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00000 UNIVERSITYMBA THESIS PROPOSALTHE CAPITAL MARKETS OF CHINA AND USA: A COMPARATIVE STUDYPREPARED BY: 00000 1234567 脚后跟犹太人可ID NO: 1211125脚后跟SUPERVISOR:Prof. 云贵退热January, 2001TABLE OF CONTENTSSIGNIFICANCE OF THE RESEARCH ……………………………………...….3STATEMENT OF THE PROBLEM………………………………………………4RESEARCH OBJECTIVES………………………………………………….……5SCOPEAND LIMITATION………………………….…………….………………6LITERATURE REVIEW………………………………………................................6Overview Of China’s Capital Market………………...……….6Overview Of US Capital Market………….………...………..13Comparison Of US and China Capital Market Systems…...16CONTENTS AND FRAMEWORK………………………….....…………………17RESEARCH METHODOLOGY……………………………………..…………17SCHEDULING…………….……………………………………………….……19REFERENCES……………………………………………………………...……20THE CAPITAL MARKETS OF CHINA AND USA: A COMPARATIVE STUDYSIGNIFICANCE OF THE RESEARCH:The economic stance of a country at any point in time is very strongly correlated and determined by its capital market. For example, when the capital market is facing a bull market, it is said that the economy is booming while in a bear market situation, the economy is in decline. When we hear of what is going on in Wall Street, we can then say whether the US economy is in a boom or a decline. This is due to the fact that when the capital market is doing well, more investors are attracted who pump money into the economy by buying securities which go ahead to finance those large corporations which would highly affect the economy say through employment and so forth, thus resulting to an overall economic boom, and vice versa.The size of a nation’s capital markets is directly proportional to the size of its economy. The United States, the world’s largest economy, has the biggest and widest capital markets. Capital markets are increasingly interconnected in a globalized economy, which means that ripples in one corner can cause major waves elsewhere. The drawback of this interconnection is best illustrated by the global credit crisis of 2007-09, which was triggered by the collapse in U.S. mortgage-backed securities. The effects of this meltdown were globally transmitted by capital markets since banks and institutions in Europe and Asia held trillions of dollars of these securities(investopedia; 2013/12/07)The Chinese capital market, though still young as compared to the US market, has undergone through a series of reformation and changes, and has grown in leaps and bounds since its creation in the 1980s, and has a big role to play on the international scene.The United States on the other hand, since it’s got one of the oldest capital markets, is usually taken as a benchmark when making reforms to other capital markets around the world, china not being an exception. The United States is today’s financial powerhouse. Its equity and bond markets are the largest and most important in the world, and its markets account for nearly half the world’s total market capitalization. The US markets are also the best documented and most heavily researched, thanks to the early availability of comprehensive, high quality financial data.This research is aimed at comparing one of the youngest capital markets with one of the oldest capital markets, so as to identify if the young has had some loopholes or has being growing at an unimaginable pace. Thus the young market can be appreciated for its successes or scolded for its failures.STATEMENT OF THE PROBLEMThe interrelationship between international capital markets is a key issue in international portfolio management and risk measurement. The efficient markets hypothesis (EMH) has been one of the most widely criticized theories in the financial literature in recent years on the basis that investors may exhibit irrational and predictable biases mainly attributed to psychological factors.Most investors; companies, organizations, individuals or even governments are oftentimes faced with the dilemma of which capital market they should choose to invest in. The paper aims to address the differences and the similarities in the capital markets and the capital market systems of the largest economy in the world (USA) with that of the second largest and fastest growing economy in the world (China), as of date. When investors want to invest in any capital market, they always want to know about the past, the present and the future of the market in order to be able to estimate their required returns and the inherent systematic risk associated with that return. With this problem in mind, a paper with a thorough and comprehensive analysis of each individual capital market would come in handy to potential investors.RESEARCH OBJECTIVESThis research paper is geared to accomplish a