?Introduction The stock exchange market in China has developed rapidly since the early 1990s. In 2007, the Chinese stock market overtook the Japanese market in terms of capitalization and topped the world in initial public offerings, underlining the dramatic surge in the country’s financial sector. Nonetheless, within one year the Chinese stock market plunged to less than a third of the value it held at its peak. This marks the most rapid decline of any major market in the world, even against the backdrop of a global financial crisis.
The high level of volatility and the rapid growth of the Chinese stock market have attracted numerous studies that have focused on market operation and efficiency. In this paper, I will focus a study on two stock exchange market in China. Financial reform and the need to establish a stock market in China China began its reform programs at a particular moment under a unique economic history and was able to develop its own distinctive approach to financial development and financial reform. In China, the banking sector replaced the government fiscal sector in the mid 1980s as the main source of long-term funds.
However, a high level of bad debt, which reached 20% of total loans by the end of 1994, persisted throughout China during this period. The banking sector, which was required to improve asset-liability management after the implementation of the Commercial Banking Law effective 1 July 1995, had a very small margin to meet increasing demand for long-term funds. Moreover, by the early 1990s the liabilities of state-owned enterprises (SOEs) reached a very high proportion of total asset value. Consequently, not only did many SOEs face debt-servicing problems, but they also experienced severe working capital shortages.
Largely this situation was attributable to the lack of flexible fundraising channels. China, therefore, must give higher priority to the stable supply of long-term funds through the stock market. There are two stock exchanges in China, they are: 1. Shanghai Stock Exchange (SSE) The Shanghai Stock Exchange (SSE) was founded on Nov. 26th, 1990 and in operation on Dec. 19th the same year. It is a membership institution directly governed by the China Securities Regulatory Commission (CSRC). After several years’ operation, the SSE has become the most preeminent stock market in
Mainland China in terms of number of listed companies, number of shares listed, total market value, tradable market value, securities turnover in value, stock turnover in value and the T-bond turnover in value. As at the end of 2009, SSE boasted 1,351 listed securities and 870 listed companies, with a combined market capitalization of RMB 18,465. 523 billion and a total of 89. 6543 million trading accounts. A large number of companies from key industries, infrastructure and high-tech sectors have not only raised capital, but also improved their operation mechanism through listing on Shanghai stock market.
2. Shenzhen Stock Exchange (SZSE) The Shenzhen Stock Exchange (SZSE) established on 1st December 1990, is a self-regulated legal entity under the supervision of China Securities Regulatory Commission (CSRC). SZSE is committed to its mission to develop China’s multi-tier capital market system. It gives full support to development in small and medium businesses and implementation of the national strategy of independent innovation. The SME Board was launched in May 2004. The ChiNext Market was inaugurated in October 2009.
By 30 June 2010, SZSE was home to 1,012 listed companies, with 485 on the main board, 437 on the SME board and 90 on the ChiNext market. The total market capitalization was valued at 5. 6 trillion yuan (US$828. 7 billion). In the first half of 2010, SZSE raised 154. 3 billion yuan (US$22. 7 billion) in IPO proceeds and recorded a total trading value of 9. 73 trillion yuan (US$1. 43 trillion). There are 3 basic types of shares: A-Shares A-Shares on the Shanghai and Shenzhen stock exchanges refer to those that are traded in CNY, the currency in mainland China.
In general, foreign individuals are not allowed to directly invest in A-shares as CNY is not a convertible currency and the Capital Account of China is not open yet. However, some large foreign entities, known as QFII (Qualified Foreign Institutional Investor), are permitted by the Chinese government to buy A-shares in recent years with the trend of China’s integration into the global financial system, and those QFII then put the package on another country’s market traded as an ETF. B-Shares B-shares on the Shanghai and Shenzhen stock exchanges refer to those that are traded in foreign currencies.
Nevertheless, foreign individuals are forbidden to trade B-shares——even with their foreign currency. The face values of B shares are set in CNY. In Shanghai B shares are traded in US dollar, whereas in Shenzhen they are traded in Hong Kong dollar. Only some listed companies of SSE and SZES issue B-shares. H-shares H-shares refer to the shares of companies incorporated in mainland China that are traded on the Hong Kong Stock Exchange. Many companies float their shares simultaneously on the Hong Kong market and one of the two mainland Chinese stock exchanges.
