China’s Financial Markets An Insider’s Guide to How the Markets Work Editors Salih N. Neftci Michelle Yuan Me´nager-Xu AMSTERDAM • BOSTON • HEIDELBERG • LONDON NEW YORK • OXFORD • PARIS • SAN DIEGO SAN FRANCISCO • SINGAPORE • SYDNEY • TOKYO Academic Press is an imprint of Elsevier Acquisitions Editor: Karen Maloney Assistant Editor: Dennis McGonagle Publisher: Duncan Enright Project Manager: Sarah Hajduk Marketing Manager: Christian Nolin Cover Design: Maria Ilardi Design Composition: Cepha Imaging Pvt. Ltd. Cover Printer: Phoenix Color Interior Printer: Sheridan Books Elsevier Academic Press 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA 525 B Street, Suite 1900, San Diego, California 92101-4495, USA 84 Theobald’s Road, London WC1X 8RR, UK This book is printed on acid-free paper. Copyright © 2007, Elsevier Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without permission in writing from the publisher. Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone: (+44) 1865 843830, fax: (+44) 1865 853333, e-mail: [email protected]. You may also complete your request on-line via the Elsevier homepage (http://elsevier.com), by selecting “Customer Support” and then “Obtaining Permissions.” The CD-ROM accompanying this book contains English translations of Chinese financial rules and regulations. Neither the authors nor the Publisher shall be responsible for any error or variances in the translations. Furthermore, as regulations are always subject to change, neither the authors nor the Publisher warrant that they are either current or complete. The materials in the accompanying CD-ROM should not be used as the basis for any decisions or analysis. Library of Congress Cataloging-in-Publication Data APPLICATION SUBMITTED British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 13: 978-0-12-088580-0 ISBN 10: 0-12-088580-8 For all information on all Elsevier Academic Press Publications visit our Web site at www.books.elsevier.com Printed in the United States of America 0607080910987654321 DEDICATION To Philippe, for his kind support and understanding over these years. — Yuan iii CONTENTS Preface xi About the Contributors xii About the Editors xv 1. An Overview of China’s Financial Markets 1 Liu Lisheng 1.1 Overview of China’s Financial Markets 1 1.2 The Stock Market 2 1.3 The Opening Up of the Securities Industry 4 1.4 Securities Offerings 7 1.5 The Bond Market 11 1.6 Securities Exchanges 12 1.7 Listed Companies 15 1.8 Securities Companies 18 1.9 Securities Depositories and Clearing 19 1.10 Investment Funds 21 1.11 Qualified Foreign Institutional Investors (QFIIs) 23 1.12 Other Major Institutional Investors 24 1.13 Stock Exchanges 26 1.14 Futures Markets 27 1.15 Legal Framework 31 1.16 Regulatory System and Organizational Structure 32 1.17 Conclusions 32 Appendix: Contacts 34 v vi Contents PART I China’s Money and Foreign Exchange Markets 37 2. China’s Money Markets 41 Zheng Xu 2.1 Structure 41 2.2 History and Statistics 45 2.3 REPO (Outright Repo) Market 50 2.4 Bond Market 58 2.5 Bills Market 65 2.6 Regulation and Supervision 68 2.7 The People’s Bank of China 68 2.8 Monetary Policy 72 2.9 Market Practice 74 2.10 Some Current Problems 78 2.11 Conclusions 84 References 85 3. China’s Money Markets: Policies and the Banks 87 Thom Thurston 3.1 Introduction 87 3.2 Bonds: Spot and Repo 91 3.3 Central Bank Bills 95 3.4 Bonds and Monetary Policy 96 3.5 Acceptances and Commercial Paper 99 3.6 Foreign Participation in Securities 101 3.7 Commercial Banking 101 3.8 Conclusions 105 References 106 Appendix: An Overview of China’s Banks 106 4. China’s Foreign Exchange Markets 113 Le Yan 4.1 China’s Foreign Exchange Controls 113 4.2 A History of China’s Foreign Exchange System 114 4.3 The Exchange Rate Regime 116 4.4 China’s Foreign Exchange Market 120 4.5 The “Other” Foreign Exchange Market 132 4.6 Conclusions 133 Appendix: Currency Swaps 134 Contents vii PART II China’s Bond Markets 135 5. China’s Bond Market 137 Le Jiachun 5.1 Structure of China’s Bond Market 137 5.2 Statistics and Figures 152 5.3 Regulation and Supervision 158 5.4 Trading in China’s Bond Market 160 5.5 Conclusions 168 References 168 6. China’s Convertible Bond Market 171 Liu Qiang 6.1 Introduction 171 6.2 Development of the Market 172 6.3 The Data 174 6.4 Convertible Holders and Market Players 179 6.5 Convertible Bonds versus Stock Or Corporate Debts 183 6.6 Conclusions 184 PART III China’s Equity Markets 187 7. China’s Stock