Today, onshore Chinese asset management firms maintain a plethora of systems, often cobbled together to bridge the shortcomings of other providers. But looming initiatives intended to drive greater participation by Chinese investors in international markets could stretch these setups to breaking point, software vendors warn.

The key problem is that there’s no true all-in-one system in China—nor is there a very complete concept of a portfolio management system, says Iris Wang, global head of strategy and head of China at Enfusion Systems. In July, the Chicago-based cloud investment management software and service provider obtained a wholly foreign-owned enterprise (WFOE) license in China, which allows it to start operations in Mainland China and hire locally.

“They have various legacy systems from different providers. The last time I counted, as an example, one of the bigger players has roughly 12 different systems. Some in-house, some third-party, all cobbled together,” Wang says.

And each of those systems may focus on different aspects of the investment value chain, such as content or risk management, with none bringing everything together and connecting to order and execution management systems to give investment managers real-time transparency and make smarter investment decisions, she adds.

Even if these disparate systems can connect to each other, they generally don’t communicate with each other well. “It’s not real-time; it’s certainly not efficient in terms of data flow and reporting out. And it’s definitely not accurate, because you have to do multiple reconciliations between different systems,” Wang says.

This legacy setup—while convoluted—may work just fine today for onshore managers’ domestic business, but increased access to international markets will put greater pressure on these systems and drive firms to seek more efficient replacements.

Impetus for change

Chief among these is the introduction of “southbound” trading on the Bond Connect initiative—a cross-border trading program established in 2017 to open up China to more international investment via Hong Kong. The first phase of Bond Connect was “northbound” trading, which allowed foreign investors to access mainland China’s domestic bond markets. That went live in 2017.

Southbound trading is expected to go live later this year, which will allow mainland Chinese asset managers to participate in international bond markets. This is expected to result in far greater volumes of order flow and market data, which onshore asset managers’ systems may not be able to handle.

Northbound and southbound trading are two very different things, says Bing Li, head of Asia Pacific at Bloomberg in Hong Kong.

“The Southbound Bond Connect is completely different in that China is now a large developing market coming into the international space, and trying to take in data and understand the technology, so the approach has to be different,” Li says.

Specifically, the China market that is investing offshore is limited to institutions like the large commercial banks, sovereign wealth funds, and those participating in qualified foreign institutional investor (QFII) programs.

“It’s a relatively small universe of investors learning about the international market. Now [when Southbound Bond Connect launches], the community is going to expand dramatically,” Li says.

This will require different approaches to technology and connectivity. While the international markets are certainly no strangers to electronic trading, the onshore community, at this point, is still foreign to the concept of electronic trading and workflows that use request for quote (RFQ), for example. “A lot is still done over voice,” Li says.

In contrast, from a data perspective, the introduction of Southbound Bond Connect will see international bond market data being consumed at scale by onshore Chinese buy-side firms for the first time. This—and anticipated increases in trading volumes—will create more demand for automation.

“Once you have this new Southbound trade activity, then you have many more international market makers participating through these electronic trading platforms, trying to compete with each other. Onshore buy-side firms are probably thinking, ‘It’s taking less time for this particular market maker to respond to me,’ which creates competition. And that competition creates a push for further automation, increasing the efficiency of the overall market,” Li says.

“The only thing that drives innovation is demand. If I’m sitting there as a market maker or a bond trader and I get five orders a day, I don’t need automation. More activity and volume will demand a reaction that demands more automation,” he adds.

While global providers like Bloomberg can serve clients with its various data products, it’s still early days for the bond trading infrastructure in China, and will require participation from local and international participants to develop the market.

For example, this may include international data providers adding more context to their data, to provide clarity for Chinese investors who are unfamiliar with overseas listings.

“If Home Depot is coming to market for new issuances, Chinese investors would ask, ‘Who is Home Depot?’. You normally wouldn’t need to provide that much information about Home Depot, as it is a recognizable brand name and its issuing and rating history is disclosed in a format that is familiar with most international investors,” he says. “But with this new group of participants in the international space, we need to be much more organized with how we present that information.”