China And its stock exchanges

CHINESE FINANCIAL SYSTEM
REVELAED
PRESENTED BY
 UDIT PANDEY
 VIKRAMADITYA
 HITEN MAHAJAN
 MANDEEP SINGH
 GAGAN VIJ

Flow of presentation
• CHINA’S HISTORY
• BANKING REFORMS
• REGULATORS
• MAJOR SECTORS OF THE ECONOMY
• STOCK MARKETS
• WHAT SETS CHINA APART
• CURRENT TRENDS
• BLUECHIP CHINESE FIRMS

BEFORE WE START A FEW REASON WE
MUST REPECT CHINA FOR

WHEN THE WHOLE WORLD WAS DOWN CHINA CHUGED ALONG TO SAVE THE
GLOBAL ECONOMY WITH DOUBLE DIGIT GROWTH

Brief history of china
China is one of the world’s four ancient
civilization.

Structure of the post-revolution economy
transformation
 On October 1 , 1949 ,The Communist Party of China (CPC) took power
in Beijing and tried to solve the problem of low levels of gross
domestic output, high rates of inflation, high levels of urban
unemployment and problem of food shortage.
 Mao Zedong called for the rapid eradication of feudal landlords system
in order to restore the food production.
 He also established people’s court at all level of jurisdiction, peasant
jurisdiction throughout the countryside, and workers' councils in
industrial enterprise
 CPC settled new economic policy like providing farmers with
guaranteed market for some of their output, buying rice, grain, and
other basic goods through state purchasing stations (established in
1952) for resale in the cities and towns.
 Government gained control of the pricing and allocations of the key
commodity, which reduced the unplanned price inflation.

Adoption of Mixed economy approach
 Banks and most of the industries confiscated from the
private owners.
 Many private capitalist enterprises, particularly those
engaged in "light manufacturing" were allowed to operate.
 The government not only controlled the profits generated
in industry but would also control the allocation and pricing
of the outputs and inputs of industry, both state-owned and
privately owned enterprises.

The First Five Year Plan (FYP)
• The first FYP was launched in 1953, with the aim of
developing the Chinese economy on the Soviet model.
As the USSR was the only existing communist economic
system and was the only source of technical aid for the
PRC.
• The first FYP gave priority to heavy industry, all industry
and larger commercial enterprises were nationalized.
Soon, all private property was abolished as well

1958-1962 The Great Leap Forward Movement(GLF)
• This meant the reorganization of state and collective farms into
huge communes. Furthermore, the peasants in these
communes were ordered not only to work the land, but also to
make their own tools out of the iron that they were to smelt
into steel.
• But this movement turned into the great disaster. The peasants
could not smelt iron into steel for tools in their backyard
furnaces. At the same time, this work took away the time
needed to work the land, so that crops rotted in the field.
• Poor planning and bad management lead to crop failure in
various provinces and starve 30 million people to death.

1966-1976 The Cultural Revolution
• After the turmoil of the GLF, most of the party member turned
against the Mao. In order to regain the power Mao decide to fight
against his party opponents by attacking the intellectuals.
• As his weapon he choose young particularly frustrated high school
students, which were dissatisfied with educational system, which
favored the children of party bureaucrats and high military
officers.
• These students had been raised as loyal supporters of Mao, and
formed units of Red Guards. Red guards were fighting pitched
battles with government troops outside of the Foreign Ministry
Building.
• Later on in the Cultural Revolution , Red guards units ended up
fighting with each other for supremacy. In the summer of the
1967, there were massive riots in both Hong Kong and Macau.
•

Deng’s Reforms
 After the death of the Mao and his successor. Deng
Xiaoping took over the charge and created the open door
policy, and China began to open to the outside world,
Tourism was allowed, student began to go overseas, special
economic zones were established , and joint ventures with
foreign firms were encouraged to bring in foreign
technology, investment, managerial skills and market
access.
 He encourage the elimination of the rural commune and
turned over the land to the rural households (for
production, and income , but not for the real ownership).
 Agricultural productivity jumped and free markets were
created to sell food.
 He also developed closer relation with United States and
Japan

