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 inflation
securities and central bank
investment in and
real estate reform
prohibited bubble
market package
areas economy
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

Share prices of new

Immoral for stock dealers to lure listed stock ran up too
students investing their live much
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

Share prices of new

Immoral for stock dealers to lure listed stock ran up too
students investing their live much
saving into stocks

Insider trading and manipulation

Stock prices of companies with Intentionally destroy evidence
poor performance still shot up
 7 ‘SINS’ In China’s Captial Market
China Securities Regulatory Commission
Chairman Shang Fu Lin

Share prices of new

Immoral for stock dealers to lure listed stock ran up too
students investing their live much
saving into stocks

Insider trading and manipulation

Stock prices of companies with Intentionally destroy evidence
poor performance still shot up

1/ Companies Restructure
2/ ‘Rubbish’ asset injection
3/ Speculation
4/ Rise stop board
 7 ‘SINS’ In China’s Captial Market
China Securities Regulatory Commission
Chairman Shang Fu Lin

Share prices of new

Immoral for stock dealers to lure listed stock ran up too
students investing their live much
saving into stocks

Insider trading and manipulation

Stock prices of companies with Intentionally destroy evidence
poor performance still shot up

Fraud in rise of 1/ Companies Restructure

newly open 2/ ‘Rubbish’ asset injection
accounts in A 3/ Speculation
shares 4/ Rise stop board
 7 ‘SINS’ In China’s Captial Market
China Securities Regulatory Commission
Chairman Shang Fu Lin

Share prices of new

Immoral for stock dealers to lure listed stock ran up too
students investing their live much
saving into stocks

Insider trading and manipulation

Stock prices of companies with Intentionally destroy evidence
poor performance still shot up

Fraud in rise of 1/ Companies Restructure

newly open 2/ ‘Rubbish’ asset injection
accounts in A 3/ Speculation
shares 4/ 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 long-
term, 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 long-
term, 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,
diversified dynamic and competitive financial
intermediation. The short-term challenge is managing
the fallout from a stock market bubble. For the long-
term, 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,
diversified dynamic and competitive financial
intermediation. The short-term challenge is managing
the fallout from a stock market bubble
bubble. For the long-
term, 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,
diversified dynamic and competitive financial
intermediation. The short-term challenge is managing
the fallout from a stock market bubble
bubble. For the long-
term, 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,
diversified dynamic and competitive financial
intermediation. The short-term challenge is managing
the fallout from a stock market bubble
bubble. For the long-
term, 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,
diversified dynamic and competitive financial
intermediation. The short-term challenge is managing
the fallout from a stock market bubble
bubble. For the long-
term, 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