A Short Primer on China’s Financial Market Structure
If you are relatively new to the Chinese markets, it may be helpful to get a brief intro into how the Chinese financial system is organised. Here’s a very high-level overview.
The Rule-Makers and Regulators
Reporting directly into the State Council – China’s highest government body – are the Ministry of Finance, the People’s Bank of China (PBoC), the China Banking and Insurance Regulatory Commission (CBIRC) and the China Securities Regulatory Commission.
The PBoC, China’s central bank (and the largest central bank in the world as measured by financial assets), also has important regulatory responsibilities, regulating the inter-bank lending market, the inter-bank bond market (including the CIBM Direct and Bond Connect Access Schemes), the foreign exchange market and the gold market.
In addition to issuing Chinese Government Bonds, the PBoC is in charge of the ‘Chinese Policy Banks’: the Export-Import Bank of China (EXIM), and the Agricultural Development Bank of China (ADBC) and, previously, the China Development Bank. Policy Bank Bonds are considered a form of quasi-government debt and extremely popular with overseas investors.
As well as administering macroeconomic policies and the national annual budget, the Ministry of Finance handles fiscal policy, economic regulations and government expenditure.
The CBIRC was formed from the merger between the CBRC (for Banking) and the CIRC (for Insurance) in 2018. Its remit is to regulate and supervise China’s banking and insurance institutions.
The CSRC formulates the policies, laws and regulations that concern the securities and futures markets. In doing so, the CSRC is the regulator for securities firms, investment funds, futures firms, the Stock Exchanges and Futures Exchanges. The QFII, RQFII and Stock Connect Access Schemes are administered by the CSRC.
The State Administration of Foreign Exchange (SAFE), an independent division of the PBOC, is concerned with the policy measures surrounding the RMB, including the development of the foreign exchange market and the gradual advancement of the convertibility of the RMB.
The 2 main Stock Exchanges in (mainland) China are the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). Currently ranked 4th and 7th in world based on the market cap of companies listed there. Both are state owned and under the direct supervision of the CSRC. In addition to cash equities (A Shares, B Shares – RMB denominated but traded in foreign currencies – and Chinese Depository Receipts), Indices, Exchange Traded Bonds, Funds, Equity Derivatives and the burgeoning sector of Green Securities are all available. Both exchanges participate in the Stock Connect Mutual Access Scheme with the Hong Kong Exchange (HKEx), where these is both Northbound (foreign investors buying into the domestic markets) and Southbound flow (chinese investors buying HK listed shares).
China has 4 large Futures Exchanges. 3 are dedicated to Commodities: the Dalian Commodity Exchange (DCE), the Shanghai Futures Exchange (SHFE) and the Zhengzhou Commodity Exchange (ZCE).
Stock Index and Interest Rate Futures are listed on the China Financial Futures Exchange (CFFEX), situated in Shanghai and jointly owned by the 3 commodity exchanges and the 2 main stock exchanges and regulated by the CSRC. It is worth noting that Chinese Government Bond Futures are listed on CFFEX. Whilst volumes have traditionally been too low for most bond portfolio hedge requirements, expect to see volumes grow now that the rules allowing bank and insurer participation in these markets are being lifted.
China Foreign Exchange Trade System (CFETS), also known as the National Interbank Funding Center (NIFC), plays the central role across China’s FIC markets. Directly affiliated to the PBoC, CFETS provides trading, post-trade processing, and information services across the inter-bank money market, bond market and foreign exchange market and their derivatives. Even where CFETS isn’t directly involved in the execution, CFETS undertakes the daily monitoring of all transactions in these markets. CFETS compiles crucial market Benchmarks (such as, Shibor, LPR, Repo fixing rate and the RMB index and reference rate). CFETS e-trading systems support multiple modes of execution (anonymous, bilateral, volume-matching). CFETS offers trade analysis and real-time communication tools. CFETS even runs trade compression for IRS and FX swaps.
The Clearing Houses
The China Securities Depository and Clearing Corporation Limited (CSDC) is the clearing house jointly owned by the SSE and SZSE, who each have a 50% stake. It is supervised by the CSRC. It is non-profit orientated and undertakes all the securities registration, clearing and settlement business on behalf of the 2 exchanges.
China Central Depository and Clearing Co. Ltd (CCDC) is the primary CSD for Bond Markets. Approved and funded by the State Council, CCDC provides full life-cycle services covering issuance, registration, depository, settlement, principal and interest payment, information disclosure, pricing and valuation, and collateral management across China’s bond markets. By the end of June 2019, the amount of bonds under deposit at CCDC was RMB 61.31 trillion, accounting for 84.95% of the total depository amount in the inter-bank market1. CCDC has notable subsidiaries, including ChinaBond (a research, data and valuations business).
The Shanghai Clearing House (SHCH) is a CSD and Central Counterparty under the direction of the PBoC. SHCH settles certain corporate credit bonds, financial bonds and money market instruments, including NCDs (which have been popular with international investors). As a CCP, SHCH clears OTC interest-rate, FX and commodity derivatives.
1 The China Inter-bank Bond Market is approximately 86% of the entire Chinese Bond Market (Exchange Traded Bonds make up 13%, with OTC and other making up the balance).
National Association of Financial Market Institutional Investors (NAFMII) is a voluntary self- regulatory organization consisting of various market participants in the inter-bank market, including inter-bank bond market, inter-bank lending market, foreign exchange market, bill market and gold market. I tend to think of NAFMII as the Chinese equivalent of ISDA. NAFMII even publishes the Master Agreements to support the Chinese OTC derivatives markets.
I could go on, but I fear information overload. Suffice to say, there are a lot of important institutions to be aware of and I have failed to do justice to their importance with such high-level descriptions! Perhaps further follow-on posts are required in the future where I can give each of them a deeper dive and discuss the commercial side of the market too.
In the meantime, if you are keen to deepen your knowledge, especially if you are struggling with how to access China’s markets in a robust and scalable way, we would love to hear from you.
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