| Financial Markets in China |
Source: EMEAP
A. MONEY MARKET The money market in China consists of the interbank lending market, the negotiable instruments market and the treasury bond repurchase market. 1. Types of Instruments 1.1 Interbank lending On January 3,1996, a nationwide unified interbank lending computer network was put into operation on a trial basis, and the nationwide unitary, open, order interbank lending market has been established. The interbank lending market was not unified prior to this date. The establishment of unified interbank market has linked all interbank markets across the country. The first publication of the China interbank offered rate (CHIBOR) was on January 4 1996. By the end of 1996, the transaction values totaled amount came to RMB587.161 billion. On June 1, 1996, the PBC gave up control over the upper interest rate limit for interbank lending. This is now determined by the market. The central bank regulates market interest rates indirectly. The nationally integrated interbank lending market consists of two levels. The first level- national level - links all the headquarters of the commercial banks and the regional financing centers through a computer network. The second level - regional level - links the branches of banks at various administrative levels and non-bank financial institutions through the regional financing intermediaries who buy funds from the financial institutions with excessive money and sell to the institutions short of funds. The financing intermediaries can go to the first level to meet funding imbalances at the second level. The interbank lending instruments include 7 types of maturities: 1 day, 7-day, 20-day, 30-day, 60-day, 90-day, and 120-day. 1.2 Negotiable instruments The negotiable instruments market is the one in which commercial papers are the main instruments. Commercial paper activity commenced in 1981. In recent years the commercial paper market has developed steadily and the acceptance, discount and rediscount process has become standardized. From March 1,1997, the PBC has started to rediscount commercial paper with the head offices of the four wholly owned state banks (the Industrial and Commercial Bank of China, the Agriculture Bank of China, the Bank of China, and the China Construction Bank). Rediscounting has become an important instrument for indirect regulation by the central bank. The commercial bills market has increased significantly. The total value of transactions in 1996 was about RMB400 billion. The accumulated value of discounted bills and rediscounted bills held by financial institutions is about RMB230 billion and RMB130 billion respectively. The ratio of rediscounted bills : discounted bills : accepted bills is around 1: 1.8: 3.1. In some industries and big enterprises commercial bills have become the major means of raising funds. Some enterprises have made payments by endorsing the accepted bills and some have begun trading the discounted bills. Some local branches of People’s Bank of China have setup a local commercial papers market. The discount and rediscount maturities have shortened and the turnover has speeded up which has supported the funding needs of the national industry development policy and credit policy. The commercial banks involved have improved their management in terms of the inter-bank authorization of the bills acceptance operations and risk control processes. 1.3 Repurchase transactions — open market operations On April 9, 1996, the central bank engaged in the open market transactions on the money market with treasury bills as the trading instrument. The object of the open market operation is controlling the liquid reserves of the financial institutions. By the end of 1996, the central bank completed 51 repurchases of treasury bills totaling RMB4.3 billion. Compared with other monetary policy instruments (such as added loan scale regulation and re-loans), the scope of the open market business is small. The significance of the startup of open market in treasury bill lies in the move to indirect interest rate setting by the central bank. The central bank will increase the proportion of open market business for basic monetary regulation and reduce direct planned loans. The open market business will become the main instrument of monetary policy of the PBC. Open market operations are conducted over the counter. Prices are determined by public bidding in terms of short-term repurchase. The operational instruments options during its infant period are short-term state bonds issued by the Ministry of Finance. Because of their predictable yield, and high liquidity, short-term state bonds are an appropriate instrument for the central bank to use to adjust the monetary base during the initial period of open market operations. 2. Participants 2.1 Interbank market All authorized commercial banks, trust and investment corporations, financial leasing companies, finance companies of business conglomerates, urban credit cooperatives and rural credit cooperatives, securities companies, insurance companies and financing intermediaries can enter the inter-bank lending market, which consists of the primary dealing network and the secondary dealing network. The primary network participants include the head offices of various commercial banks and 35 financing intermediaries. The secondary network participants include the branches of commercial banks and non-banking financial institutions. The branches need to get the approval from their head office before they enter the inter-bank lending market. 