Transcript Macroeconomic Trends and Cycles

Financial System
Junhui Qian
2014 November
Content
• Basics
• The Reform of the Financial System
• The Banking System
• Capital Markets
• Stock Markets
• Bond Markets
• Other Financing
• Future Financial Reform
What is financial system?
• Financial system is the collection of rules and institutions that
facilitate the transfer of financial resources between savers and
borrowers.
• Franklin Allen and Douglas Gale in Comparing Financial Systems:
"Financial systems are crucial to the allocation of resources in a modern
economy. They channel household savings to the corporate sector and allocate
investment funds among firms; they allow intertemporal smoothing of
consumption by households and expenditures by firms; and they enable
households and firms to share risks. These functions are common to the
financial systems of most developed economies. Yet the form of these financial
systems varies widely."
Dimensions of the Financial System
• Financing
• Provide financing to enterprises and financial products to savers (investors).
• Information
• Generate information on enterprises and investment projects so that risk can
be priced and resources can be efficiently allocated.
• Control
• Impose discipline on managers of public companies
Content
• Basics
• The Reform of the Financial System
• The Banking System
• Capital Markets
• Stock Markets
• Bond Markets
• Other Financing
• Future Financial Reform
The Financial System Before The Reform
• Monobank: People’s Bank of China
• It is both the central bank and the commercial bank.
• The monobank system collects savings, channels funds to work units
according to plans. No information is generated from the process.
• The role of the monobank system is passive, accommodating the
needs of the planner. The monobank system does not impose
discipline on managers of the work units.
Financial Deepening
• As the transition from the planned economy to the market economy
started, more financial wealth (relative to income) had been created
and held as claims on banks and enterprises. This process is often
called “financial deepening”.
• The financial deepening may be measured by the ratio of financial
assets to national income. More conveniently, it is often measured by
M2/GDP.
Financial Deepening
Financial Broadening
• Financial broadening refers to an increase in the variety of financial
institutions and instruments.
• Over the past three decades, China had transformed the monobank
into a sophisticated banking system, had developed stock and bond
markets, derivatives market, etc.
• During the development, there appeared a wide variety of
institutional investors (mutual funds, insurance companies, private
equities, hedge funds, etc.) and financial products.
The Transition Pains
• “The reform without losers” was achieved by absorbing losses by the
financial system, the banking system in particular.
• “The reform with losers” inflicted further pains on the stock market,
which became a financing source for SOE’s.
• The reform of the financial system is still ongoing.
Content
• Basics
• The Reform of the Financial System
• The Banking System
• Capital Markets
• Stock Markets
• Bond Markets
• Other Financing
• Future Financial Reform
The Banking System
Bank’s Dominance in Total Financing
Recent Decline of Banking
Equity financing on the
domestic stock market
by non-financial
enterprises
2%
Social Financing (2012)
Net financing of
corporate bonds
15%
Undiscounted bankers'acceptances
7%
Trust loans
8%
Entrusted
loans
8%
Foreign currency bank loans
(converted into RMB)
6%
RMB Bank Loans
54%
Bank Capital to Asset Ratio (%)
CN: Bank Capital to Assets Ratio (World Bank (WDI))
7.000
6.000
5.000
4.000
CN: Bank Capital to Assets Ratio (World Bank (WDI))
3.000
2.000
1.000
0.000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Policy Rates on Deposits and Loans
Saving
One-year deposit
One-year lending
7
6
5
4
3
2
1
0
2010.10.20
2010.12.26
2011.02.09
2011.04.06
2011.07.07
2012.06.08
2012.07.06
Interest Rate Liberalization
• Interest rate policy as a financial repression.
• Interest rate policy leads to inefficient allocation of financial
resources.
• Liberalization of interest rates on deposits and loans
• The ordering the interest rate liberalization: first foreign, then domestic; first
money market, then loans, then deposits; first long-term big-denomination,
then short-term small denomination.
