Introduction
China’s asset market development has lagged well behind the extraordinary growth in the real economy during the post-1978 period. Secondary markets for government bonds did not even exist until the latter half of the 1980s and the interbank market was established only in 1997.
Although stock exchanges were opened in the early 1990s, market capitalizations remained quite low relative to the size of China’s economy and, on average, market performance was rather poor relative to the robust growth registered elsewhere. Finally, bond and equity prices, as well as real estate prices, have been vulnerable to the effects of abrupt regulatory policy shifts by the government. All this helps explain why asset markets have historically played only a small role in the funds raised by China’s nonfinancial institutions. Indeed, even in 2006, bank financing still accounted for over 85% of total finance raised within China (Table 8.1). A positive element, though - as discussed in the following section - was the increase in the importance of corporate bonds from a minimal 1% share of total financing in 2004 to above 5% in 2005 and 2006.1 Gregory C. Arquette is Vice President of Performance Systems at Pendo Systems in Seattle, Washington (garquette@gmail.com), and William O. Brown is Associate Professor in the Bryan School of Business and Economics at the University of North Carolina-Greensboro (wobrown@uncg.edu). The authors are grateful to Nancy Tao for her research support.
Table 8.1. Financing Sourcesfor China’s Domestic Non-Financial Sector, 20002006
| 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | |
| Total | 4,385.9 | 3,150.7 | 2,902.3 | 3,515.4 | 2,397.6 | 1,655.5 | 1,716.3 |
| (100) | (100) | (100) | (100) | (100) | (100) | (100) | |
| Bank Loans | 3,764.5 | 2,461.7 | 2,406.6 | 2,993.6 | 1,922.8 | 1,255.8 | 1,249.9 |
| (85.8) | (78.1) | (82.9) | (85.1) | (80.2) | (75.9) | (72.8) | |
| Government Securities | 251.1 | 299.6 | 312.6 | 352.5 | 346.1 | 259.8 | 247.8 |
| (5.7) | (9.5) | (10.8) | (10.0) | (14.4) | (15.7) | (14.4) | |
| Corporate Bonds | 241.1 | 201.0 | 32.7 | 33.6 | 32.5 | 14.7 | 8.3 |
| (5.5) | (6.4) | (1.1) | (1.0) | (1.4) | (0.9) | (0.5) | |
| Equities | 129.2 | 188.4 | 150.4 | 135.7 | 96.2 | 125.2 | 210.3 |
| (2.9) | (6.0) | (5.2) | (3.9) | (4.0) | (7.6) | (12.2) |
Notes: Amount of financing is in billions of renminbi; percentages are given in parentheses; and 2006 figures have been annualized based on data from the first three quarters of the year.
Source: People's Bank of China, Monetary Policy Report, various issues; author's calculations.
Chinese authorities are well aware of the importance of establishing a more advanced system of asset markets and reducing the dependence upon a banking system that, despite great strides triggered by China's entry into the World Trade Organization, still falls short of being an adequate supplier of funds to China's rapidly growing private sector (Chapter 7). A much richer array of securities has emerged in China in recent years, with subordinated debt, asset-backed securities, and short-term corporate paper all entering the interbank market since 2004. The nation's stock markets, meanwhile, dramatically exploded onto the world stage when a near 9% drop in the Shanghai stock market on February 27, 2007 - which a year or two before would have, at best, merited a few lines at the back of the financial papers - was seen as a trigger for major market declines in the United States and around the world the next day. The strong rise in the Chinese markets during most of 2006-2007 itself followed a much longer, but also much less widely noted, period of moribund performance that left average stock prices in early 2005 no higher than in 1993. Comparisons with the neighboring Hong Kong stock exchange reveal that the valuations attached to Chinese stocks were, for the most part, rising less quickly in Shanghai than in Hong Kong as this advance got underway. Whereas Shanghai prices did accelerate ahead of Chinese stock prices in Hong Kong after April 2006, the relative price level in Shanghai at the end of June 2007 was still cheaper than any time from September 1997 to January 2005. This performance rather calls into question the extent to which the initial large advances in the Shanghai market were necessarily as “excessive” as some have claimed.