Financial system of China

Stock market

In contrast to the markets of developed countries, China’s stock market has a history of only 23 years. However, since its opening in 1991 in Shanghai and Shenzhen, it has become oneof the most important enterprise financing channels in China. As a country, China has thesecond largest stock market by trading volume and the third largest by market capitalization,$3.7 trillion in 2013, after the the US and Japan. Figure 1 shows that the number of stockshas risen from 53 in 1992 to 2538 in 2012. The main boards of the Shanghai and Shenzhen

Stock Exchanges list larger more mature stocks, like the NYSE in the US. The Shenzhen

Stock Exchange also includes two other boards, the Small and Medium Enterprise Board

and the ChiNext Board, also known as the Growth Enterprise Board, more comparable to

the NASDAQ in US, which provide capital for smaller and high-technology stocks.

China’s stock market has a number of distinctive features. First, it is a pure order- driven market, as opposed to a quote-driven market, whereas the US and several other countries have hybrid equity market systems. Second, it is a centralized market, whereas the US market is fragmented, with dark pools and other off-exchange trading. This may have important implications for market informativeness. There are no dark pools with hiddenorders in China, all orders are visible. Moreover, there is no extended trading period for institutional investors. Institutional and retail investors have equal access to information from a market microstructure point of view. In addition, China’s stock market has a price move limit of 10% to deter excess volatility and stock manipulation.China’s stock market has a dual-share system in which domestic investors can invest only in A shares, while foreign investors can invest only in B shares. In addition, many firms have H shares, traded on the Hong Kong Stock Exchange. A number of articles,such as Chan, Menkveld, and Yang (2008) and Mei, Scheinkman, and Xiong (2009), study the discount of B share and H share value relative to A shares, which they attribute to information asymmetry between foreign and domestic investors and speculative motives.With the introduction of programs such as the Qualified Foreign Institutional Investors (QFII) program of 2002, which relaxed the cross-trading restrictions, B share issuance and trading have mostly vanished. In addition, China’s equity market used to have a large nontradable component, held by corporate founders, often central or local governments. With the share structure reform starting in 2002, this phenomenon has mostly disappeared among mid and small-cap stocks, though not entirely among large stocks.In 2001, a famous Chinese economist, Wu Jinglian, characterized China’s stock market as a “Casino” manipulated by speculators, misled by the central government’s visible hand to unfairly support state owned enterprises (SOEs), and without a strong link to fundamentals. Moreover, much of the academic literature in finance on China has emphasized the market’s mperfections. However, our results suggest that, on the contrary, China’s stock market is as informative as the US stock market in terms of aggregating and impounding information about future profits into prices, and exhibits a cross-sectional return pattern surprisingly similar to those in developed markets, despite its segmented nature.

China Stock Market (SSE Composite) 

The China Stock Market (SSE Composite) increased to 2473.67 Index points in November from 2420.17 Index points in October of 2014. Stock Market in China averaged 1693.63 Index points from 1990 until 2014, reaching an all time high of 6092.06 Index points in October of 2007 and a record low of 99.98 Index points in December of 1990.

SWOT analysis of China

Strengths

• China is continuing to open up various sectors of its economy to foreign investment

• With its vast supply of cheap labor, the country remains the top destination for foreign direct investment in the developing world

• The Communist Party of China, which has governed for over 60 years, remains secure in its position as a sole political part in China

China’s expanding economy is gradually giving it greater clout in international affairs, which will allow to build politically important ties, especially with the developing world.

Weaknesses

• Foreign companies continue to complain about the  poor protection in intellectual property in China

• Chinese corporate governance is weak and non-transparent by western standards. There is a considerable risk for foreign companies in choosing the right local partner

• As with any other one-party state, China’s political system is unstable and unable to respond to the wider changes taking place in society.

Opportunities

• China’s ongoing urbanization and infrastructure drive will provide major opportunities for foreign investment in landlocked provinces as well as the transfer of skills and know-how

• The Chinese government is giving more protection and encouragement to the private sector, which is now the most dynamic in the economy and accounts for most of the country’s job growth

• China is actively expanding its political and economic ties with major emerging markets such as Africa and Middle East

Threats

• China’s government will block attempts by foreign firms to take over assets of national importance
• China is experiencing rising labor costs, promoting some  investors to turn to cheaper destinations such as Vietnam
• Growing corruption, widening inequalities, increasing rural poverty and environmental degradation have lead to an increase in social unrest in recent years.

List of sources:

1. https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html
2. http://ieconomics.com/china-stock-market-forecast
3. http://www.tradingeconomics.com/china/stock-market
4. http://www.worldpopulationstatistics.com/population-of-china-2014
5. http://www.cina.bbc-llp.co.uk/tax-system-in-china.html
6. http://en.wikipedia.org/wiki/Banking_in_China
7. www.deloitte.com/view/en_CN/cn
8. http://www.imf.org/external/country/CHN/index.htm
9. http://www.theguardian.com/business/2014/oct/01/shadow-banking-system-risk-financial-stability-imf
10. http://www.worldbank.org/cn
11. http://people.stern.nyu.edu/jcarpen0/pdfs/Carpenter%20Lu%20Whitelaw%202014%20%20The%20Real%20Value%20of%20China's%20Stock%20Market.pdf
12. http://www.cbl-international.com/docs/csu0614/taxation-china-steven-kah-teck-tan-2014.pdf
13. http://www.suomenpankki.fi/bofit_en/seuranta/kiina_ennuste/Documents/bcf213.pdf