CHINA OPENS UP WITH BANKING
REFORMS

The First Stage of Reform (1978-92)
• Main Goal: To change the mono-banking system into a plural-banking system
consisting of a central bank and various kinds of financial institutions.
• The following 4 were separated from PBC:
1. ABC (The Agricultural Bank of China) Rural and Agricultural Sector
2. BOC (The Bank of China) Foreign trade and Investment.
3. PCBC (The People’s Construction Bank of China) Construction and fixed-asset
investment
4. ICBC (The Industrial and Commercial Bank of China) SOEs business financing
• These institutions took over the commercial bank business from the PBC.
• PBC’s role – Well Defined: Its mission was to carry out monetary policy, monitor
financial markets, issue bank notes, etc. This change basically abolished the
commercial bank functions of the PBC. Though
• The PBC was not independent from the government but was a part of the State
Council (the Cabinet), and it was required to manage the funding of the SOEs.

The First Stage of Reform (1978-92)
CONTD.
• 1986: Bank of communication JSCBs(later)
 Primarily regional banks but expanded their business areas
nationwide within a few years.
• In the mid-1980s, the SOEs’ funding source was changed
from direct grants by the central or local governments to
interest-bearing bank loans and the role of the Chinese
banks was transformed from that of government grant
distributor to that of creditor
• During this period, the total credit balance of Chinese
banks increased 11.7 times.
• Driven by the change in the banks’ role and by increases in
household income, the funds available in the Chinese
financial sector increased rapidly (Refer next slide), which
in turn provided room for the establishment of some basic
financial markets.

The Second Stage of Reform (1993-
97)
• Resolution of the CPC Central Committee on Issues regarding the
Establishment of the Socialist Market Economic System.
1. The establishment of an independent macro economic control
mechanism by the PBC (independent from local governments,
but under the direction of the State Council),
2. The establishment of policy banks,
3. The transformation of state-owned specialized banks to actual
commercial banks,
4. The establishment of unified, open, well-ordered, competitive,
and well-managed financial markets,
5. The reform of foreign-exchange control,
6. The issuance of appropriate guidance for the development of
nonbank financial institutions, and
7. The development of a financial-service infrastructure and the
establishment of a modern financial-management system
• A series of arrangements were made to implement this policy.

97) CONTD
• The government set up three policy banks in 1994, to separate
policy lending from commercial lending.
 China Development Bank,
 the Export and Import Bank of China,
 the Agricultural Development Bank of China.
• The 4 existing specialized banks became known as SOCBs(State
owned Commercial Banks)
• There was a focus on promoting the computerization of payment
systems.
• Commercial bank laws 1995: To enhance the independence of
the commercial banks.
 However, since this law also required commercial banks to conduct
business under the guidance of the national industrial policies,the
SOCBs had to provide lending to inefficient sectors, such as
stagnant SOEs, and they accumulated large volumes of
nonperforming loans (NPLs).

97) CONTD
• In 1994 the PBC established the China Foreign Exchange Trading System
(CFETS)
 In order to operate unified foreign-exchange transactions smoothly using a computer
system,
• To introduce order into the interbank money market,
 The PBC established local financing centers in 1995 and closed brokerage institutions run
by commercial banks, although the lending rates in the local financing centers still varied
greatly.
 In order to unify these rates, the PBC established the National Interbank Funding Center
(which shared its computer system with the CFETS) in Shanghai in 1996 and transformed
the local financing centers into the affiliates of the new national center.
• Payment and Settlement System:
 Late 80s: PBC began the development of the Electric Interbank System (EIS)
 The commercial banks were also developing their own intra-bank payment systems during
this period.
 International Advisory Committee(world bank initiative) + China’s Domestic Advisory
Committee: A new system, the China National Advanced Payment System (CNAPS), has
gradually replaced the EIS since 2001.
 CNAPS has greatly improved Chinese commercial banks’ fund transaction management.

After the concept of the market economy was
widely accepted in China, the CPC and
government leaders were seeking effective
ways to commercialize the SOCBs.
However, it also became clear that the huge
SOE support burden of the SOCBs would be a
serious obstacle to reform efforts and therefore
should be substantially reduced.