Investors, whether individual or institutional, all over the world are welcomed to trade H-Shares as they wish. However, mainland Chinese citizens are restricted to directly invest in H-shares. As a result, price discrepancies between the H shares and the A share counterparts of the same company are not uncommon as investors trading H-shares and A-shares may differ from each other when making an buying/selling decision. There are 4 major stock indices in China 1. SSE Composite Index The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange.
The base day for SSE Composite Index is December 19, 1990, and the base period is the total market capitalization of all stocks of that day. The Base Value is 100. The index was launched on July 15, 1991. The B share stocks are generally denominated in US dollars for calculation purposes. For calculation of other indices, B share stock prices are converted to RMB at the applicable exchange rate (the middle price of US dollar on the last trading day of each week) at China Foreign Exchange Trading Center and then published by the exchange.
2. SZSE Component Index The SZSE Component Index is an index of 40 stocks that are traded at the Shenzhen Stock Exchange. The base day for SZSE Component Index is July, 20, 1994 and the base value is 1000. Only companies which meet the criteria set by the SZSE are possibly selected as constituent stock of the Index, including a long history as a listed enterprise, a market cap large enough, a positive earning scenario, being actively traded and representative in its industry or sector. 3. CSI 300
As a joint venture between the Shanghai Stock Exchanges and the Shenzhen Stock Exchange, the China Securities Index Company Limited (CSI) is a professional business entity specializing in the creation and management of indices and index-related services. As the first equity index launched by the two exchanges together, CSI 300 aims to reflect the price fluctuation and performance of China A share market. And the constituent stocks are selected from both the SSE and the SZSE. CSI 300 is designed for use as performance benchmarks and as basis for derivatives innovation and indexing.
4. Hang Seng Index The Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong. These 45 constituent companies represent about 60% of capitalisation of the Hong Kong Stock Exchange HSI was started on November 24, 1969, and is currently compiled and maintained by Hang Seng Indexes Company Limited, which is a wholly owned subsidiary of Hang Seng Bank, one of the largest banks registered and listed in Hong Kong in terms of market capitalisation.
Chinese stock exchange market investors As of 2007 about 40 to 50 percent of shares were owned by state-owned enterprises while most the remainder were owned by individual Chinese shareholders. This differs from the United States and other mature markets where institutions control 80 or more percent of shares. Some 58 million Chinese have stock-trading accounts (2001). Playing the market is major pastime among Chinese, especially those who live in coastal areas. People still sometimes wait in line for hours to sign up for brokerage firm accounts.
Many people quit their jobs, put their savings and retirement funds into trading accounts, borrow money and made trading sticks a full time pursuit. About 300,000 new share trading accounts are opened every day as more and more people become in trading known as chao gu or “stir-frying stocks. ” For the most part Chinese stocks can be purchased only by Chinese. Trading is dominated by the yuan-denominated shares. Chinese mutual funds are the main vehicle for individual investments. Foreign investors are barred from buying yuan-denominated shares except through the qualified foreign institutional investor program.
As of December 2006, 52 firms have approval through the program to buy a total of $8. 65 billion on stocks and bonds. The government has been expanding quotas to the foreign institutional investors. Chinese companys listed on the stock exchange market: In 2005 there were 1,381 traded companies listed on the Shanghai and Shenzhen stock markets. In 2006, 842 companies were listed in the Shanghai Stock exchange. Ninety to 95 percent of the companies listed on the Chinese stock exchanges—such as China Telecom. Baoshan Iron & Steel and the Industrial and Commercial Ban— are state-owned.
Many have state-owned parent companies that are not listed and are hybrids of public and private enterprises in which the government floats minority interests to raise money while retaining the bulk of shares. About two thirds of the shares of China’s listed companies are in state hands. Many of the stocks are over priced, in some cases selling for double the price they do in foreign markets. Private shareholders have little say in corporate decisions. Private companies can list on China’s stock markets although getting such a listing can take considerable time and effort.
