2016/9/8 About financial Markets Chinese financial markets · Basic Questions Introduction and overview How do we define the financial markets? of the Financial Market What is the major function and instruments in the financial markets By Zhang Xiaorong How do we evaluate whether the market is goo Fudan University, Shanghai, China Why the course? Text Book This course aims to providing the international Foundations of financial markets and students with nstitutions, 4th Edition an understanding of the basic mechanism in the By Frank J Fabozzi/Franco Modigliani/Frank J.Jones financial market Copyright Pearson Education, reprinted by CMP(China) the chinese characteristics of chinese financia Talks mainly the markets and schemes in the US, but markets(by comparing with some more advanced) not china the reforms that have been done and challenges ahead No textbook specifically talking about china Text Book Course structure Introduction of financial markets and financial assets Exchange Rate 金融市场 与金融机构基础 History of the Chinese Stock Forex Before 1978Banking System Markets Markets Banking SectorStructure Exchange after 2003 Rate reform 1
2016/9/8 1 Chinese Financial Markets Introduction and Overview of the Financial Market Sept.‐Dec.2016 By Zhang Xiaorong Fudan University, Shanghai, China 0-1 About Financial Markets • Basic Questions – How do we define the financial markets? – What is the major function and instruments in the financial markets? – Who are the key players? (the government’s role?) – How are the financial markets organized? – How do we evaluate whether the market is good or not so good? 0-2 Why the Course? • This course aims to providing the international students with – an understanding of the basic mechanism in the financial market – the Chinese characteristics of Chinese financial markets (by comparing with some more advanced) – the reforms that have been done – and challenges ahead 0-3 Text Book Foundations of Financial Markets and Institutions, 4th Edition – By Frank J. Fabozzi/Franco Modigliani/Frank J. Jones – Copyright Pearson Education, reprinted by CMP (China) – Talks mainly the markets and schemes in the US, but not China – Translated version in Chinese is available – No textbook specifically talking about China 0-4 Text Book 0-5 Course Structure 0-6 Introduction of Financial Markets and Financial Assets Central Bank Commercial Banks Exchange Rate Regimes Stock Market PBoC Before 1978 History of the Banking System Chinese Stock Markets Reform of PBoC and Monetary Policy Reforming Banking Sector after 2003 RMB Exchange Rate Reform Split‐Share Structure Reform Forex Markets
2016/9/8 Course structure Course Schedule Topics that will Not Be Covered leek 1(Sept. 8): Course Introduction, Overview of Financial Insurance Companies id-Autumn Day Holiday, no class Mutual funds Pension funds trusts Week 3(Sept 22): the Central Bank Treasury and Agency Securities Markets Week 4(Sept. 29): the Central Bank Municipal Securities Markets 8): the Corporate Senior Instruments Week 6(Oct 13): the Banking System in China Mortgage and Securitized Asset Markets Week 7(Oct 20): Visiting Yonglibao com Markets for Derivatives Week 8(Oct 27): the Stock Market in China Week 9(Nov 3): the Stock Market in China Course Schedule Evaluation and Grading Week 10(Nov 10): the Stock Market in China Classroom Attendance--20% eek 11(Nov 17): the RMB Exchange Rate Reform Week 12(Nov 24): Visiting Shanghai Futures Exchange Bonus up to 5% based on the classroom discussion Week 13(Dec 1): the RMB Exchange Rate Reform Project Presentation --Group work, 30% Week 14( Dec 8): Students'Classroom Presentation Students will be divided into 8 group k 15 (Dec 15): Students' Classroom Presentation; Course Each group should give a presentation on a specific topic Wrap-up financial markets in the end of the course Week 16(Dec 22): Individual Thesis Tutoring Final thesis Individual Thesis due on Dec 24th Each student should write a thesis(5-8 pages)on a specifi Deadline: Dec 24th 2016 Teach Types of Assets Lecturing Professor Xiaorong ZHANG ·Rea| Assets Department of Finance, School of Management Assets used to produce goods and services Lands, plants, equipment, technology, know-how, Office: Room 214, Siyuan Building 25011088(O) Email:xizhang@fudan.edu.cn Qi ZHOU Graduate student in the School of Management Email:15210690016@fudan.edu.cn
