Deutsche Bank Research Current Issues trading(see chart 5 below). The OTC market accounts for more tha 97% of total transaction value, with the overwhelming majority in interbank activity and followed by exchange-based trading in Shanghai and Shenzhen(2.7%). The China Government Securities Depository Trust& Clearing Co Ltd (CGSDTC)takes the functio of centralised depository and settlement for all market segments with commercial banks and Chinaclearacting as sub-custodians in the otc market and exchange-based trading respectively China bond market structure OTC Exchange Market type Market Market CGSDTC (General custodian) Custod ian Commercial ban ks (Sub-custodian (Sub-custodian rkets of market OTC market market transaction Negotiating Match-making Pricing nvestors Non-financial Non-bank institutions nstitutions participant Public sector issuance dominates Liquidity trading overview 100% Market liquidity measured by turnover ratios(calculated as trading volume divided by value of outstanding bonds)is higher for cor- porate bonds than for government bonds, making mainland China 60% an exception in emerging Asia. However, when looking at bid-ask spreads, liquidity seems to be much higher for government (i.e treasury) bonds. This has probably to do with the dominant position treasury bonds have with regard to issuance and amount outstand ing, which also translates into much higher trading volumes for 00010203040506 government bonds(approx. eight times the trading volume of UPBC corporate bonds) ■ Treasury Commercial Paper ABS/MBS Market participants Domestic commercial banks are the major players in Chinas local Bond holding structure bond market, holding close to 60% of the total amount outstanding of total (see table 7). However, their share has been declining from around 200820072006 65%in 2006, while the share of insurance companies and other Commercial banks 57.1 59.0 64. 6 market participants has risen substantially. This trend can be linked of w hich foreign 0.50.50.4 to CSRC's explicit policy of broadening the investor base and Credit cooperatives 3.1 2.7 3.6 making the bond market an alternative for institutional investors Securities funds 754.38.8 Also, demand for life insurance products has likely risen but only at companies, other non- low pace. Ongoing reform of the social security system coupled bank FI Insurance companies 11.3 9.4 10.3 3.13.96.2 Chinaclear(or China Securities Depository and Clearing Corp. Ltd ) established in Others(incl. Special 17.8 20.7 6.5 members, non-Fl custodian for China' s stock exchanges, comparable to Germanys Clearstrear Shanghai and Shenzhen stock exchange both hold 50% stakes in the company individuals) which is under supervision of CSRC Sources: Chinabond. DB Resear ADB (2008). Asia Bond Monitor 2008, November 2008 arch16.2009
Current Issues 6 March 16, 2009 trading (see chart 5 below). The OTC market accounts for more than 97% of total transaction value, with the overwhelming majority in interbank activity and followed by exchange-based trading in Shanghai and Shenzhen (2.7%). The China Government Securities Depository Trust & Clearing Co. Ltd. (CGSDTC) takes the function of centralised depository and settlement for all market segments with commercial banks and Chinaclear5 acting as sub-custodians in the OTC market and exchange-based trading, respectively. Liquidity & trading overview Market liquidity measured by turnover ratios (calculated as trading volume divided by value of outstanding bonds) is higher for corporate bonds than for government bonds, making mainland China an exception in emerging Asia6 . However, when looking at bid-ask spreads, liquidity seems to be much higher for government (i.e. treasury) bonds. This has probably to do with the dominant position treasury bonds have with regard to issuance and amount outstanding, which also translates into much higher trading volumes for government bonds (approx. eight times the trading volume of corporate bonds). Market participants Domestic commercial banks are the major players in China’s local bond market, holding close to 60% of the total amount outstanding (see table 7). However, their share has been declining from around 65% in 2006, while the share of insurance companies and other market participants has risen substantially. This trend can be linked to CSRC’s explicit policy of broadening the investor base and making the bond market an alternative for institutional investors. Also, demand for life insurance products has likely risen but only at slow