2.2 Open market operation Participants of the open market operations are the central bank and large domestic commercial banks (1). The Open Market Operations Office of PBC conducts the transactions. Financial institutions voluntarily take part in open market operations. They conduct securities transactions directly with the central bank. Their obligations are; to actively participate in the open market operation to actively cooperate with the central bank in promoting the stability of the financial markets while adhering to the monetary policy of the central bank to honestly conduct securities transactions to submit financial markets data to the central bank to subject themselves to the regular and irregular examination and supervision of their securities operation and performance by the PBC. The participants in the open market operation must be approved by the PBC. Factors considered in the approval process include the capital adequacy of the financial institution. Approvals are officially announced. The number of participants and the types of financial institutions is expected to increase. Note (1): At present, there are about 17 commercial banks participating in the open market operations: the Industrial and commercial Bank of China, the Agricultural Bank of China, Bank of China, the Construction Bank of China, Bank of Communications, CITIC Industrial Bank, China Everbright Bank, China Investment Bank, Hua Xia Bank, Shanghai Pudong Development Bank, Merchants Bank, Guangdong Development Bank, Shenzhen Development Bank and Fijian Industrial Bank, Shanghai urban Cooperative Bank, Beijing Urban Cooperative Bank and Nanjing Urban Cooperative Bank. 3. Brokers/Dealers and Trading Systems 3.1 Interbank market In the interbank market the financing intermediaries, as the local brokers, undertake 70 percent of the total transaction volume. Financing intermediaries have a responsibility to adjust the fund balances within the local branches of commercial banks and local non-banking financial institutions, implement and execute the central bank’s policies and regulations, maintain in good order the local lending business and supervise activity in terms of lending amount, maturity, lending counterparty and risk. The financing intermediary may act in a purely broking role or may act as a dealer borrowing and lending funds on its own account. In all cases it checks the lending maturity and lending purpose in line with the regulations. The financing intermediaries are permitted to make charges of interest rate differentials of 0.03% monthly when they deal with their own accounts and take commission of 0.03% monthly when they act as the agent of their customers. Both these two charges are calculated based on the lending amount. The primary dealing network is computerized linking the head offices of commercial banks and financing intermediaries. The computerization system has three functions as follows; (1) Quoting and Trading; (2) Transaction Data Statistics; (3) Information Service. 3.1.1 Quoting and trading The dealers can make and find quotations through the computer system, which shows the various real-time quotations and the amount and maturity of the funds available. The transaction is done through the computer system by the counterparties inputting the relevant data. The clearing process, which is not done in this system, is described in paragraph 5. 3.1.2 Transaction data statistics The financing intermediaries record the daily lending amount, maturity and lending rate within the secondary dealing network in the computerized system. The system consolidates the information and calculates the China Inter-bank Lending Offer Rate (CHIBOR) and transaction volumes in the different maturities as a reference point for the central bank. 3.1.3 Information service In accordance with the requirements of the central bank and dealers, the computer system stores all relevant information and keeps a record of lending activity, especially the pending amount due to the counterparties. 3.2 Repurchase transactions - open market operations To ensure the smooth performance of open market operations, the Open Market Operations Room of PBC is establishing a transaction network supported by telephones and computers. This system, which is also called the Working Station Of the Central Bank, has the following functions: tendering, bid receipt and acceptance; clearing securities for accepted bids, securities information about registered companies and custodian institutions; and statistics and information about open market transactions. This technical system is expected to be improved step by step. The design of the computer network and the extension of its ability to allow direct transactions will create appropriate conditions for the development of the open market operations. 4. Price Determination Process 4.1 Interbank market The lending rate is determined through negotiation by lender and borrower in accordance with the supply and demand for funds. Currently the lending rate is higher than the rate quoted to customers by financial institutions and a little lower than the re-lending rate of the central bank 4.2 Open market operations Prices are determined in open market operations through tendering. Tendering is made up of quantitative and interest rate tendering, with the latter further divided into complete interest rate tendering and bottom-price interest rate tendering. On the transaction day, the Open Market Operations Office of PBC will announce the details of the tender to all the participants. Details include the types of securities, the fixed prices (interest rates) and the total quota available for repurchase that day. Each commercial bank will lodge their bids with the Operations Office of PBC within the quotas and time limit specified. The Operations Office will determine the quantity for each bidder based on promulgated principles. If the total bids are within the quotas offered by the central bank, the bidders will get their award accordingly. If the amount of bidding exceeds the ceiling for tendering, the Operations Office will determine the award for each bidder based on the proportion of bidding amount submitted by each compared to the total bids submitted. The PBC publishes information on types of state bonds to be transacted, the repurchase maturities and quotas. Commercial banks voluntarily declare the quantities and interest rates of state bond transactions are required by their financial position. The central bank queues the bids in interest rate order and determines the award. The award rate will be the tendering rate. Because of China’s present interest rate framework and the commercial reform of banks, the bottom-price interest rate is regarded as the basis of interest rate bidding among commercial banks. Gradually this should change to complete interest rate tendering in the future. 