• By Nov 2013, only the domestic deposit rate has a upper-limit. Other interest
rates, including those on loans, are all determined by the market.
Content
• Basics
• The Reform of the Financial System
• The Banking System
• Capital Markets
• Stock Markets
• Bond Markets
• Other Financing
• Future Financial Reform
The Stock Markets
• The Shanghai Stock Exchange was opened in 1990 and is now the 7th
largest stock market by market capitalization at 2.87 USD tn.
• The Shenzhen Stock Exchange was opened in 1991 and is now the 9th
largest stock market by market capitalization at 1.91 USD tn.
• The Hong Kong Stock Exchange is the 6th largest stock market by
market cap at 3.15 USD tn.
Major Stock Exchanges (ranked at Sep 2014 )
Characteristics of the stock markets
• Segmented markets (A share, B share, H share)
• Low contestability
• Rationing of listing opportunity (high IPO price)
• Strict regulation, weak law enforcement
• Policy-driven market
• Large turnover, especially on small-cap stocks
Turnover Rate on Asian Stock Exchanges
450%
400%
350%
300%
Hong Kong Exchanges
Japan Exchange Group - Tokyo
250%
Korea Exchange
Shanghai SE
200%
Shenzhen SE
150%
Singapore Exchange
100%
50%
0%
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
The Shanghai Composite Index
Index: Shanghai Stock Exchange: A Share (China)
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Index: Shanghai Stock Exchange: A Share (China)
The Opening-Up of the Stock Market
• B share markets
• QFII and QDII mechanism
• Shanghai-Hong Kong Connect (to be started on Nov 17, 2014)
B-Share Markets
• Since 1991, listed companies in Shanghai and Shenzhen are allowed
to issue B shares to foreign investors. By 1998, there are 106 B-share
stocks (52 in Shanghai, 54 in Shenzhen).
• Since 2001, domestic investors are allowed to trade B-share stocks.
• As companies were allowed to list in Hong Kong, the B-share markets
stagnated.
The P/E of Shanghai Stock Exchange
80.000
70.000
60.000
50.000
40.000
30.000
20.000
10.000
0.000
PE Ratio: Shanghai Stock Ex: A Shares: Wgt Avg by Issued Volume (China)
PE Ratio: Shanghai Stock Ex: B Shares: Wgt Avg by Issued Volume (China)
The P/E of Shenzhen Stock Exchange
80
70
60
50
40
30
20
10
0
PE Ratio: Shenzhen Stock Exchange: Stocks: A Shares (China)
PE Ratio: Shenzhen Stock Exchange: Stocks: B Shares (China)
The Bond Markets
• There are basically three markets for trading bonds: inter-bank,
security exchanges, and OTC.
• The majority of the bond trading takes place in the inter-bank market.
• In security exchanges, treasury bonds, corporate bonds, and
convertible bonds can be traded, with relatively low liquidity.
• Repo and reverse repo operations can be conducted on high-quality
bonds.
Market Capitalizations of Bonds Listed in
Shenzhen Stock Exchange
300,000
250,000
200,000
150,000
100,000
50,000
0
Market Capitalization: Shenzhen Stock Exchange: Corporate Bond (China)
Market Capitalization: Shenzhen Stock Exchange: Convertible Bond (China)
Other Financing
• Entrusted loans
• Trust loans
• Undiscounted bankers‘ acceptances
• Informal lending
Content
• Basics
• The Reform of the Financial System
• The Banking System
• Capital Markets
• Stock Markets
• Bond Markets
• Other Financing
• Future Financial Reform
Future Reforms in the Financial System
• Lower the entry barrier to and increase competition in the banking
industry.
• Reform IPO, and strengthen law enforcement in the stock market.
• Deregulate bond market and encourage bond trading in the security
market.
• Allow bankruptcies of SOE’s and local government financing vehicles,
so that the latter no longer enjoy the sovereign credit rating.