Tradeweb’s head of Asia reflects on the firm's year of connecting China’s investor community with global financial markets

James Sun, industry veteran and Tradeweb’s head of Asia, talks about the firm’s 2021 Asia-Pacific highlights, including the evolution of mainland China’s financial markets and how Bond Connect’s Southbound channel is streamlining Chinese investors’ connectivity with the global bond universe

In January 2021, when he joined Tradeweb as the firm’s head of Asia, James Sun knew he would be getting a front-row seat at the evolution of Asia’s capital markets: from the accelerating adoption of electronic trading – particularly in the emerging markets swaps space – to the transition from Libor to new reference rates. Yet, according to Sun today, this year’s main event came from China and the recently launched Southbound Bond Connect channel, which follows the successful implementation of its Northbound leg more than four years ago.

The launch of Southbound trading has been a significant financial event for China and its investor community. And, due to the sheer size of its economy, Sun believes this development is also of global significance. He explains: “Bond Connect has been driven by market demand in China and other markets. The new Southbound channel represents a milestone in the renminbi internationalisation process. And, for Chinese institutional investors, it means they are now able to invest in the global bond universe in a more streamlined, efficient manner.”

Sun predicts Southbound will undergo several evolutionary stages, and describes its first phase as “steady”. He says: “The Northbound channel took time to expand and diversify its user base, and also to increase trading activity, but it has managed to boost global investor participation in the onshore bond market. I believe Southbound will follow the same meticulously choreographed path.” 

Why Southbound matters

The main benefit for Chinese local wealth managers, real-money investors and banks participating in Southbound is that they are now able to create a more diversified investment portfolio by entering the offshore bond universe. When the initiative went live in September 2021, 41 onshore commercial banks accessed liquidity from 13 market-makers in bonds tradeable in the Hong Kong market.

“Global bond markets are Tradeweb’s familiar territory,” Sun states. “We also have the advantage of being the only trading platform to have witnessed the evolution of Bond Connect from day one, back in July 2017, working closely with the China Foreign Exchange Trade System [CFETS] to help open up China’s financial markets to the rest of the world.”

Given his background in the asset management space, Sun expects the learning curve for domestic investors participating in offshore bond trading and investing to be fairly short. He says: “Once users become accustomed to the advantages of electronic trading, such as pre-trade transparency, workflow efficiency and innovative trading tools, they will never go back to manual trading.” 

Sun believes the role Tradeweb has played in the design and construction of Bond Connect gives the firm a unique vantage point as a connecting force between local and international bond markets. “Tradeweb has been involved in all the enhancements to the channel, from the introduction of pre- and post-trade allocations to fully automated execution, having worked alongside CFETS to bring them to market first,” Sun says.

Both Northbound and Southbound are built for the long term and place disclosed electronic request-for-quote (RFQ) trading at the centre of their modus operandi. Sun stresses that Bond Connect usage and traffic will stand the test of time. “In China, it’s very common to create the infrastructure first and then, gradually, increase product scope and participation, supported by national initiatives and driven by market demand,” he says.

Other shared traits include the adoption of a multi-custody model to facilitate investors’ cross-border participation, and the way they link infrastructure to improve access to bond markets. But, ultimately, the two channels function in opposite directions, so they are bound to differ in terms of design and investor impact.

Sun goes on to explain how the differences between the two channels are straightforward. “Unlike Northbound, Southbound has a net outflow limit, both daily and annual. Also, Northbound investors need to be filed at the People’s Bank of China [PBoC], while Southbound users are not required to follow the same process,” he says.

As for market impact, Northbound has helped increase foreign investor participation in renminbi assets, spurred by the inclusion of Chinese bonds in global fixed income indexes. For Southbound users, Sun believes “participation in offshore assets will be more gradual through bespoke products included in the programme.”

What lies ahead

When Tradeweb was invited to attend the Southbound launch ceremony at the CFETS Shanghai headquarters, Sun was able to fully appreciate the firm’s growing influence among local industry leaders and their appetite to expand their use of the firm’s innovative trading solutions. 

Looking ahead, Sun’s eyes are firmly on the rising trend of more digitised fixed income and derivatives trading workflows. Many are attributing this to the Covid‑19 pandemic and subsequent shift to widespread remote working.

Sun mentions that Tradeweb saw the same macro-level trends and enjoyed record trading volumes as a result. After all, the platform pioneered the RFQ trading mechanism across Asia, helping to eliminate the longstanding operational inefficiencies of voice execution. 

Sun says: “China has already established a fully electronic trading system in the form of Bond Connect, which fits well into the regulatory mindset and [national policy] requirement for more transparency. From that perspective, voice-based trading is suboptimal, and China is already ahead of the curve in recognising the merits of fully digitised execution.”

Sun predicts electronic trading will inevitably become the norm across Asia, despite differences in development across regional markets.

“Eventually, what will prevail are [e-]trading platforms and technology that offer regulatory transparency, improved price discovery, enhanced access to liquidity and operational efficiency – the things that are important to all markets and all investors,” he concludes.

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