While money market development has remained slow in the first decade and a half of reforms, capital market development has become one of the most salient parts of financial development in China. The approach applied to several other sectors of the economy—small-scale experimentation, gradual relaxation of controls, and decentralization of responsibility—has also been used in this area.

While money market development has remained slow in the first decade and a half of reforms, capital market development has become one of the most salient parts of financial development in China. The approach applied to several other sectors of the economy—small-scale experimentation, gradual relaxation of controls, and decentralization of responsibility—has also been used in this area.

Capital market development has mainly been concentrated in and borne by the government securities market. The promotion of government bond markets in China, at least in the initial years, was primarily a means of tapping and guiding available financial resources, complementary to the credit plan. More particularly, growing central government deficits as a result of policy decentralization in the first reform years forced the Government to search for financial resources other than central bank credit. The role of the government securities market as an alternative to the credit plan was reflected, among other things, in the mandatory character of the sales. Gradually, the government securities market has acquired more features of a real market without, however, entirely losing its administered character.

Other debt instruments were allowed shortly after the first issues of government securities. Enterprise shares, corporate bonds, and financial bonds (issued by banks) were first issued in the period 1982–84 while certificates of deposits appeared in 1988. Even though the volume of outstanding nongovernment debt has been growing (Chart 5), debt instruments issued by the Central Government and government agencies still represented more than 50 percent of the total at the end of 1992. Issue procedures for debt instruments other than from the Central Government showed that those instruments also complemented the credit plan, as the issues were strictly regulated by quota to ensure consistency with the plan.

Chart 5
Chart 5

Composition of Outstanding Debt Issues

(In percent)

Source: State Council Securities Committee.

Money Markets

Money markets have been slow to develop in China. The interbank market is still the main component of the money market. By 1993, a repurchase market had emerged, but this market is still relatively underdeveloped.23 Other market segments, such as a treasury bill market, do not yet exist.

The need for intrabank and interbank transactions emerged soon after the start of the reforms, when banks were allowed to grant credit autonomously. The predecessor of interbank activities was a type of intrabank market created by the Agricultural Bank of China (ABC) in the city of When Zhou. This market allowed branches and subbranches of the bank to lend to and borrow from each other. Soon, branches of other banks in the city were included (Girardin (1995)).

In 1984–85, the first information centers made their appearance in some major cities, such as Beijing, Shanghai, and Guangzhou, thereby introducing the concept of an interbank market. At the origin of their appearance was the tight monetary policy stance of the People’s Bank of China (PBC), which led to severe shortages of funds in some regions and excess funds in others. Even though these centers could not bridge interregional differences, they could at least balance the flows within regions.

These information centers were either the PBC branches themselves, PBC-sponsored agencies, or agencies jointly sponsored by the PBC and state-owned specialized banks. The centers received bids and offers for funds from bank branches and non-bank financial institutions (NBFIs). The majority of these transactions were unsecured. Initially, transfers were based on the centers’ temporarily releasing banks’ excess deposits at the PBC or by using permitted but unutilized credit lines (De Wulf and Goldsbrough (1986)), p. 229).

During the first years, this embryo interbank market grew slowly, but during the 1987–88 boom years interbank operations increased rapidly. As the market conditions—and particularly the interest rates—were partially unregulated, interest rates started soaring and diverging widely among regions. Funds were systematically attracted by high-growth regions, where they were often used for speculative real estate projects. In addition, some malpractices started developing, such as short-term borrowing to fund long-term lending. Faced with this situation, the PBC started regulating the market. A “reference rate,” around which the interbank market rate could fluctuate within a 30 percent margin, was introduced, and the Provisional Measures on the Management of Interbank Business were promulgated in 1990, aimed at standardizing and centralizing inter-bank market activity.

