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World Bank Document Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Anjali Kumar Kwang Jun Anthony Saunders Susan Selwyn Yan Sun Dimitri Vittas David Wilton FINANClAL TIMES Financial Publishing Asia Pacific Published by FT Financial Publishing Asia Pacific An imprint of Pearson Professional Asia Pacific Suite 1808 Asian House 1 Hennessy Road Wan Chai Hong Kong Tel: (852) 2863 2600 Fax: (852) 2520 6646 Internet: [email protected] Web: www.pearson-pro.com.hk O 1997 The World Bank Conditions of Sale All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, ortransmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the Publishers. No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in this publication can be accepted by the Author or Publishers. First edition 1997 Printed in Hong Kong ISBN 962 661 048 4 Publisher's note The findings, interpretations and conclusions expressed in this study are the results of research supported by the World Bank, but they are entirely those of the author and should not be attributed in any manner to the World Bank, to its affiliated organisations, or to members of its Board of Executive Directors or the countries they represent. CONTENTS vii Tables in Text. .. Figures in Text Vlll Statistical Appendix X Currency Equivalents, Fiscal Year, Weights and Measures xii Acronyms and Abbreviations xiii Acknowledgements xvi 1. THE CONTEXT OF CAPITAL MARKET DEVELOPMENT China's Capital Markets: Central Questions The Growth of China's Capital Markets The Role of Capital Markets in China's Economy 2. THE REGULATORY FRAMEWORK Introduction Principles of Securities Market Regulation: Relevance for China The Regulatory Framework Regulation of Securities lssue and Trading: An Evaluation Regulation of Participating Institutions Distribution of Oversight within the Government Annex 2.1 China: Laws and Regulations Related to Securities Activities Annex 2.2 Central and Local Authorities' Approvals Required for Listing Annex 2.3 Central and Local Regulations: Listing Criteria Annex 2.4 The Trading Systems Annex 2.5 Restrictions Against Insider Dealing Annex 2.6 Regulation of Securities Dealers 3. DOMESTIC BOND MARKETS Introduction The Primary Market lssue Method Secondary Markets in Debt Securities 4. EQUITY MARKET PERFORMANCE Introduction: Equity Markets and the Shareholding System Characteristics of China's Equity Markets The New Issue Process and Public Offerings Stock Price Volatility and Returns to lnvestors Market Integration: Current and Potential Other Issues: Enterprise Debt Securities Annex 4.1 Clearance, Settlement and Depository Systems Annex 4.2 Technical Note on the Analysis of Equity Markets 5. INTERNA1-IONALISKrION OF CHINA'S SECURITIES MARKETS The Scope for Safe Participation in lnternational Securities Markets lnternational Participation in China's Equity Issues The Performance of China's Overseas Equity Listings Opening of Fixed-Income Securities Markets China's Access to Overseas Securities Markets Trading in Derivative Instruments on lnternational Markets 6. INSTITUTIONAL lNVESTORS Institutional lnvestors and Securities Markets The Insurance Industry in China The Pension System Housing Funds Mutual Funds Annex 6.1 Glossary on Contractual Savings Institutions Annex 6.2 Institutional lnvestors in Hong Kong 7. CONCLUSIONS AND RECOMMENDATIONS Conclusions Suggested Policy Changes REFERENCES STATISTICAL APPENDIX TABLES IN TEXT Contribution of Capital Markets to Real Sector Investment Government Debt Purchases: Households and Non-Households Treasury Bill Coupon Rate, Deposit Rates and Inflation Comparison of Coupon and Deposit Rates, and Secondary Market Yield Comparison of Coupon on Treasury Bills Sales by Purchaser: Households, Enterprises, and Financial Institutions Tradability of 1994 Treasury Bill Issues China: Spot and Futures Trading of Bonds Ratio of Bond Trading Value to Stock Outstanding Trading in Repurchase Agreements Concentration Ratios of Member Firms Trading on the Shanghai Stock Exchange (January 1995) Concentration of Share Trading on China's Securities Exchanges China's Equity Markets: Underpricing of New Share issues IPO Underpricing Worldwide Trading on China's Equity Markets: Returns and Volatility Chinese Companies with ADR and GDR Programmes (December I 994) China Closed-End Country Funds: Discounts/Premiums Average Spread on Floating Rate Medium and Long Term Bond lssues China Underwriting Performance of the People's Insurance Company of China (1 992193) China and Other Countries: Basic Equation of Social Pension System China Projected Basic Equation of Social Pension System FIGURES IN TEXT Growth of Securities Issued and Outstanding (1981 -1 993) 2 