5. Delivery Mechanism Interbank market The Clearing process is done in the Clearing System of People’s Bank of China after the two counterparties have reached agreement. All financial institutions and financing intermediaries involved in the inter-bank lending market need to open an account with the People’s Bank of China. The inter-city clearing is done through the Electronic Inter-bank Clearing System. It takes place on T+1; that is, the day after the transaction day. The local clearing is done through the local bill exchange. It takes place on T+0; that is, on the transaction day. Open Market operations At present the register of securities at the Shenzhen and Shanghai Stock Exchanges mainly serves for transactions on the exchanges. In March 1996 the People’s Bank of China and the Ministry of Finance jointly established the China Government Securities Depository Trust and Clearing Co, Ltd. (the Clearing Corporation). The purpose of the Clearing Corporation is to foster this over the counter market and to gradually form a nationwide unified state bond bookkeeping and settlement system. The Clearing Corporation has been handling registration, custodian services and settlements of policy financial securities as well as storage for state bonds. The central bank and the commercial banks all have opened securities depository accounts at the corporation. The securities transfer and clearing for the open market operations are conducted through the Clearing Corporation. As both the Shanghai and Shenzhen Stock Exchanges have opened the depository accounts with the Clearing Corporation, transactions on the exchanges and over the counter can be linked up. Fund settlements for open market operations are carried out through the electronic fund settlement network of the PBC. The PBC is responsible for the formulation of the specific accounting procedures and conducts fund settlements with the head offices of commercial banks through their excess reserve accounts. The fund transfer among local branches of commercial banks is done by their own head offices. The settlement of securities transactions between the PBC and the head offices of the commercial banks is T+1. 6. Legal Framework, Accounting Practice and Tax System Interbank market The central bank is responsible for organizing the inter-bank lending market, specifying appropriate regulations acts, supervising the market and punishing infringements to those acts and regulations. The People’s Bank of China has promulgated the following regulations to control lending risk, standardize lending activities, to prevent lending from flowing into the capital market and to assist supervision by the central bank: The financial institutions are not permitted to take part in off-network lending activities. All their lending business must be done in the primary and secondary dealing network. The financial institutions are not permitted to invest in fixed asset investment, such as securities investment and property investment, or supplement shortage of credit fund using inter-bank lending funds. The commercial banks, securities companies, and other non-banking financial institutions are only permitted to lend funds with maturities of 120 days, 5 days and 7 days. Borrowing and lending by the commercial banks is not permitted in excess of 4% and 8% of the total amount of various deposits categories (minus reserve requirement, excess reserve and inter-bank borrowings). Borrowing and lending of other non-banking financial institutions is not permitted in excess of their total capital. Both the primary and secondary dealing network are free of tax collection. 7. Relationship with Monetary Policy and the Role of the Central Bank To utilize the monetary tools to accommodate its market conditions the central bank monitors the daily volume of transactions in the inter-bank lending market and the movement of interest rates. From this information it makes judgments about whether market conditions are tight or loose. Market conditions are altered by decreasing or increasing the re-lending funds available to commercial banks and buying or selling Treasury bills in the open market. From 1997, the PBC will enhance its ability to adjust the monetary base and decrease the proportion of direct planned financing. Open market counterparties will also be expanded from commercial banks to other financial institutions to promote open market operations as one of the central bank’s major monetary policy instruments. As an important policy instrument of the central bank, the open market operations can be used frequently and flexibly to forecast and adjust the money supply. 8. Measures to Develop the Market Interbank market The inter-bank lending market is the foundation for the operation of the central bank’s monetary policy. The current interbank lending market, which is still undeveloped, needs to be upgraded further. The main steps comprise stipulating the integrating regulations on inter-bank lending, strengthening risk control, and helping the central bank to strengthen the management of the national inter-bank lending market. Negotiable instruments To enhance money market and promote the development of the negotiable instruments market, the central bank will take the following measures; raise the proportion of rediscount activities to progressively strengthen the role of commercial bills in the economy at large, encourage transfers of endorsed bills and discount business among commercial banks, restructure the interest rates for discounting and rediscounting and set up the benchmark interest rate for rediscounting, develop negotiable instruments to encourage enterprises which have good-will in credit book commercial bill, and to make commercial credit billization. Open market operations In future open market operations will utilize state bonds, policy financial securities and central bank financing bonds as its transaction instruments. First priority will be the state bonds and policy financial bonds with the central bank’s financing bonds in reserve. To speedily and effectively transmit the objectives of the central bank’s monetary policy to the markets, the open market operations counterparties will be extended from commercial banks to non-banking financial institutions. To further strengthen the functioning of the open market operations it is intended to; extend the open market operations mechanism to adverse repurchase and direct securities transactions; accelerate the process of interest rates being fully market determined; set up an efficient payment clearing system and provide reliable technical support for the open market operation. It is also intended to further develop and clarify the open market operations rules and regulations by; setting up administrative measures for primary dealers and standardize the participants in open market operations; formulating the regulations for the open market operations supporting system. B. BOND MARKET Introduction It is in the course of reform and opening to the outside world that China’s bond market made a fresh start and developed rapidly. A bond market with government bond as its main part and corporate bond and financial bond coexisting has begun to take shape. A relatively standard market trading system has also been formed. 