Download Chapter One Overview of China’s Financial System

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1. Introduction
2. Overview of China’s Financial System
2.1 A brief Review
2.2 Overview of Financial System
2.3 Efficiency of the Financial System: Theory
discussion
3. The Banking and Intermediation sector
3.1 Bank Deposits and Loans
3.2 The Efficiency of state-owned Banks
3.3 Growth of Non-state Financial Intermediaries
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4. Financial Markets
4.1 Stock Exchanges
4.2 Overview of Bond Markets
4.3 Real Estate Markets
4.4 Private Equity/Venture Capital and the
Funding of New Industries
4.5 Fund Industry
4.6 Regulation Framework
4.7 Further Development of Financial Markets
5. Concluding Remarks
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1. Introduction
 The role of China’s financial system in supporting the
growth of its economy.
 We provide a comprehensive review of China’s
financial system and explore directions of future
development
 How to study the general theory of financial system
to economic growth?
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 Almost every functioning financial system includes
financial markets and intermediaries(e.g., a banking
sector), but how these two standard financial sectors
contribute to the entire financial system and
economy differs significantly across different
countries.
 Although there is no consensus regarding the
prospects for China’s future economic growth, a
prevailing view on China’s financial system
speculates that it is one of the weakest links in the
economy, and it will hamper future economic growth.
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 We discuss what has worked and what remains
to be done within the two sectors and examines
how further development can better serve the
entire economy.
 Discussion
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2. Overview of Financial System
 2.1 A Brief Review
 The history of China’s financial system
 Steps of financial reform
 Progress of financial reform
 Financial development
 Financial crisis
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A. The History of China’s Financial System
 Between 1950-1978, China’s financial system
consisted a single bank-the People’s Bank of
China (PBC),a central-government-owned and
controlled bank under the Ministry of Finance,
which served as both the central bank and a
commercial bank, controlling about 93% of the
total financial assets of the country and handling
almost all financial transactions.
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B. Steps of Financial Reform
 The first main structural change began in 1978,
and ended in 1984
 By the end of 1979, the PBC departed the
Ministry of Finance and became a separate entity,
which three state-owned banks took over some
of its commercial banking businesses.
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Big Four Commercial Banks
 The Bank of China (BOC) was given the mandate to
specialize in transactions related to foreign trade and
investment.
 The People’s Construction Bank of China originally
formed in 1954,was set up to handle transactions related
to fixed investment (especially in manufacturing).
 The Agriculture Bank of China (ABC) was set up (in 1979)
to deal with all banking business in rural areas.
 Finally, the fourth state-owned commercial bank, the
Industrial and Commercial Bank of China(ICBC) was
formed in 1984, and took over the rest of the commercial
transactions of the PBC.
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 The PBC was finally established as china’s
central bank, and eventually a two-tier banking
system was formed.
 The system of PBC has been fully established
through the legislation in 1994 and gradually
adjusted in the past two decades.
 International comparison: financial system
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C. Progress of Financial Reform
 For most of the 1980s, the development of the
financial system was characterized by the fast
growth of financial intermediaries outside “Big
Four” banks.
 Some issues
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 Regional banks were formed in the coastal areas; in rural
areas, a network of rural credit cooperatives(RCCs) was
set up under the supervision of the ABC, while urban
credit cooperatives(UCCs),were also founded in the
urban areas.
 Non-bank financial intermediaries ,such as the Trust and
Investment Corporations(TICs) ,emerged and proliferated
in this period.
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 The most significant event for China’s financial system in
the 1990s was the inception and growth of China’s stock
market.
 Two domestic exchanges (SHSE and SZSE) were
established in 1990 and grew very fast during most of the
1990s in terms of the size and trading volume. However,
their scale and importance are not comparable to the
banking sector, and they have not born effective in
allocating resources in the economy.
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 In parallel with the development of the stock market ,the
real estate markets also went from non-existed in the
early 1990s to one that is currently comparable in size
with the stock market.
 Both the stock and real estate markets have experienced
several major corrections during the past decades and
are characterized by high volatilities and speculative
short-term behaviors by many investors.
