china’s financial system: developments and...

GCFP 2017 ©2017 Jiang Wang

China’s Financial Development

Jiang WangMIT

China’s Financial System:Developments and Challenges


China’s Financial DevelopmentChina’s Economic Growth

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GDP Trades Reserve

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China’s GDP, International Trade and FX Reserve (USD Billion)


China’s Financial DevelopmentChina’s Economic Growth

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USD Trillion US China Japan Germany IndiaGDP 18.57 11.20 4.94 3.47 2.26International Trade 4.92 3.69 1.36 2.39 0.63Trade Surplus -0.50 0.51 0.04 0.28 -0.10Foreign Reserve 0.12 3.01 1.25 0.20 0.40Population (million) 323 1,379 127 83 1,324GDP per capita (USD) 57,467 8,123 38,894 41,936 1,709

China’s Economy in Comparison(2016.12)


China’s Financial DevelopmentChina’s Financial Development

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Financial Development: China and US (USD Trillion)(2016.12)

Sector Bank Credit Stock Fixed Income Insurance Investment FundsSize (China) 15.45 7.32 10.43 2.19 1.32Size (US) 12.44 27.35 39.36 8.46 19.20% GDP (China) 137.95% 64.30% 93.12% 19.55% 11.76%% GDP (US) 67.00% 147.40% 211.95% 45.56% 103.39%



The Size of Capital Markets of Major Economies (USD Trillion)(2016.12)

China’s Capital Market: A Global Comparison

US China Japan Germany UK FranceStocks 27.35 7.32 5.06 1.73 3.50 3.49Gov’t Bonds 13.91 3.28 9.11 1.22 1.78 1.77 Corporate Bonds 20.73 2.99 0.67 2.19 2.09 1.67Total 61.99 13.59 14.84 5.14 7.37 6.93% of GDP 331.8% 121.3% 313.7% 146.9% 278.1% 278.3%GDP 18.56 11.20 4.73 3.50 2.65 2.49

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China’s Financial DevelopmentChina’s Foreign Direct Investment

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For the US, the total FDI reached USD 5.6 trillion in 2016 (at historic cost). Average around USD 200 billion per year between 1990-2016.

China’s Total Foreign Direct Investment (USD Billion)



China has made long strides in its financial development In certain areas, the progress is very fast

However, the development often lacks clear goalso Is market a goal or a tool?o Opaque, segmented and fast changing plans/rules

The development is uneven across different areas The pace of progress is not consistent, words often exceed reality Many distortions still remain (although improving)

o Government implicit guarantees and direct interventionso Biased prices: interest rates and stock priceso Missing/constrained marketso Segmentation from global financial markets

Many fundamental/structural reforms have yet to occuro Boundaries of the government, property rights, legal system, …

Casual Observations

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1. Government’s dominance in the economic/financial landscape1) political, social, legal2) economic and financial

2. Main objectives of the government (central and local)/officials1) political/social stability2) economic growth and “fair” distribution3) economic efficiency (long vs. short term goals)4) career

3. Legacy of the planned economy/socialist sentiment

4. Existing political/social/legal environment

Institutional Reality

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1. Banking1) opening of the banking sector2) interest rate liberalization3) “new finance” (mobile payment and banking)

2. Capital market1) stocks2) corporate bonds3) derivatives

3. Globalization1) capital account liberalization/RMB convertibility2) capital market opening3) investment management

Major Reforms/Developments

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1976: End of the cultural revolution, beginning of the economic reform 1984: Four state owned banks were spurn off from the central bank (PBOC); first

issuance of stock shares and enterprise bonds 1986: First stock share bank established (now 12) 1995: First city bank established (now 134) 1996: RMB convertible under current accounts 2001: Joining of WTO 2002: Union Pay established (credit card) 2004: The big four banks began the process of becoming listed (on/off shore) 2013: Bank lending rates liberalized 2015: Deposit insurance established; cap on deposit rates abolished; private

banks approved 2017: Establishment of Financial Stability and Development Council; centralized

payment clearing system

Key Events -- Banking

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China’s Financial DevelopmentBank Assets (RMB Trillion) and ROA (%)

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Major Banks Joint Stock Banks City Banks

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China’s Financial DevelopmentBank Deposit/Lending Rates

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China’s Financial DevelopmentWMP through Banks (RMB Trillion)

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China’s Financial Development“New Finance”: Mobil Payment

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Mobile Payment(2016.12)

Transaction volume (USD trillion) 2.78

Annual growth 22%

Number of mobile pay accounts (million) 469

Annual growth 31%

Third-party payment license first granted in 2011.