pace. Ongoing reform of the social security system coupled 5 Chinaclear (or China Securities Depository and Clearing Corp. Ltd.), established in 2001, is in charge of clearing any security transaction and also covers the role of custodian for China’s stock exchanges, comparable to Germany’s Clearstream. Shanghai and Shenzhen stock exchange both hold 50% stakes in the company which is under supervision of CSRC. 6 ADB (2008). Asia Bond Monitor 2008, November 2008. Source: Chinabond CGSDTC (General custodian) OTC Market Exchange Market Exchange market Chinaclear (Sub-custodian) Individuals Non-financial institutions Bid-ask Commercial bank OTC market Institutional investors Negotiating Inter bank market Commercial banks (Sub-custodian) Individuals Non-bank institutions Match-making Market type Custodian Markets of transaction Pricing Market participants % 6 % of total 2008 2007 2006 Commercial banks 57.1 59.0 64.6 of w hich foreign 0.5 0.5 0.4 Credit cooperatives 3.1 2.7 3.6 Securities, funds companies, other nonbank FI 7.5 4.3 8.8 Insurance companies 11.3 9.4 10.3 Exchanges 3.1 3.9 6.2 Others (incl. Special members, non-FI, individuals) 17.8 20.7 6.5 Sources: Chinabond, DB Research 7 0% 20% 40% 60% 80% 100% 00 01 02 03 04 05 06 07 08 PBC Financials Treasury Corporates Commercial Paper ABS/MBS 8 Source: Chinabond 9
China's financial markets-a future global force? Deutsche Bank Research with growing sophistication and awareness on the part of market Stock market crash participants will help to increase the share of institutional investors like insurance companies 5,000 Stock market 4.000 China operates two stock exchanges, one located in Shanghai and the other one located in shenzhen Instruments traded on both 2,000 exchanges include shares(A shares and B shares), convertible bonds, warrants, closed-end mutual funds, ETFs, corporate and government bonds, and repos. Aside from B shares, all instruments 959801040 are only denominated in local currency Stock market cap, USD tr(left) China s stock market experienced a first period of strong growth SH composite index (right) between the mid-and late 1990s with the Shanghai Composite soures CEI, DB Research& Index almost quadrupling within five of fise and Starting in 2006, ars. However over the llowing five years, the index lost half China's stock markets witnessed a stellar rise and the Shanghai Composite Index doubled in both 2006 and 2007(see chart 8). In 2007, the combined market capitalisation of both exchanges in IPOs plunge in 2008 Shanghai and Shenzhen reached almost 140% of GDP, making Chinas stock market the second-largest in Asia after Japans. In a 160 global comparison, China s stock market capitalisation was the third- 140 largest. Average daily trading volume reached USD 26 bn, making it 120 one of the most actively traded markets worldwide. However, after the stock market started to correct in october 2007. market capitalisation declined to around 50% of nominal gDP as of end- 600 2008. Trading activity also dropped, reaching USD 17 bn on a daily average basis 0 The strong rise and sharp fall of the chinese stock market is also 05060708 reflected in IPO figures. Both the amounts raised as well as the USD bn(left) Number(right) number of IPOs rose sharply between 2005 and 2007. By Source: Dealogic November 2008, they had fallen below their 2005 levels(see chart 9) Stock market capitalisation in comparison 100 20 China Germany Russia 2007 ■2008 Sources: Bloomberg, DB Research 7 World Bank(2008 ). China Quarterly Update. February 2008, p. 17 8 See, for instance, Yao, Shujie and Dan Luo(2008). Chinese Stock Market Bubble Inevitable or Incidental? The University of Nottingham China Policy Institute Briefing Series No 41, August 2008 March 16. 2009
China's financial markets – a future global force? March 16, 2009 7 with growing sophistication and awareness on the part of market participants will help to increase the share of institutional investors like insurance companies. Stock market China operates two stock exchanges, one located in Shanghai and the other one located in Shenzhen. Instruments traded on both exchanges include shares (A shares and B shares), convertible bonds, warrants, closed-end mutual funds, ETFs, corporate and government bonds, and repos. Aside from B shares, all instruments are only denominated in local currency. China’s stock market experienced a first period of strong growth between the mid- and late 1990s with the Shanghai Composite Index almost quadrupling within five years. However, over