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D. Financial Development
 Following the Asian Financial Crisis in 1997, the financial
sector reform has focused on state-owned banks and
especially the problem of NPLs. The China Banking
Regulation Committee was also established to oversee
the banking industries.
 China’s entry into the WTO in December 2001 marked
the beginning of new area, as we continue to observe
increasing competition from foreign financial institutions.
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Institutional Investors
 In China, institutional investors began to emerge in the
late 1990s: the first closed-ended fund in which investors
cannot withdraw capital after initial investment, was set
up in 1997, and the first open-ended fund, in which
investors can freely withdraw capital, was established in
2011.
 By the end to 2006, there were 58 fund companies
managing 307 funds with 25 open-ended funds and the
rest closed-ended.
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 In 2003, a few qualified foreign institutional
investors(QFII) entered China’s asset
management industry, and they have been
operating by forming joint ventures with Chinese
companies.
 On the other hand China allowed qualified
domestic institutional investors(QDII) to invest in
overseas markets beginning in July 2008.
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 As of early 2008, 10 fund companies have
obtained the license to launch QDII with a total
investment quota of US$ 42.17 billion, and five
QDII funds have been set up.
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E. Financial Crisis
 The entrance of China into the WTO introduces
cheap foreign capital and technology, but large scale
and sudden capital flows and foreign speculation
increase the likelihood of a crisis.
 How to avoid damaging financial crisis?
 What is possible for regional financial crisis in China?
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2.2 Overview of Financial System
 Banking and Intermediation Sector
 Financial Markets
 Non-standard Financial Sector
 Foreign Financial Sectors
 Others
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China’s Financial System
Banking and
Intermediation Secter
Policy banks
Commercial bands
Financial Markets
Non-standard
Financial Sector
Foreign sectors
(FDI,Capital Flows)
Stock market
Informal Financial
(SHSE,SZSE,HKSE)
Institutions
Bond market
Coalitions/institutions
among Hybrid Sector firms
and their investors
State Owned
Partially state owned
Government bond
Private owned and
Corporate bond
Foreign
Non-bank Financial
Venture Capital/PE
Institutions
RCC,UCC,
Real Estate
Postal Savings
TIC,Mutual Funds,
Finance Companies
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Banking Financial Institutions, 2011
Institutions
Large commercial banks
Share-holding banks
City Commercial banks
Rural Commercial banks
Rural Cooperative banks
Rural Cooperatives
Postal and Savings Bank
Financial-Asset Management co.
Foreign-funded banks
Number
5
12
144
212
190
2265
1
4
40
Employment
23
Continued
Institutions
Number
Trust and Credit co.
66
Financial Companies of enterprise groups
127
Financial Leasing co.
18
Currency Brokerage co.
4
Automobile Finance co.
14
Consumer finance co.
4
Village and Township Banks
635
Credit and Loans co.
10
Rural Cooperatives
46
Total
3800
Employment
3.2 million
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Four Tiers of Banking Industry
1. Five large commercial banks dominate the
banking industry, in spite of the decreasing shares
in deposits and loans business.
2. Shareholding banks……
3. Regional and local banking institutions such as
urban commercial banks, rural commercial banks
and rural cooperative bans and rural cooperatives,
and postal saving banks……
4. Foreign banks, after 30 years of Greenfield
development committed by foreign banks, the
foreign banks activity in China still accounted for a
paltry 1.93% of total assets and liabilities in 2011.
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The Number of Banks in China
Institutions
2006
2007
2008
2009
2010
2011
Policy Banks
3
3
3
3
3
3
Large commercial banks
5
5
5
5
5
5
Share-holding Banks
12
12
12
12
12
12
City Commercial Banks
113
124
136
143
147
144
City Cooperatives
72
42
22
11
0
0
Rural Cooperatives
19348
8348
4965
3056
2646
2265
Rural Commercial Banks
13
17
22
43
85
212
Rural Cooperative Banks
80
113
163
196
223
190
Village & Township Banks
0
19
91
148
349
635
Postal & Savings Bank
1
1
1
1
1
1
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2.3 Efficiency of the Financial System
 Law and finance literature
 How compare China’s financial system to
those of LLSV sample countries, with
measures for the size and efficiency of
banks and markets?