Post 1998 reforms(towards Market-
Oriented Economy)
• PBC committed to full compliance with the Core Principles for Effective
Banking Supervision which were released by the Basel Committee on
Banking Supervision in 1997.
• Financial system reform, mainly focusing on the rehabilitation of the 4
SOCBs, since, as providers of over 70 percent of the country’s total loans,
they were regarded as too large to fail.
1. In 1998, the Standing Committee of the National People’s Congress (NPC)
passed a plan submitted by the State Council to issue special government
bonds to provide for the injection of capital into the SOCBs. The amount of
this capital injection was RMB 270 billion.
2. Organisational restructuring – Reducing Branches, laying off employees.
3. Public listings of BOCOM, CCB, BOC, and ICBC. Capital surged 30-80%.
4. Tax Exemptions: In addition to these arrangements, the MOF allowed tax
exemptions related to the write-offs of NPLs and the organizational
restructuring. For instance, the CCB officially announced that its income tax
exemption was RMB 15.4 billion in 2004 and RMB 7.4 billion in 2005.
5. The government established four asset management companies (AMCs) to
take NPLs off the books of the banks.
o They purchased NPLs amounting to RMB 1.4 trillion (21 percent of the loan balance of the
SOCBs at the end of 1998) from the SOCBs and the China Development Bank (CDB) at book
value.

Latest trends in the banking sector
1. Bank deposit insurance scheme:
– Launched on 1st May, 2015
– Under the plan released by the State Council, China’s cabinet,
up to
500,000 yuan ($80,550) in deposits made by businesses and
individuals per bank will be insured.
– Deposit insurance would make it possible for banks to
compete via higher rates without putting customers’ money at
risk, and for the government to shift away from the implicit
guarantee of all lenders, pressing ahead with a pledge to give
the market a bigger role in deciding winners and losers.
– Basing interest rates on market factors, rather than
government policy, also could make the financial system more
robust and better able to handle capital moving freely into and
out of the country

CONTD
2. NPLs and distressed assets
• After the financial crisis in 2008, the Chinese government introduced a
stimulus package of RMB 4 trillion, which helped expand the production
capacity of Chinese enterprises.
• But domestic demand and investment remained sluggish, so China
faced the problem of overcapacity, which had its origin in structural and
institutional problems.
• A slowing global economy caused Chinese goods to be in less demand,
which made it difficult for Chinese enterprises to discharge their
obligations. As a result, both the balance and ratio of commercial banks’
NPLs were increasing, posing a threat to the security of banks’ assets.
• In their credit risk management, banks attached importance to
formalities, financial analysis, collaterals and product innovation, while
neglecting substantive issues, the authenticity of financial information,
the recoverability of loans and post-lending monitoring.

NPLs of 9 Listed Banks by
Industry(2014)
BOC, BOCOM, HXB, NJCB, BOB and NBCB have not disclosed details of their
NPLs by industry
In
Million
s RMB

CONTD
3. Private Banks:
– As at 31 December 2014, the first batch of 5 private
banks were piloted.
• Kincheng Bank of Tianjin,
• Shanghai Huarui Bank,
• Wenzhou Civil and Commercial Bank,
• WeBank
• and Zhejiang Mybank
– The five pilot banks all focus on providing
specialized and differentiated services to small and
micro-sized enterprises and local communities,
targeting to improve the multi-tier banking financial
system.

CONTD
4

China Securities Regulatory
Commission
• China’s Securities
Law(passed December
1998) was the nations
first comprehensive
securities legislation
that gave power to
CSRC over the
securities and futures
market of China.
• China Securities
Regulatory
Commission performs
the following duties in
the supervision and
administration of the
securities market:
Study and formulate
policies and
development plans
for the securities
and futures markets.
Exercise a vertical
administration over
the domestic
securities and futures
regulatory institutions.
Supervise the
listing, trading and
settlement of
domestic contract-
based futures.
Investigate and
penalize the
activities in
violation of the
securities law.
Administer the
foreign exchanges
and international
cooperation affairs
of the securities.
Chairman
CSRC

China Banking Regulatory Commission
• CBRC is an agency
authorised by the
state council to
regulate the
banking sector of
People’s Republic
of China except
the territories of
Hong Kong and
Macau.
• It was set up as
country’s
independent
banking regulator
in 2003.
Regulatory
Objectives
Combat
financial
crimes
Maintain
market
confidence
Enhance
public
knowledge
of modern
finance
Protect the
interests of
depositors
&
consumers
MainFunctions
Formulate supervisory
rules and regulations
Authorize the
establishment, changes,
termination and business
scope of the banking
institutions
Stay focused on risk-based
supervision and improvement
of supervisory process
Chairman -Shang

