Foreign Securities Firms Tap into China's Bond Market

An increasing number of foreign securities firms operating in China are beginning to tap into the Chinese bond market.

In early September, the application for the establishment of Mizuho Securities (China) Co., Ltd., a wholly-owned subsidiary of Japan's Mizuho Securities Co., Ltd., received feedback from the China Securities Regulatory Commission (CSRC). The feedback revealed that in the initial stage of its business, Mizuho Securities will mainly focus on bond business, with equity activities limited to underwriting only.

The layout of foreign securities firms in China's bond market is becoming more frequent, which is closely related to the continuous growth of the scale of China's bond market and the increase in foreign capital allocation. Subsequently, with the continuous enrichment of risk management tools, the capabilities of foreign securities firms in derivatives trading, bond issuance underwriting, and other areas are expected to be further utilized.

Foreign securities firms are focusing on fixed income business

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In November last year, the CSRC received the establishment application materials of Mizuho Securities. In June this year, the aforementioned establishment application was accepted. At that time, the Mizuho Group had disclosed on its official website that the future business direction of the proposed securities subsidiary in China would mainly be the underwriting business of Chinese corporate bonds, including sales and trading business in China's bond market. In the recent feedback, the CSRC also required the company to supplement and explain whether securities brokerage and proprietary trading also do not involve equity business.

Mizuho Securities is not the only foreign securities firm focusing on China's bond market. In fact, this year, both foreign securities firms that are planning to establish and those that have already started operations have clearly stated that the focus of their future business in China will be the bond market.

In March this year, China's first newly established wholly foreign-owned securities firm - Standard Chartered Securities officially started operations in Beijing. Chen Mingqiao, Head of the Asian Financial Markets Department of Standard Chartered Group and Chairman of Standard Chartered Securities (China) Co., Ltd., said that after starting operations, Standard Chartered Securities will focus on the fixed income business field based on its own advantages, such as bond underwriting, asset securitization, and structured products. He said that the scale of China's bond market has risen to the second largest in the world. With the securities license, Standard Chartered's bond business in China will expand from the interbank bond market to the exchange bond market.

Foreign capital increases the allocation of bond market

In recent years, foreign capital has increased its allocation to China's bond market, and behind this trend, selling institutions have also seen new business opportunities.

"Generally speaking, the correlation between Chinese bonds and European and American bonds is relatively low, and they rarely rise and fall synchronously. Allocating Chinese bonds has become a must for more and more international investors. From the transaction volume of Bond Connect, Standard Chartered's customers have a great demand for the Chinese bond market." Chen Mingqiao said.Since 2019, Chinese bonds have been successively included in the Bloomberg Barclays, J.P. Morgan, and FTSE Russell, which are among the world's three major bond indices. The Bond Connect channel has also been continuously improved and upgraded since its official launch in 2017. Data released by the Shanghai headquarters of the People's Bank of China on September 18th shows that by the end of August, overseas institutions held 4.52 trillion yuan worth of bonds in the interbank market, accounting for approximately 3.1% of the total custody volume of the interbank bond market. This means that in August of this year, overseas institutions continued to increase their holdings of interbank market bonds, with an increase of about 60 billion yuan for the month. Chinese bond markets have seen consecutive increases in holdings by overseas institutional investors for 12 months.

In addition, this year, several foreign securities firms have been focusing on fixed-income business, which is closely related to their banking backgrounds. Taking Mizuho Securities as an example, it is an institution under the Japan-based financial holding group, Mizuho Financial Group. The top five comprehensive securities firms in Japan are mainly divided into two categories: bank-based securities firms and non-bank-based securities firms. Mitsubishi UFJ Securities, Nomura Securities, and Mizuho Securities belong to bank-based securities companies, while Nomura Securities and Daiwa Securities belong to securities companies with non-bank backgrounds. In January of this year, Mizuho Bank (China) just obtained the qualification of the main underwriter for Panda bonds. The Mizuho Financial Group had previously stated that the new securities company would leverage Mizuho's existing experience and office network in China to focus on sales and trading business in the Chinese bond market.

Standard Chartered Securities and BNP Paribas Securities, which were approved to be established in April this year, are respectively 100% owned by Standard Chartered Bank (Hong Kong) Limited and BNP Paribas. Both institutions also have rich experience in fixed-income product categories at the group level.

Business advantages are expected to be further utilized.

Compared with banks and other financial institutions, the business advantages of securities firms lie in primary market underwriting, derivatives trading, proprietary trading capabilities, and other aspects. As the systematic opening of China's capital market continues to deepen, the interest of foreign capital in allocating Chinese bond markets is still increasing, and the capabilities of foreign securities firms in derivatives trading, green bond issuance underwriting, and other aspects are also expected to be further utilized.

In September 2020, the China Securities Regulatory Commission, the People's Bank of China, and the State Administration of Foreign Exchange issued the "Administrative Measures for Securities and Futures Investments by Qualified Foreign Institutional Investors and Renminbi Qualified Foreign Institutional Investors within the Territory," allowing foreign capital to invest in financial futures, including stock index futures and Treasury futures. The enrichment of risk management tools has attracted the attention of many foreign institutions.

In its 2023 annual report, Goldman Sachs mentioned that last year, the company's exchange bond and Treasury futures trading volumes increased significantly, and the company obtained the qualification of the China Foreign Exchange Trade Center Bond Connect "Northbound Trading" quote institution at the end of 2023. In the future, the company will fully utilize the global resource advantages of the Goldman Sachs Group to develop overseas trading counterparts. Daiwa Securities focuses on fixed-income products in its proprietary business, with a year-on-year increase of 21% in the company's proprietary business income last year and a 20% increase in investment return rate. The company is also actively exploring new businesses and has successfully carried out Treasury futures short hedging business.

In terms of investment banking business, China's green bond market has developed rapidly in recent years. DBS Securities stated that in 2023, the company completed multiple credit bond projects and local government bond syndication business, and as the sole lead underwriter, it helped State Power Investment Corporation to complete the market's first green scientific and technological innovation Panda bond and green "Belt and Road" Panda bond issuance.

Chen Mingqiao said: "With the continuous alignment of China's green bond standards with international standards, the attractiveness of China's green bond market to international investors is increasing day by day. Standard Chartered Group plans to mobilize $300 billion into the global green bond market by 2030 and increase its layout in China, which will bring opportunities for the development of Standard Chartered Securities."