number of objectives including those enumerated below:To compare and contrast the economic powerhouse of the east with the economic powerhouse of the west.To educate potential investors on the capital market situations in the targeted countries.To give recommendations to potential investors on the nature of capital market and on risk minimization while maximizing returns.To give recommendations to governments and political institutions on best practices in terms of policies that would affect either adversely or positively the capital markets and thus the overall economic situation of the countries concerned.SCOPE AND LIMITATIONSThe two capital markets to be studied are undoubtedly among the five biggest in the world. As a result the scope of the research will be so wide that it will cover every aspect of global capital markets. The markets to be covered will include the stock markets, the bond markets, derivatives markets such as options and futures markets, as well as primary and secondary markets and over the counters(OTCs). As most of the valuable authentic data for the Chinese capital market is available in Chinese language only, or if translated to English some information might be lost in translation, a limitation to this research is the availability of information and the difficulty in gathering first-hand information on the topic. However, this limitation could be overcome by using a very broad poll of data, thus diversifying away the risk (possibility) of misrepresentation of information.LITERATURE REVIEWOverview Of Chinese Capital MarketThe European central bank’s occasional paper series number 116 of July 2010 provides a comprehensive description of China’s securities market system.China’s capital markets consist of twomain markets: the stock market and the bondmarket. Their sophistication and importancefor the economy have increased steadilyover the last two decades, leading also to thegradual development of a comprehensive legaland regulatory framework for holding andtransferring securities.There are three stock exchanges in the People’s Republic of China (PRC): the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange (SZSE), and the Hong Kong Stock Exchange(HKEx). Unlike thelatter, the former two are not entirely open toforeign investors due to capital account controlsexercised by the Chinese mainland authoritiesApart from stocks and funds, bonds are also listed and traded on the Shanghai and Shenzhenstock exchanges.The Shanghai Stock Exchange and the Shenzhen Stock Exchange are non-profit organizationsdirectly administered by the China SecuritiesRegulatory Commission (CSRC). Many companies float their shares simultaneouslyon the Hong Kong market and one of the twomainland stock exchanges.There are four different types of stockissued by Chinese mainland companies:“A shares” (common shares): listed in Shanghai and Shenzhen, denominated, traded and settled in RMB; Only domestic investors and selected foreign institutional investors under the QFII program launched in 2003 – are allowed to trade in A shares.“B shares” (special shares): listed in Shanghai and Shenzhen, denominated in RMB and traded/settled in USD (Shanghai) or HKD (Shenzhen); only foreign (institutional or individual) investors, including investors from Hong Kong, Macau and Taiwan, can trade in B shares.“H shares”: listed on the Hong Kong Stock Exchange, denominated, traded and settled in HKD.“N shares”: listed on the New York Stock Exchange, Nasdaq or AMEX, denominated, traded and settled in USD.The original reason for the segmentation of theChinese stock market was to protect it againsthigh volatility in world markets and controlof Chinese companies by foreign investors, reflecting a fear of external dependence visiblealso in other policy areas and rooted in China’shistory. Nowadays there are plans to eventuallymerge A and B shares in the future, but no exact schedule exists.The most commonly used indicators to reflectthe market performance of the three stockexchanges are the Hang Seng Index in HongKong, the Shenzhen Stock Exchange 100 Indexand the Shanghai Stock Exchange Composite Index. Fig 1.source: http://en.wikipedia.org/wiki/Shanghai_Stock_Exchange retrieved on 09 December 2013The bond market in mainland China has a multi-layered structure, comprising the interbankbond market, the exchange bond market and thebank counter market, with the interbank bondmarket being the dominant trading venue.Fig 2. China’s bond market is now the fourth largest in the worldsource: bank for international settlement, march 2012The interbank bond market is a quote-driven OTC market outside the exchanges. It isregulated by the People’s Bank of China (PBC)and functions as a wholesale market