Key Problems and Challenges of China’s MONEY and SECURITIES market China’s Economy In Transformation / Presentation 06
Money Market
money market a place for short term borrowing and lending specializes in debt securities that mature in less than one year
treasury notes treasury bills bankers’ acceptance certificates of deposit repurchase agreement (repo) commercial paper
1980
Short Term
Long Term
State of Disorder
realizing investment in prohibited areas
securities and real estate market
inflation and bubble economy
central bank reform package
1996
Unified national interbank funding market
16 headquarters of commercial banks
RMB 587.2 billion total trading volume
2006
RMB 39 trillion total trading volume
interbank credit borrowing & lending bond repos spot bond transactions
703 market players in interbank borrowing & lending
6439 market players in interbank bond market
Problems
Inadequate market tools underdeveloped treasury bond market lack of treasury bills with maturity less than 1 year inactive commercial paper market
fragmented market
Different interest rates and trading rules Low liquidity of the market between regional and national market
Challenges
Interest Rates Liberalization
% : Adjustment to balance supply and demand for money
Interest Rate
Ms % MD
Loanable Funds
Interest Rate
M2 M1 %1 MD
Loanable Funds
Interest Rate
M2 M1 1
%1 MD
Loanable Funds
Interest Rate
M2 M1 2
%2
1
%1 MD
Loanable Funds
Interest Rate
3
M2 M1 2
%2
1
%1 MD
Loanable Funds
China People’s Bank of China stipulates the commercial banks’ benchmark deposit and lending rates of all maturities, with a certain degree of flexibility
Interbank rates normally serve as an important benchmarks for setting interest rates for other financial products Ultimate goal: Allow commercial banks to decide all their commercial rates in accordance with markets forces
Central Bank Paper
RMB
FX Market Foreign Currency Purchase
Central Bank Paper
Money Market Liquidity Absorption
RMB
FX Market Foreign Currency Purchase
Central Bank Paper
Money Market Liquidity Absorption
Capital Market
capital market market for securities where companies and government can raise long terms funds
Stock Exchange
Shares Unit Trust Bond
3 share markets & 3 types of shares
Shanghai Stock Exchange Shenzhen Stock Exchange Hong Kong Stock Exchange
A Shares
B Shares
priced in RMB
priced in USD / HKD
locals + QFII *
locals and foreigners
* QFII : Qualified Foreign Institutional Investor System
Number of domestically listed PRC companies 1996 - 2005
1504 listed companies in Aug 2007
23.55 trillion market capitalization
8 trillion tradable market capitalization
60% increase compared to August 2003
Problems
Underdeveloped corporate bond market
" China’s captial market only has one leg at the moment " "... hope to see smooth development of the corporate bond market" Mandy Wang, Chief Executive of China International Fund Management, of which JPMorgan Chase owns 49 %
A mass of regulations Interest rate limitation Government control on listing
Inappropriate positioning of stock market
China Construction Bank listing on 25/9/07
“...A-share listing is politically driven It's not a business decision CCB has no urgent need for fresh capital”
Paddy Ran, analyst at Nomura International (HK)
To please the citizens Develop Shanghai as regional financial center
39% CCB H-shares in 3 months time
Over-speculation and bubble formation
7 ‘SINS’ In China’s Captial Market China Securities Regulatory Commission Chairman Shang Fu Lin
7 ‘SINS’ In China’s Captial Market China Securities Regulatory Commission Chairman Shang Fu Lin
Immoral for stock dealers to lure students investing their live saving into stocks
7 ‘SINS’ In China’s Captial Market China Securities Regulatory Commission Chairman Shang Fu Lin
Immoral for stock dealers to lure students investing their live saving into stocks Stock prices of companies with poor performance still shot up
7 ‘SINS’ In China’s Captial Market China Securities Regulatory Commission Chairman Shang Fu Lin
Immoral for stock dealers to lure students investing their live saving into stocks Stock prices of companies with poor performance still shot up
Share prices of new listed stock ran up too much
7 ‘SINS’ In China’s Captial Market China Securities Regulatory Commission Chairman Shang Fu Lin
Immoral for stock dealers to lure students investing their live saving into stocks Stock prices of companies with poor performance still shot up
Share prices of new listed stock ran up too much Insider trading and manipulation Intentionally destroy evidence
7 ‘SINS’ In China’s Captial Market China Securities Regulatory Commission Chairman Shang Fu Lin
Immoral for stock dealers to lure students investing their live saving into stocks Stock prices of companies with poor performance still shot up
Share prices of new listed stock ran up too much Insider trading and manipulation Intentionally destroy evidence
1/ 2/ 3/ 4/
Companies Restructure ‘Rubbish’ asset injection Speculation Rise stop board
7 ‘SINS’ In China’s Captial Market China Securities Regulatory Commission Chairman Shang Fu Lin
Immoral for stock dealers to lure students investing their live saving into stocks Stock prices of companies with poor performance still shot up Fraud in rise of newly open accounts in A shares
Share prices of new listed stock ran up too much Insider trading and manipulation Intentionally destroy evidence
1/ 2/ 3/ 4/
Companies Restructure ‘Rubbish’ asset injection Speculation Rise stop board
7 ‘SINS’ In China’s Captial Market China Securities Regulatory Commission Chairman Shang Fu Lin
Immoral for stock dealers to lure students investing their live saving into stocks Stock prices of companies with poor performance still shot up Fraud in rise of newly open accounts in A shares
Share prices of new listed stock ran up too much Insider trading and manipulation Intentionally destroy evidence
1/ 2/ 3/ 4/
Companies Restructure ‘Rubbish’ asset injection Speculation Rise stop board
Misleading descriptions of financial products
"The valuation of China Eastern is too high and the company is still loss-making, so it would take time to reflect synergies and other benefits from the deal," said an analyst with a European investment bank
Wealth Effect
P/E Ratio : Price per share / Earning per share
14 p/E ratio of U.S equity market
20 p/E ratio of developed markets
59.17 p/E ratio of Shanghai Composite Index August 2007
68.99 p/E ratio of Shenzhen Component Index August 2007
RISE
DROP
Clearly, something is wrong
Strengthen Corporate Governance Market Liberalization Delisting and Listing Regulations Share Reform
“...sustaining growth requires deepening China’s capital markets. It is not likely that the current bank-based system will be able to meet China’s needs for diversified, dynamic and competitive financial intermediation. The short-term challenge is managing the fallout from a stock market bubble. For the longterm, Chinese policy-makers might also consider further liberalizing capital markets by lifting restrictions on foreign and domestic private firms and developing new asset classes, especially corporate and municipal debt. Innovative new players, such as private equity firms, are particularly needed to inject competition and dynamism into China’s capital markets...”
