History, Status Quo and Future of the Chinese Capital Market Chunsheng Tao Associate Professor of Finance Minzu University of China May 19, 2011 Seminar at University of Rhode Island

Overview The Chinese capital market was first established in December The market is now among the largest capital markets in the world. This lecture offers three aspects of the Chinese capital market. The current status and structure of the Chinese capital market. History and functions of different elements in the equity market, such as the main board, small and medium enterprises board, growth enterprise boards, and Stock Transfer Agent System (OTC), and the debt market. Macro aspects of the Chinese capital market. It involves the regulatory system of the security market, and the trend in the Chinese capital market.

Structure of the Chinese Capital Market Capital Market Equity Market Bond Market Stock Index Future 1.Shanghai Stock Exchange (SSE) 2.Shenzhen Stock Exchange (SZSE) 3.OTC 1.Inter-Banks 2.Exchanges 3.OTC China Financial Futures Exchange (CFFEX)

Structure of the Chinese Stock Market(2010) Stock Transfer Agent System (STAS, i.e., the OTC market) 3 Components:

Snapshot of Chinese Stock Market in 2010

Structure of SSE in 2010 Market Capitalization (Yuan / % of market cap ) denominated in RMB but subscribed to and traded in US dollars

Structure of SZSE in 2010 (Market Capitalization in billion Yuan / % ) Small and Medium Enterprises Board (SME) Growth Enterprises Market (ChiNext)

Structure of SZSE's Main Board (2010) (Market Capitalization in million Yuan / % ) denominated in RMB but subscribed to and traded in HK dollars

Structure of STAS Trading Shares of three kind of Companies Originally listed in STAQ and NET systems,which were closed later Delisted from SSE and SZSE Unlisted Hi-tech in Zhongguancun S&T Park

Structure of Fund Market Source:TX

Close-end Funds (Market value in billion Yuan and Number of Funds) Source: SSE, SZSE

Open-end Funds (Market value in billion Yuan / % ) Source: SSE, SZSE, TX

1.3 Structure of Bond Market (2010) (Value traded in %)

Structure of Bond Market (2010) (Value traded in billion Yuan)

Development of SSE The Shanghai Stock Exchange (SSE) was founded on Nov 26, 1990 and in operation on Dec 19. Four stages for SSE. (1) Before 1993, SSE was a local market (Local companies, Local investors). (2) During , it was a regional one (companies and investors from economic leading cities and provinces). (3) After 1996, it was became to a national one. (4) After 2004, SSE turn into a market for large enterprises or blue-chip companies.

Number of Listed Companies in SSE Increasing slowly after 2004

Number of Investors of SSE (in 10 thousands) Viewed on the number of investors, there are 3 jumps.(1) from 1.11 of 1992 to 4.24 million of (2) from 6.85 of 1995 to million of 1996; (3) from of 2006 to million of

Market Capitalization in SSE (in billion Yuan) It fell into a 5 years term of stagnation after 2000.

Market Capitalization in SSE (in billion Yuan) A sharp jump during

Market Capitalization and Number of Investors in SSE Market capitalization increased much quicker than the number of investors did after 2006.

Market Capitalization and Number of Investors in SSE

Drive for the Jump of Stock Market Capitalization Nontradable share reform So far, all the shares discussed are tradable 2/3 of shares in China were nontradable before 2005 Nontradable share reform is to bring those nontradable shares to the market in a gradual way Up to 2010, the reform is virtually completed Such reform has a huge impact on Chinese financial market

Capital Raised in SSE (in billion Yuan)

Development of SZSE Shenzhen Stock Exchange (SZSE) was established on December 1, Six stages During , SZSE developed similarly as SSE. i.e. (1) before 1993, it was a local market (Local companies, Local investors). (2) In , it was a regional (companies and investors from economic leading cities and provinces) one. (3) After 1996, it became to a national one.

Launch of SME (4) In 2000, SZSE was asked to stop IPO and prepare for the Growth Enterprise Board. But it took a much longer time than expected for Nasdaq dropped dramatically. It then fell into a period of stagnation for 4 years. (5) In May, 2004, SZSE found a way to launch Small and Medium Enterprises Board (SME). SME Board is a segment of the main board, keeping the same laws, regulations and IPO eligibility criteria as the main board.

Launch of ChiNext (6) In October, 2009, SZSE finally got approval of launching a GEB, named ChiNext. ChiNext is fully independent from the main board. It is a new market for SMEs engaged in independent innovation and facilitating industrial upgrade, and other growing venture enterprises.

Number of Listed Companies of SZSE After 2000, SZSE’s main board stopped IPOs.

Number of Listed Companies of SZSE Year Number of Listed Companies A- share SMEYear Number of Listed Companies A- share SME Chi Next

Number of Investors of SZSE Viewed on the number of investors, there are 3 jumps.(1) from 1.05 of 1992 to 3.54 million of (2) from 5.57 of 1995 to million of 1996.

Number of Investors of SZSE (3) from of 2006 to 68.4 million of 2007.

