) The regime removed Didi’s ride-hailing app from stores days after its 2021 IPO on the New York Stock Exchange for $4.4 billion, robbing its new shareholders of about 70 percent of its value. China’s draconian COVID-19 lockdowns slowed the entire economy for three years. Concerns about the CCP’s utilization of its tech companies for espionage abroad make it difficult for them to expand and turn them against each other in cutthroat competition for local market share in China itself. Three of the biggest—Alibaba, JD, and PDD—lost $33 billion of market value in a single day last month. As long as the regime limits foreign stock investors to purchasing shell companies called variable interest entities, rather than the companies themselves, and fails to allow full transparency in reporting and accounting, as required of all other companies on U.S. exchanges, China’s economy will be crippled with investor doubt. China’s stocks are down about 15 percent from this year’s high, and in January, overseas Chinese interbank debt fell to its lowest since 2020. In 2022, international funds sold record amounts of China bonds. While Beijing persists on its authoritarian path of communism, it will likely continue to stumble.