As interbank market activity grew, it also began to diversify. The number of information centers (called financing centers) grew steadily to cover most of China, with 44 centers operating in 1994.24 However, the market remained segmented as these centers were regionally oriented. For a long time, transactions among regional centers were rare because of technical problems (lack of a fast and reliable payments and settlement system) and political problems (the local authorities did not want the funds to flow out of their jurisdictions and therefore put restrictions on the outflows).25 Gradually, bank branches and NBFIs also started conducting transactions with each other directly (via telephone or fax), bypassing the information centers. This direct method for conducting transactions, used mainly for short-dated transactions (for a few days to one month), is known as the intangible or invisible market, whereas the market through the information centers is known as the tangible or visible market. Maturities in the latter market are usually longer, of up to even three years.

In the period 1992–93, the interbank market started growing dramatically. In 1993, lending increased fourfold and borrowing sixfold over the previous year.26 Growth in 1994 continued, albeit—owing mainly to the measures taken in 1993 to counteract the overheating of the economy—at a slower pace. The 16-Point Program, adopted in the summer of 1993, focused, among other areas, on the “leakages” in the interbank market that had been fueling inflation. Banks and NBFIs were ordered to recall before a specified date all loans “illegally” made. These were mainly loans made directly or through the interbank market to the construction and real estate and securities sectors. Loans worth about ¥ 200 billion were identified as being illegally made, of which some ¥ 40–50 billion had been made through the interbank market.

To prevent similar problems in the future, the PBC amended its guidelines on interbank activities, setting ceilings on interest rates and limits on volumes and maximum maturities of transactions according to the type of institution involved (bank or NBFI). In addition, it was also stipulated that the interbank market could no longer be used for intrabank transactions. The major effect of the new and stricter guidelines was the sharp restriction of the NBFI sector’s access to the interbank market. Borrowing by trust and investment companies (TICs) had almost doubled in 1992 but decreased in actual terms in 1993 and only grew slowly in 1994. Bank borrowing and lending, however, continued growing in 1994 (see Table 2).

Table 2.

Structure of the Financial System

(In billions of yuan; end of period)

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Source: People’s Bank of China.

Including portfolio of bonds.

While China’s interbank market has significantly increased its channeling of funds at the regional level, this market still looks distinctly different from a traditional interbank market for several reasons. First, participants also include NBFIs, and transactions with these institutions tend to have long maturities. Second, given the structure of the banking system, most transactions are initiated by bank branches acting in a semiautonomous way (for a long time, transactions between branches of the same bank were also conducted via the interbank market). Third, the PBC’s involvement differs from center to center. Some centers only bring together bids and offers, while other centers intervene to balance the market. In fact, the PBC was reluctant for a long time to absorb any liquidity overhang in the interbank market, which is one reason why the central bank encouraged the NBFIs to become active in the market.

Primary Securities Markets

Government Securities

Treasury Bonds

After an interruption of 23 years, the Government resumed the systematic issuance of treasury bonds in 1981 through mandatory allocations to enterprises and individuals. Bonds issued between 1981 and 1984 had a maturity of ten years (Table 3). Redemption of these bonds was divided into five equal portions, with the first redemption beginning in 1986.

Table 3.

Domestic Government Debt: Total Amounts Issued by Maturity Type and Interest Rate

(In billions of yuan, unless otherwise indicated)

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Sources: People’s Bank of China and Ministry of Finance.

Includes bonds issued to financial institutions.

Includes ¥ 9.4 billion in conversion bonds.

Eight percent on conversion bonds.

Includes ¥ 7.0 billion conversion bonds.

Six-month treasury bills issued to wholesale market

One-year treasury bills issued to wholesale market

The role of the government securities market as an alternative to the credit plan and borrowing from the PBC is reflected in some of the methods used by the Government. In the initial years, sales of government securities were mandatory and diversified according to the holders; mandatory sales of government securities at administered rates that were negative in real terms were tantamount to taxation. Also, the administrative channels for issuing debt instruments were the same as those used to implement the credit plan. The bonds were allocated by the Ministry of Finance to the provincial governments, which, in turn, allocated them to the next administrative level and to enterprises under their jurisdiction.27 The individuals would receive the bonds in bearer form as part of their wage payment.28

Over time, more market-based techniques, such as underwriting syndication, have been used (although the coupon is set administratively). The growing influence of the market is also reflected in the shortening of the maturity structure of the securities. However, the continued administered character of the government securities market is shown by the concentration of the issue period in the first half of the year, the compartmentalization of the market among issues, and the regulation of the tradability of the securities.