1. TYPES OF INSTRUMENTS 1.1 Government bond Government bonds include Treasury Bond, State Key Construction Bond, and Special-type Bond. The first issuance of government bonds after the foundation of New China was in 1950, and the bonds issued then were named People’s Triumph Commodity-indexed Government Bonds. State Economic Construction Government Bonds were issued each year from 1954 to 1958. During the twenty years from 1959 to 1979, no government bond was issued. China resumed the issuance of government bond in 1981, and has issued for 16 consecutive years with the total amount of various issuance up to RMB670 billion by 1996. The main purpose of Treasury bond issuance in China is to finance the constructive fiscal deficit. The proportion of government bonds to finance the fiscal deficit has been increasing since 1981, and the proportion rose up to 100% in 1994. 1.2 Corporate bond Corporate bonds include National Key Enterprise Bond, Local Enterprise Bond, short-term financing bond, internal bond, etc. The issuance of corporate bond in China began in 1978. By the end of 1995, the accumulative total of the corporate bonds issued in China registered RMB164.2 billion and the amount redeemed was RMB129.2. The corporate bonds are normally issued on a commission basis with the securities companies and, the trust and investment companies acting as the commission agents, or underwritten by a number of financial institutions. 1.3 Financial bond China’s financial bond was firstly issued by the Agriculture Bank of China and the Industrial and Commercial Bank of China in 1985. Some other banks also began to issue financial bond in the years that followed. Revenue from the issuance of financial bond is mainly used in providing special-type loans. Financial bonds include bond with a lump sum payment of principal and interest at maturity, bond issued at a discount rate and bond with accumulative interest. By the end of October 1996, the grand total of the financial bonds and policy financial bonds issued in China amounted to RMB118.2 billion and 212.8 billion respectively. Most of the financial bonds and the corporate bonds are traded over the counter across the country. The amount of the corporate bonds traded on the stock exchanges is much less than those traded over the counter. 1.4 Primary market 1.4.1 Government bond The issue method of Treasury bond on the primary market went through the process of administrative allocation, over-the-counter sale, underwriting and tender issue. Price bidding was firstly introduced in January 1996, which formed a very significant milestone in Treasury bond issuance in China. Bonds of various terms were issued in 1996. The frequency of Treasury bond issuance has gone up from once a year previously to ten times in 1996. The reform of the issuance method and the gradually rationalization of the term structure of Treasury bond prepared the ground for the open market operation of the central bank. 1.4.2 Corporate bond The corporate bonds are normally issued on a commission basis with the securities companies and, the trust and investment companies acting as the commission agents, or underwritten by a number of financial institutions. 1.5 Secondary market 1.5.1 Government bond During the first several years from 1981, the Treasury bonds could not be traded or redeemed before they matured. The secondary market for Treasury bond gradually developed in a number of cities from 1988, and had been completely formed in the cities above prefecture across the country by 1991. At present, some of the Treasury bonds, such as the paperless bonds and the bearer bonds can be traded on Shenzhen and Shanghai Stock Exchanges. The others that are not tradable include the certificate bonds and the specified directional bonds. The secondary market of Treasury bond has developed rapidly. The market systems consist of both over-the-counter market and stock exchanges. 1.5.2 Financial bond Most of the financial bonds and the corporate bonds are traded over the counter across the country. The amount of the corporate bonds traded on the stock exchanges is much less than those traded over the counter. 2. ISSUERS AND INVESTORS The commission agents or underwriters of the Treasury bonds, corporate bonds and financial bonds in China are mainly the non-bank financial institutions, including the securities companies, trust and investment corporations and finance companies. The investors are mainly the enterprises, institutional units and individuals. Pension fund and insurance fund in China are permitted to invest in the Treasury bonds only. 3. BROKERS/ DEALERS AND TRADING SYSTEM The Treasury bond trading agents are the securities companies and the trust and investment companies which receive orders from the clients and bid on the stock exchanges. 4. PRICE DETERMINATION MECHANISM 4.1 Price determination mechanism of treasury bond The issue price of Treasury bond is determined through price bidding or consultation between the issuer and the underwriting group, while the trading price on the secondary market moves according to market supply and demand. 4.2 Price determination mechanism of corporate bond and financial bond The issue price of corporate bond is set by the central bank. The redemption price of the corporate bond traded over the counter equals the price at maturity minus outstanding interest payment. The price of the corporate bond listed on the stock exchange is determined by market supply and demand. 