“...sustaining growth requires deepening China’s capital markets. It is not likely that the current bank-based system will be able to meet China’s needs for diversified, dynamic and competitive financial intermediation. The short-term challenge is managing the fallout from a stock market bubble. For the longterm, Chinese policy-makers might also consider further liberalizing capital markets by lifting restrictions on foreign and domestic private firms and developing new asset classes, especially corporate and municipal debt. Innovative new players, such as private equity firms, are particularly needed to inject competition and dynamism into China’s capital markets...”
“...sustaining growth requires deepening China’s capital markets. It is not likely that the current bank-based system will be able to meet China’s needs for diversified, dynamic and competitive financial diversified intermediation. The short-term challenge is managing the fallout from a stock market bubble. For the longterm, Chinese policy-makers might also consider further liberalizing capital markets by lifting restrictions on foreign and domestic private firms and developing new asset classes, especially corporate and municipal debt. Innovative new players, such as private equity firms, are particularly needed to inject competition and dynamism into China’s capital markets...”
“...sustaining growth requires deepening China’s capital markets. It is not likely that the current bank-based system will be able to meet China’s needs for diversified, dynamic and competitive financial diversified intermediation. The short-term challenge is managing the fallout from a stock market bubble bubble. For the longterm, Chinese policy-makers might also consider further liberalizing capital markets by lifting restrictions on foreign and domestic private firms and developing new asset classes, especially corporate and municipal debt. Innovative new players, such as private equity firms, are particularly needed to inject competition and dynamism into China’s capital markets...”
“...sustaining growth requires deepening China’s capital markets. It is not likely that the current bank-based system will be able to meet China’s needs for diversified, dynamic and competitive financial diversified intermediation. The short-term challenge is managing the fallout from a stock market bubble bubble. For the longterm, Chinese policy-makers might also consider further liberalizing capital markets by lifting restrictions on foreign and domestic private firms and developing new asset classes, especially corporate and municipal debt. Innovative new players, such as private equity firms, are particularly needed to inject competition and dynamism into China’s capital markets...”
“...sustaining growth requires deepening China’s capital markets. It is not likely that the current bank-based system will be able to meet China’s needs for diversified, dynamic and competitive financial diversified intermediation. The short-term challenge is managing the fallout from a stock market bubble bubble. For the longterm, Chinese policy-makers might also consider further liberalizing capital markets by lifting restrictions on foreign and domestic private firms and developing new asset classes, especially corporate and and municipal municipaldebt debt. Innovative new players, such as private equity firms, are particularly needed to inject competition and dynamism into China’s capital markets...”
“...sustaining growth requires deepening China’s capital markets. It is not likely that the current bank-based system will be able to meet China’s needs for diversified, dynamic and competitive financial diversified intermediation. The short-term challenge is managing the fallout from a stock market bubble bubble. For the longterm, Chinese policy-makers might also consider further liberalizing capital markets by lifting restrictions on foreign and domestic private firms and developing new asset classes, especially corporate and and municipal municipaldebt debt. Innovative new players, such as private equity firms firms, are particularly needed to inject competition and dynamism into China’s capital markets...”
The Outlook for China’s Capital Market
1) What is the outlook for China's capital markets? Where are the greatest opportunities and risks? 2) What role do foreign investors play in the growth of China's capital markets? 3) How will China's stock exchanges continue to attract top companies to list domestically? What are the implications for foreign stock exchanges? Discussion Leader Fang Xinghai, Deputy Director-General, Office for Financial Services, Shanghai Municipal Government, PRC Fred Zuliu Hu , Managing Director, Goldman Sachs (Asia), Hong Kong SAR Shang Fulin, Chairman, China Securities Regulatory Commission, People's Republic of China Martin Wolf, Associate Editor and Chief Economics Commentator, Financial Times, United Kingdom Levin Zhu, Chief Executive Officer, China International Capital Corporation, People's Republic of China Moderated by Bernard Lo, Presenter, Bloomberg News, Hong Kong SAR
http://dws.runsky.com/index.htm
http://youtube.com/watch?v=or9NCEXYhYg