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Readings
 Rafael La Porta, Florencio Lopez-De-Silanes, Andrei
Shleifer, and Robert W.Vishny (LLSV),1997 “ Legal
Determinants of External Finance”, The Journal of
Finance 52, 1131-1150.
 Rafael La Porta, Florencio Lopez-De-Silanes, Andrei
Shleifer, and Robert W.Vishny,1998 “Law and Finance”,
Journal of Political Economy, 106, 1113-1155.
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 Franklin Allen and Douglas Gale, 2004, “Financial
Intermediaries and Markets”, Econometrica 72, 10231061.
 Franklin Allen, Michael K. F. Chui and Angela Maddaloni,
2004, “Financial Systems in Europe, the USA, and ASIA”,
Oxford Review of Economic Policy 20, 490-508.
 Franklin Allen, J Qian and M Qian, 2008, “China’s
Financial System: Past, Present, and Future”, in Chapter
14.
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 The size of bank loans relative to China’s GDP:
 A. New issuance loans to GDP
 B. Total outstanding loans to GDP
 China’s banking sector has played much larger role
in allocation of financial resources compared to the
equity market.
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New Issuance Loans/GDP
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
New issuance loans
Trillion yuan
0.56
1.29
1.90
2.77
1.84
1.73
3.06
3.64
4.17
9.63
7.95
6.87
8.20
8.89
9.78
GDP
Trillion yuan
9.92
10.97
12.03
13.58
15.99
18.49
21.63
26.58
31.40
34.09
40.12
47.16
51.93
56.88
63.60
NIL/GDP
(%)
5.68%
11.80%
15.77%
20.40%
11.49%
9.37%
14.14%
13.70%
13.28%
28.25%
19.82%
14.58%
15.78%
15.63
15.38
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140
120
100
80
60
40
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
NIL/GDP
TOL/GDP
32
Total Outstanding Loans(at year-end)/GDP
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Total loans(at year-end)
Trillion yuan
9.94
11.23
13.13
15.90
17.74
19.47
22.53
26.17
30.34
39.97
47.92
54.79
62.99
71.90
81.70
GDP
Trillion yuan
9.92
10.97
12.03
13.58
15.99
18.49
21.63
26.58
31.40
34.09
40.12
47.16
51.93
56.88
63.60
TL/GDP
(%)
100.16%
102.43%
109.11%
117.06%
110.94%
105.27%
104.15%
98.45%
96.61%
117.24%
119.44%
116.20%
121.29%
126.41
128.46
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The Size of Equity Market to GDP
 How to evaluate the role of equity market to
China’s economy?
 How to compare China’s case with other major
economies?
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Market Capitalization/GDP
Year
2001
2002
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Market capitalization
Trillion yuan
4.81
4.35
3.83
4.25
3.71
3.24
8.94
32.71
12.14
24.39
26.54
21.48
23.04
GDP
Trillion yuan
9.92
10.97
12.03
13.58
15.99
18.49
21.63
26.58
31.40
34.09
40.12
47.16
51.93
MC/GDP
(%)
48.47%
39.69%
31.85%
31.26%
23.18%
17.54%
41.33%
123.07%
38.65%
71.56%
66.16%
45.54%
44.12%
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Discussion
 If banks and equity markets are small relative to
the overall economy of China, then where do
firms get the capital and funds?
 Social financing as a new feature of China’s
financial system emerged just two or three years
ago.
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Social Financing
and Its Composition
Social Financing and Its Composition
Year
Social
Financing
RMB
Loans
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2011.2
3411.3
2862.9
3000.8
4269.9
5966.3
6980.2
13910.4
14019.1
12828.6
15760.6
172904
164571
1847.5
2765.2
2267.3
2354.4
3152.3
3632.3
4904.1
9594.2
7945.1
7471.5
8203.5
8891.7
9781.6
trillion yuan
Foreign
Currency Credit Entruste
Loans
Loans d Loans
(RMB)
73.1
17.5
228.5
60.1
138.1
311.8
141.5
196.1
145.9
269.5
82.5
386.4
337.1 170.2
194.7
426.2 314.4
926.5
678
436.4
485.5
874.8 386.5
571.2 1286.2 203.4
916.3 1283.7 1288.8
584.8 2546..6 1840.4
355.4 2507.0 517.4
Undiscou
nted
Bankers'
Acc.