Market 189 Tan Wentao 7.1 Introduction 189 7.2 Structure of the Chinese Stock Market 190 7.3 Regulation 197 7.4 Special Characteristics of the Chinese Stock Market 200 7.5 Some Special Characteristics of the Chinese Stock Market 207 7.6 Weak Market Foundations 208 7.7 Financial Distress and Brokerages 211 7.8 Conclusions 214 References 214 viii Contents 8. A History of China’s Stock Markets 215 Tan Wentao 8.1 Graphical Overview 215 8.2 First Phase: The Stock Market Is Born 218 8.3 Second Phase: Rapid Growth 218 8.4 Third Phase: Enforcing Regulations 223 8.5 Fourth Phase: The Speculative Bubble 225 8.6 Current Period 227 8.7 State-Owned Share Liquidation 232 8.8 Conclusions 235 References 236 PART IV China’s Futures and Derivatives Markets 237 9. China’s Futures Markets 239 Tan Wentao 9.1 Futures Exchanges 239 9.2 Main players 243 9.3 Regulation 245 9.4 Historical Review 247 9.5 Third Stage: 1998–2001 255 9.6 Fourth Stage: 2002–Present 256 9.7 Some Existing Problems 257 9.8 Future Developments 260 9.9 Conclusions 263 10. China’s Derivatives Markets 265 Michelle Yuan Me´nager-Xu 10.1 Introduction 265 10.2 The Rules 266 10.3 Regulation 266 10.4 Old Ways 267 10.5 New Rules in FX Derivatives 267 10.6 Futures Markets 268 10.7 Interest Rate Derivatives 269 10.8 Securitization 271 Contents ix 10.9 Conclusions 274 10.9 References 275 PART V China’s Mortgage, Insurance, and the Funds Industry 277 11. China’s Mortgage and Housing Market 279 Wu Xuchuan 11.1 Overview 279 11.2 Real Estate Market 280 11.3 The Situation in the Real Estate Market 280 11.4 History 286 11.5 Development of the Mortgage Market 287 11.6 Basic Parameters of the Mortgage Market 289 11.7 Reasons Contributing to the Rapid Development of Mortgages 294 11.8 Risks in the Current Real Estate Market 298 11.9 Conclusions: The Future 300 Appendix 303 12. China’s Insurance Market 307 Guan Lin and Michelle Yuan Ménager-Xu 12.1 Introduction 307 12.2 Current Parameters 311 12.3 Market Players 316 12.4 Reinsurance Companies 319 12.5 Brokers and Agencies 319 12.6 Marketing Channels 326 12.7 Investment Management 330 12.8 Challenges 333 12.9 Future Prospects 334 References 335 Appendix 336 13. Investment Funds in China 337 Mu Xianjie 13.1 History and Introduction 337 13.2 Securities Investment Funds 340 x Contents 13.3 Trust Funds 357 13.4 Private Funds 360 13.5 Regulations 361 13.6 Types of Funds 363 13.7 Problems and Future Trends 374 13.8 Conclusions 376 References 377 List of Figures 379 List of Tables 383 Index 386 On enclosed CD-ROM: Chinese Financial Regulations (see inside back cover) Regulation 1—Access of Banking Institutions to National Interbank Lending Market Regulation 2—Bond Forward Trading on the National Interbank Bond Market Regulation 3—Financial Bonds on the National Interbank Bond Market Regulation 4—The Bankcard Industry Regulation 5—Short-term Financing Bills Regulation 6—Administration of the Issuance of RMB Bonds Regulation 7—Administration Rules for Pilot Securitization of Credit Assets Regulation 8—Lending Interest Rates of Financial Institutions Regulation 9—Management Guidance for Commercial Bank Mortgages For updates on regulations and statistical data on the Chinese financial markets, please go to the site: www.ruiji-regis.com PREFACE This book on China’s financial markets is intended as a manual for market professionals, academics, and researchers. It will be revised and new editions will be published hopefully, every two years. The book has few, very clear aims. Essentially we wanted to collect in the same source “current” market practices, regulations, and the conventions in major financial markets in China. We did this by asking market professionals to write separate chapters on their market of expertise. The same chapters also give a brief description of the history of how each market has evolved during the last twenty-five years. The book does not contain much in terms of analysis. We completely left out any statistical work that researchers may attempt on the existing data from Chinese markets. On the other hand, readers may have access to financial time series from China and to the recent regulatory changes in our Web site, www.ruiji-regis.com. The chapters are written almost in entirety by Chinese market professionals who have worked in that particular sector for significant amounts of time. The contributors are not academics, and their approach is not in the format of an academic journal article.