China’s Capital Markets
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China’s Capital Markets

Challenges from WTO Membership

Edited by Kam C. Chan, Hung-Gay Fung and Qingfeng ‘Wilson’ Liu

China’s economy has been growing rapidly since the late 1970s and is expected to maintain this momentum in the foreseeable future. Coupled with the biggest population in the world, there is tremendous growth potential for China’s capital markets and financial services industry, both vital to the continued development of the economy. The contributors present research on all facets of China’s markets including: stock and bond markets; futures and over-the-counter markets; regulatory issues; and the development and roles of financial institutions such as brokerage firms, banks and insurance companies. Also addressed are the recent performance of equity markets, the emergence of small and medium enterprises, and the state banks’ bids to be listed in overseas stock exchanges. Taken together, the book sheds a welcome light on China’s overall economic growth.
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Chapter 8: China’s Foreign Exchange Market

Gaiyan Zhang


Gaiyan Zhang OVERVIEW China holds a significant and growing place in the international trading system1 and it is appropriate that China acquire the financial tools available commensurate with its size and presence in the markets. As the country becomes more market oriented and global, China is actively taking steps to modernize its financial infrastructure. A deep and liquid foreign exchange market is a perquisite for a more flexible foreign exchange rate regime and gradual liberalization of the capital account. Since China’s opening-up and reform in 1978, and particularly after the foreign exchange reform in 1994, China’s foreign exchange market has witnessed significant progress in a variety of aspects, including market infrastructure, products and services. The market volume has steadily increased over the past decade. The annual turnover reached US$209 billion in 2004, with an average daily turnover of US$829 million, an increase of 411 percent compared to that in 1994 (Figure 8.1). However, due to the inconvertibility of RMB under capital account and the limited currency flexibility, China’s foreign exchange market is still an insulated market that is independent of movements of international foreign exchange markets. The advantage of such a market is that it helps to insulate the Chinese economy from speculative external shocks that can be destabilizing. It also enables Chinese policymakers to have better control of fund inflow and outflow in order to maintain economic stability for the Chinese economy. Nonetheless, the lack of openness and competition renders the market an...

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