the following five years, the index lost half of its value. Starting in 2006, China’s stock markets witnessed a stellar rise and the Shanghai Composite Index doubled in both 2006 and 2007 (see chart 8). In 2007, the combined market capitalisation of both exchanges in Shanghai and Shenzhen reached almost 140% of GDP, making China’s stock market the second-largest in Asia after Japan’s. In a global comparison, China’s stock market capitalisation was the thirdlargest. Average daily trading volume reached USD 26 bn, making it one of the most actively traded7 markets worldwide. However, after the stock market started to correct in October 2007, market capitalisation declined to around 50% of nominal GDP as of end- 20088 . Trading activity also dropped, reaching USD 17 bn on a daily average basis. The strong rise and sharp fall of the Chinese stock market is also reflected in IPO figures. Both the amounts raised as well as the number of IPOs rose sharply between 2005 and 2007. By November 2008, they had fallen below their 2005 levels (see chart 9). 7 World Bank (2008). China Quarterly Update. February 2008, p. 17. 8 See, for instance, Yao, Shujie and Dan Luo (2008). Chinese Stock Market Bubble: Inevitable or Incidental? The University of Nottingham China Policy Institute. Briefing Series No 41, August 2008. 0 1,000 2,000 3,000 4,000 5,000 6,000 0 1 2 3 4 5 95 98 01 04 07 Stock market cap, USD tr (left) SH composite index (right) 2 Sources: CEIC, DB Research 3 0 20 40 60 80 100 120 140 160 0 10 20 30 40 50 05 06 07 08 USD bn (left) Number (right) 8: '""3 Source: Dealogic ! 0 20 40 60 80 100 120 140 160 180 China US UK France Germany Japan Brazil Russia India 2006 2007 2008 2 % of GDP Sources: Bloomberg, DB Research "
Deutsche Bank Research Current Issues Overview of china s stock exchanges Shanghai Stock Exchange Shenzhen Stock Exchange Total end-2008 end-2007 end-2008 end-2007 end-2008 end-2007 740 1,604 p(RMB bn) 9,7252 26,983 5,7302 12,1366 32.714.1 A-shares 96875 268497 23691 5.6090 12,0567 32458.8 B-shares Avg daily turnover 2.3588 (RMB bn) 1.572.5 19735 933.5 A-sh 1.568 19608 7825 2.350.5 2.886.6 4.6 127 3.8 7.7 Sources: Shanghai Stock Exchange, Shezhen Stock Exchange, CEIC A&8 shares There are different share types in existence, although for China,s domestic stock markets so-called A-shares and B-shares are most important(see table 13). Both types are issued by companies incorporated in the People' s Republic of China(PRC), the main difference being who is entitled to trade them. Chinese nationals as well as foreign institutional investors authorised under the Qualified Foreign Institutional Investor (QFII) scheme are allowed to buy and sell A-shares that are denominated in rmB. B-shares -which are denominated in USD or HKD-were originally designed for foreign investors only, but since March 2001 domestic retail investors are also allowed to trade them Importance of A-shares in However, judging from figures regardir raising capital shares are by far the most important segment in China's stock Y of total (incl H-shares) market (see chart 12)and, since the early 2000s, the amount raised via B-shares has been virtually zero. The drop in the share of capital aised via A-shares in the period 2003-06 can be attributed to the strong growth in capital raised via H-shares issuance The little attention paid to the B-shares market over the past decade 50 can be explained by their huge discount compared to A-shares Also, it seems that the B-shares market has lost its function since it was originally designed to attract limited foreign investment, which 10 can now also be achieved via QFlls. Liquidity has been scarce over the past few years, and a possible merger of A and B-shares also 95979901030507 adds to subdued performance of the latter. However, still existing Sources: CSRC, CEIC restrictions on full convertibility of the RMB pose an obstacle to such arch16,2009
