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"China's latest corporate and financial market reforms and ...

"China's latest corporate and financial market reforms and ...






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    "China's latest corporate and financial market reforms and ... "China's latest corporate and financial market reforms and ... Presentation Transcript

    • China’s Financial Development, Reforms and Challenges Chun Chang Professor of Finance China Europe International Business School
      • China’s Latest Financial Reforms and Development
    • Source: CICC Research Financial Regulatory Structure China’s Financial System The State Council CBRC CSRC Commercial Banks Credit Cooperatives CIRC Trust & Investment Securities Firms Exchanges Fund Management Insurance Companies
    • Heavy Reliance on Bank Financing (2006) Source: CEIC; CICC Research China’s Financial System
      • Japan-Germany-like Financial Structure
        • Financial assets concentrated in the banking system
        • No stock markets before 1991
        • In 2006, more than 80% of financing is still through banks
        • insurance industry is growing fast but still underdeveloped
        • legal framework for private equity financing is just starting
      China’s Financial System
    • The State’s Dominance of the Banking Industry (Assets, 2006) Source: The Statistics Quarterly PBOC China’s Financial System
    • Banks in China
      • State-owned banks: ICBC, CCB, BOC, CAB
      • Joint stock banks: Bank of Communication, China Merchants Bank, Guangdong Development Bank, Minsheng Bank
      • City banks and credit unions: Bank of Shanghai, Bank of Nanjing, Ningbo Commercial Bank
      • Foreign banks: HSBC, Citibank, Standard Chartered,
      • Progress in Banking Reform
        • Recapitalization of state banks
          • 4 asset management companies set up in year 2000 to take over US$1,600 billion of non-performing loans
          • US$1108 billion NPLs disposed up to March 2006,
          • cash recovery rate 20.8%
          • US$45 billion capital injection in 2004 for BOC and CCB
          • US$15 billion capital injection in 2005 for ICBC
        • CCB listed in Hong Kong in 2005, BOC and ICBC in 2006
        • Reorganization and recapitalization of China Agricultural Bank and Postal Savings Bank for listing
      China’s Financial System
      • Progress in Banking Reform (2)
        • Brought in foreign strategic investors before IPO
        • Foreign strategic investors introduced
          • CCB: Bank of America, Asian Financial Holdings (AFH), holding 14.4%
          • BOC: Royal Bank of Scotland, AFH, UBS, Asian Development Bank, holding 16%
          • ICBC: Goldman Sachs, Allianz et. al. 17%
        • Foreign investment in banks raised to 25%
        • Invited private entrepreneurs to take minority stake
      China’s Financial System
    • China’s Financial System Comparison of Chinese and Foreign Banks 2002 Source: Banks’ Annual Reports, CICC Research
    • China’s Financial System Comparison of Chinese and Foreign Banks 2005 Source: Banks’ Annual Reports, CICC Research
    • ROA & ROE of Listed Chinese Banks 2006, 2007   ROA ROE   Year 2006 First half year of 2007 Year 2006 First half year of 2007 China Merchants Bank 0.81% 1.20% 16.70% 21.40% Bank of China 0.85% 1.06% 12.81% 14.09% ICBC 0.71% 1.05% 13.60% 19.90% Industrial Bank 0.70% 1.02% 26.20% 29.90% Bank of Communications 0.78% 0.93% 14.10% 17.47% China CITIC Bank 0.60% 0.82% 14.10% 11.70% Shenzhen Development Bank 0.54% 0.78% 22.40% 31.50% China MinSheng Bank 0.61% 0.73% 22.10% 19.00% Shanghai Pudong Development Bank 0.53% 0.70% 16.50% 23.70% HuaXia Bank 0.36% 0.44% 13.10% 17.80%
    • Nonperforming Loans of Chinese Banks
      • Chinese Capital Markets
        • 1540 publicly listed companies on domestic exchanges, 143 on overseas (Feb 2007)
        • Equity market capitalization of around US$3 trillion (2007)
          • State Shares 33.1%, (non-tradable until 2005)
          • Legal person shares 16.7% (non-tradable until 2005)
          • Tradable individual shares 50.2%
        • Government bond market cap US$ 364 billion
        • Corporate bond market cap US$35 billion
      China’s Financial System
    • Progress of Chinese Stock Market Reform
      • Before 2005, state-owned and legal person-owned shares could not be traded on stock exchanges. Large shareholders paid little attention to the prices of tradable shares held by the public.
      • In 2005, the government initiated reforms that made non-tradable shares tradable.
      • This aligned the interests of large shareholders with that of outside shareholders
    • Financial Reforms
      • Great Leap Forward in Equity Market
        • An average of US$9 billion raised per year from 1991 to 2006
        • In 2007, $50 billion new A-shares were issued, taking the first place in the world (the second place US equity markets raised less than $40 billion in 2007)
