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The People’s Republic of China (PRC) is the undisputed second largest economy in the world in terms of nominal gross domestic product, trumped only by the economic superpower of the United States. Once a centrally-planned closed economy before the 1970’s, the country has rapidly transformed over the years to become arguably the world’s most important manufacturing and industrial hub. Despite a marked slow-down in gross domestic product growth of late, the PRC is likely to eventually surpass the United States in the coming years. As the world’s largest exporter of goods, China is the largest trading nation in the world and plays an increasingly important role in international trade. This article will cover China’s financial system, as well as a range of market information covering currency, futures, and stocks.
The central banking system of PRC is known as the People’s Bank Of China, or the PBC for short. The PBC is primarily responsible for carrying out monetary policy and Chinese fiscal regulation. Under control of the highest authority body called the State Council, the PBC is known to have the largest financial asset holdings by any central bank on the globe since July 2017.
The PRC banking system is rather concentrated. In fact, five of its largest commercial banks are predominantly owned and controlled by the State, and also hold a majority of total assets within the banking industry.
Overall, China’s financial system remains fairly undeveloped compared to developed nations due to the country’s close linkages between banking, the government and the pervasive Communist Party, as well as their combined heavy influence on central bank decisions.
show moreMainland China is home to two main exchanges, known as the Shanghai Stock Exchange and Shenzhen Stock Exchange, which opened in 1990. Comparatively new and by no means mature exchanges, the Shanghai and Shenzhen Stock Exchanges are ranked 5th and 8th largest markets in the world, with a market cap of of $5.5 and $2.3 trillion USD respectively. With such a young market and over 3,300 companies listed, it is rife with speculative trading by inexperienced retail investors who place more reliance on short term price movements and hearsay, as opposed to institutional foreign investors who base valuations on company fundamentals.
Two types of stocks are issued on the exchanges and open to both domestic and foreign investors: A-shares are exclusively quoted in Chinese yuan and strictly off-limits to non-Chinese investors, while B-shares are priced in USD and HKD.
Unlike free market economies, China’s mainland stock markets are not a reliable indicator of economic performance. Due to a combination of inexperienced governance, excessive government manipulation, sloppy regulations, restrictions on foreign investments, unsophisticated investors and a young market, Chinese stock markets have long been derided as a ‘casino’ by global investors. However, in recognition of China’s reform efforts and a relatively stable two-years of market trade, global market research and index company MSCI added 230 China-listed big cap stocks to its emerging market benchmark in June 2018. Subject to further market deregulation, we may see more stock inclusions and a gradual rise in overseas investments in mainland Chinese stocks. As of today, the market remains largely in an undeveloped state best left for high-risk speculative retail traders.
The Chinese currency is known as the Renminbi (RMB) with its units of currency called the Chinese yuan (coded as CNY). Despite being the largest contributor to world growth since the global financial crisis, China is defined as an emerging and developing country today as its market reforms are still considered incomplete by world standards. Today, the Chinese yuan is the second most widely used currency in trade finance in the world, and ranks within top 10 most traded currencies overall.
Before 2009, the Chinese yuan was considered off limits to non-Chinese due to tight Chinese government restrictions over its monetary base. In an effort to internationalize the yuan, China has since floated the currency’s valuation to allow for greater market volatility and currency growth potential. As a result, the trading of the CNY has grown far more popular among investors over the years.
As the value of Chinese yuan continues to appreciate and become more freely traded, high-yield seeking investors with a greater risk tolerance looking to gain overseas exposure can take advantage of currency fluctuations by trading in the USD/CNY currency pair on the forex market. As the most popular CNY pair, USD/CNY is the 8th most traded pair.
The Chinese yuan can be further subdivided into 10 jiao. Regulated by the PBC, the yuan is symbolized by ¥. Although accepted by a few major retailers, Chinese renminbi is not legal tender in China’s special administrative regions, Hong Kong or Macau.
The renminbi is increasingly used in the settlement of international trade and financial transactions. To maintain the currency’s stability, strength and viability as a key tool for international transactions, the PBC limits capital outflow and controls exchange rates as they see fit.
While mainland Chinese stock exchanges offer exposure to some 3,300 companies, it is regarded as a largely undeveloped, emerging market. China’s economy is predominantly reliant on its manufacturing, services and agricultural sectors.
The Shanghai Stock Exchange consists primarily of blue-chip, state-owned businesses responsible for national economic growth, predominantly within the financial and manufacturing sectors. As a smaller exchange, the Shenzhen Stock Exchange trades the stocks of more growth-oriented small cap stocks including many private enterprise, strategic emerging businesses and tech companies, which makes it similar to America’s NASDAQ.
The Chinese stock market is known for its volatility with a market crash in 2015 that caused global panic over a potential recession. Concerns over the elevation in US-China trade tensions of 2018 paired with China’s slowing economic outlook have also driven mainland Chinese markets down into bear market territory. As a result, investors should safeguard their portfolios by adequately diversifying to avoid high volatility risks. After all, China’s economy remains one of the largest on the globe and their stock market continues to gain traction, which means that international investors with a high risk tolerance may choose to have some exposure via an investment in B-shares, ETF, or MSCI emerging market index.