Current Issues 8 March 16, 2009 A&B shares There are different share types in existence, although for China’s domestic stock markets so-called A-shares and B-shares are most important (see table 13). Both types are issued by companies incorporated in the People’s Republic of China (PRC), the main difference being who is entitled to trade them. Chinese nationals as well as foreign institutional investors authorised under the Qualified Foreign Institutional Investor (QFII) scheme are allowed to buy and sell A-shares that are denominated in RMB. B-shares – which are denominated in USD or HKD – were originally designed for foreign investors only, but since March 2001 domestic retail investors are also allowed to trade them. However, judging from figures regarding total capital raised, Ashares are by far the most important segment in China’s stock market (see chart 12) and, since the early 2000s, the amount raised via B-shares has been virtually zero. The drop in the share of capital raised via A-shares in the period 2003-06 can be attributed to the strong growth in capital raised via H-shares issuance. The little attention paid to the B-shares market over the past decade can be explained by their huge discount compared to A-shares. Also, it seems that the B-shares market has lost its function, since it was originally designed to attract limited foreign investment, which can now also be achieved via QFIIs. Liquidity has been scarce over the past few years, and a possible merger of A and B-shares also adds to subdued performance of the latter. However, still existing restrictions on full convertibility of the RMB pose an obstacle to such a merger. Overview of China's stock exchanges end-2008 end-2007 end-2008 end-2007 end-2008 end-2007 Companies listed 864 860 740 670 1,604 1,530 Market cap. (RMB bn) 9,725.2 26,983.9 2,411.5 5,730.2 12,136.6 32,714.1 A-shares 9,687.5 26,849.7 2,369.1 5,609.0 12,056.7 32,458.8 B-shares 37.7 134.2 42.3 121.2 80.0 255.3 Avg. daily turnover (RMB bn) 1,572.5 1,973.5 786.3 933.5 2,358.8 2,907.0 A-shares 1,568.0 1,960.8 782.5 925.8 2,350.5 2,886.6 B-shares 4.6 12.7 3.8 7.7 8.4 20.4 Shanghai Stock Exchange Shenzhen Stock Exchange Total Sources: Shanghai Stock Exchange, Shenzhen Stock Exchange, CEIC 11 0 10 20 30 40 50 60 70 80 90 100 95 97 99 01 03 05 07 Importance of A-shares in raising capital % of total (incl. H-shares) Sources: CSRC, CEIC 12
China's financial markets-a future global force? Deutsche Benk Research Derivatives in China's financial markets The Chinese stock market alphabet soup Regarding derivative financial products, the Chinese govemment has taken a cautious Currency Description approach towards liberalising derivatives A-shares RMB Companies incorporated in PRC markets. First experiments with futures exchanges date back to the early 1990s, raded in Shanghai& Shenzhen tarting with grain forward contracts and Largest class of Chinese shares als futures. Treasury bond futures were Investors: Chinese nationals and foreign introduced in December 1992 and both institutional investors authorised under OFIl arkets experienced chaotic devele leading to stronger regulation from the mid- B-shares USD/HKD mpanies incorporated in PRC 1990s onwards. In general, derivatives have Traded in Shanghai(USD)& Shenzhen( HKD) itted in selected market segments vestors: prior to Mar 01 only foreigners, now nly commodities. Here, too, a lively market has developed in the past decade also domestic retail investors featuring a turnover of more than RMB 40 tr H-shares HKD Companies incorporated in PRC USD 5.8 tr/EUR 4 tr)in 2007. Stock inde Traded in Hong Kong futures are not available yet, as the China Financial Futures Exchange(CFFEX) stil N-shares USD Companies incorporated in PRC, listed and traded awaits approval from CSRC. Other on the New York Stock Exchange derivatives include warrants, currency forwards and swaps, bond forwards, and L-shares GBP Companies incorporated in PRC, listed and traded interest rate swaps. Red chips HKD Chinese companies incorporated outside PRC Often state-ow ned or state-controlled companies S-shares SGD Like H-shares but traded in Singapore Phasing-out of non-tradable shares Additionally, there is a distinction between tradable and"non- Vibrant growth in Chinas tradable "shares within the A-shares category, a distinction that futures market dates back to the early years of the Chinese stock market. Prior to April 2005, only about 1/3 of shares from listed companies were 2.500 tradable shares. The remaining 2/3 were not freely trading in the 2,000 market but held by the government or related entities. The non- tradable share reform, starting in April 2005, aimed at eliminating the difference between tradable and non -tradable shares while at the 1.000 same time, avoiding market disturbance due to the huge amount of new' supply coming to the market. Appropriate compensation was therefore a core element of the reform and usually holders of non- 0001020304050607 tradable shares compensated those of tradable shares by giving out Trading turnover, RMB tr(left) a portion of their shares at mutually agreed prices. By the end of Trading volume, m units(right) 2007, 1, 300 listed companies- accounting for 98% of total market ource: PBoC capitalisation- had either started or finished the reform process However, the amount of floating shares -i.e. shares that can be freely traded on the secondary market and are not subject to any lock-up restrictions-is still very low. As of end-2007, the free float totalled less than 30% of all the shares outstanding 9KPMG(2007, 10 CSRC (2008). China Capital Markets Devel Report. China Securities B ry Commission. March 2008, p 205 d.p.24 March 16, 2009