The predominantly retail character of the government securities market is also important. The Government has not yet really attempted to establish a wholesale market for its securities. There are several reasons for this policy, including the technical and administrative difficulties experienced by the Government during most of the period in managing short-term securities in paperless form. But perhaps the most important reason was the Government’s targeting of the household sector to soak up purchasing power and to ensure noninflationary financing of its fiscal deficit.29 Despite the advantages of having a retail market, too much concentration on this segment has hampered the development of a wholesale money market.

Between 1982 and 1988, the interest rate on treasury bonds issued to households was significantly higher than the interest paid on similar bonds issued to enterprises. In general, interest rates on bonds issued to individuals were set at about 11/2 percentage points above the rates on savings deposits of comparable maturity. Interest payments were calculated on the basis of simple interest rates and made in full upon maturity. Administrative complications prevented the use of compounded interest rates.30

However, growing inflationary pressures in the mid-1980s led to resistance to mandatory allocations of government securities with negative real interest rates, particularly because some nongovernment issuers were able to offer more attractive rates. So, in order to achieve the planned sales, the Government had to shorten the maturities. The 1985 bond issue was shortened to a five-year maturity, and the maturity of the 1988 issue was further reduced to three years.

Other Government Securities

Starting in 1987, the Government began to diversify its debt instruments in response to increasing financing needs. In 1987 and 1988, the Ministry of Finance issued “key construction bonds” to house-holds and state enterprises. Later, other debt instruments were added, such as state construction bonds and special state bonds. Most of these issues were either funds earmarked for specific projects or issues by the State Planning Commission through state investment corporations. In 1988, fiscal bonds were sold for the first time to financial institutions. The bonds, which were allocated to the banks as part of the credit plan, had a two-year maturity, and the interest rate was below the rate on bank deposits. In 1989, treasury bonds issued to enterprises were renamed “special state bonds.” Also, high inflation led the Government to issue “price-indexed bonds” in 1990, maturing in 1992.31

The significant shortening of maturities since the mid-1980s resulted in a “bunching” of maturities by 1990, when ¥ 24.5 billion matured (Table 3). The Government, faced with problems in repaying the full amount of maturing debt during that year, decided to roll over a total of ¥ 9.4 billion of enterprise-held bonds into five-year “conversion bonds.” A similar operation took place in 1991, when ¥ 7 billion in conversion bonds were issued. A major innovation in the issuance of treasury bonds targeted for households and individuals occurred in 1991 when part of the issue was floated via an experimental underwriting syndicate and thus was no longer mandatory.32 The Industrial and Commercial Bank of China (ICBC) group, as the lead manager, subscribed ¥ 550 million, and five comanagers each subscribed ¥ 300 million. The success of these first voluntary purchases in early 1991 led the Ministry of Finance to sell more bonds on a voluntary basis than planned during that year.

After this initial success with voluntary sales, the authorities planned to phase out mandatory sales to households over a three-year period. Voluntary sales went well in 1991 and 1992, but 1993 posed new problems. Because of very attractive returns in other markets, particularly on equities and enterprise bonds, only ¥ 4 billion out of the ¥ 33 billion offered was sold by the end of the subscription period. Even an increase in the interest rate offered did not attract sufficient investors, and, as a result, the Government returned to a policy of mandatory allocations to households.