forinstitutional investors. Deals are struck based onbid and ask prices negotiated between twotrading counterparties. The interbankbond market was established in 1997 and has become the most active bond market in China, absorbing 97% of trading activity in 2008 (about RMB 94.6 trillion out of RMB 97.3 trillion). As at end 2008 the total amount of bonds outstanding was RMB 15.1 trillion (over USD 2 trillion) with RMB 13.9 trillion in the interbankmarket. As the interbankand exchange markets are half-segmented, RMB bonds are traded at different prices in dual markets (JP Morgan, June 2009). Today, the interbank bond market is byfar the biggest bond market in China, accountingfor more than 90% of the total custody andtrading volume. Apart from using the InterbankTrading System of the National Interbank FundingCenter (also known as CFETS),counterparties canalso negotiate deals directly via bilateral contracts. Compared with the other two markets,participants in the interbank bond market haveaccess to a broad range of trading instrumentslike government bonds, central bank bills, different types of financial bonds and nonfinancial corporation bonds, asset-backedsecurities and panda bonds (RMB-denominatedbonds issued by international development institutions). The interbank bond market is alsowhere the PBC conducts its open marketoperations. The central bank bill, corporatecommercial paper and the mid-term note, threeinstruments that are solely traded in the interbankbond market, are by far the most actively tradedproducts in the Chinese bond market.Fig 3. China’s bond market growth over the last ten years.source: Wind, as of Dec 2012.The exchange bond market is an order-driven market, where bonds are traded, alongsideequities, on an exchange. It is regulated by theCSRC. Small and medium-sized institutionsas well as individuals are the main players inthis market and usually access it via brokerageservices provided by the stock exchanges inShanghai and Shenzhen. Although commercial banks arecurrently still prohibited from trading in theexchange bond market, the State Council hasrecently approved a new regime for granting qualified listed commercial banks access to it,which is currently in a pilot phase and will, if itis successful, be completely implemented. Themain instruments traded in the exchange bondmarket are government bonds and (lower-rated)corporate bonds with medium to long-termmaturities(see fig 4). Corporate bonds have been boostedby the fact that they are usually guaranteed byone of the state-owned banksFig.4.Chinese government bond issuance from 1981 to 2008; source: modified from standard and poor’s (2009), exhibit1, p.4The peak in 1998 was caused by aggressive fiscal policies in the aftermath of the Asian financial crisisThe bank counter market is a retail bond market offered by commercial banks. It is regulated bythe PBC. Targeting mainly individual investors,it complements the othertwo bond markets,although the varieties of bond instrumentsavailable in this market are rather limited,with mainly government bonds in the form ofbook-entry bonds and electronic saving bondsavailable. Electronic saving bonds are mainlysold at banks. They target individual investorsand channel household savings directly intonational construction funds. The issuing processis relatively simple. Saving bonds cannot betraded, but they can be used as collateral and if needed sold back to banks before maturity.Major investorsin bonds are commercial banks (via interbankmarket only), insurance companies, asset management companies, securities houses, finance companies and other institutional investors in China. The Mainland bond markets are generally closed to foreign investors, except for Qualified Foreign Institutional Investors (QFIIs) via the exchange markets.The single most important bond category iscentral bank bills, the issuance of which hasgrown from RMB 723 billion (€75 billion)in 2003 to RMB 4.3 trillion (€448 billion) in 2008. They are issued by the PBC to membersof the interbank bond market, with the majorityof maturities lying between three months andone year (JP Morgan, June 2009). In 2003, short of government bondsneeded for open market operations, the PBCstarted to issue its own central bank“sterilization” bills to absorb extra marketliquidity(European Central Bank; issue No:116) Due to its simplicity and flexibility,the central bank bill quickly became not onlythe most important monetary tool for openmarket operations in China, but also one of themost actively traded instruments and thereby auseful benchmark.Overview Of US Capital MarketThe US capital market is highly developed and influential on theworld economy. Its equities markets, debt markets, foreignexchange markets