Financial Market Evolution

Since the late of 1970s, the last three decades witnesses a broad and deep economic reform relating to almost each aspects of the economic system in China. As the core issue in the economy, financial system, which consists of financial market and financial intermediaries (institutions), has undoubtedly experienced a great progress and a long-term process of diversification during the reform period as well. This essay discusses the development and liberalization of Chinese financial system in the Chinese economic reform by analyzing the change of the financial market and institutions respectively. 

Financial market evolution

Before the economic reform, China was a typical planned economy country. Financial market in china could be simply viewed as the money market which was only operated by the People’s Bank--the unique financial institution as well as the financial authority at that time. Systematic obstacles seriously limited the vitality of economy. In order to promote the market economy to take place of the former planned economy, the evolution of financial market in China could be classified as the development of money market and the creation of capital market. 

To diversify the money market system, the interbank money market, interbank bond market and bill market were launched in succession and compose the base of China money market during the last three decades. The interbank money market was set up in 1996 and it provides a unified platform for interbank money transection and the interbank rate starts to be announced regularly from that time. (Laurenceson, J. 2003) Figure <i> shows the interbank rate floating during the last decade in China. However, before the launch of the unified interbank money market, although banks could do the borrowing transections with other banks from the beginning of the reform, the transactions are operated in separated interbank money market and the nonstandard operation and separated interest rate usually leads to systematic risk. So the unified market could run for providing the banks borrowing business a healthy and efficient platform. In addition, the interbank bond market in china started in 1980s when the first bonds were issued. However, with the establishment of the securities exchange at the beginning of 1990s, bonds transection could be operated both in and out of the securities exchange. The defect resulted in the banks’ money flowing into the securities exchange and the price of bonds fluctuating acutely. To avoiding it, the separated interbank bonds market was set up in 1997. Now, the market has experienced about fifteen years development and contains many kinds of bonds, such as treasury bonds, company bonds and several transection types, such as forward transection, repurchase transection. Finally, comparing with two markets mentioned above, the bill market in china has a relatively short history. In 1994, in order to solve the problem of lack of working capital in some companies, People’s bank began to promote the use of bills. However, there was not a unified market for the bills transection until the establishment of a website named “Chinese bills” which is operated by China Foreign Exchange Center. The market enhances the efficiency of bill transection and unifies the separated bills market in China. Since that, the full money market in China has been built up. 

Besides, the establishment of an efficient capital market was another landmark in Chinese economic reform. The capital market includes the markets for bonds, stocks and derivatives and stock exchange is the most typical one in the capital market. The development of the capital markets started from the beginning of the economic reform when some small state-owned companies issued shares in the early 1980s. Moreover, the government of PRC firstly issued a treasury bond in 1981, which means the bonds emergence in china. As a landmark of Chinese economic reform as well as the development of Chinese capital market, Shanghai Stock Exchange was established in 1990 and Shenzhen stock exchanges set up later. Since the two stock markets established, Chinese capital markets has experienced an constantly advancing process, many branches in the stock exchanges, such as growth enterprises market, overseas enterprises market and so on. (Neftci, S. ,Yuan, M. Xu, M. 2007) Meanwhile, The market value of Chinese stocks market also has a great-leap-forward development, the figure <ii> shows amount of listed companies and stock investors rapid increase in China. In the near future, with the steps of Chinese Yuan internationalization, Chinese capital market will tend to be more extroversive and diversified. 

Financial institutions development

Before the reform, in china, People’s Bank played the unique role of authority as well as participant in the financial system but the reform broke the old and rigid financial system. 

The development of financial institutions in China mainly is embodied in the diversification of banks and the spring up of other financial institutions. First of all, after the government adopted the reform policy, both the value and amount of financial institutions boomed. The table (i) shows the market value of several Chinese banks in 2008, where the Industrial & Commercial Bank of China (ICBC) has the highest market value among all the commercial banks around world and is the most profitable bank as well. Meanwhile, the private capital began to enter the bank industry which was totally stated owned in the beginning of 21st century. China Zheshang Bank which composes of 85.7% private capital currently is one of the typical joint-equity banks in China. In addition, many foreign banks enter china in succession after the relaxation of the restriction in 2007. (Clouse, T. 2007) The banks industry in China becomes much more competitive and advanced with the steps of the economic reform. 

Another significant character of the development and liberalization of Chinese financial industry is the spring up of other financial institutions, such as the insurance agency, securities company. Besides, other firms like assets management company, Rural Credit Cooperatives, auto financing company, etc. are also the component of Chinese financial institutions nowadays. 

In conclusion, the development and liberalization process of Chinese financial system in the last three decades is the establishment and rapid development phase and in the coming years, Chinese financial system should tend to be sounder and more advanced.