5. DELIVERY MECHANISM The Treasury bonds and the corporate bonds are required to be deposited in the custody office before they are traded on the stock exchanges. First, the investors deliver their paper bonds to the dealer; the dealer then selects a custody office nearby for centralized custody. The paperless bonds must be registered at the securities registration and settlement companies designated by Shanghai Stock Exchange before they are traded. By the end of September 1996, the total amount of the bonds deposited in over sixty custody offices nationwide of the Central Bond Registration and Settlement Company of Shanghai has reached RMB114.7 billion. The Central Government Securities Depository Trust and Clearing Co. Ltd. which was established in 1996 is responsible for the custody and settlement of the Treasury bonds and policy financial bonds, and it has started to provide bond custody and settlement service for the open market operation of the central bank. 6. LEGAL FRAMEWORK, ACCOUNTING PRINCIPLES AND TAX SYSTEM 6.1 Regulatory framework With a view to setting up a primary market with high efficiency and low cost and a secondary market with high liquidity, Chinese government has issued a set of rules and regulations governing the Treasury bond market, among which are Regulations on Treasury Bond of the People’s Republic of China, Regulations on Primary Dealers of the People’s Republic of China, Rules for Implementation of Examination and Confirmation of Credentials for Primary Dealers and Accounting Treatment and Redemption Method of Treasury Bond In the Principal and Interest Payment by the Fiscal Organs (Trial Implementation). Corporate Law of the People’s Republic of China which was promulgated in 1993 sets detailed rules on the corporate bonds. There are two tiers in the present legal framework of the corporate bonds. One is the general provisions concerning the bonds, such as General Provisions of Civil Law and Guarantee Law. The other is the provisions in Corporate Law and regulations on corporate bonds. 6.2 Commission/charges and tax system The underwriting commission of the Treasury bonds and the corporate bonds is 0.3% and about 1% of the amount underwritten respectively. Fee and brokerage are charged by the stock exchanges and the brokers. The interest income from the holding of the Treasury bonds is not subject to personal income tax payment, while the interest income of the corporate bonds is personal income tax payable at a rate of 20%. 7. RELEVANT MONETARY POLICIES AND ROLE OF THE CENTRAL BANK The issuance of Treasury bond provides the ground for the open market operation of the central bank and contributes to the transformation from direct means to indirect means in the central bank’s monetary policy operation. The central bank gives approval to the issuance of the corporate bonds and financial bonds and supervises the operation and management of the issuer to ensure the due redemption. 8. MARKET REFORM AND PROSPECTS To foster the future development of the bond market in China, the government plans to implement a number of reform measures. These include:- To promote the marketization of the issue method of the corporate bonds and the financial bonds; To design new types of bonds in the light of the specific features of different industries; To improve the corporate bond guarantee system and establish the system of mortgage and floating guarantee; To set up the creditor meeting system and the trustee system of the corporate bonds; To establish a unified and standard credit rating system. C. STOCK MARKET Introduction With reform and economic development, the Chinese stock market is growing. Within less than 10 years the stock market has expanded dramatically. Access to stock issuance has been extended from Shanghai and Shenzhen to a nationwide integrated securities exchange network with the Shanghai and Shenzhen Stock Exchanges as centers. Investors across the country are now provided with access to the exchanges. Accompanying the development of the stocks available to domestic investors (known as A shares), the B shares, H shares and N shares have also developed steadily. Today, relatively sophisticated stock markets are in operation, with relevant legal and regulatory frameworks and market mechanism basically in place. 1. Types of Instruments 1.1 Stocks The stocks issued by Chinese enterprises are divided into categories. The RMB stocks listed on domestic stock exchanges are called A-shares and are ordinary stocks listed on domestic Stock Exchanges for internal investors. The foreign currency stocks listed on domestic markets are called B-shares and are traded on domestic stock exchanges by foreign investors in foreign currencies. H-shares and N-shares are foreign capital shares. H-shares are those listed on the Stock Exchange of Hong Kong (SEHK) and N-shares are those listed on the Stock Exchange of New York. The foreign investors include foreigners and people from Hong Kong, Macao and Taiwan. 1.2 Funds In 1992 the funds market commenced operation. At present more than 20 funds have listed on the Stock Exchange of Shanghai (SESH) and the Stock Exchange of Shenzhen (SESZ), 4 of which are approved by the People’s Bank of China. The others have been approved by the local branches of the PBC in Shanghai and Shenzhen. Although this market is small at present, there exists great potential for its development. The funds ate traded electronically on the Shanghai and Shenzhen Stock Markets. 