The People’s Bank of China keeps a tight grip on money flowing into the country, leaving many stock market investors who have long wanted to join the party turned away at the door.

Those who were denied access to the Chinese market must now be counting their blessings. It has been on a nosedive since late last year, when the credit crunch bully started crashing parties around the world.

However, there is a silver lining to the heavy cloud which cast a shadow over the nation’s equity markets – the collapse of the stock market is leading to a rejuvenation of the Chinese bond market, arguably a more important part of a financial economy.

Of course, a vibrant stock market is a key feature of a capitalist society. But Chinese companies previously had an unhealthy addiction to funding through IPO activity, rather than helping to build the country’s embryonic bond market – even when the cost of equity was much higher than the interest they would have paid in the bond market.

Over the last two months, they have been forced to navigate the choppy waters of the domestic bond market and volumes have soared as a result.

The stock market will rebound to new highs sooner or later. That’s a safe bet. But in the meantime, China’s nascent financial system is making much needed steps forward in other areas. If the bond market continues to develop, next time a crash won’t be so severe – or so painful.

And maybe we’ll all be allowed in on the party.

About the author

Lunch is for Wimps used to trade currencies and equity indices – and even occasionally traded German government bonds when he was trying to cure insomnia. Watching Wall Street one night, he heard Gordon Gekko deliver the classic line: “if you want a friend, get a dog”. Unfortunately, a large build-up of ear wax led to him mishearing this piece of wisdom, and he ended up starting this damn blog when he should have been at the pet shop instead.

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