China Insurance Regulatory
Commission
• CIRC is an agency authorized by the state
council to regulate the
Chinese insurance products and services
market established in 1998.Functions Formulate policies for developing the insurance industry.
Scrutinize and approval of insurance companies, subsidiaries, insurance
holding companies.
Supervise the financial health of insurance companies.
Supervise fair competition in industry.
Create standards for risk, forecast, profitability and report to the People's
Bank of China.
To investigate and punish unfair competition and illegal conduct, non
compliance of registration.
Chairman – Wu
Dingfu

The three Industries driving
Chinese Economy

1. Manufacturing
• China makes and sells more goods than any other
country on this planet. As of 2015, Manufacturing is
the largest and the most diverse sector in the country.
• The range of Chinese goods include iron, steel,
aluminum, textile, cement, chemical, toys, electronics ,
rail cars, ships, aircrafts and many other products.
• Almost 80% of the world’s air conditioners are made by
China’s businesses. It manufactures 45 times as many
personal computers per person than the rest of the
world combined. Biggest producer of solar cells, shoes ,
cellphones and ships.

Contd.
• China is has a fair automobile industry. It is the world’s third-largest car
manufacturer, though Chinese Govt. claims it is the world leader.
• Though car consumption eventually caught up after 2005, most of
these early cars were destined for the export markets because the vast
majority of Chinese citizens were too poor to purchase the products
themselves.
• This is a common theme in the Chinese manufacturing sector. Products
are frequently churned out for government use or are immediately put
on boats and shipped to foreign consumers.
• Compared to other nations, Chinese workers historically buy relatively
little of their own high-end manufactured products, which is a problem
exacerbated when the government devalues the Chinese currency,
having the effect of lowering real Chinese wages.
•

2. Services
• As of 2013, only the United States and Japan boasted a higher services
output than China, which represents a significant shift for the country.
• A 2010 world study found the services sector accounted for 43% of
total Chinese production, slightly less than its manufacturing sector.
However, there are still more Chinese employed in agriculture than in
services, which is a rarity for more developed countries.
• Before economic reform in 1978, shopping malls and private retail
markets did not exist in China. As of 2015, however, there is a young
and burgeoning services market. This has bolstered tourism and led to
a proliferation of Internet and phone products.
• Large foreign companies, such as Microsoft and IBM, have even
entered the Chinese service markets. These kinds of moves help to
jumpstart the telecommunications industry, cloud computing and e-
commerce.

3. Agriculture
• There are nearly 300 million Chinese farmers, larger than the entire
population of every country except China, India and the U.S.
• Rice is the dominant agricultural product in China, but the country is
also very competitive in wheat, tobacco, potatoes, peanuts, millet, pork,
fish, soybeans, corn, tea and oilseeds. Farmers also export large amounts
of vegetables, fruits and novel meats to nearby countries, Hong Kong in
particular.
• Comparative statistics show that Chinese farms are among the least
productive in the world on a per capita basis.
• Farmers are not allowed to own and mortgage farmland and cannot get
credit to purchase better capital equipment, two functions which promote
innovation and development.
•

Other growing Industries
• One industry not identified but worthy of note is the
Chinese health-care sector. The rise of middle-class households and
urbanization has sparked a huge demand for health care services,
which is a hopeful sign for a developing economy. Reforms were
passed in 2011 to allow competition into the health care market,
including wholly foreign-owned entities. This drew investment from
major international players such as Pfizer, Merck and
GlaxoSmithKline. China boasts one of the fastest-growing health
care sectors in the world.
• Large government investments are being made in the areas of
biotechnology, information technology, new energy, environmental
maintenance, new materials, high-end manufacturing and
alternative fuels.

ForeX market in China
• Foreign exchange market China forms an important
segment of the national economy of China. The Chinese
government, and regulators view forex as a highly
leveraged product which carries too much exposure.
• The official currency of mainland China or the People’s
Republic of China is known as the Renminbi Yuan or simply
Yuan.
• The exchange rates of Yuan are determined by the Chinese
Central Bank and they are dependent on a number of
factors. These factors include the volume of trading of
Yuan, the supply of Yuan in the forex market and a number
of other factors.