1.3 Primary and secondary markets The Chinese stock market is divided into a primary market and secondary market. The stocks in the primary market are issued to and purchased by individual investors and some jurisdictional entities. The secondary market consists of the Stock Exchange of Shanghai and the Stock Exchange of Shenzhen which are the national markets. In addition, there are another 28 local stock exchange centers, some of which perform services such as registration, and clearing for the two Stock Exchanges. The initial issuing procedure is as follows; the Stock Committee of the State Council and the State Planning Committee decide on the general level of the national stock issuance having regard to the requirements of national economic development, enterprise financing and the reform of the joint stock system in accordance of the general level and issuing terms decided the enterprises issuing stocks are determined by provinces, autonomous regions, municipalities and related ministries. Local governments or responsible authorities report to the Stock Committee of the State Council which determines which enterprises can issue stock. B-shares and H-shares could be issued and listed on the Exchange where it is considered suitable enterprises authorized to issue must meet any requirements specified (e.g., capital restructuring, accounting and portfolio structure). Local stock-regulating authorities and governments must submit the application for listing to the China Securities Regulatory Commission(CSRC) for examination. The Committee for Examining Stock Issuance inspects and re-examines the applications. Finally, the examined and verified enterprise can issue stocks and apply for trading in the Exchange. 2. Issuers and Investors At the end of 1996 there were 530 companies issuing on the SESH and SESZ, with 599 stocks listed totaling of 111.035 billion shares. There were a large number of new listings in 1996. The total amount of new stocks issued was RMB23.53 billion, accounting for 39% of the RMB60.124 billion total financing from 1991 to 1996. By the end of 1996 there were 21 million accounts opened by domestic investors. The total financing raised by B-shares and H-shares reached US$3 billion and US$4.9 billion respectively. 2.1 Industrial structure of listed companies At the end of 1996 the industrial structure of companies listed on the SESH and SESZ was as follows: 315 industrial companies accounting for 59.43%, 69 commercial companies for 13.02%, 3 financial companies for 0.57%, 27 land asset companies for 5.09%, 39 public service companies for 7.36%, and 77 comprehensive companies for 14.53%. Most of these listed companies are from the eastern area middle area of China with less from the west. 2.2 Issuers and investors on the B-share market By the end of 1996 there were 86 companies listed on the B-share market; 43 listed on SESH and 43 listed on SESZ. According to the statistics from SESH, 52% of investors in the B-shares market are from Hong Kong. The B-shares companies are from the whole nation, not just Shanghai and Shenzhen. In the past these B-shares companies are determined and approved by the local governments in Shanghai and Shenzhen. Now, B-share companies must be authorized by the central authority. 2.3 Issuers and investors of shares listed on external stock markets By the end of 1996 there were three batches of 22 companies issuing H-shares and listed on Hong Kong markets, 2 issuing N-shares on the Stock Exchange of New York. The fourth batch of 38 companies have been determined by the way of preliminaries election. Investors are mainly from outside institutions. 3. Brokers/Dealers/Underwriters and Trading Systems 3.1 Brokers and dealers Chinese dealers can perform the activities of issuance, consignment and sale in the Primary Market as well as operate on their own account and as a broker in the Secondary Market. However, operating on their own account and agency activity require the separation of staff, capital and accounts. To strengthen the management of brokers and stock dealers, CSRC implements an annual inspection and examination and qualification program. 3.2 Market information systems and trade support systems The market information reporting system in China is being gradually developed. It combines the regular reporting, including annual and medium term performance information, with irregular reporting, including temporary, clarification and warning announcements. To assist with maintaining an informed market, releases of significant news about listed company can result stock exchanges stopping trading that stock for half day. The Stock Exchanges and CSRC are responsible for examining the information given by the listed companies and Stock Exchanges are charged with supervising trading. Stock dealers release important information in a timely manner through electronic screens. Trading prices are also released electronically by the two Stock Exchanges. The release is synchronized across the main cities to accelerate the dissemination of the information to improve market efficiency. 4. Price Determination Process The Chinese stock market uses the collective bidding system to determine trading prices. Trading orders are entered into the computer terminal in the trading hall. The prices of sellers and buyers are matched automatically. The Stock Exchanges has a 10% price movement limit mechanism. 5. Delivery Mechanism At present the Shanghai and Shenzhen Stock Exchanges have independent registration systems. All stocks are recorded in each electronic system, with stock trading and settlement electronically controlled. Settlement is on a T+1 basis. 6. Legal Framework, Accounting Principles and Tax System 6.1 Legal framework Laws, rules and principles related to the Chinese stock market have been further perfected, forming a preliminary legal framework which includes cooperation law, the temporary regulation for managing stock issuance and trading, the temporary decree of forbidding cheat activities, the regulation on listing foreign equity of limited company, the regulating acts on stock exchange, etc. The stock law is currently in the process of being drawn up. To strength the centralized and unified management of the Chinese stock market, the Securities Committee of the State Council and the China Securities Regulatory Commission were formed in 1992. The Securities Committee is the main institution by which the government manages the nationwide securities market. The China Securities Regulatory Commission is the regulatory institution of the stock securities companies, account offices, lawyer offices, listed companies and asset evaluation institutions. 6.2 Charge and tax system The trading charges on the stock market consist of 0.35% commission and 0.3% stamp duty. 7. The Role of the Central Bank Monetary policy has a direct influence on the stock market through interest rate and currency control, as well as an indirect influence by affecting the development of the economy and listed companies. 