        • Shanghai Stock index increased by almost 100% in 2007
      China’s Financial System
    • Over-Valuation? (P/E) Source: CEIC China’s Financial System
      • QFII and QDII
      • Raised QFII quota to US$ 30 billion at the end of 2007
      • QDII launched in July 2006
        • 5 domestic banks: BOC, CCIB, CCB, BOCOM, CMB; 3 foreign banks (Bank of east Asia, HSBC, Citibank); & Huaan Fund Management chosen for experiment
        • 19 institutions approved, US$14.5 billion investment quota granted
      • QDII quota reached US$42.17 billion by the end of the third quarter in 2007
      • Local markets (Shanghai & Shenzhen) have 120 million investor accounts in Sept. 2007.
      China’s Financial System
      • Private Equity
        • Size estimated around 620 billion RMB in 2007, much of it comes from abroad.
        • Limited Partnership were authorized in Chinese law in June of 2007
      • Enormous Potential
        • Great demand in a vibrant economy for private equity
        • High risk and cost due to poor legal and financial infrastructure
      China’s Financial System
      • Financial Regulations
        • Entry regulation
          • Geographic and business restrictions for foreign banks and insurance companies
          • Foreign stake in commercial banks capped at 25%
          • Foreign partners can take up to 33% in JV brokerage firms and fund management companies
          • Approval required for branches & offices
          • License required for domestic institutions
          • Private individuals can only have a minority position
      China’s Financial System
      • Financial Regulations (2)
        • Interest rate regulation
          • Both lending and deposit benchmark rates are set by the central bank (one year lending rate is now 7.47% and deposit rate is 4.14%)
          • Lending rate has no upper limit and the lower bound is 90% of the benchmark rate. the rates for mortgage loan can be 85%.
          • Deposit rate has the benchmark rate as the upper limit and is allowed to float downward.
          • Interbank rate SHIBOR was introduced on Dec. 1, 2006 and determined by market forces
      China’s Financial System
      • Financial Regulations (3)
        • Regulation of international accounts
          • Current account deregulated
          • Closed Capital/Financial account with a few exceptions
        • Managed floating exchange rate regime
          • The RMB pegged to USD at RMB 8.27/USD from mid-1990s to 2005
          • It is supposed to be pegged to a basket of currencies since July 21, 2005
          • The RMB/US$ exchange rate allowed to float no more than 0.5% of the previous day’s closing, 1.5% against other currencies
          • No timetable for full convertibility
      China’s Financial System
    • Strong RMB Backed by Foreign Reserves Source: CEIC China’s Financial System
      • The Value of RMB
        • The upward pressure on RMB is driven by the twin surplus (current account and financial account) and is balanced by holding surplus foreign currencies as reserves
        • To balance the twin surplus and reduce foreign currency reserves, RMB needs to be revalued
        • The speculation that RMB will be revalued eventually has caused hot money flowing into China and excess liquidity and asset inflation
      China’s Financial System
        • Factors Against Appreciation:
          • Worries about adverse effect on exports and employment
          • Unwillingness to be seen as yielding to foreign pressure
      • Factors in Favor of Appreciation:
          • Domestic inflationary pressure and asset bubbles
          • Interest rate differentials and inflow of hot money
          • Ability to raise interest rate in order to cool down economy
          • Responsibility for the loss of value of foreign currency reserves
    • Challenges Ahead
    • Exchange Rate Issues
      • How much and how fast should RMB rise?
      • Free floating, Pegging and pegging to what?
      • When and how to make RMB fully convertible?
    • Banking Issues
      • How and when to eliminate interest rate regulation and introduce real competition?
      • How to compensate party-appointed bank officials?
      • How to introduce universal banking?
      • How to establish government deposit insurance?
    • Capital Market Issues
      • Need to develop a more mature market and less government intervention
      • Institutional investors need to play a more important role
      • Need to develop corporate bond market, learn how to price credit risk
      • Information disclosure and insider trading
    • Other More Important Issues
      • The following issues will have a bearing on how fast China’s financial reforms will be carried out:
      • Income inequality
      • Political stability and reforms
      • Environmental Issues