Volatility in China's Securities Trading 4 Growth of the Equities Market 6 Secondary Markets in China's Securities 7 China and Other Emerging Equity Markets: A Comparison (1 993) 8 Securities Markets in China's Financial Sector 11 Central Government Budgetary Deficit and Treasury Bond Issues 16 Share of Bonds in China's Overseas Borrowing 20 China: Composition of Outstanding Debt Issues 82 Outstanding Debt Composition Disaggregated 84 China: Trading Value of Bonds 100 Ratios of Trading Volume of Debt to Debt Stock and to GDP 101 Ratios of Debt Stock Outstanding to GDP: China and Other Countries 102 Regional Bond Yield Differentials (1 990) 108 Yield Differentials between Treasury Bills on Principal Markets: 1994 (Shanghai, Wuhan and Shenzhen) 108 China: Secondary Market Yield Curve 11 0 China: Bond Yield, Deposit Rate and Inflation 11 1 Equity Index and Average Bond Yield 11 2 Average Daily Trading Value of Shares 122 Shanghai Securities Exchange 125 China: A Stylised IPO Process: Post-Offer to the Beginning of Trading 130 Initial Offerings of Shanghai A and B Shares 132 Risk-Adjusted Returns to lPOs at Shanghai 135 China: Shanghai and Shenzhen Share Indices and Volume of Trade 143 Shanghai and Shenzhen: Share Price Variance 1 44 Spreads between Shanghai and Shenzhen A and B Shares 150 Discounts on Shares Listed in Overseas Exchanges 151 Private Capital Flows to China 179 China and Other Emerging Markets: Participation in International Capital Flows 180 China and Mexico Inflows 181 Country Funds - Average Discount 193 lnternational Bond Issues by Chinese Borrowers: Currency, Type and Maturity China: lnternational Syndicated Loans China: Maturities and Spreads on lnternational Syndicated Loans China: lnsurance Premium Growth (1986 -1 992) China: lnternational Comparison of lnsurance Premiums (1 992) China: Comparison of the Life and Non-life Structure of lnsurance with Selected Countries China: lnsurance Premiums by Line (1 992) China: Comparisions of the Performance of the lnsurance Industry in Selected Countries STATISTICAL APPENDIX Al.l China: Debt Securities Issued and Outstanding A1.2 China: Trade in Securities A1.3 China: Securities Trading on the Shanghai Exchange in 1994 (January1994 to January 1995) A1.4 China: Securities Markets and the Financial Sector A1.5 Financing of the Government Deficit: Contribution of Bond Issues A1.6 China: Contribution of Securities Markets to Investment A1.7 China: Overseas Debt and Capital Markets (1987 -1 993) A2.1 China: Structure Of Securities Regulation A2.2 Structures of Regulation in Asian Securities Markets A2.3 Minimum Listing Requirements of Major Stock Markets A3.1 China: Securities Trading by Region A3.2 Monthly Transaction Volume in the lnterbank Market A3.3 Assets of Financial Institutions Engaged in the lnterbank Market A4.1 China: Key Characteristics of the Equities Markets of Shanghai and Shenzhen A4.2 China: Size and Growth of China's Equities Markets (1991 -1 994) A4.3 Trading Value of Equities (1991 -1 994) A4.4 China: Trading Volume of Securities Per Day (1991 -94) A4.5 Trading Value of Inter-Linked Trading Centres (Linked to Shanghai) (January 1995) A4.6 China: Stock Trading Centres A4.7 Shanghai Securities Exchange: Trading Summary of Sectoral Stocks A4.8 Initial Public Offering Quotas (1993) A4.9 China and Other Emerging Equity Markets: Relative Size and Market Liquidity (1 994) A4.10 China and Other Emerging Equity Markets: Growth (1989 -1 993) A4.11 China and Other Emerging Equity Markets: Volatility (1993 -1 994) A5.1 International B and H Share Offerings by Chinese Issuers A5.2 China's Overseas Share Listings (Hong Kong and New York) A5.3 Country Funds: Trends in Total Returns A5.4 Credit Ratings of Chinese Borrowers A5.5 Sovereign Rating Selected Developing Countries A5.6 China: Overseas Bond Issuing lnstitutions B5.1 Limits on Equity Participation by Foreign Investors B5.2 Foreign Exchange Controls on Portfolio lnvestment Capital Gains and Dividends B5.3 Taxation of Dividends and Capital Gains of Foreigners Investing in Emerging Markets A6.1 China: lnsurance Premium Growth (1986 -92) A6.2 China: International Comparison Of lnsurance Premiums (1 992) A6.3 China: Comparisons of Growth of lnsurance Penetration A6.4 China: Comparisons of the Structure of Life and Non-life lnsurance (1 992) A6.5 China: Comparisons of the Performance of the lnsurance Industry in Selected Countries A6.6 China: Assets and Liabilities of the People's lnsurance Company (1 992193) B6.1 lnvestment Patterns of Contractual Savings lnstitutions CURRENCY EQUIVALENTS Currency Unit: Renminbi (Rmb) (Nominal Official Period Average Rates) Year Rmb per US$ 1996 (January
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