-69.5
201
-29
2.4
150
670.1
106.4
460.6
2334.6
1027.1
1049.8
775.1
-128.5
Corporat
e Bonds
Domestic
Equity
Financing
36.7
49.9
46.7
201
231
228.4
552.3
1236.7
1106.3
1365.8
2249.8
1811.1
2425.3
62.8
55.9
67.3
33.9
153.6
433.3
332.4
335
578.6
437.7
250.8
221.9
435.0
37
Social Financing and its Composition, 2002
1%
2%
3% -3% 3%
RMB Loans
Foreign Currency
Loans(RMB)
Credit Loans
Entrusted Loans
Undiscounted Bankers'
Acc.
Corporate Bonds
88%
Domesitc Equity
Financing
38
Social Financing and its Composition, 2012
RMB Loans
2%
15%
Foreign Currency
Loans(RMB)
Credit Loans
7%
Entrusted Loans
8%
54%
Undiscounted Bankers' Acc.
8%
6%
Corporate Bonds
Domesitc Equity Financing
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Discussion
 Bank loans were one of the most important
financing sources for Chinese economy
but started to decrease the influence.
 Which channel will be promoted in China’s
financial system in the coming years?
 Comparative studies to your own country.
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3. The Banking and Intermediation
 Saving behavior in China
 Interest-bearing “saving deposits” are by far the
most important form of deposits in China, which
provide a good source for bank loans and other
form of investment.
 How to explain the saving behavior in different
countries?
41
Total Saving Amount to GDP,%
Country
China
India
Argentine
Brazil
Mexico
1995
42
27
16
16
19
2009
54
35
23
15
22
Middle
26
29
Netherlands
Greece
27
18
22
3
Country
Australia
France
Germany
Japan
Korea
Singapore
Switzerland
UK
US
1995
18
19
20
30
36
30
30
15
16
2009
21
16
21
24
30
32
32
12
10
42
Readings
 Modigliani, Franco and Shi Larry Cao, “The
Chinese Saving Puzzle and the Life-Cycle
Hypothesis,” Journal of Economic Literature,
Vol.XLII (March 2004), 143-170.
 Others
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3.1 Bank Deposits and Loans
 China’s household savings rates have been high
throughout the past two decades.
 Given the growth of the economy, the sharp
increase in personal income, total bank deposits
from individuals have been growing fast since
the mid-1980s, with the 2010 figure of RMB
30.33 trillion, and RMB 40.6 trillion in 2012, 50.3
trillion in 2014.
44
Household Savings/GDP,1991-2010
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0.00%
45
Total Outstanding Loans/GDP
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
200.00%
180.00%
160.00%
140.00%
120.00%
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%
Total savings/GDP
46
Sources for Bank Deposits (RMB)
Household
Trillion, %
45.95%
Enterprises
Trillion, %
17.6
2008
22.2
21.7
1.8
45.7 (46.6)
2009
26.5
29.8
2.2
58.5 (59.8)
2010
30.8
30.5
2.5
63.8 (71.8)
2011
34.8
30.4
2.6
67.8 (80.9)
2012
40.6
2013
46.1
36.2
3.0
104.4
2014
50.3
37.8
3.6
113.9
32.7
48.59%
35.66%
1.8
2.4
4.63%
Total
2007
44.27%
18.9
Fiscal
Trillion, %
2.62%
38.3 (38.9)
75.7 (91.7)
47
Credit Fund Balance Sheet
Credit funds Balance Sheet of Financial Institutions(billion yuan)
YEAR
2002
2009
funds
%
funds
%
All uses
18402.45
100.00%
68187.5
100.00%
Loans
13129.39
71.35%
39968.5
58.62%
Short-term loans
7424.79
40.35%
14661.1
21.50%
Medium-long loans
4864.2
26.43%
22241.9
32.62%
Credit loans
217.03
1.18%
527.7
0.77%
Other loans
623.37
3.39%
2537.8
3.72%
Securities & Investment
2678.97
14.56%
8664.3
12.71%
Purchase of PX
2322.33
12.62%
19311.2
28.32%
Others
271.75
1.48%
243.48
0.36%
48
 Others include Assets in International Financial
Institutions, purchase of gold & silver, and
Government debt.
