Volatile swings in bond trading could stir up larger knock-on effects for China’s economy, according to the International Monetary Fund.
The lending body’s 2018 Global Financial Stability Report said that China’s $12 trillion bond market – the third-largest in the world – is heavily driven by repos (repurchase agreements), in which financial institutions offer securities in exchange for short-term cash.
In 2017, repo borrowing was 15 times the average trading volume in China’s bond market, much higher than in other economies, reports the Wall Street Journal. This high exposure to credit-fuelled trading raises the possibility, however, that sharp drops in interest rates could quickly sap the market of liquidity.
“This procyclical link between bond trading and financial conditions represents a significant vulnerability in China’s financial markets,” said Henry Hoyle, finance analyst at the IMF.