A mature capital market may also be conducive to

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Unformatted text preview: then industries and individual companies by weeding out the under-performers. A mature capital market may also be conducive to solving problems such as the NPL issue. Even though China's capital market has experienced enormous growth since 1980s, it has not been mature enough to accomplish all these goals. There are four major problems facing China's capital markets. First, the capital market is still too small to absorb the large amount of household and institutional capitals. The numbers from the Flows of Funds Accounts in 1999 (Table 12) provides us with a general picture of the fund flow in China. In 1999, about 75% of household savings in addition to corporation funds were deposited in banks with 70% of these capitals were lent to corporations, 10% to household and another 10% being invested in government bonds. The other 25% of household savings have been invested in government bonds (16%) and stock market (9%). Even though only about 9% of household savings are put in the stock market, many stocks are still over-priced partially due to the relatively large amount of capital chasing the small amount of stocks. There were only 1,116 companies listed in A-share market and 113 in B-share market in 2001. Table 12: Flow of Funds Accounts in China, 1999 (unit: RMB billion) Households Government Dr. Dr. Dr. Cr. Government Bonds Cr. 505 728 Loans Bonds Ine tment Intiutions Dr. Deposits Corporations 132 914 153 88 Direct Foreign Inv. -79 27 1,102 1 278 293 1 10 162 Stock Cr. 92 278 Cr. Dr. Cr. -12 -106 -3 -5 28 1,340 124 132 93 15 5 321 321 15 Source: The People's Bank of China QuarterlyStatisticalBulletin, (As only major items are included, total per department and item may not correspond. Second, the stock market also suffers form the low liquidity due to the distinction between tradable and non-tradable shares. Stocks in China can be classified into four categories by the type of shareholder: state shares (government-owned), corporate entity shares, employee-owned shares, and general public shares. Among them, only general public shares, accounting for 40% of the total, are listed and traded. State shareholdings accounts for nearly 40% of the total number of shares. The government has introduced a plan to release such state-owned shares for open trading in order to enhance market liquidity. Since June 2002, the plan has been suspended in response to complaints from various market participants that the scheme had caused a sharp decline in stock prices. Third, the whole capital market is fragmented artificially. In the stock market, the listed shares are divided into A, B and H shares. A shares are denominated in RMB yuan and issued in China, with a market capitalization of about RMB 4.5 trillion. B Shares are denominated in foreign currencies and issued in China with a market capitalization of RMB 121.3 billion. B shares were originally sold exclusively to foreign investors and were made available to domestic individual investors in February 2001. H shares are denominated in Hong Kong...
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