8. Measures to Develop the Market The Chinese government actively regulates the stock market and wishes to see it develop further. It believes that the stock markets instruments and systems, and overall market efficiency should be further improved. This includes encouraging a broader range of institutional investors. The Chinese stock market is not yet mature. In this period, regulation is the prerequisite and basic condition to make the market grow and mature. China will actively create conditions conducive to gradually establishing better law, supervision systems, efficient self-discipline mechanisms, more mature financial institutions, and accounting systems. D. FOREIGN EXCHANGE MARKET Introduction In 1994, with the reform of the foreign exchange system in China, the foreign exchange market was established under the “surrender and settlement” system. Since 1996, further improvements in the system have been made, to create a unified foreign exchange market in China and achieve the convertibility of the Renminbi (RMB) on the current account. The changes will promote further growth and development of the market and its internationalization. The principle of the “surrender and settlement” system is to eliminate remittance restrictions on foreign exchanges for current account transactions and to administer the foreign exchanges for capital account transactions. Except otherwise approved, domestic enterprises (excluding foreign-funded enterprises) are required to sell “surrender” all their foreign exchange earnings to designated foreign exchange banks. They can, with valid business documents and certificates, purchase foreign exchange with Renminbi for current account transactions from the designated foreign exchange banks. Foreign funded enterprises still enjoy the preferential policy under which they are allowed to retain a maximum amount of foreign exchange. But they must sell any excess above the ceiling to the designated banks. For capital account transactions, approval by the exchange control agencies is required before foreign exchange transactions can be made with the designated banks. 2. Types of Transactions Over the years, the foreign exchange market has operated and expanded steadily. By 1996, the total surrendered foreign exchange and sold foreign exchange amounted to US$116.53 billion and US$87.96 billion respectively. The surplus of foreign exchange supply over demand was US$28.57 billion in 1996. The trading volume in the interbank foreign exchange market amounted to US$62.84 billion in that year, or an average daily volume of US$246 million. The interbank foreign exchange market conducts spot transactions of the Renminbi against 3 currencies: the US dollar, the Hong Kong dollar and the Japanese Yen. Transactions of the Renminbi against the US dollar predominate, accounting for slightly over 90% of total turnover in 1996. Transactions against the Hong Kong dollar and Yen accounted for the remainder, comprising about 6% and 2% respectively of the total turnover in 1996. 3. Market Participants, Organizational Structure and Trading System Participants in the foreign exchange market include the central bank, designated foreign exchange banks, non-bank financial institutions, companies, enterprises and individuals. The foreign exchange market comprises two levels: the retail market between the designated banks and firms, and the inter-bank foreign exchange market with the central bank, designated foreign exchange banks and non-bank financial institutions forming the market players. The interbank market is centrally located in The China Foreign Exchange Trading Center (CFETC) in Shanghai, which has branches in major cities. Today, 37 cities are electronically linked to the CFETC. Financial institutions can take part in the interbank market only after becoming members of the CFETC or its branches. They can apply for membership in the CFETC only if they have been established with the approval of the Peoples’ Bank of China (PBC), and conduct foreign exchange operations authorized by the State Administration of Exchanges. There are two types of membership: dealers and brokers. A broker act only as agent for the foreign funded enterprises while a dealer can act both as dealer and broker. By October 1996, the CFETC had altogether 394 members, among whom 230 are state-owned banks or their branches, 128 are foreign-funded banks, and 36 are non-bank financial institutions. Members of the CFETC are linked by long distance telecommunication wires and computers, forming a unified market with a nation-wide coverage. Since July 1996, foreign funded enterprises can engage in foreign exchange transactions with the designated foreign exchange banks for current account transactions. They are also allowed to retain the old practice of obtaining their foreign exchange requirements from the swap centers. In these swap centers, brokers match the foreign exchange positions of the foreign funded enterprises. Trades must be approved one day before transactions. In cities that are linked electronically with the interbank foreign exchange market, the foreign funded enterprises can go to the interbank market with financial institutions as their agents; in unlinked cities, they can do foreign exchange transactions in the swap centers based on the benchmark rate quoted by the central bank. All inter-bank foreign exchange trading among members must take place on the computer network provided by the CFETC. Trading time is 9.20 a.m. - 11.00 a.m. from Monday to Friday. Dealers quote their prices on their terminals, and quotations are matched automatically by the trading system. The quotations are matched on a first-come-first-serve basis. The CFETC has a double back-up technical system to ensure the safe operation of computers. There are two control centers in Beijing and Shanghai, and a satellite network and ground public data network, which back up each other in the telecommunications network. The main branches also have backup computer stations. 