For 1994, the Ministry of Finance planned the introduction of two new government debt instruments—treasury bills and savings bonds—besides its traditional government bonds. Two treasury bill issues took place in the first two months of the year (January 25 for the six-month bill and February 1 for the one-year bill). Both issues were underwritten by a syndicate composed of banks, NBFIs, and securities dealers on an allotment basis. The price was set by the Ministry of Finance on a fixed-rate, simple interest basis at a price of 100. In both instances, the treasury bills were issued at yields higher than those on bank deposits of the same term. A major innovation was that both issues were meant mainly for the wholesale market and were placed in book-entry form through the Shanghai Securities Exchange.

The six-month treasury bill issue was well received and was oversubscribed. The one-year treasury bill, in contrast, did not sell well.33 No other issues of these new instruments took place in 1994, and, at maturity, they were rolled over into other debt instruments. This decision reflected the Government’s preference for managing debt by emphasizing the retail sector of the market (and tapping into household savings) rather than by emphasizing the banks and other financial institutions.

The other new instrument in 1994 was a savings bond tailored to retail investors. The savings bond issue had a stepped interest rate structure to encourage investors to buy and hold the bonds. The bonds also included a redemption option for investors, commencing after a holding period of six months. Issues in 1995 were also through these three types of instruments. One other experiment in 1995 concerned the issue of five-year government bonds with annual interest payments. These bonds will be more attractive to investors because of the cash flow that they provide during the bonds’ life.

Nongovernment Securities

Very soon after the first issuance of government securities in 1981, the Chinese authorities allowed other market participants to issue their own debt instruments. These include enterprise shares (issued by private enterprises, as well as by state-owned enterprises (SOEs)), financial bonds issued by the specialized banks, and corporate bonds. Certificates of deposit and commercial paper emerged later, toward the turn of the decade (Chart 5).

Enterprise Shares

As early as 1982, experiments started with the issuance of enterprise shares, first for collectively owned enterprises and, in 1985, for SOEs.34 Granting permission to collectively owned enterprises to issue shares relatively early in the reform process must be seen as a means of relieving pressure from those enterprises to compete for bank financing, as the bulk of such financing was supposed to go to the SOEs. Permitting the SOEs to issue shares was intended to reduce their reliance on bank credit.

The early issues, although called shares, differed in several important respects from the shares issued in market economies: they carried no ownership rights; they frequently offered a guaranteed minimum annual rate of return; and they often had a maturity date (between one year and five years), as well as an option of early redemption. So, in many respects, these shares were very similar to bonds. Enterprise shares owed a great deal of their attractiveness to their high returns.35

Corporate Bonds

Beginning in 1984, local enterprises were allowed to issue corporate bonds. Each issue had to be approved by the PBC. These bonds were allowed to pay interest up to 40 percent higher than bank deposits. Because these enterprises are state owned and state supported, treasury bonds and corporate bonds were regarded by the public to be of the same quality; hence, the large interest differential permitted for corporate bonds reduced the demand for treasury bonds and bank deposits. As the ensuing drain on bank deposits threatened the funding under the credit plan, the authorities decided in 1986 to set annual quotas under the credit plan for corporate bond issues.

Financial Bonds, Certificates of Deposit, and Commercial Paper

In 1985, banks were permitted, upon approval from the PBC, to issue financial bonds. The proceeds of these bonds were to be used to fund long-term, project-oriented bank lending. These bonds stipulated a maximum maturity (mostly of five years), but they could also be redeemed any year after the first year. The interest rate was set 2 percentage points above deposit rates of similar maturities. Since 1988, financial bonds have been marketable but, owing to the flexible redemption features, trade has remained insignificant.

While there has been increased issuing activity of certificates of deposit and commercial paper, trade in these instruments is still very limited, primarily because most people still consider them as an alternative to savings deposits and therefore hold them until maturity.

