Global markets are in a “precarious time.”

Patrick McHenry

That was the message from Patrick McHenry, a Republican from the State of North Carolina, and the ranking member- or leader of the minority- in the House Financial Services Committee.

The Committee held its annual hearing on the state of global financial markets with Steve Mnuchin, the US Secretary of the Treasury as its lone witness.

During his opening remarks, McHenry painted a dire picture. He referred to a January letter he wrote to Mnuchin.

“In that letter, I raised questions about the uncertainty of a prolonged Brexit and that affect it would have on financial institutions, derivatives markets, cross-border trading, financial services, and insurance contracts.”

Brexit remains uncertain with a failed vote this week and the British Prime Minister Theresa May submitting her resignation.

Brexit is coupled in Europe with “a possible slowdown in Germany. I’m particularly concerned about the overexposure of German banks and what this means for American financial institutions. This is a serious thing for systemic risk,” McHenry said.

McHenry said that Europe was only one place of uncertainty. “In China, the era of double digit growth is seemingly at an end. Thanks to the state run allocation of capital, a disregard for the rule of law, and a regime that favors the theft of intellectual property over homegrown ideas, we see that coming home to roost.”

McHenry also asked if the committee should be concerned that China recently opened up its $13 trillion debt market to global investors.

“What does this move for global markets,” McHenry asked rhetorically.


State Street Global Investors explained more about this move, “In April 2019, Chinese bonds will begin joining the main global bond index, the Bloomberg Barclays Global Aggregate Index, meaning they will be widely held by international investors.”

State Street made three points for traders thinking about taking on positions in Chinese debt.

  • China’s debt growth has been largely a re-allocation of internal capital and savings from consumption to longer-term investment.
  • China is a net creditor to the world, with a positive net asset position of 14.7% of GDP;3 this appears likely to prevail for the foreseeable future given the current account surplus.
  • China’s large foreign exchange reserves remain a significant support at approximately USD 3 trillion as of March 2018, but it should be noted that this is down from USD 4 trillion in 2014.

In March 2019, Bloomberg ran an analysis about what China opening up its debt market might mean.

“Foreigners are already making demands, including readily available hedging tools, more transparent and faster registration procedures and — less loudly, given the sensitivity — assurance they’ll be able to take their money out when they like. Their voices are set to become more important as their share of the domestic market climbs from little more than 2 percent today.”

Bloomberg continued, “The fresh impetus comes from the phased inclusion of Chinese sovereign bonds and debt sold by three key state-owned policy banks into the Bloomberg Barclays Global Aggregate Index, starting in April 1. Up to now, inflows have been dominated by central banks and sovereign wealth funds.

“Now private-sector managers following the index will start joining in, though there are differences in terms of appetite. One challenge is to ensure that the transaction costs of buying Chinese debt aren’t so high that it erodes the return to investors in those funds.”

McHenry said these risks are combined with other more traditional risks, “Whether they emerge from international terrorism, weapons proliferation, or illicit finance flows.”