and futures and options markets, all exercise enormous influenceover financial markets in other countries. In 1996, there were 45 600 security andcommodity brokers(Legislative council secretariat; IN10/00-01). The table below lists the regulators and self-regulating organizations(SROs) for the US financial markets.Type of instrumentFederal Government RegulatorSelf-RegulatingOrganizationCorporate stocks/bondsSecurities & ExchangeCommissionNational Association ofStock DealersAsset-backed securitiesNoneNoneMunicipal securitiesNoneMunicipal Securities Rulemaking BoardFuturesCommodity FuturesTrading CommissionNational FuturesAssociationOptionsCommodity FuturesTrading CommissionOptions ClearingCorporationOTC Foreign exchangeNoneNone Table 1. Regulators and SRO of the US financial market; Source: http://www.bus.duq.edu/faculty/burnham/RegFinmrks-OVH.htmlThere are different types of equities, namely, stocks, preferred stocks and warrants.The US equities markets comprise several stock exchanges. The most important ones are located in New York City: the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX or NYSE Amex Equities) and the National Association of Securities Dealers AutomatedQuotation system (Nasdaq).Other smaller regional exchanges arelocated in Boston, Philadelphia, Cincinnati, Chicago, San Francisco and Los Angeles.Stocks not listed on a formal exchange are traded in the over-the-counter (OTC)markets which include the National Market system (NMS)and the Over the Counter Bulletin Board (OTCBB). Securitiesmarkets are regulated by the Securities and Exchange Commission (SEC)To operate in the securities business, firms must be licensed and subscribe to the Security Investor's Protection Corporation (SPIC) which insuresclient balances against brokerage failure. Bonds are debt securities with maturities of longer than one year andmust be registered with the SEC. They may be issued by governments or by privatesector companies.Asset-backed securities are divided into two categories, namely,mortgage-backedsecurities and non-mortgage securities. Mortgage-backed securities give investors the right to interest payments from a large number ofmortgage loans. Examples of mortgage-backed securities are Fannie Maes20, GinnieMaes21, Freddie Macs22 and Farmer Macs23 (legislative council secretariat;INH10/00-01). Non-mortgage securities are assetbackedsecurities which give owners the right to income from other assets.Examples of non-mortgage securities are credit card securities, home equity loans,automotive loans, manufactured-housing securities, student loans, stranded-costsecurities and other novel types of asset-backed securities. There is no governmentregulator or SRO to regulate the asset-backed securities industry.{NOTE: Fannie Maes are securities issued by the Federal National Mortgage Association, a publicly owned,federally sponsored corporation that provides liquidity to the financial system by buyingmortgages from the institutions that originate them, thus allowing them to relend the funds. Ginnie Maes are securities issued by mortgage bankers, under the auspices of the GovernmentNational Mortgage Association, to facilitate government mortgage lending.Freddie Macs are issued by the Federal Home Loan Mortgage Corporation (FHLMC). FHLMCpackages the individual mortgages they buy into pools (groups of similar types of mortgages withsimilar rates and maturities) and sell them to investors as debt securities. Farmer Macs are pass-throughs of mortgages on farms and rural homes. The FederalAgricultural Mortgage Credit Corporation, a shareholder-owned company established by the USgovernment, securitizes both agricultural mortgages and loans guaranteed by the US Departmentof Agriculture, some of which are not mortgages.} (Oliver Wyman; Deccember4,2012)There are also municipal securities. Municipal securities are debt securities such as bonds and notes issued by states, cities and counties or their agencies to help financing public projects(see fig.5 below).Municipal securities are regulated by the Municipal Securities Rulemaking Board(MSRB).Fig. 5: US bond Market size; source:http://en.wikipedia.org/wiki/Bond_market retrieved on 12 Dec 2013.Comparison Of China And US Capital Market systems.From the above description of the two countries’ capital markets, we can already spot some differences and similarities in the markets. This comparative study is summarized in table 2 belowMARKET CHARACTERISTICUSACHINARegulatory bodySECCSRCSROpresentabsentStock exchangesNYSE, NASDAQ AMEX,CBOE, NYSE Arca,NASDAQ OMX BX, ISE, CHX, CME, CBOE Futures Exchange, etc.SSE SZSE HKExMarket development stagematuritygrowthForeign investors accessOpen to foreign investorsLimited to QFII except for HKEx