ForeX market in China
• China’s Forex market is comprised of 2 parts. The inter-bank or wholesale market
and the retail market.
• Major parties involved in the forex market are:
1) CFETS which functions as a trading platform for inter bank markets, and is
responsible for clearing the market and for providing the supervisory
authorities with market information
2) PBOC and SAFE as regulatory authorities
3) Designated FX banks and non-banking financial institutions and
non-financial enterprises authorized by SAFE to engage in foreign
exchange business
4) The enterprises that can earn and spend Forex.
5) Individuals who have forex trading needs.
• The two factors that most seriously constrain development of China’s FX market
are the compulsory FX settlement system and the rigid exchange rate regime.

Forex- some facts and statistics
• China's foreign exchange (forex) market posted turnover of
110.93
trillion yuan ($16.7 trillion) last year according to the State
Administration of Foreign Exchange (SAFE).
• In December, forex market turnover totaled 12.17 trillion y
uan, including 2.46 trillion yuan inforex transactions betwe
en banks and their clients,
9.71 trillion yuan in interbank forextransactions,
5.53 trillion yuan in transactions on the spot forex market a
nd 6.64 trillion yuanin forex derivatives transactions.
• In 2015, China opened its interbank forex market to overse
as central banks and similarinstitutions to promote a marke
t-oriented and more transparent interbank forex market.

Debt Market/Bond Market
• People’s Republic of China bond market is composed of both exchange and Inter-
bank Bond Markets. These two markets complement, interconnect with, and
complete each other. Both are integral parts of the Chinese financial markets as a
whole.
• The Inter-bank Bond Market is an over-the-counter (OTC) wholesale market, the
exchange bond market is a retail market. The Inter-bank Bond Market is an OTC
market, and accounts for about 94% of outstanding bond value, as well as 99% of
bond trading volume. It was established in 1997 and has recorded an average
annual growth rate of over 50% since 2005.
• The initial bond categories of Treasury bonds and corporate bonds have evolved
into a wide range of bond varieties. These include policy bank bonds, central bank
bills, general financial bonds, subordinated bonds of commercial banks, hybrid
capital bonds, super and short-term commercial papers,commercial papers,
medium- term notes (MTNs), credit asset securitization products, listed companies
bonds, local government bonds, international development institution bonds, and
small- and medium-size enterprise (SMEs) collective notes,and private placement
notes.

Debt/Bond Market
• Bond trading instruments have witnessed an evolution
from spot trading and repurchase trading to bond forwards,
forward rate agreement, Renminbi interest rate swap,
bond lending, credit risk mitigation agreement, and credit
risk mitigation warrant, among many others.
• In China’s bond market, bonds can be issued in two ways:
by tender through the issue system of the People’s Bank of
China (PBOC) and by book building.
• There are eight major credit rating agencies in China’s
bond market. Two of these are Sino-foreign joint ventures;
one is engaged in a technical cooperation with a foreign
enterprise and the remaining five are domestic-funded
agencies.

Trading of Bonds
1. OTC Market
• The Inter-bank Bond Market is an OTC market, and
accounts for about 94% of outstanding bond value, as well
as 99% of bond trading volume. It was established in 1997
and has recorded an average annual growth rate of over
50% since 2005.
• At present, the Inter-bank Bond Market has over 10,000
members, covering all types of financial institutions such as
commercial banks, securities companies, insurance
companies, and various kinds of investment vehicles like
mutual funds and pension funds. Among these, commercial
banks are the most active participants.

Trading of Bonds
2. Bond Repurchase Market
• Bond repo has two sub-types: collateral repo and outright
repo. The major difference between the two is that the
latter involves transfer of bond ownership during the repo
period while there is no transfer of ownership in collateral
repo.
• The terms of collateral repo transactions range from 1 day
to 1 year, and are divided into 11-period categories,
including 1-day (overnight) repo, 7-day repo (2–7days), 14-
day repo (8-14days), etc.
• Market participants vary from commercial banks, other
financial institutions, to non-financial firms and non-
institutional investment products.

