In the past few years, the Chinese bond market has been developing rapidly, but shows very low liquidity. What are the causes of the problem? We will look at this problem from 3 dimensions: development stage of market, the source of funding, and trading structure of the market.
Considering the development stage, China’s bond market has a relatively short history, thus market infrastructure is still inadequate. In terms of source of funding, banks are the biggest players in China’s bond market which supply 99% of the funds in the market. But banks are so risk averse that they have little interest in the secondary market bond trading. As for trading structure of the market, the US bond market has a multi-layer structure, yet China’s bond market is much more flat. In the US there are more than 40 electronic trading platforms catering the need of different types of customers. As a result, the liquidity of assets increased tremendously. However, in China the penetration of electronic trading is low, with 70-80% of bond trading still being conducted through traditional voice brokering.
However, the liquidity of the Chinese bond market has started to improved. Various investment tools such as financial monitoring model, portfolio management system, public opinion surveillance and trading price monitoring signals, are increasingly used by institutional investors. More e-trading platforms begin to enter this market, which will rapidly improve bond liquidity. Fin-tech is the magic key to solve bond liquidity dilemma in China.