Secondary Markets for Securities and Equity

In 1986, the Government officially authorized an experiment in secondary market trading in securities. Secondary markets developed at a fast pace shortly thereafter. At the end of the 1980s, considerable efforts were put into improving the infrastructure for secondary market trading (stock and securities exchanges and electronic networks). Despite major progress, the secondary market for government securities—still the largest component of the secondary markets—remains largely a retail market and is not completely unified. Market development is constrained by some of the features of the primary market mentioned above, such as small denominations, issue procedures, and pricing concerns. Market unification (in terms of price formation) is still not complete because of a lack of arbitrage possibilities and because of problems in delivering securities and cash when trade takes place between cities.

Initial Developments

Until 1985, securities were officially nontransferable in China. The authorities were of the view that the country lacked experience in establishing secondary markets and in correctly pricing the securities in those markets. From 1985 on, treasury bonds could be discounted at the PBC or used as collateral for loans. In addition, an unofficial secondary market gradually began operations.36

The first real experiment in securities trading took place in 1986 with the establishment of a secondary market for corporate bonds in Shenyang. However, trading was limited to only two bonds, and the prices were determined by the authorities. Because no fringe benefits were offered for trading such bonds, almost no transactions took place and the market remained illiquid.

In 1988, the State Council officially approved trading in government securities on an experimental basis. Trading was permitted in seven cities and only in those treasury bonds that had been sold to house-holds in 1985–86. Two months later, trading was extended to 63 cities, and other securities were added to the list, including key construction bonds, corporate bonds, financial bonds, enterprise shares, and other nongovernment securities, such as commercial paper and certificates of deposit. Trade was also permitted in treasury bonds issued in the 1987–89 period. The 1990 issue became tradable about four months after it was floated. A few other types of securities, such as special state bonds, conversion bonds, and fiscal bonds, remained nonnegotiable.

As soon as it was legalized, securities trading gathered momentum, dominated by transactions in treasury bonds. In 1988, total trading volume in securities amounted to about ¥ 2.6 billion, of which ¥ 2.4 billion were in treasury bonds (Chart 6). This volume should be compared with the outstanding volume of the two tradable treasury bond issues of ¥ 7.9 billion. In 1989, trading volume fell slightly, mainly as a result of an official temporary freeze in the development of the securities market in the aftermath of the June 1989 events. However, total trade volume in 1990 boomed for the first time, with treasury bonds still the main security (accounting for about 88 percent of total trade, that is, ¥ 10.5 billion out of a total trade volume of ¥ 11.8 billion). The market in essence kept its retail character, as more than 80 percent of the trading was conducted on behalf of individuals. A dramatic change took place in 1992 when trade in corporate bonds for the first time exceeded trade in government securities. In 1993, while transactions in government securities and other securities stagnated, trade in corporate bonds soared even higher.

Chart 6.
Chart 6.

Transactions in Debt Securities

(In billions of yuan)

Source: People’s Bank of China, Almanac of China’s Finance and Banking.

Another feature of the early years of China’s secondary market was its segmented character. Insufficient communications infrastructure, the bonds’ small denominations, and, most important, official restrictions on trade between cities or provinces severely restricted intercity and interregional trading. As a result, secondary market prices showed significant differences. Any attempts by dealers in cities with high demand to buy bonds in other cities at lower prices to resell in their own cities were systematically discouraged. In those early days, the Ministry of Finance took the view that government bonds should not trade below par. (On a few occasions—for example, in June 1990—both the 1987 and 1989 issues were trading below par, and the Ministry of Finance intervened in the markets to support prices through its own securities houses.)

Building the Infrastructure

Stock Exchanges

Several institutional improvements and regulatory changes were initiated in 1990–91 that gave the market a new boost and assisted in the integration of the securities markets throughout the country. First, official stock exchanges started emerging in 1990. The Government’s approach toward establishing stock exchanges consisted of allowing a small number of them to open and providing investors around the country with access to those exchanges. Thus, the Shanghai Securities Exchange was officially opened at the end of 1990, and the Shenzhen Stock Exchange was officially recognized in the spring of 1991.37