49
Breakdown of Bank Loans by Borrower Types
Breakdown of Bank Loans (billion yuan)
Year
2002
Total loans
13129.39
Short-term loans
7424.81
Industrial loans
2009
/
39968.5
/
100.00%
14661.1
100.00%
2019.05
27.19%
3876.9
26.44%
Commercial loans
1797.31
24.21%
1948.3
13.29%
construction loan
274.8
3.70%
364.7
2.49%
Agricultural loans
688.46
9.27%
2162.3
14.75%
Loans to TVEs
681.23
9.18%
902.9
6.16%
Loans to private and individual
cooperative firms
105.88
1.43%
711.7
4.85%
loans to foreign-invested enterprises
269.74
3.63%
218
1.49%
other short-term loans
1588.34
21.39%
4476.3
30.53%
50
3.2 The Efficiency of State-owned Banks
 A central question in reforming the state-owned
banks is the ongoing privatization process.
 There are two imminent issues. First, more
competition in the banking and intermediation sector,
including the entrance of more non-state banks and
intermediaries, is good for improving the efficiency of
both the Big Four banks and the entire banking
sector.
 Another issue is the government’s duel role as
regulator and as majority owner.
51
Discussion
 Only after these state-owned banks are owned by non-
government entities and individuals can they
unconditionally implement all profit-and-efficiencyenhancing measures.
 In fact until a sample of both state-owned and non-stateowned banks, Berger et al. show that the addition of
foreign ownership stakes into banks’ ownership structure
is associated with significant improvement of bank
efficiency.
52
3.3 Growth of Non-state Financial
Intermediaries
 The development of both non-state banks and other
financial institutions is crucial for China to have a stable
and functioning banking system in the future.
 In addition to boosting the overall efficiency of the
banking system, these financial institutions providing
funding to support the sustainable growth of Chinese
economy.
 More discussion
53
. Financial Markets
 We examine China’s financial markets, including
both the stock and real estate markets, and the
recent addition of venture capital and private
equity markets, as well as asset management
industries.
 The Futures Market
 The Foreign Exchange Market
54
Distinction between Stock and Bonds
 Investors can earn a return from stock in one of
two ways. Either the price of the stock rises over
time, or the firm pays the stockholder dividends.
Frequently, investors earn a return from both
sources.
 Stock is riskier than bonds because stockholders
have a lower priority than bondholders when the
firm is in trouble, the returns to investors are less
assured because dividends can be easily
changed, and stock price increases are not
guaranteed.
55
 It is possible to make a great deal of
money by investing in stock, whereas that
is very unlikely by investing in bonds.
 Another distinction between stock and
bonds is that stock does not mature, which
brought about a notorious story in a
Chinese listing company.
56
A Residual Claiment
 Ownership of stock gives the stockholder certain
rights regarding the firm. One is the right of a
residual claimant: stockholders have a claim on
all assets and income left over after all other
claimants have been satisfied. If nothing is left
over, they get nothing.
 It is possible to get rich as a stockholder if the
firm does well.
 Most stockholders have the right to vote for
directors and on certain issues, such as
amendments to the corporate charter and
whether new shares should be issued.
57
4.1 Stock Exchanges
 After the inception of China’s domestic stock
exchanges, the SHSE and SZSE in 1990, they
initially grew quickly.
58
Evolution of Stock Market
 The preparation for capital markets(1978-1990)
 Initiated the shares of firm and transformed one State-
owned Department Store to be a share-holding
company in 1984.
 It was permitted to sell and buy firm’s shares over the
country in major city’s commercial banks in the late
1980s.
 The emergence of stock exchange markets (Shanghai
and Shenzhen) and their operation features (1991-1996).