Market capitalization$18.7 trillion$3.7 trillionIndicesDow Jones & Company indices(11),Amex indices(4), CBOE indices(5),Goldman Sachs indices(2),MarketGrader indices(1),MSCI indices(9),Nasdaq indices(3),Russell Indexes(21),Standard & Poor's indices(10)Wilshire Associates indices(18)Value Line Composite Index,CPMKTE-The Capital Markets Equity Index.SSE composite index(上证综指), SZSE composite index(深证成指)CSI 300 index(zh:沪深300指数)Bond Market statusWell developedRapidly developingOutstanding corporate bonds (2008)20%8.4%OTC statusHighly occupied. More than 60000 companies. Similar entry and trading criteria in different districtsStrictly regulated.Highly under occupied, Very limited number of companies Market entrance and trading criteria very different in different districtsInsufficient regulationOTC bulletin board presentpresentOTC annual turnover10 trillion USD2 billion RMB (Tianjin, chongqin, shanghai)Table 2: comparing the US and China’s Capital market systemsCONTENTS AND FRAMEWORKIntroductionSignificant of researchStatement of problemResearch objectivesScope and limitation Contents and frameworkLiterature reviewHistory; birth and growth of capital MarketsThe Chinese capital marketThe US capital marketCurrent Situation intheChinese Capital MarketCurrent Situation in the Us Capital MarketComparative Study Of The Two MarketsComparative Study of the market systems: A look at the pastComparative Study of the status QuoWhat the future holdsConclusions and Suggestions.RESEARCH METHODOLOGYThe research process is going to be in the following five main stages:• Choosing the research problem• Review of related literature• Collection of data• Interpretation of data• Preparing the research reportThe methodology to be employed will be as follows:Quantitative Research Methodology: in-depth in-sight into matters and gathering of relevant information from the specified documents and compiling database in order to analyze materials and arrive at a complete understanding of the topic. This will be done by visiting related internet websites such as standard and poor’s and by extensive reading of relevant articles, books andjournals.In-depth Data Collection:data will be collected from historical and current statistical market indices of the two markets to be studied and also by consulting some institutional investors of both markets through questionaires.Critical Analysisof Data:the collected data will be analyzed by using the analytical statistical tools of corporate finance and then conclusions will be drawn from the results of the analyses.SCHEDULLINGThe following schedule illustrated by the Gantt chart below would be rigorously employed in the preparation and writing of the thesisSCHEDULE FOR DISERTATION WRITING201320142015NovDecJanFebMarAprMayJunJulAugSeptOctNovDecJanFebMarSupervisor ChoosingTopic ImplementationOpening ReportDissertation WritingApplication for GraduationDissertation PresentationDegree VerificationAward of DegreeREFERENCESPatrick Hess; Securities clearing and settlement in china. Markets, Infrastructures and Policy-making.http://www.investopedia.com/terms/c/capitalmarkets; accessed December 2, 2013.http://www.investopedia.com/terms/m/mbs accessed on December 10,2013. JP Morgan Asset Management; China-in-Focus, Introduction to RMB bond markets, June 2009CSRC team; China Capital Markets Development Report, January 2008Shiu-Fa Wong; comparing the Chinese and German capital markets: Do informal institutions jeopardize formal institutional supremacy?; City university of Hong Kong,; September 2006.Kuntara Pukthuanthong et al;Venture capital in China: a culture shock for Western investors; College of Business Administration, San Diego State University, San Diego, California, USA,Zhou Yousu; Current Status and Trends of OTC in China; Social Science Academy in Sichuan ProvinceGOLDMAN SACHS GLOBAL LIQUIDITY MANAGEMENT; FAQ: China’s bond Market; first issue 2013.Anders C. Johansson; CHINA’S FINANCIAL MARKET INTEGRATIONWITH THE WORLD; Stockholm School of Economics; CERC WP 10June 2009.Chadbourne & Parke LLP; Accessing the U.S. Capital Markets: Selected Legal and Practical Considerations for Foreign Companies; Annex 3; Regulation of the securities market in the United States.Latham & Watkins LLP ;Accessing the US capital markets from outside the United States An overview for foreign private issuers and their advisors; September 2013William C. Dudley et al; How Capital Markets Enhance EconomicPerformance and Facilitate Job Creation;Global Markets Institute, Goldman SachsTriumpth of the OptimistsChapter 4; International capital market history; Prof. Lan Giddy; U.S. Capital Markets And Corporate Finance; New York University
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