Market Capitalization of SZSE (in 100 millions) Two jumps Increasing steadily during

Market Capitalization of SZSE (in 100 millions) Shrinking during Jumping in 2006 and 2007 Keep on growing quickly after 2008

2.3 Development of STAS Stock transfer agent system (STAS) refer to stock transfer brokerage services provided by securities companies with their own facilities to non-listed companies. In June 12, 2001, China Securities Regulatory Commission (CSRC, SEC counterpart) approved the Securities Association of China (SAC) to launch it for transferring the negotiable shares originally transacted in STAQ (the Securities Trading Automatic Quoting System) and NET (the National Electronic Trading System).

Development of STAS After December 10, 2001, stocks of delisted companies from SSE and SZSE have become another source. In January 2006, the System was further expanded to include share transfer of unlisted joint stock companies in Beijing ’ s Zhongguanchun Science Park. This part is kind of pool for ChiNext.

Number of Companies in STAS

Companies from STAS to Exchanges Number Transferred to ChiNext3 Transferred to SME1 Transferring to ChiNext1 Processing to transfer13 By may,2010. Source: SAC, SZSE

B-share market B-shares are denominated in RMB but subscribed to and traded in US (for SSE) or Hong Kong dollars (for SZSE). It was launched in 1992 and aimed at foreign investors for attracting foreign capital at first. After October 2000, the B-share market was suspended share issuance. There was only a few of exceptional cases in 2003 and In February 2001, China permitted domestic residents to be B-share investors.

Development of Inter-bank Bond Market The inter-bank bond market was set up in 1997 to make commercial banks move out of Exchanges. It is mainly for institutional investors. Market value Number of debt securities Source: PBC

Development of Bond OTC Market The counter service offered by commercial banks was set up in As an extension of the inter-bank market, it is for individual investors and SMEs. At the end of 2010, there are 8 commercial banks got approval of providing the counter service, with 8.96 million investors.

Tendency to Focus on Capital market Growth The Chinese stock market is strictly regulated, not a free market Policymakers emphasize the growth in the capital market De-emphasize returns to investors; emphasize total amount of capital raised by firms SSE and SZSE are leading exchanges in capital raising in the world. Stock performances are very poor relative to stocks listed in other major exchanges.

Amount of Capital Raised in Major Exchanges Capital Raised (2010, in billions of USD) RankExchangeIPOsSEOsTotal 1NYSE Euronext (US) Hong Kong Exchanges BM&FBOVESPA Shanghai SE Shenzhen SE London SE Group Australian SE Tokyo SE Group SIX Swiss Exchange NYSE Euronext (Europe) National Stock Exchange India

Performance of Major Indices Index Change of Major Exchanges (2010) RankExchangeName of index% change 1Athens ExchangeGeneral Price-35.6% 2BME Spanish Exchanges BarcelonaBCN Global Index-19.7% 3Shanghai SESSE Composite Index-14.3% 4SIX Swiss ExchangeSMI-1.7% 5Tokyo SE GroupTOPIX-1.0% 6Australian SEAll Ordinary Price-0.7% 7NYSE Euronext ParisSBF % 8BM&FBOVESPAIbovespa1.0% 9Hong Kong ExchangesS&P/HKEX LargeCap Index7.1% 10Shenzhen SESZSE Composite Index7.5% 11NYSE Euronext (US)Composite10.8% 12London SEFTSE % 13National Stock Exchange IndiaS&P CNX % 14TSX GroupS&P/TSX Composite14.4%

Issues of current capital market policies If investors can not get a reasonable return, the long run performance of the market will be bad. This is a threat to the Chinese stock market. Policymakers can improve the situation by correcting capital-raising bias in regulating IPO, SEOs and other fund raising activities.

3.2 IPOs: Toward A Registration System Before 1993, IPOs in China needed to get approval from local governments. Between 1993 and 2000, IPOs were subject to administrative approval from the authorities with a quota system. In March 2001, a new ex-ante review and approval system, named leading underwriter recommendation system, was introduced by the CSRC. The quota system was abolished.

IPOs: Toward A Registration System In February 2004, the Sponsorship System was put into effect by the CSRC, replacing the leading underwriter recommendation system. In the future, IPOs in China will go to a registration-based system like in developed countries.

Where Do B Shares Go? After 2000, the number of B-share companies decreases No IPO since 2000 A few SEOs got approved in 2003 and 2004 Development for 9 years, and stagnation for 11 years. Where is its way? It needs a final solution. International Board will promote it. Now is a good chance for investors.

Where Do B Shares Go?

3.4 Expansion of STAS A large number of non-listed corporations in China, but very limited means for their shares to be transferred efficiently. CSRC has the plan to set up a national OTC market under its supervision. The STAS is a base. As transfer mechanism to ChiNext and SME was built, STAS made a great step to attract unlisted companies and investors. Unlisted companies in STAS increases quickly and will expand to other science parks out of Beijing.

3.5 Integration of Bond Market China ’ s domestic bond market includes exchanges, the inter-bank, and bank OTC retail markets. Investors are few in the inter-bank market. Commercial banks are the dominant players holding about 80% of all bonds outstanding. Latest developments Bank-based bonds may become exchange-traded bonds Some suggest to build an interconnected trading and settlement system for bonds

Growth in Corporate Bonds Corporate bonds market lags far behind stock market. Government encourage corporates to issue bonds. The corporate bond market is expected to catch up with the stock market.

U.S. Corporate Bonds New Securities Issues by U.S. Companies in 2010 BondsStocks In billions% % Nonfinancial Financial Total Source: U.S. Census Bureau

Corporate Bonds in China

Thank you!