 The policy adjustments for stock markets and market
development (1997-Today) .
59
 There are two other markets established to complement
the two main exchanges.
 First, a fully electronically operated market(second-tier
market) for small and medium enterprises(SMEs) was
opened in June 2004. it was designed to lower the entry
barriers for SME firms, especially newly established firms
in the high-tech industries
 By the end of February 2007, there were 119 firms listed
in this market
60
 Second, a “third-tier market” was established to
deal primarily with de-listing firms and other overthe-counter(OTC) transactions.
 Since 2001, some publicly listed firms on both
SHSE and SZSE that do not meet the listing
standards have been de-listed and the trading of
their shares shifted to this market.
61
Discussion
 There is abundant evidence showing that
China’s stock markets are not efficient in that
prices and investors’ behavior are not
necessarily driven by fundamental values of
listed firms.
 The current process of listing companies fosters
both a problem of adverse selection among firms
seeking an initial public offering(IPO) and a
moral hazard problem among listed firms.
62
4.2 Overview of Bond Markets
 The government bond market had an annual growth rate
of 26.9%during the period 1990-2005 in terms of newly
issued bonds, while total outstanding bonds reached
RMB 3,144.9 billion at the end of 2006.
 The second longest component of the bond market is
called “policy financial bonds”. These bonds are issued
by “policy banks”, which operate under the supervision of
the ministry of Finance and the proceeds of bond
issuance are invested in government-run projects and
industries such as infrastructure construction.
63
 The most underdeveloped component of China’s
financial markets is the corporate bond market.
 Compared to government-issued bonds, the size
of the corporate bond market is minuscule up to
the end of 2010, but is increasing rapidly in the
past four years.
64
Issued Volume of T-Bonds and
Corporate Bonds
Issued woluume of T-bonds and Coporate Bonds(billion yuan)
Year
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
T-bonds
593.43
32.5
682.39
704.2
888.33
2313.91
855.82
1792.72
1977.83
1710
Coporate Bonds
628.01
35.8
32.7
204.65
393.83
505.85
843.54
1586.44
1549.15
2185.07
65
Issued volume of T-bonds and Corporate Bonds (billion yuan)
2500
2000
1500
1000
500
0
2002
2003
2004
2005
T-bonds
2006
2007
2008
2009
2010
2011
Coporate Bonds
66
Discussion
 There are a number of reasons for the
underdevelopment in bond markets in China.
 Lack of sound accounting/auditing system and high
quality bond-rating agencies is an important factor.
 Lacking of a well-constructed yield curve is another
important factor in China.
 The deficiencies in the term structure of interest
rates hamper the development of derivatives.
markets that enable firms and investors to manage
risk, as well as the effectiveness of the government’s
macroeconomic policies.
67
4.3 Real Estate Market
 Prior to 1998, government control was dominant with
the market only playing a secondary role, and
mortgages were not designated for retail customers
and households.
 Chinese citizens working for the government and
government-owned companies and organizations
could purchase properties at prices significantly
below market prices, with the subsidies coming from
their employers.
68
 The reform policies introduced in 1998 aimed to
end the distribution of properties by employers
and establish new housing finance and market
system.
 Local governments have established programs
to sell properties to individuals instead of
allocating residency as part of the employment
benefits.
69
 Since 1998,the residential housing reform and the
development of individual mortgages, along with
rising household income and demand for quality
housing, had stimulated the fast growth of the real
estate.
 Total investment increased 1.11 trillion RMB in
2003 ,or 24.24% of the national fixed assets
investment, to 7.57 trillion RMB in 2011, or 25.02%
of the national fixed assets investment.
70
Real Estate Investment
Real Estate Investment (2003-2011)
billion yuan
2003
1314.34
2004
1667.89
2005
1950.53
2006
2452.44
2007
3243.89
2008
4044.18
2009
4935.85
2010
6487.73
2011
8168.61
2012
9915.93
2013
11880.94
71
Real Estate Investment (2003-2011)
billion yuan
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
72
Financing for the Real Estate Sector
 As the real estate sector gains more weight in
the economy, its impact on other industries,
especially financial and banking industries, has
also increased considerably. Bank loans are the
most important source of real estate financing at
early stage.
