The next twelve months could turn out to be a pivotal year for China’s capital markets, the largest in the Asia-Pacific and the world’s third largest bond market. The proposed inclusion of Chinese yuan bonds in the Bloomberg Barclays Global Aggregate Index, phased in over a 20-month period starting in April 2019, could further accelerate the participation of foreign investors.

Ahead of the index inclusion, international asset owners and managers have stepped up their activity. Tradeweb, the electronic trading venue linked to Bond Connect, recorded a healthy boost to trade levels, with an uplift of over 40% in the average daily volume, which accrued to US$0.5 billion each day for the 12-month duration end of December 2018. The number of approved overseas institutional investors on Bond Connect reached 503 at the end of 2018, a 74% increase from the 288 global institutional investors registered at the end of Q1 2018.

While there is much reason for optimism, the integration of China’s capital markets within the global financial system comes at a particularly challenging time. The ongoing China-US trade war has added to market uncertainty. The efforts by China to de-risk its financial system (especially in pursuing deleveraging) as it transitions away from fixed asset investment face headwinds. The slower global growth, with the World Bank cutting its forecast to 2.9% in 2019, is keeping investors on their toes and softens sentiment.

These short-term worries, however, do not detract from the longer-term expectation that once these issues are addressed, the region is on track to become one the foremost centres of economic activity in the coming two decades. This also means that capital markets will become an integral part of financing among corporates operating in this region while presenting tantalizing opportunities for investors looking at return and diversification.

As a share of G3 primary issuance, Chinese issuers now account for 60% of activity year-on-year. A study published in January 2019 by the Global Financial Markets Association notes that even based on relatively conservative assumptions, capital markets located in the Asia-Pacific region are set to experience the most rapid growth over the coming decade. Furthermore, Asia’s share of global capital markets activity will rise to just under half over the next 20 years from around one-third today. Much of what’s behind the region’s rise is driven by China, which accounts for 40% of Asian capital markets activity. As a share of G3 primary issuance, Chinese issuers now account for 60% of activity year-on-year.