Trading of Bonds
3. Proprietary Trading Systems
• CFETS, also known as the National Inter-bank Funding Center, is the
unified trading platform for the inter-bank Bond market in China.
• CFETS has been operating the inter-bank bond market trading
platform since 1997, and is now developed into a unique OTC
electronic bond-trading platform in China with comprehensive
functions of trade, post-trading service, risk management, and
information service.
• CFETS has been operating the inter-bank bond market trading
platform since 1997, and is now developed into a unique OTC
electronic bond-trading platform in China with comprehensive
functions of trade, post-trading service, risk management, and
information service

SHANGHAI STOCK EXCHANGE
• The current exchange is a non-profit organization directly
administered by the China Securities Regulatory Commission
(CSRC)
• The world's 5th largest stock market by market capitalization
at US$5.5 trillion as of May 2015
• The Shanghai Stock Exchange is still not entirely open to
foreign investors due to tight capital account controls
exercised by the Chinese mainland authorities and often
manipulated by the decisions of the Central Government
• Major listings-:Bank of China
– Ping An Insurance
– PetroChina
– Industrial and Commercial Bank of China

SHENZEN STOCK EXCHANGE
• Shenzhen Stock Exchange (SZSE), established
on 1st December, 1990, is a self-regulated
legal entity under the supervision of China
Securities Regulatory Commission (CSRC).
• Market cap of around $2.2 trillion
• Average monthly trade volume $800 billion
• Globaly 4th largest stock exchange by volumes

HONG KONG STOCK EXCHANGE
One of the world's largest securities markets by market
capitalization, the Hong Kong Stock Exchange traces its origins to
the founding of China's first formal securities market.
• The Association of Stockbrokers in Hong Kong, in 1891.
• A second market opened in 1921, and in 1947 the two
merged to form the Hong Kong Stock Exchange
• 6th largest stock exchange with market cap of $3.2 trillion
• Some major listings are
– PetroChina
– Industrial & Commercial Bank of China
– HSBC Holdings

Shares Categories
• Non-tradable shares
a. Legal person shares
b. State-shares
• Tradable shares
a. A-shares: denominated in RMB (1264)
b. B-shares: denominated in US$ and HK$ (53,57)
c. H-shares: PRC-registered listed in HK
d. Red-chips: Chinese companies registered
overseas and listed abroad

HANG SENG VS SHANGHAI SSE COMP
• Chinese companies may have Shanghai listed trading as well as Hong Kong
listed trading. A-shares are listed on the Shanghai exchange and are largely
available only to domestic investors. H-shares are listed on the Hong Kong
Stock Exchange; they are available mainly to non-chinese investors (like
QDII, International investors). But in both cases, the origin of business
should be Mainland China.
• There is a huge price difference at which mainland companies trade in
both the exchanges, and interestingly there is no channel to arbitrage. A-
shares trade at a huge premium over H-share counterparts (or even what
is being quoted in London exchanges). This is largely due to huge
imbalances between supply and demand of high quality stocks in China.
High restrictions/regulations combined with high demand from newfound
investible wealth is pushing premiums up.
• To track this, there is an index called Hang Seng China AH Premium Index"
which measures the the spread between the A-shares and H-shares of
dual-listed companies domiciled in Mainland China. This means that A-
shares as a group are currently trading at a premium of about 80% over
the H-shares and that at one point they were trading at a premium of
more than 100% !!

Contd.
• The spread is going up constantly, perhaps due to China
being a closed market whereas Hong Kong is a fiercly open
economy; thus it reacts more sharply to international
economic developments. A recent credit crisis left many
markets crashing, impacting HK markets as well. Again, the
HK currency is pegged to the USD, implying a greater hit for
investors!
• While the Hang Seng has traditionally been viewed as a
"back door" to gaining access to mainland Chinese stocks,
this is a common misconception
• Monthly returns between the Hang Seng and Shanghai
Composite indices have deviated quite dramatically in
recent years

DIFFRENCE IN CUMALATIVE RETURNS

What should an outsider know about
China’s Financial System?
• Capital markets to a large extent are closed- you cannot
simply inject capital into China’s Market without permission
from the government.
• Investing with a trusted partner and in a Business Plan that
makes a lot of sense – good connections with the central and
the state.
• A business plan that is anti to the State is not advisable
because it is not a free market economy- ‘State directed
Capitalism’.