China's financial markets – a future global force? March 16, 2009 9 Derivatives in China’s financial markets Regarding derivative financial products, the Chinese government has taken a cautious approach towards liberalising derivatives markets. First experiments with futures exchanges date back to the early 1990s, starting with grain forward contracts and metals futures. Treasury bond futures were introduced in December 1992 and both markets experienced chaotic development leading to stronger regulation from the mid- 1990s onwards. In general, derivatives have been permitted in selected market segments, primarily commodities. Here, too, a lively market has developed in the past decade, featuring a turnover of more than RMB 40 tr (USD 5.8 tr/EUR 4 tr) in 2007. Stock index futures are not available yet, as the China Financial Futures Exchange (CFFEX) still awaits approval from CSRC. Other derivatives include warrants, currency forwards and swaps, bond forwards, and interest rate swaps. Phasing-out of non-tradable shares Additionally, there is a distinction between “tradable” and “nontradable” shares within the A-shares category, a distinction that dates back to the early years of the Chinese stock market. Prior to April 2005, only about 1/3 of shares from listed companies were tradable shares. The remaining 2/3 were not freely trading in the market but held by the government9 or related entities. The nontradable share reform, starting in April 2005, aimed at eliminating the difference between tradable and non-tradable shares while, at the same time, avoiding market disturbance due to the huge amount of “new” supply coming to the market. Appropriate compensation was therefore a core element of the reform and usually holders of nontradable shares compensated those of tradable shares by giving out a portion of their shares at mutually agreed prices10. By the end of 2007, 1,300 listed companies – accounting for 98% of total market capitalisation – had either started or finished the reform process.11 However, the amount of floating shares – i.e. shares that can be freely traded on the secondary market and are not subject to any lock-up restrictions – is still very low. As of end-2007, the free float totalled less than 30% of all the shares outstanding12 . 9 KPMG (2007), p. 4. 10 CSRC (2008). China Capital Markets Development Report. China Securities Regulatory Commission. March 2008, p. 205f. 11 Ibid., p. 208. 12 Ibid., p. 240. The Chinese stock market alphabet soup Name Currency Description A-shares RMB Companies incorporated in PRC Traded in Shanghai & Shenzhen Largest class of Chinese shares Investors: Chinese nationals and foreign institutional investors authorised under QFII B-shares USD/HKD Companies incorporated in PRC Traded in Shanghai (USD) & Shenzhen (HKD) Investors: prior to Mar 01 only foreigners, now also domestic retail investors H-shares HKD Companies incorporated in PRC Traded in Hong Kong N-shares USD Companies incorporated in PRC, listed and traded on the New York Stock Exchange L-shares GBP Companies incorporated in PRC, listed and traded on the London Stock Exchange Red chips HKD Chinese companies incorporated outside PRC listed in Hong Kong Often state-ow ned or state-controlled companies S-shares SGD Like H-shares but traded in Singapore 13 0 500 1,000 1,500 2,000 2,500 3,000 0 5 10 15 20 25 30 35 40 45 00 01 02 03 04 05 06 07 Trading turnover, RMB tr (left) Trading volume, m units (right) Source: PBoC Vibrant growth in China's futures market 14