4. Exchange Rate Determination Mechanism At present, China has a unified managed floating exchange rate system based on market forces. The interbank market is at the core of the exchange rate determination mechanism, with the function of balancing the positions of banks. The central bank steps into the interbank market to influence the demand and supply of foreign exchange and the determination of the Renminbi exchange rate, and to implement its monetary policy. The PBC monitors the movements of the Renminbi through the State Administration of Foreign Exchanges (SAFE). Everyday, it publishes the medium exchange rates (market rates) of the Renminbi against the US dollar, Hong Kong dollar and Japanese Yen. These benchmark rates are the weighted average exchange rates of the previous trading day. Under present regulations on foreign exchange rates, the Renminbi exchange rate against the US dollar can fluctuate in a band of ± 0.3% of the benchmark rate during the trading day, while its exchange rates against the Hong Kong dollar and Japanese Yen can fluctuate in a band of ± 1% of benchmark rates. Members of CFETC can quote within these ranges and transactions are automatically matched by the computer trading system. Since the CFETC only conducts transactions of the Renminbi against the US dollar, Hong Kong Dollar and Japanese Yen, banks with other currencies must convert these currencies into US dollars, Hong Kong dollars or Japanese Yen in international markets first, and then trade against the Renminbi. Based on the benchmark rates published by the PBC and the prescribed bands, designated foreign exchange banks make quotations with their clients. In accordance with regulations, these quotations of spot exchanges must be within ± 0.15% of the benchmark rate for the US dollar and within ± 1% of bench-mark rates for the Hong Kong dollar and Japanese Yen. The rates of the Renminbi against other currencies can be crossed-computed by designated foreign exchange banks for their clients, but are subjected to a ± 0.25% band of medium rates. The price differential between the buying rates of currency notes and spot exchange medium rates cannot exceed 2.5% of the spot medium rates. The selling rates of currency notes are the same as the selling rates of spot exchanges. 5. Clearing Mechanism The CFETC is in charge of centralized clearing of all foreign exchange trading. A two-level clearing system is carried out for Renminbi funds; that is, branches of CFETC are responsible for the clearing of members’ balances under their jurisdiction, while the headquarter is responsible for totaling up the balances. The members of the CFETC are required to open Renminbi accounts with the PBC for Renminbi clearing of foreign exchange trading. A one-level clearing system is carried out for foreign exchange funds, that is, the headquarter is in charge of the clearing among members. Clearing must be carried out for both Renminbi and foreign exchange funds during the first operating day after the trading day, that is T+1. 6. Regulatory Framework, Charges and Tax System 6.1 Regulatory framework In accordance with regulations for the foreign exchange market, the State Administration of Foreign Exchanges (SAFE), as authorized by the PBC, exercises supervision over the foreign exchange market and is responsible for formulating the relevant rules and regulations governing the market. It is also responsible for maintaining a fair and just trading environment. The CFETC, as an operational institution, is in charge of formulating the detailed rules regarding trading and clearing. The rules and regulations include: Regulations on Exchange Control of the People’s Republic of China; Regulation on the Foreign Exchange Surrender, Settlement and Payment; Provisional Regulation on Interbank Foreign Exchange Market and The Notice of Renminbi Exchange Rates Management of the PBC. 6.2 Charges and tax system The CFETC charges RMB50,000 per member seat per annum, and its branches determine the fee standard which is below RMB50,000. The CFETC charges a fee of 0.03% of trading volume from members acting as dealers. When members conduct foreign exchange transactions for foreign-funded enterprises as brokers, the enterprise will be charged a fee of 0.15% of trading volume, of which one third will be collected by member brokers. 7. Monetary Policy and Role of the Central Bank The PBC regulates the foreign exchange market in accordance with the law and is in charge of macro-adjustments in the foreign exchange market to implement foreign exchange and monetary policy, taking into account changes in the market. As a member of the CFETC, the central bank intervenes in the market directly, so as to adjust the supply of and demand for foreign exchange and realize the purpose of the foreign exchange policy. 8. Market Reform and Its Prospects As a developing country undergoing rapid economic growth, China’s opening to the outside world not only poses challenges to the foreign exchange market but also brings a great impetus to its development as well as facilitate international economic co-operation. The foreign exchange market of China has a bright future. At present, the reform of foreign exchange market is focused on the following aspects: expanding the number of trading entities, so as to let more participants into the foreign exchange rate determination mechanism; introducing new trading instruments so as to meet diversification demand improving trading style and strengthening risk control over clearing. 9. Summary The Chinese foreign exchange market system and framework have adapted to the needs of management system reform and development. Over the years, the foreign exchange market has gradually stepped into a healthy track of growth and development. The CFETC and the swap centers have operated steadily. The long distant foreign exchange trading system has been further perfected. The change of trading means has been advanced. The Renminbi exchange rate supervision system has been gradually improved and the rate has generally been kept stable. In 1997, the Chinese government will further regularize and develop the interbank foreign exchange market which will be improved by amplifying market organization, regularizing market trading behavior and strengthening market supervision. In 1997, the Chinese foreign exchange market will remain in the basic state of supply in excess of demand and the Renminbi’s exchange rate will be maintained at a stable rate. E. OFFSHORE MARKET The offshore market does not exist under the definition of; i) special unit or accounts with less regulation and lower tax, nor ii) foreign currency market with no exchange. Related News
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