The Shanghai Securities Exchange operated under the supervision of the Shanghai PBC branch, with a representative of the PBC as one of the four members of the supervisory committee. Under the supervision of the Shanghai PBC branch, the exchange also established a centralized clearing and settlement system through an affiliated unit that provided depository services for its members. Payment and delivery are based on a book-entry system. Each member of the Shanghai Securities Exchange has to open a settlement and securities account. The member settles with the respective clearing corporation, which, in turn, has an account with its local branch of the ICBC. The Shanghai clearing corporation has established 54 settling participants and 57 government bond depositories across the country. Since the establishment of both exchanges, the number of companies with shares (A and B) listed in the exchanges has risen to more than 270 (by early 1994), with combined market capitalization estimated at over ¥ 430 billion.

Price Convergence in Secondary Government Securities Markets: The 1990–91 Episode

In the initial stages, when trading in government securities was first allowed, there existed almost no channels to conduct transactions between cities; even if there had been channels, such trade was highly discouraged by the local authorities. As a result, major price differences existed for the same issue of government securities, depending upon the volume of trade in a given city. Gradually, institutional developments—the establishment of stock exchanges, government securities trading centers, and electronic trading networks—have brought about a convergence in the quotations, although to date this convergence is still not complete. The government securities markets are thus not yet really integrated nationally, although trade between cities and centers has greatly increased.

The top panel of the chart presents a distribution of trade between the major cities in 1990–91, the period par excellence of infrastructure building in the government securities markets. On average, between 30 percent and 50 percent of total trade took place in four major cities: Shanghai, Wuhan, Guangzhou, and Shenyang. Shanghai was the most active trading city. In general, most trading activity was concentrated in the southeastern coastal cities. However, the second most important trading city was Wuhan, a more centrally located city. The share of “other cities” began growing rapidly after April 1990. The intensity of trading varied throughout the period.

The top panel also indicates that institutional improvements during the course of 1990, such as the establishment of the Quotation Center and the Securities Trading Automated Quotations System (STAQS) and the opening of the Shanghai Securities Exchange, had a significant impact on volumes traded: total trade volume increased from an average of ¥ 1.2 billion in the preceding months to ¥ 1.8 billion in December 1990. While the opening of the Shanghai Securities Exchange seems to have given a significant impetus to securities trading in general, trading in the other cities received a boost from the establishment of the electronic networks, particularly STAQS.

The bottom panel of the chart provides some indication of the role played by these institutional developments in the convergence of quotations of government securities markets. The panel presents the evolution of the differentials and average price quotation of the 1988 treasury bond issue in a sample of 36 cities with active trade in government securities in the period May 1990-April 1991. An acceleration in price convergence is observed in the period October 1990-January 1991, which coincides with the consecutive introduction of the Quotation Center, STAQS, and the Shanghai Securities Exchange.

Some additional information can be gathered from this chart. The highest prices were typically quoted in the southeast coastal area—particularly Shanghai, Hangzhou, and Nanjing—reflecting constantly high demand in this area in general and these cities in particular. Prices in the cities in that part of China were on average close to each other and close to the top end of the price spectrum (the southeast coastal region as a whole accounts for 73 percent of the highest prices). The concentration of trade in southeastern coastal cities also explains why the average prices were in general closer to the higher end.

The lowest quotations were often prices in outlying cities where markets are more supply determined. Other centers (Chongqing, for instance) show substantially varying prices, indicating that sudden supply and demand changes had a high impact on prices in markets that were still thin.


Trade Volumes and Bond Quotations in Secondary Government Securities Markets

Source: People’s Bank of China.1 Owing to lack of data on trade activity in these cities, the average is a simple average.

Electronic Networks

The rapid development of China’s financial markets also set in motion the development by national and local authorities of electronic networks aimed at facilitating trading, unifying the markets by connecting several parts of the country, and enhancing the safety and security of securities trading and related payments, clearing, and settlement systems.