Deutsche Bank Research Current Issues QFII Market participants The Qualified Foreign Institutional Investor In 2006. the investor structure of china s stock market was"still not (QFII)scheme was introduced in 2002. The aim was to let foreign institutional investors desirable"according to the People's Bank of China as institutional participate in local stock and bond markets in investors accounted for only 30% of the total market capitalisation order to bring more stability to the markets By As of end-2007, retail investors still had a share of more than 50% the end of 2007, 52 foreign institutions had Institutional investors generally play an important role in developing obtained a qfll licence of which 49 had been capital markets as they can help to channel (individual) savings into allocated quotas totalling USD 9.995 bn Five ovide OFIl capital markets with a medium to long-term investment horizon and custodian services are foreign banks. OFIl are lower risk for investors, due to size and risk diversification. They can allowed to invest in A-shares, bonds, and other also add to product innovation and possibly improve market and financial instruments approved by the CSRc pricing transparency Eligibility rules are established by the CSRC and include the following requirements The structure of institutional investors in the chinese stock market differs markedly from that of more developed markets. As of end oper- USD bn 2007. investment funds accounted for 52.7% of all institutional investor assets in China, followed by pension funds that had a share years of around 40%. The share of the latter group is much higher in Type Japan or Korea, while insurance companies play a much stronger role in the Us. Investment funds offer only a limited range of manager 5 ≥1 products and have only weak innovation capability. Also, particip- Insurance ation of insurance companies and social security funds is very low, which can be attributed to the low development level of the funded companies >30 social security system. Domestic private equity funds are under- Ranked≥1 developed in China, which explains why foreign players dominate in cial bank this field in China. Last but not least, the complex regulatory 100 banks environment for collective investment schemes hampers the globally by development of institutional investors as it raises costs and leads to total assets efficiency losses. Currently there are three entities-CSRC, CBRC and CIRC -in charge of regulating collective investment schemes in China This large share of retail investors and-according lack of sufficient institutional investors is widely seen as a problem. Re investors are often linked to higher volatility, as herd behaviour he qualified domestic Institutional investo prevails and people tend to act more sentiment-driven. However, (QDII) scheme was introduced in mid-2006 in there are also views that the share of"real" retail investors in China order to give approved domestic institutiona is lower than suggested by the numbers for individual stock trading investors the opportunity to invest in inter- accounts, as entities with close state linkages- like the military national, foreign-currency-denominated police, local governments, state-owned enterprises and private securities(fixed income, stocks, derivatives). he scheme had principally two goals: 1)to funds opened such accounts in order to participate in the stock funnel abundant domestic liquidity abroad and market boom". Additionally, in the case of China, relatively low 2) to stem appreciation pressure on the experience among traders and institutional investors might also currency from rising foreign exchange reser- have added to the build-up of the stock market bubble and height ves.By the end of 2007, 15 fund management ened volatility. It would therefore not be sufficient only to increase firms and 5 securities firms had been granted QDIl status with a total quota of USD 24.5 bn the share of institutional investors. An improvement in financial literacy would also be desirable People's Bank of China(2008a). China Financial Stability Report 2007. March People's Bank of China(2008b). China Financial Stability Report 2008. July 2008, Kim, Yongbeom, Hi, Irene and Mark St Giles(2003). Developing institutional investors in the People's Republic of China. World Bank Country Study Paper. September 2003, p 3ff 6 CSRC(2008). China Capital Markets Development Report. China Securities Regulatory Commission. March 2008, p. 273 China's Illusory Retail Investor 07. Online http://ww.businessweek.com/gl 07471221hm arch16,2009