China’s Financial Development“New Finance”: YuEBao – Mobile Banking

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Size of YuEBao (RMB billion) FR007 (%) YuEBao (%) Current Deposit (%)

YuEBao’s size reached USD 211.5 billion by 2017.6.30. Vanguard’s Prime Money Market Fund is ~USD 97 billion.

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1981: Issuance of the first central government bond 1990: Establishment of Shanghai and Shenzhen stock exchanges 1998: Emergence of many trust, investment corporations and closed-end funds 2001: First open-end mutual fund established 2005: Split share structure reform 2010: Opening of China Financial Futures Exchange (stock index futures) 2014: Shanghai-Hong Kong connect established 2015: Corporate bond registration system implemented 2017: Fidelity’s license for on shore RMB funds granted

Major Events – Capital Market

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Stock Market Capitalization – Floating Shares (1990.12 – 2015.12)

Number of listed stocks: 8 (1990.12) – 2,774 (2015.12)

Market cap (RMB trillion): 0.0006 (1990.12) – 41.5 (2015.12)

Stocks

No. of Listed Stocks Market Cap (RMB Trillion)

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Floating vs. Non-Floating Shares (1990.12 – 2015.12)

Market cap (RMB trillion): Floating: 0.0006 – 41.5; Non-floating: 0.0012 – 11.2 Percentage (%): Floating: 35 (1990.12) – 79 (2015.12); Non-floating: 65 – 21

Stocks – Floating vs. Non-Floating Shares

Market Cap (RMB Trillion) Percentage

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Government and Enterprise Bonds Outstanding (RMB Trillion)(1997.01 – 2015.12)

Government and Enterprise Bonds

Government Bonds Enterprise Bonds

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China’s Financial DevelopmentInvestor Structure of Bond Market (2016.12)

20Data Source: WIND

67.07%

15.09%

5.89% 11.95%

Government Bonds

Banks

Special Clearing Members

Exchanges64.79%

22.88%

12.33%

Policy Bank Bonds

Banks

Funds

Others (Special ClearingMembers, Credit Unions,Security Firms, Insurance,Exchanges)

47.69%

26.69%

14.58%

11.05%

Enterprise Bonds

Funds

Exchanges

Banks

Others (Special ClearingMembers, Credit Unions,Security Firms, Insurance)

46.17%

34.89%

9.14%

9.80%

Medium Term Notes

Funds

Banks

Insurance

Others (Special ClearingMembers, Credit Unions,Security Firms, Exchanges)



Wealth Indices of Investments in the Chinese Capital Market - Stocks(Year-End 1992 = ￥1.00)

Return and Risk from Chinese Stocks

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Summary Statistics of Yearly Returns -- China (%)(1993.01 – 2015.12)

Return and Risk – China

Geometric Mean

ArithmeticMean

StandardDeviation

Large Company Stocks 6.4 18.8 60.0

Small Company Stocks 22.5 36.4 67.0

Long-Term Corporate Bonds 5.3 5.7 9.1

Long-Term Government Bonds 6.5 6.9 10.1

Short-Term Government Bonds 4.0 4.0 3.5

Inflation 4.2 4.4 6.3

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China’s Financial DevelopmentReturn and Risk – US

GeometricMean

ArithmeticMean

StandardDeviation

Large Company Stocks 10.1 12.0 20.0

Small Company Stocks 12.2 16.5 32.0

Long-Term Corporate Bonds 6.1 6.3 8.4

Long-Term Government Bonds 5.7 6.0 10.0

Short-Term Government Bonds 3.5 3.5 3.1

Inflation 2.9 3.0 4.1

Summary Statistics of Yearly Returns – US (%)(1926.01 – 2015.12)