Differences in Financial System
• In the U.S if a firm borrows money from the debt capital
markets, investors are aware about the business of the firm,
whether it is risky to invest or not. If they do, they make sure
that the interest rates are very high – Capital gets allocated to
the firms with best businesses.
• In China this hasn’t been working so well because of mainly two
reasons:
1) Default is considered as an extremely adverse result in China
and when a corporation gets into trouble, either the central or
the State Government is prone to bail it out- means as an
investor in Corporate bonds, I really don’t care much about the
company I am buying bonds of because most of them are going
to pay off eventually- Companies with goods business plans
don’t have any significant advantage.
2) China has a very nascent Bond Market. Shockingly China has
as much corporate debt as the United States (U.S Corporate debt
is two-thirds of its securities market) but a tiny fraction is
obtained through Bond Markets.

Implications
• Its not possible for China to grow at the rate
it has been unless it develops an effective
bond market because if corporations get
larger and larger, they cant just simply rely
on Bank loans to sustain themselves, they
need access to bond markets to get cheap
Capital and boost operations.

How do China’s Big Banks
work?
• Four large Banks Bank of China, China Construction
Bank(CCB), Agricultural Bank of China(ACB), Industrial and
Commercial Bank of China (ICBC), analogous to J.P Morgan,
BOA, Goldman Sachs, Citi Bank- but more than fifty percent
of the stake is owned by the central Government of China.
• To be the CEO of one these top four banks, one needs to be
selected from the Chinese Communist Party and eventually
acquire a ministerial rank in the Government – leads to
biased money lending.
• Hence act more as Government agencies rather than free
corporations, listed on stock exchanges having public
shareholders.

Shadow Banking
• Estimated to be more than $70 trillion worldwide.
• It is not just about risky investment products and lending
between the individuals, shadow banking also covers loan
shark operations and pawn shops as well as respectable
activities like derivatives and securities lending.
• In brief summary it includes, non-bank financing, entrusted
loans and banker’s acceptance bills.
• What makes them Shadowy is that they operate outside
the banking sector hence prone to regulations.
• According to Financial Stability Board, Shadow Banking
poses Systemic Risks to the financial systems- hence
making it difficult to control economy using interest rates
and money supply.

Shadow Banking in China
• Shadow Banking in China looms
largest.
• Estimated to be more than $6
trillion- 65% of the Chinese overall
economy because - Saving deposit
rates in China are low and most
small businesses do not get loans
and turn to other sources of
lending.
• In 2013, China tried to rein-in
wealth management
products(bundled assets sold to
bank customers) resulting is worst
cash crunch in more than a decade.
• Shadow banking acted as an
alternative source of funding to the
real estate sector and local
government financing vehicles to
boost the GDP.
• The decline in shadow banking was
wrapped into a larger political
economic stance warning that an
economic slowdown was a natural
part of restructuring.

China Current Trends
• After more than doubling the value in the last years despite
a slowing economy and a weak corporate earnings report-
stock markets in China are in a free fall- 43.55% ($4.5
trillion wiped out) crash since 12th June 2015.
Source: Bloomberg(22-01-
2016)

Current Trends
• Since 21st November 2014, the People’s Bank of China has reduced interest
rate six times – encouraging to borrow more at cheap rates to boost
consumption, and again lowered the amount of cash that banks have to
deposit as reserves.
• Role of Circuit Breakers- Markets getting hammered 7% in just 14 minutes
of trading raises questions about the efficiency of CBs.
• Various brokerages and funds announced plans to buy massive amount of
stocks, essentially funded by Chinese state funded margin finance
companies- which was given a ‘direct line of liquidity from the central
bank’ the previous year.
• China's central bank injected 150 billion yuan ($22.80 billion) into banks on
Wednesday through its short-term liquidity operations (SLO), The PBOC
injected 55 billion yuan via a 3-day SLO on 18th Jan, 2016. It also injected
410 billion yuan into the nation's banking system via its medium-term
lending facility (MLF) and lowered rates for three-month and one-year
tenors on 19th January.
Implication: Chinese central bank is creating more
money out of thin air and giving it to people to boost
consumption and investment to prop up their economy
on paper- devaluing everything in the economy.

Trends(Contd.)
• CSRC banned shareholders with stakes of
more than 5% from selling shares for six
months last July whose expiry date is
approaching- worry signs for the market.
• Patterns similar to the U.S crash of 1929 which
led to the economic depression.
• Lets see how do the regulators all over the
world and the Chinese Government prevent
such a catastrophe.