Current Issues 10 March 16, 2009 QFII The Qualified Foreign Institutional Investor (QFII) scheme was introduced in 2002. The aim was to let foreign institutional investors participate in local stock and bond markets in order to bring more stability to the markets. By the end of 2007, 52 foreign institutions had obtained a QFII licence of which 49 had been allocated quotas totalling USD 9.995 bn. Five of the 13 banks permitted to provide QFII custodian services are foreign banks. QFII are allowed to invest in A-shares, bonds, and other financial instruments approved by the CSRC. Eligibility rules are established by the CSRC and include the following requirements: QDII The Qualified Domestic Institutional Investor (QDII) scheme was introduced in mid-2006 in order to give approved domestic institutional investors the opportunity to invest in international, foreign–currency-denominated securities (fixed income, stocks, derivatives). The scheme had principally two goals: 1) to funnel abundant domestic liquidity abroad and 2) to stem appreciation pressure on the currency from rising foreign exchange reserves. By the end of 2007, 15 fund management firms and 5 securities firms had been granted QDII status with a total quota of USD 24.5 bn. Market participants In 2006, the investor structure of China’s stock market was “still not desirable” according to the People’s Bank of China13 as institutional investors accounted for only 30% of the total market capitalisation. As of end-2007, retail investors still had a share of more than 50%14 . Institutional investors generally play an important role in developing capital markets as they can help to channel (individual) savings into capital markets with a medium to long-term investment horizon and lower risk for investors, due to size and risk diversification. They can also add to product innovation and possibly improve market and pricing transparency15 . The structure of institutional investors in the Chinese stock market differs markedly from that of more developed markets. As of end- 2007, investment funds accounted for 52.7% of all institutional investor assets in China, followed by pension funds that had a share of around 40%. The share of the latter group is much higher in Japan or Korea, while insurance companies play a much stronger role in the US16. Investment funds offer only a limited range of products and have only weak innovation capability. Also, participation of insurance companies and social security funds is very low, which can be attributed to the low development level of the funded social security system. Domestic private equity funds are underdeveloped in China, which explains why foreign players dominate in this field in China. Last but not least, the complex regulatory environment for collective investment schemes hampers the development of institutional investors, as it raises costs and leads to efficiency losses. Currently there are three entities – CSRC, CBRC, and CIRC – in charge of regulating collective investment schemes in China. This large share of retail investors and – accordingly – lack of sufficient institutional investors is widely seen as a problem. Retail investors are often linked to higher volatility, as herd behaviour prevails and people tend to act more sentiment-driven. However, there are also views that the share of “real” retail investors in China is lower than suggested by the numbers for individual stock trading accounts, as entities with close state linkages – like the military, police, local governments, state-owned enterprises and private funds opened such accounts in order to participate in the stock market boom17. Additionally, in the case of China, relatively low experience among traders and institutional investors might also have added to the build-up of the stock market bubble and heightened volatility. It would therefore not be sufficient only to increase the share of institutional investors. An improvement in financial literacy would also be desirable. 13 People’s Bank of China (2008a). China Financial Stability Report 2007. March 2008, p. 44. 14 People’s Bank of China (2008b). China Financial Stability Report 2008. July 2008, p. 43. 15 Kim, Yongbeom, Hi, Irene and Mark St Giles (2003). Developing institutional investors in the People’s Republic of China. World Bank Country Study Paper. September 2003, p. 3ff. 16 CSRC (2008). China Capital Markets Development Report. China Securities Regulatory Commission. March 2008, p. 273. 17 China’s Illusory Retail Investor Class. In BusinessWeek. June 7, 2007. Online: http://www.businessweek.com/globalbiz/content/jun2007/gb20070607_471221.htm ?campaign_id=rss_as Type In operation, years Paid-in capital, USD bn AuM, USD bn Fund manager > 5 - 1 Insurance companies > 30 1 10 Securities companies > 30 1 10 Commercial banks - Ranked among top- 100 banks globally by total assets 1 Source: www.fundcn.org 15