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According to a 2013 publication by Goldman Sachs, there are still major differences between US and Chinese capital markets. The most prominent difference is that capital markets in the US are much larger than China’s in all sectors except for bank credit as shown in the figure below.

The Chinese banking credit sector has expanded in recent years which is now at 128% of China’s GDP compared with 48% in the US. Thus the Chinese economy is highly dependent on bank credit, which can be dangerous for the country in the coming years.

In other sectors, there are large gaps between the size of Chinese and US capital markets with the former still lagging behind the latter. Thus, there are many opportunities for China to develop its stock and fixed income markets, along with its insurance and asset management industries. Among these, the asset management industry seems to have the greatest growth potential.

 

China Capital Market differences 

 

 

On August 6, 2013, Chinese securities companies received ‘the notice of preparing the initiating stock options full simulating trading works’ sent by the Shanghai Stock Exchange. This information implies that SHSE is already fully prepared for the launching of stock options. Although there is no clear timetable for launching the stock options, it is likely that they will appear in Chinese capital markets in 2013 or 2014.

China’s Central Bank has been rapidly shifting towards full interest rate liberalization. On July 20th, 2013, The People’s Bank of China (PBOC) announced liberalizing the loan interest rate. With this announcement, the deposit interest rate ceiling is the last variable waiting to be liberalized in China.

With interest rates liberalization now on the horizon, competition in deposit interest rates is heating up. Many joint-stock banks have recently increased their long term deposit interest rates about 10%. Everbright Bank increased its 2-year term deposit interest rate from 3.75% to 4.125%, 3-year term deposit interest rate from 4.25% to 4.675%, and 5-year term deposit interest rate from 4.75% to 5.125%. It will be effective until the end of 2013. Since 2012, many city commercial banks have increased their deposit interest rate. We can see the interest rate liberalization trend, and it is currently affecting China’s banking sector from local banks to joint-stock banks, and maybe state-owned banks in the near future.

Increased Bank Deposit Rates in China 

 

 

Throughout the history of capital markets in China, public listings, or IPOs in the Chinese A-share market have been suspended 8 times; we are currently in the 8th suspension period. The modern Chinese stock market is only about 23 years old and of that, IPOs have been suspended for nearly four and a half years, which makes up almost 20% of the market's history. There is still no actual timetable to reopen the IPO market, but according to some market information, it could be possible at some time in August or September, 2013.

China is already the second largest economy in the world, however, RMB has really not been fully accepted as a payment currency internationally, which most view as a prerequisite to 'RMB internationalization'.

According to The Wall Street Journal, the fundraising of PE funds in Asia continued to drop in the first half of 2013. Compared to the US and European markets, the amount of funds that Asian private equity funds raised was the smallest among the three regions, while the percentage decline is the largest. The slowing Chinese economy is thought to be one of the biggest reasons for the decline in fundraising figures as well as the IPO suspension in China; only US$16 billion in public listings were completed in the first half of 2013. 

Private Equity Fund Raising

 

On 4 July, 2013, The China Securities Regulatory Commission (CSRC) announced that the state council of the People’s Republic of China (PRC) had approved the Treasury bond futures’ return to trading, specifically on the China Financial Futures Exchange (CFFE). Currently, the T-bond futures are under the final preparation stage and it will take approximately two months for this preparation period before they officially are released and start trading. So the most likely time for T-bond futures to be released is in early September.

In respond to Chinese national policy, Chinese banks have been actively advancing and cooperating with small and micro-enterprises in the lending business. The total small and micro-enterprise loan balance keeps climbing, and the proportion of small and micro-enterprise loan to total corporate loan remains on a stable level. Recently, the small and micro-enterprise loan balance reached to 12.25 trillion Yuan, and 28.6% of corporate loan belongs to small and micro-enterprises. The increase in small and micro-enterprise loan not only effectively relieves the constraint of funding issues for the companies, but also promotes the transformation of small and micro enterprises in China.

A look at how small and micro enterprise lending is growing.

As seen from the chart below, the trading volume of Shanghai and Shenzhen stock exchanges since August, 2011, the trading volume has fluctuated in a relatively low level, compared to the previous few years’ performance. We see this being a result of retail investors' lost confidence in a stock market that hasn't performed well recently, or at least not to the same levels as a few years ago. 

This may be very temporary however as a number of the recent Chinese economic announcements and regulatory changes will likely have impact on the country as a whole and more specifically in the financial sector.

Watch this space. 

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