 Most of the investment funds have come from
domestic sources.
73
Discussion on Bubble
 With the expansion of the real estate market,
banks and other financial institutions lent more to
keep up with the demand for financing; when the
fast expansion could not be sustained by
economic growth and household income, inflated
demand led to hikes in property prices and a real
estate bubble surfaced.
74
4.4 Private Equity/Venture Capital
and the Funding of New Industries
 Financial source for new industries.
 Franklin Allen, Douglas Galeb, “Diversity of
Opinion and Financing of New Technologies”,
Journal of Financial intermediation, Volume 8,
1999, 68–89.
75
 What is unusual about China is that it currently
has the ability to develop both traditional
industries, such as manufacturing, and new high-
tech industries in the near future , such as
aerospace, computer software, internet business,
semi-conductors, and bio-genetics.
76
4.5 Fund Industries
 The independent securities firms and banks all
offer a wild variety of investment funds (or mutual
funds). Investment funds pool the resources of
many small investors by selling these investors
shares and using the proceeds to buy securities.
 Through the asset transformation process of
issuing shares in small denominations and
buying large blocks of securities, investment
funds can take advantage of volume discounts
on brokerage commissions and can purchase
diversified portfolios of securities.
77
 Investment funds allow the small investors
to obtain the benefits of lower transaction
costs in purchasing securities and to take
advantage of the reduction of risk by
diversifying the portfolio of securities held.
 Hedge funds……
78
Development of the Fund Industry
 The growth of open-end funds contributed to
most of the growth in the industry.
 Management fee in the major source of income
for fund. companies, accounting for about 80% of
total income. administration fees account for 9%
of total income, and the rest of the income
comes from investment and other incomes.
79
 With only a handful of investment funds in
1998,China had 914 securities investment funds
by the end of 2011.
 The total fund value increased from RMB 11
billion in 1998 to about RMB 2.58 trillion in May
2008.
 The capital of securities investment funds
increased from RMB 2.42 trillion in 2010 to RMB
2.65 trillion in 2011.
80
Growth of Securities Investment Fund
Growth of Securities Investment Fund
Year
NO.of SIF
Capital of SIF (billion yuan)
2005
218
471.42
2006
301
602.07
2007
346
2233.98
2008
439
2574.18
2009
557
2676.71
2010
704
2422.84
2011
914
2651.04
81
3000
800
2500
NO. of SIF
1000
2000
600
1500
400
1000
200
500
0
capital of SIF(billion yuan)
Growth of securities investment fund
0
2005
2006
2007
2008
year
NO.of SIF
2009
2010
2011
capital of SIF
82
QFII
 The first fund managed by a qualified foreign
institutional investor(QFII) was set up in 2002.
 The State Administration of Foreign
Exchange(SAFE) is the government agent that
regulates the QFII funds.
 The QFII Act allows foreign investors to invest in
Chinese securities, with the intention of introducing
sophisticated foreign investors to the Chinese
market with hope that their presence would improve
market efficiency.
83
 In August 2006, CSRC revised QFII rules to
promote more participation from foreign
investors. Under the new rules, there has been a
significant increase in applications from foreign
investors for QFII quotas.
 As of April 2008,there are a total 54 of QFIIs
operating in China.
84
QDII
 The approval of qualified domestic institutional investors
(QDII) to invest in overseas markets came after QFII, in
July 2006.
 The QDII funds were invested in stocks, bonds, real
estate investment trusts, and other mainstream financial
products in markets such as New York, Tokyo, London,
and Hong Kong.
 As of early 2008, 10 fund companies have obtained the
approval to launch QDII; five QDII funds have been
launched by January 2008.
85
 Mutual funds in China only hold around 1.5% of
all financial assets.
 The further growth of the economy and
continuing reform of the pension system will
generate both demand and supply of capital for
the industry.
