For emerging capital markets, the journey from local origins to global success doesn’t usually follow a one-size-fits-all script. But there are lessons that can be learned and actions the global financial community can take to smooth the path. 

As the world economy grows to bring prosperity everywhere and global connectivity becomes the norm, newly developed countries are rushing to join the world markets. But with infrastructural, regulatory, and technological challenges, emerging markets have to work adversely hard to do before joining the most important players on the world stage.

At an industry session during the 2024 Sibos conference in Beijing, speakers gathered to extrapolate future trends by looking backwards. The panel consisted of:

• Bernard Ferran, Managing Director and CCO, Euroclear
• Rajesh Ramsundhar, Head of Investor Services, Standard Bank
• Jiang Rui, Deputy General Manager China, Foreign Exchange Trade System (CFETS)
• Julia Streets, Founder and CEO, Streets Consulting
• Ying Ying Tan, Global Head, Product Management, Financing & Securities Services, Standard Chartered Bank
• Anupam Verma, Global Head-International Financial Institutions Group & Head- Syndications, ICICI Bank

China and India: the giants’ examples

Looking at some past successes is a good place to start. 

Consider, for instance, China’s bond market, which in just a few years became the second-largest bond market in the world. The China Foreign Exchange Trade System worked with central security depositories to turn all market mechanisms —from trade to clearing—into seamlessly interconnected structures that can be easily accessed by investors everywhere. This means that international traders can use trading platforms they are familiar with while still abiding by China’s financial regulations.

In today’s interconnected global market, not harmonising is just not an option. “Clients may use one provider to go into 30 or 40 markets, and they don’t want 40 different sets of reports – they want aggregation. So clients will force you to harmonise within local market practices so it looks and feels seamless to them,” said Tan. 

A strong market base is also essential to ensure that things run smoothly once global investors have entered the market. A strong and transparent institutional framework is key, not only to attract investors but to keep them there and strengthen the domestic side at the same time. 

For example, China has introduced new trading mechanisms to make its markets stronger and more appetising for investors. “The international standards and practices not only benefit foreign investors, they are also adopted by the domestic institutions, which help to further improve the trading efficiency in the domestic market,” said Jiang.

Liquidity is also a crucial factor in attracting international investors: 10-year Chinese government bonds are now almost as stable as US treasuries, which should encourage investors. Japan, whose foreign debt is 14% foreign-owned, and South Korea have employed similar strategies, placing them as some of the most attractive markets globally. Strong and liquid government bonds mean investors can use them as collateral and trade them frequently in several regions, strengthening a market’s global reach. 

India, another new player whose debt and equity markets are among the largest among emerging economies, has instead focused on innovation: new issuers and original structures like zero-coupon bonds are attracting investors and propelling growth. As innovations sweep the market, countries must be able to quickly adapt and leverage new technology to make themselves more attractive to investors looking for the “next best thing”.

Challenges

Innovation is also crucial to addressing development challenges. Emerging markets in Asia, Africa, and the Middle East are all growing at different paces, making collaboration difficult; geopolitical uncertainty in many of these regions requires businesses to closely monitor their supply lines, be resilient, and adapt to changing circumstances. 

Africa, for example, has a wide range of market development: while countries like South Africa have well-established financial markets with corporate, government, and fixed-rate bonds, new players are only just starting to develop a secondary market. Many Sub-Saharan African countries, however, are growing at extraordinary speeds: Ghana has seen a fiftyfold growth in its secondary market since the establishment of a financial market less than 10 years ago. 

Sometimes development doesn’t last: Nigeria, which had been an investment darling in the early 2000s, was removed from the JP Morgan Index in 2015 due to overly complex currency regulations and is only just building back infrastructure and credibility. Geopolitical, regulatory, and economic challenges have slowed foreign investment, but can be overcome with a strong infrastructure and a focus on innovation. 

The new frontiers

While innovation in both emerging and established markets has been transformative, the next step is to ensure it reaches every player and is implemented in the same way everywhere. Harmonising new practices, such as the shift to T+1 settlement in the US, which is driving change globally, is crucial to ensuring seamless collaboration between markets. 

Advanced emerging markets like China have found it easier to join the effort, standardising practices on green bonds and settlement cycles that have made it even more attractive to Western investors; newer players, like sub-Saharan African countries, can find it harder to catch up. This is where external help can come in. The Africa Exchange Linkage Project, an AfDB initiative to promote cross-border securities trading, has been helping countries develop stronger interconnected markets and strengthen regional trade. 

Increased efforts to support climate efforts will also lead to innovation and new bonds entering global markets at a scale. “India has taken a commitment of net zero by 2070, which will require an investment of about $5 to $10 trillion; it’s too early for the domestic stock market to have established ESG funds, but the government is trying to start setting up a green bond, which it piloted in 2023,” said Verma.

Unique solutions for unique needs

Ultimately, supporting emerging markets depends on each region and country’s specific circumstances: a project that worked in India might not work in Africa’s fragmented economic landscape, and strategies that helped China grow may not be compatible with the Middle East’s complex geopolitics. 

The strategy each country takes, for example, will depend on the type of investors it is trying to attract – individuals, credit institutions, and investment banks – as well as the government’s openness to having its bond market partially owned by foreigners. 

However, some challenges and opportunities are common to all. AI is set to be a key driver of change, enabling data sourcing and analysis at a scale never seen before. This will lead to more accurate, fact-based decision-making processes everywhere, which could be crucial for markets still building their infrastructure. 

The emergence of digital currencies and distributed ledger technologies (DLT) will also be crucial in unlocking private market assets – which could be especially helpful to Africa’s many infrastructure investments. For digital assets, “It’s not a matter of if, it’s a matter of when,” said Ramsundhar. “I see DLT as essential in unlocking assets in the African market and propelling a big shift in digital ledger technology, creating opportunities in the private market,” 

The tokenisation of non-bankable assets in general, including art or intellectual property, could be transformative for all players; emerging markets could seize the opportunity to be at the forefront of the tokenisation revolution and draw foreign investment. “Emerging markets have a very great part to play because they don’t really have the legacy that the old economies have, which means they can really embrace new technology,” said Ferran.

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For an emerging market attempting to incorporate itself into the global economy, obstacles can be paralysed. But harnessing their unique advantages could drive market integration to the betterment of not just that country, but the entire ecosystem.

“In China,” explained Jiang, “we didn’t simply apply a copy and paste method. Instead, we created a model of interconnectivity between the domestic infrastructure and the international infrastructure. That was impossible because at that time, China bond market was one of the top three globally by size.” Also, we always established a framework including a centralised electronic trading platform and the efficient central secret depositories The connectivity allow us to maintain our domestic strengths while meeting the needs and habits of the international investors.”

Domestic and international interest often overlap: the intention for financiers and policy makers should be to find this mutual area.