Some of mainland China’s largest firms prefer to list on the deeper, more stable markets in Hong Kong and overseas. China’s two Chinese oil giants, Sinopec and China National Petroleum, are sold on the Hong Kong, New York and Nasdaq stock exchanges. These days more and more large Chinese companies are listed on Chinese stock markets. Stock exchange Market Volatility in China The Shanghai stock market is known for its volatility. When the market opened in 1991 Chinese stood in line for days to register for the right to buy shares. In the first half of 1992, the Shanghai index soared over 450 percent.
In the second half, it plunged 72 percent, including a one-day drop of 13 percent that sent many investors into a panic. Rises in the stock market are fueled more by speculation, profit-seeking, rumors and psychological factors than economic fundamentals, especially in real estate, construction and raw materials. Rumors are spread by text messages and blogs, and Internet chat lines. Many people have lost a significant portion of their life savings investing in stocks. Many investors are worried about a lack of transparency. They had hoped the stock market would do a better job diverting China’s $14.
trillion in savings to companies in need of investment to grow and expand. Instead money is often spent on real estate speculation. Recent developments in the stock exchange market Market expansion period In 2003 and 2004, China’s stock market as a poorly performing market by a wide margin, this decline paused in 2005, and was followed by a bull market that lasted for almost two years. The Shanghai Composite Index, started at 1,163. 88 on 4 January 2006, closed at 2,675 at the end of 2006, hit 6,124 on 16 October 2007 and closed at 6,092—the highest levels it has reached and closed at in the history of China’s stock market.
The Shenzhen Component Index followed a similar trend to rise 1. 6 times higher in 2007. It closed at 19,531, the highest in its history, on 31 October 2007. Trading on the stock market was extremely active in 2007, stocks total 46. 06 trillion yuan changed hands, compared with 9. 05 trillion yuan in 2006. Total stock market capitalisation in China was 32. 71 trillion yuan, a growth of 2. 66 times that of the previous year’s 8. 94 trillion yuan. The value of tradeable shares stood at 9. 31 trillion yuan as of December 2007—2. 72 times the value at the end of 2006.
One reason for the market boom was that it followed a five-year slump from 2001. Many economists expected corporate net profits to reach 20% in 2007, while others warned that the sustainability of the bull market was questionable Trading Turnover on A Share Market, Jan1999–Sep 2009 (in billion yuan) Shanghai Composite Index and Shenzhen Component Index, 2006–2010 Market downturn period. The bubble in the Shanghai stock market came true in October 2008, by which time the Chinese stock market had suffered an almost 71% loss from its peak in October 2007.
The average P/E of listed companies in Shanghai had dropped to around 20 from a high of 69 in October 2007. The trading volumes of the two stock exchanges were at a record low. It is generally recognized that the tighter monetary policy implemented in late 2007 had a negative impact on the share price. Another main contributing factor to the downturn of the market was the conversion of non-tradeable shares into tradeable ones. P/E Ratio of A Shares Listed on Shanghai Stock Exchange (Jan 1999 – Jan 2010) Shanghai Composite Index and Trading Volume (July 2008 – Mar 2010) Conclusion
The Chinese Government views the stock market as crucial to the country’s economic development. China’s stock market is known for its high levels of volatility. However, these defects are mostly not related to policy. Also, they reflect the current stage of Chinese economic development, or the fixed costs associated with constructing a well-developed market infrastructure. Today, China’s stock market has been adaptive and effective, any credible evaluation of China’s stock market needs to focus on understanding the coherence of the market in terms of the country’s developmental goals.
The experience of China also reveals that the government must play an important role in times of uncertainty, as many Western governments did in the global financial crisis and are still doing in the current European debt crisis. This role should primarily focus on macroeconomic stability. Reference http://www. szse. cn/main/en/ https://editorialexpress. com/cgi-bin/conference/download. cgi? db_name=ACE10&paper_id=194 http://www. tradingeconomics. com/china/stock-market http://factsanddetails. com/china. php? itemid=354&catid=9&subcatid=62