In September 1990, the PBC established the Quotation Center for government securities. The center provided online exchange of price information to securities dealers. Members communicated with the Quotation Center by telephone, providing their bid and offer prices, as well as the volumes that they intended to trade on a given date. They also communicated their trading activity of the previous day, including prices and volumes of trade. All this information was accessible by all members. However, the Quotation Center did not provide trading facilities. Given this limitation, it was quickly overtaken by other networks in 1991–92.

In 1993, the Quotation Center was transformed into the National Electronic Trading System (NETS), established by the PBC in cooperation with the state-owned specialized banks and the three national securities companies. In addition to automated trading operations, NETS also provides book-entry-based clearing and settlement facilities, mainly for shares. Thus far, virtually no bonds or government securities have been traded through NETS.

In October 1990, the Stock Exchange Executive Council, which was founded in 1989, established in cooperation with the financial institutions the Securities Trading Automated Quotations System (STAQS) to promote securities market development. It is a satellite- and computer-based, over-the-counter (OTC) securities market, providing on-screen price information, as well as centralized clearing and settlement facilities. STAQS is unique in that it uses the “market maker” trading structure, under which members can be divided into two groups: those who can trade on their terminals versus those who can only receive market information. In 1995, STAQS connected 17 traders in six cities.

Other Initiatives

Secondary market development in government securities was further stimulated by other initiatives. First, government securities trading centers were established in major cities around the country. The most active centers are Wuhan, Guangzhou, and Shenyang. Wuhan, established in 1992, is now the most active trading center in government securities. In addition to government bonds, the Wuhan exchange center also lists ten investment funds. The center has established a clearing and settlement facility, which has an account with the local PBC branch (providing next-day settlement, as indicated in Table 4). The center runs a book-entry system and provides custody services for securities. Thus far, the settlement center has established 30 branches throughout the country.

Table 4.

Clearing and Settlement Procedures of Selected Exchange and Trading Systems

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Sources: Shanghai Securities Exchange, Shenzhen Stock Exchange, Wuhan Securities Exchange, and NETS.

A same-day settlement and delivery versus payment system was established in early 1994 for the six-month and one-year treasury bills.

Delivery versus payment refers to a mechanism in an exchange-for-value settlement system that ensures that the final transfer of one asset occurs if and only if the final transfer of (an)other asset(s) occurs. Assets could include monetary assets (such as foreign exchange), securities, or other financial instruments.

Second, several government securities were listed on the Shanghai Securities Exchange and the Shenzhen Stock Exchange. Third, the transfer of bonds from one trading center to another was legalized in October 1990, and, finally, securities trading was legalized throughout the country in March 1991. The combination of these changes, in turn, boosted the development of TICs and securities houses, as discussed in Section III. In the wake of the liberalization of trade between centers, the Shanghai Securities Exchange established links with seven securities trading centers throughout the country enabling floor members in Shanghai to buy and sell securities listed in other trading centers and vice versa. Table 4 provides an overview of the main features of the most important securities trade and exchange systems established in China in the period 1990–94. The Wuhan Securities Exchange is the only system that provides same-day settlement, while NETS is unique among the systems in that it provides delivery versus payment, which ensures that the final transfer of an asset occurs if and only if the final transfer of another asset occurs.

Legal and Regulatory Framework

The institutional changes have been supported by the introduction of a legal and regulatory framework for secondary markets. In the initial stages, local initiatives were supported by local rules and regulations. The lack of uniformity in the legal framework hindered the integration of the secondary markets at the national level. Several initiatives have been taken by the PBC since the turn of the decade to issue national legislation for securities trading and stock exchanges.

Institutional and regulatory changes not only have had a significant impact on volumes traded, but they have also stimulated price convergence. However, this convergence is not yet complete, mainly owing to a lack of arbitrage possibilities among cities and to other limitations, such as the time needed physically to transfer securities and cash from one trading center to another (see Box 4 on the previous page).

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  • World Bank, The Emerging Asian Bond Market—China (Washington: World Bank, 1995).

  • Yi, Gang, Money, Banking, and Financial Markets in China (Boulder, Colorado: Westview Press, 1994).