Baidu Inc.
Baidu was founded in 2000 by Internet pioneer Robin Li, with the mission of providing
people with the best way to find information and connect users with services.
Why should we invest in Biadu?
• It is the second-most visited website in the world, used by approximately 1 billion users in
South Korea and China combined.
• As Biadu offers a Chinese language search platform. This provides Baidu with the incredible
market that can still be tapped.
• With the so-called Great Firewall of China, Baidu is naturally protected from foreign
competition.
• Since 2010, Baidu Inc. has increased its revenue each year. In 2010, the company generated
$1.27 billion and in 2014, generated revenue was $7.9 billion and total revenue of $7.7 billion
till third quarter in 2015, and there is still plenty of potential here.
• Mobile Internet penetration crossed 85% in the China. Given the trend of consumers using
mobile devices for e-commerce, Baidu has invested heavily in transforming itself from a
desktop based business to a mobile leader. Baidu stated that mobile revenues comprised
54% of its total revenues.

Alibaba
• HQ- Hangzhou, China
• Jack Ma (Chairman)
• Daniel Zhang (CEO)
• NYSE: BABA
• Last 5 years revenue: 6,417 20,025 34,517 52,504 76,204
(2011-15) in Millions CNY.
• Alibaba.com, the primary company of Alibaba, is the world's
largest online business-to-business trading platform for small
businesses.
• Alibaba reported sale of $14.32 billion on China's Singles'
Day on 11 November 2015, up 60 percent from 2014.
• Investors see Alibaba as a stock that reflects the state of the
Chinese economy, and so long as the Chinese economy is
under this slowdown, bearish bets on the stock is expected
in US.

Market Cap of
$46.51 Billion
and providing
solution in 19
sectors
Has over 30240
patents and major
facilitator of 5G
projects
Founded in
1987 by Ren
Zhengfei
Started by
manufacturing
phone switches
and is the
largest telecom
equipment
manufacturer in
the world
Out of 170000
employees 76000
are engaged in R&D
Owns the
semiconductor
fabrication unit
called HiSilicon
which is the largest
domestic designer
of ICs
Set up Financial
Risk Research
Centre in London to
manage global
finance risks and
efficiency.
Largest telecom
equipment
manufacturer in
the world

TECHNICHAL ANALYSIS
• Huawei is becoming a major force in the consumer
smartphone market backed by strong R&D. Global
smartphone sales have risen by 16% led by emerging
markets demand and Huawei is a major player with global
presence.
• Even in developing countries like India, Huawei has secured
contracts worth $150 million to upgrade Airtel and Idea
wireline network.
• It is actively involved in the process of research and
subsequently rolling out 5G services by 2020. Overall the
current trends indicate an upside to investments for a term
of 5 to 6 years down the line with good return.

• Sinovac Biotech Ltd. is a China-based
biopharmaceutical company that focuses on the
research, development, manufacturing, and
commercialization of vaccines that protect against
human infectious diseases
• Developed the first H1N1 vaccine in the world in
2009.
• The Company is currently developing a novel vaccine
against enterovirus 71, causing the severe hand,
foot and mouth disease (HFMD) among the children.
• Total sales in the first nine months of 2015 were
$44.6 million, an increase of 4.2% from $42.8 million
in the same period of 2014. Total sales in the third
quarter of 2015 were $16.8 million, a decrease of
2.0% compared to $17.1 million in the same period
of 2014. The slight decrease is attributable to the
depreciation of the Chinese RMB against the US
dollar.
Sinovac

TENCENT HOLDINGS
• Tencent Holdings Limited is an investment holding company.
• The Company and its subsidiaries are principally engaged inthe
provision of Internet and mobile value-added services (VAS), online
advertising services and eCommerce transactions services to users
in the People’s Republic of China.
• The Company operates in four segments: VAS, Online advertising,
eCommerce transactions
• Some firms under the banner are
– QQ instant messenger
– WeChat
– Epic Games
– Riot Games
– GLU mobile
– PaiPai.com
– TenPay

• Data is the new oil for the world now and
with all the masses of Most populous state
glued to one’s services t gives immense
power and to a certain extent monopolistic
existence hence bulls may favor tencent over
a long run.

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