Fiscal System
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Transcript of Fiscal System
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Financial SystemJunhui Qian
2015 November
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Content• Basics• The Reform of the Financial System• The Banking System• Capital Markets• Stock Markets• Bond Markets• Other Financing
• Future Financial Reform
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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."
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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
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Content• Basics• The Reform of the Financial System• The Banking System• Capital Markets• Stock Markets• Bond Markets• Other Financing
• Future Financial Reform
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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.
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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.
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Financial Deepening
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140%
50%
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M2/GDP
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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.
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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.
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Content• Basics• The Reform of the Financial System• The Banking System• Capital Markets• Stock Markets• Bond Markets• Other Financing
• Future Financial Reform
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The Banking System• As of 2014, there are 3 policy banks, 5 large commercial banks, 12
mid-sized commercial banks, 133 city commercial banks, 665 rural commercial banks, 89 rural cooperative bank, 1596 rural credit unions, 1 postal saving bank, 4 financial asset management companies, 68 trust companies, etc. • As of 2014, the total asset of the banking system amounted to RMB
172.3 trillion, while the total liability was RMB 160 trillion. • The bank system employs 3.76 million people at the end of 2014.
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Total Asset and Liability of the Banking System
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Market Share of Different Categories of Banks
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Decline of Bank’s Importance in the Financial System
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130%
10%
20%
30%
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80%
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100%
Share of Loans in Total Financing
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Bank Capital Adequacy
37226 -2052yy
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CN: Bank Capital to Assets Ratio (World Bank (WDI))
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Improvement in Banking Practice
2003-06
2003-09
2003-12
2004-03
2004-06
2004-09
2004-12
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2005-12
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2009-12
2010-03
2010-06
2010-09
2010-12
2011-03
2011-06
2011-09
2011-12
2012-03
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2012-09
2012-12
2013-03
2013-06
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2013-12
2014-03
2014-06
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2015-090
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Rate of NPLs (%)
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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. • By Oct 2015, all interest rates are determined by the market.
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Content• Basics• The Reform of the Financial System• The Banking System• Capital Markets• Stock Markets• Bond Markets• Other Financing
• Future Financial Reform
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The Stock Markets• The Shanghai Stock Exchange was opened in 1990 and is now the 5th
largest stock market by market capitalization at 3.9 USD tn. • The Shenzhen Stock Exchange was opened in 1991 and is now the 9th
largest stock market by market capitalization at 2.1 USD tn.• The Hong Kong Stock Exchange is the 7th largest stock market by
market cap at 3.2 USD tn.
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Major Stock Exchanges (ranked at Dec 2014 )
Rank Exchange Economy Headquarter Market cap (USD bn) Number of listed companies Monthly trade value (USD bn)1 NYSE United States New York 19351.4 1939 1536.3 2 Nasdaq - US United States New York 6979.2 2430 1154.4
3 London Stock ExchangeUnited Kingdom,Italy,London 6177.2 1286 149.6
4 Japan Exchange Group Japan Tokyo 4378.0 3458 456.2
5Shanghai Stock Exchange China Shanghai 3932.5 995 1853.6
6 EuronextEuropean Union
Amsterdam Brussels Lisbon Paris 3319.1 935 152.8
7Hong Kong Exchanges and Clearing Hong Kong Hong Kong 3233.0 1661 171.8
8 TMX Group Canada Toronto 2093.7 3691 148.9
9Shenzhen Stock Exchange China Shenzhen 2072.4 1618 1063.3
10 Deutsche Boerse Germany Frankfurt 1738.5 595 111.3
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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
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Turnover Rate on Asian Stock Exchanges
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-140%
50%
100%
150%
200%
250%
300%
350%
400%
450%
Hong Kong ExchangesJapan Exchange Group - TokyoKorea ExchangeShanghai SEShenzhen SESingapore Exchange
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The Shanghai Composite Index
19901991
19911992
19921993
19931994
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19971998
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20012002
20022003
20032004
20042005
20052006
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20092010
20102011
20112012
20122013
20132014
20142015
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
SSECI (1990-2015)
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Investor’s Enthusiasm
20032003
20032004
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20062006
20072007
20072008
20082008
20092009
20092010
20102010
20112011
20112012
20122012
20132013
20132014
20142014
20152015
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
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0
2,000
4,000
6,000
8,000
10,000
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20,000
New A-Share Accounts
IndividualInstitutional
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Investor’s Enthusiasm
2014/1
2014/1
2014/1
2014/2
2014/2
2014/3
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2014/5
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10000
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0
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Baidu Index on "Stock Market" (Jan 11 2014 - Jun 13 2015)
Baidu Index on "Stock Market" SSECI
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Recent Leverage-Up
2010/04
2010/05
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2010/12
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Margin Financing
Margin Financing as Percentage of Float Capitalization (%) Total Margin Financing (RMB bn)
Perc
enta
ge (%
)
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Shorting in the A-Share Market
20102010
20102010
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20112011
20112011
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20122012
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20122012
20132013
20132013
20132013
20132013
20132014
20142014
20142014
20142014
20142014
20152015
20152015
20152015
20150
0.005
0.01
0.015
0.02
0.025
0
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Short Position
Short Position as Percentage of Float Capitalization (%) Total Short Position (RMB mn)
Perc
enta
ge (%
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The Valuation of the A-Share Market (P/E)
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Aggregate P/E of A-Share (TTM)
ShanghaiShenzhen
P/E
(TTM
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The Valuation of the A-Share Market (P/B)
20022002
20022003
20032003
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20042005
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20062007
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20152015
0
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P/B (Aggregate)
ShanghaiShenzhen
P/B
Ratio
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The Opening-Up of the Stock Market• B share markets• QFII and QDII mechanism• Shanghai-Hong Kong Connect (started on Nov 17, 2014)
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Hang Seng China AH Premium Index
20062006
20062006
20062007
20072007
20072007
20082008
20082008
20082009
20092009
20092010
20102010
20102010
20112011
20112011
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20132013
20142014
20142014
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201580
100
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HSCAHP (2006-2015)
HSCAHPBenchmark
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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.
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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.
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Market Capitalizations of Bonds Listed in Shenzhen Stock Exchange
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0
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Market Capitalization: Shenzhen Stock Exchange: Corporate Bond (China) Market Capitalization: Shenzhen Stock Exchange: Convertible Bond (China)
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Other Financing• Entrusted loans • Trust loans• Undiscounted bankers‘ acceptances• Informal lending
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Content• Basics• The Reform of the Financial System• The Banking System• Capital Markets• Stock Markets• Bond Markets• Other Financing
• Future Financial Reform
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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.