This presentation looks into the financial market of China covering instruments traded, participants in three segments viz Money market, Capital market and Derivative Market.

1. PRESENTATION ON CHINESE
FINANCIAL MARKET
BY GARIMA GOEL
M.COM SEM IV

2. 2
CONTENTS
• The Money Market.
– Inter-Bank Market.
– Repurchasing Bond Market.
– Bill Market.
• The Capital Market.
– Stock Market.
– Bond Market.
• The Derivative Market.

3. MONEY MARKET
• The money market’s prime function is to assist
banks in their treasury operations—that is the
management of their cash, short-term assets
and short-term liabilities.
Money Market
Interbank market Repurchasing
Debt market
Bill market

4. INTERBANK MARKET
• China’s interbank market originated in the 1980s.
• Legal requirement to maintain reserves.
Interbank market provides credit without
collateral.
• Reforms in 1996
– The qualifications of financial institutions on the
interbank market clarified, and all members of the
market must conduct trading through the electronic
trading system

5. Commercial
banks
Maximum term
of L&B should
not exceed 4
months.
The amount of
L&B should be
fixed in
proportion to
balance of
deposits.
Non-banking
financial
institutions
Term should be
less than 7 days
The amount of
L&B should be
fixed
according to
level of capital

6. • From June 1996, financial institutions were
allowed to fix their own interest rates for
interbank lending or borrowing as provided by
the People’s Bank of China, and the interbank
offered rates (CHIBOR) are published regularly.

7. REPURCHASING BOND MARKET
• Bond repurchase refers to a commitment by the
seller (dealer) to buy back a security from the
purchaser (customer) at a specified price at a
designated future date.
• Bond repurchase in China began in 1991
• In the early period, repo was an important way of
trading for non-financial institutions to obtain
funds from commercial banks. Its trading was
closely associated with the stock market.

8. • In order to prevent bank funds from flowing
into the stock market, the PBC decided that
commercial banks should withdraw from
repurchase trading on the stock exchange, and
carry out repurchase trading on the interbank
bond market.

9. BILL MARKET
• In China, due to the control of interest rates
on loans, and the determination of interest
rates on commercial paper by the market,
commercial paper enjoy superiority in
financing cost.
• Motivated by the policy of central bank, the
commercial paper market has developed
rapidly, with bills of exchange, discount and
rediscount all growing apace.

10. CAPITAL MARKET
• A capital market with the
– Third largest market capitalization globally,
– a bond market with the fifth largest balance
globally, and
– a futures market with trading volume among the
highest in the world.

11. • In retrospect, China's capital market has gone through three phases of development:
Phase I: From early 1978 to 1992; China initiated full-
scale economic reform, and China's capital market
began to emerge along with the incorporation process
of Chinese enterprises.
Phase II: From 1993 to 1998, with the establishment of
the China Securities Regulatory Commission (CSRC) as
a milestone; China integrated its capital market and
supervision regime.
Phase III: From 1998 onwards, with the promulgation
of the Securities Law as a key milestone; the legal
status of China's capital market in the economy has
been formalized and strengthened.

12. STOCK MARKET
• The Government established the Shanghai Stock
Exchange in December 1990 and the Shenzhen
Stock Exchange in July 1991to discourage
unorganized and black-market trading.
• Chinese stock market index
– SSE Composite Index comprises A and B shares of 50
listed companies on SSE. SSE Indices are all calculated
using a Paasche weighted composite price
index formula.
– The SZSE Component Index is an index of 40 stocks
that are traded at the Shenzhen Stock Exchange.

13. • Stocks that trade on the Shanghai and Shenzhen exchanges.
These companies are incorporated in mainland China and their
shares are denominated in the local currency, or renminbi.A shares
• Some Chinese companies are listed in Shanghai and
Shenzhen, but their shares trade in U.S. dollars. These
stocks, known as “B shares”, were historically designed to
give Chinese companies a way to raise capital from
overseas.
B shares
• H shares are also Chinese companies, but these securities
trade on the Hong Kong Stock Exchange rather than on the
mainland, and they are priced in Hong Kong dollars.H shares
3 CLASSES OF SHARES

14. • Major Participants in stock market
– Retail investors conduct around 40 percent of the
trading by volume and own about 60 percent of
China’s tradable shares by value.
– Mutual funds(total assets hitting RMB 2.4 trillion for
open-ended funds and RMB 1.4 trillion for close-
ended funds)
– Sovereign Wealth Funds(National Social Security Fund
(NSSF) and China Investment Corporation (CIC)
– Qualified Foreign Institutional Investors(holds 2% of
total stock market holdings)
– Insurance Companies(RMB 4.9 trillion at the end of
2010)
– Pension Funds(RMB 300 billion at the end of 2010)
– Private Equities

15. BOND MARKET
• The bond market includes three segments, the
inter-bank market, the exchange market and
the over-the-counter market.
The inter-bank market is the main marketplace for bonds,
with a market share of about 90% in both balance and
trading volume.
The exchange market is another important part; it's a retail
market for centralized brokered transactions.
The over-the-counter market is an extension of the inter-
bank bond market, and it's also a retail market.

16. PARTICIPANTS
• Mutual funds
• Non-financial institutions
• Securities companies
• Non-bank financial institutions
• Insurance companies
• Credit cooperatives
• Commercial banks
• Special settlement members

17. INSTRUMENTS

18. DERIVATIVE MARKET
• The first and the only stock index futures is the
CSI 300 Index Futures which covers around 60%
of total market capitalization.
• China’s derivatives markets covered major
financial areas such as
– interest rates,
– foreign exchange,
– equities,
– commodities and
– credit.

19. Interest and FX Derivatives- Interest rate swaps are most popular.
transactions are mostly made by city commercial banks and to a
lesser extent joint-shared commercial banks
Equity Derivatives- introduction of stock index futures, in 2010.
Institutional investors — including mutual funds, brokerages and
QFIIs — and individual investors are all allowed to participate.
QFIIs cannot engage in speculative trading
Credit Derivatives- Two types of credit products are permitted.
One is named Credit Risk Mitigation Agreement and the other is
Credit Risk Mitigation Warrant
Commodity Derivatives- Rapidly growing. Traded in 3 locations-
the Shanghai Futures Exchange, Dalian Commodity Exchange,
and Zhengzhou Commodity Exchange. The categories covered
include gold, copper, aluminum, zinc, natural rubber, cotton,
sugar, rice, wheat, palm Olean, soybean and PVC

20. 20
Principal Regulatory Agencies of the Chinese
Financial and Banking Systems
Regulatory Agency Subject of Regulation
People’s Bank of China All depository institutions
China Banking Regulatory
Commission
State-chartered depository
institutions
China Insurance Regulatory
Commission
State-chartered insurance
institutions
China Securities Regulatory
Commission
Organized exchanges and financial
markets

21. THANK YOU!  