86
4.6 Regulation Framework
PBoC
MOF
CDRC*
CSRC
CP/Financial
debenture
T-Bond
Enterprise
bond
Corporate
bond
Issue
Trade
Clearing
Interbank market
Central TB Depository&Clearing
OTC
Exchange market
CSDCC
87
4.7 Further Development of
Financial Markets
 The financial markets in China do not currently
play nearly as important a role as banks.
 If it is to enlarge risk management possibilities
for its financial institutions and firms, it needs to
develop new financial products and markets.
 If there is to be an alternative to banks for raising
large amounts of capital, then China need deep
and efficient markets.
88
A. Improving Regulations
 There are two ways in which markets are
regulated in practice: market force and selfregulation, and government regulation.
 A good example of regulation though market
force and self-regulation in the UK.
 A bad example of China’s formal financial
markets.
89
B. Sale of Government Shares in
Listed Firms
 One of the major problem Chinese stock markets
have faced in recent years has been caused by
the large amount of shares in listed companies
owned by the government and government
entities.
 Share reforms began with a pilot program with
only four companies participating in April 2005.
90
C. Encouraging Listing of Firms
from the Hybrid Sector
A high priority for reform the
markets in changing of listing
requirements to make it
advantageous for dynamic and
successful companies to be listed
on exchanges.
91
D. The Development of
Institutional Investors
 An effective way to improve the efficiency of China’s
stock markets, as well as corporate governance of listed
firms, is to encourage further development of domestic
financial intermediaries that can act as institutional
investors.
 Institutional investors such as insurance companies,
mutual funds, and pension funds are relatively small in
terms of assets held given their early stage in the
development.
92
E. Develop more Financial
Products and Markets
 Another issue is to develop more financial
products so that investors can form
diversified portfolios with more than just
stocks.
 Corporate bond markets.
 More derivative securities.
 More products from issuance companies.
93
5. Concluding Remarks
 Does China’s financial system stimulate or
hamper economic growth?
 Is it a good system of bank-dominated feature to
China’s financial stability?
 Should the stock market play more important role
to promote financial stability and economic
growth?
 What kind mechanism of financial channels
should be encouraged?
94
Reading List
 Franklin Allen and Douglas Gale, 2004, “Financial Intermediaries and Markets”,
Econometrica 72, 1023-1061.
 Franklin Allen, Michael K. F. Chui and Angela Maddaloni, 2004, “Financial Systems in
Europe, the USA, and ASIA”, Oxford Review of Economic Policy 20, 490-508.
 F Allen, J Qian and M Qian, 2008, “China’s Financial System: Past, Present, and
Future”, chapter 14.
 F Allen, J Qian and M Qian, “ICBC's IPO and the Reform of China’s Banking Sector”,
Working Paper, Wharton Financial Institutions.
 Beltratti Andrea and Bortolotti Bernardo, 2006, “The Nontradable Share Reform in the
Chinese Stock Market”, Fondazione Eui Eurico Mattei Note di Lavoro Series Index,
15.
 Black, Bernard S. and Ronald J.Gilson, 1998, “Venture Capital and the Structure of
Capital Markets: Bank versus Stock Markets” Journal of Financial Economics, 47,
243-277.
 Robert Culla and Lixin Colin Xub, 2005, “Institutions, ownership, and finance: the
determinants of profit reinvestment among Chinese firms”, Journal of Financial
Economics, 77, 117-146.
95
 Roger H. Gordona and Wei Lib, 2003, “Government as a




discriminating monopolist in the financial market: the case of China”,
Journal of Public Economics, 87, 283-312.
Leslie A. Jenga and Philippe C. Wellsb, 2000, “The determinants of
venture capital funding: evidence across countries”, Journal of
Corporate Finance 6, 241-289.
Samuel Kortum and Josh Lerner, 2000, “Assessing the Contribution
of Venture Capital to Innovation”, The RAND Journal of Economics
31, 674-692.
Rafael La Porta, Florencio Lopez-De-Silanes, Andrei Shleifer, 2002,
“Government Ownership of Banks”, The Journal of Finance 57, 265302.
Levine Ross,2002, “Bank-Based or Market-Based Financial Systems:
Which Is Better?”, The Journal of Financial Intermediation 11, 1-30.
96
THANKS!
97