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Dollar Returns on Major Stock Markets (1993 – 2016)

GeometricMean

ArithmeticMean

Std.Dev. US Japan UK Germany France China

US 0.10 0.12 0.20 1.000 0.544 0.878 0.788 0.799 0.291

Japan 0.01 0.04 0.25 1.000 0.656 0.654 0.666 0.013

UK 0.05 0.07 0.17 1.000 0.913 0.835 0.304

Germany 0.09 0.12 0.24 1.000 0.820 0.382

France 0.06 0.08 0.23 1.000 0.382

China 0.10 0.20 0.54 1.000

Returns on Major Stock Markets -- USD

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Return and Risk Characteristics of Main Stock Markets (in USD)(1993-2016)

Different Countries Without China With China

Return (Arithmetic Mean) and Risk of Major Stock Markets – USD(1993-2016)

Return and Risk of Major Stock Markets – USD

China

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JapanUK

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Data Source: BLOOMBERG, CCM, WRDS

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RMB Returns on Major Stock Markets(1993-2016)

Return and Risk of Major Stock Markets – RMB

GeometricMean

ArithmeticMean

Std.Dev. US Japan UK Germany France China

US 0.08 0.10 0.20 1.000 0.588 0.901 0.819 0.821 0.374

Japan -0.01 0.02 0.23 1.000 0.693 0.693 0.694 0.010

UK 0.04 0.05 0.18 1.000 0.920 0.854 0.389

Germany 0.08 0.11 0.25 1.000 0.846 0.448

France 0.04 0.06 0.22 1.000 0.449

China 0.08 0.20 0.60 1.000

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Return and Risk Characteristics of Main Stock Markets (in RMB)1993-2016

Return (Arithmetic Mean) and Risk on Major Stock Markets – RMB(1993-2016)

Return and Risk on Major Stock Markets – RMB

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China’s Financial Development2015: Stock Indices (2010-2017)

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SCI SzCI SzSM GEM


China’s Financial DevelopmentPE for Each Market (2010-2017)

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SCI SzCI SzSM GEM


China’s Financial DevelopmentMargin Trading and Short Selling (RMB Billion)

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Margin Trading Short Selling % of Floating A Share

Note: Average shorting was RMB 2.71 billion and max was 8.85 billion.

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China’s Financial DevelopmentStock Index Futures (CSI300)

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VOLUME (left) CLOSE (left) OPEN INTEREST (right)

1. 2015.9.7: Non-hedging transaction margin raised to 40%,commission raised to 0.23%, opening transaction limited to 10 contracts per account per day.

2. 2017.2.17: Non-hedging transaction margin lowered to 20%, commission lowered to 0.092%, opening transaction raised to 20 contracts per account per day.

3. 2017.9.18: Transaction margin lowered to 15%, commission lowered to 0.069%.

Data Source: WIND. Peak daily volume exceeded USD 600 billion.



Corporate Bonds: Issuance and Outstanding (RMB Trillion)(2008.12 -- 2016.12)

Outstanding: Exchange: 0.051 (2008.12) – 4.128 (2016.12)

Corporate Bonds – Register Form

Monthly Issuance Total Amount Outstanding

(Only register-form corporate bonds. Source: CSDC)

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Shanghai Stock Exchange Shenzhen Stock Exchange

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Shanghai Stock Exchange Shenzhen Stock Exchange

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1. Chinese financial system has experienced a rapid growth

2. More is needed (quantity and quality)1) To improve allocation efficiency and social welfare2) To facilitate the transition to a more sustainable grow model

3. Challenges1) Clear development goals2) Boundaries between government and market3) Fundamental reforms: property rights, legal system4) More coherent regulatory framework5) Well functioning financial markets6) Integration into the global financial system

4. Research1) More data to shed light on existing paradigms2) Unique problems, important in their own rights3) Meaningful cross-section for new paradigms (e.g., role of government)

Concluding Comments

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china’s financial system: developments and...

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