2016/9/8 2 Course Structure • Topics that will Not Be Covered – Insurance Companies – Mutual Funds, Pension Funds, Trusts – Treasury and Agency Securities Markets – Municipal Securities Markets – Corporate Senior Instruments – Mortgage and Securitized Asset Markets – Markets for Derivatives 0-7 Course Schedule • Week 1 (Sept. 8): Course Introduction, Overview of Financial Markets • Week 2 (Sept. 15): Mid‐Autumn Day Holiday, no class • Week 3 (Sept. 22): the Central Bank • Week 4 (Sept. 29): the Central Bank • Week 5 (Oct. 8): the Banking System in China • Week 6 (Oct. 13): the Banking System in China • Week 7 (Oct. 20): Visiting Yonglibao.com • Week 8 (Oct. 27): the Stock Market in China • Week 9 (Nov. 3): the Stock Market in China 0-8 Course Schedule • Week 10 (Nov. 10): the Stock Market in China • Week 11 (Nov. 17): the RMB Exchange Rate Reform • Week 12 (Nov. 24): Visiting Shanghai Futures Exchange • Week 13 (Dec. 1): the RMB Exchange Rate Reform • Week 14 (Dec. 8): Students’ Classroom Presentation • Week 15 (Dec. 15): Students’ Classroom Presentation; Course Wrap‐up • Week 16 (Dec. 22): Individual Thesis Tutoring • Individual Thesis due on Dec 24th 0-9 • Classroom Attendance——20% • 4 times of attendance call, 5% each • Bonus up to 5% based on the classroom discussion • Project Presentation——Group work, 30% • Students will be divided into 8 groups • Each group should give a presentation on a specific topic regarding either China’s financial market or the global financial markets in the end of the course • Final Thesis ——Individual, 50% • Each student should write a thesis (5‐8 pages) on a specific topic regarding only China’s financial market • Deadline: Dec. 24th, 2016 Evaluation and Grading 0-10 Teaching • Lecturing Professor: Xiaorong ZHANG Department of Finance, School of Management Office: Room 214, Siyuan Building Tel: 25011088(O) Email: xrzhang@fudan.edu.cn Reserving time by email is preferred. • Qi ZHOU Graduate student in the School of Management Email: 15210690016@fudan.edu.cn 0-11 Types of Assets • Real Assets – Assets used to produce goods and services – Lands, plants, equipment, technology, know‐how, brands 0-12
2016/9/8 Types of Assets Types of Assets Financial Assets How are financial assets created Stocks: common stocks, preferred stocks Why do people create financial assets? Bonds: government bonds, corporate bonds, municipal What's the sum of the worlds financial assets? What's the sum of china's financial assets Futures and options Financial assets are intangible; but intangible assets an also be real assets Role of financial Assets Role of financial Assets Insfer funds from surplus units to deficit units ansfer funds from surplus units to deficit units. Example 1: You have graduated from college for 3 Example 2: In your late 40s, you have repaid all years and the salary is just satisfying. You really your mortgage and your income is mor han want to buy a small apartment near your company enough to raise the family. what can you do with but your saving can only cover 30% of it. What can the surplus money? you do now? Role of financial Assets Role of financial Assets ansfer funds from surplus units to deficit units Transfer funds so as to redistribute unavoidable risk Example 3: You retire at age 65. Since you don't associated with cash flows generated from both work, you have no salary. However, you can tangible and intangible assets. support your own living with your pension and Example 4: You and your cousin are considering your saving. personal investments in the security market. You Who contributes to your pension and your saving? prefer safe return and invest on government And how bonds, while he is apparently more aggressive and vests in the stock market with leverage O
2016/9/8 3 Types of Assets • Financial Assets – Claims on real assets – Stocks: common stocks, preferred stocks – Bonds: government bonds, corporate bonds, municipal bonds – Foreign currencies – Insurance policies, certificate of deposit, bank loans – Futures and options • Financial assets are intangible; but intangible assets can also be real assets! 0-13 Types of Assets • How are financial assets created? • Why do people create financial assets? • What’s the sum of the world’s financial assets? • What’s the sum of China’s financial assets? 0-14 Role of Financial Assets • Transfer funds from surplus units to deficit units. – Example 1: You have graduated from college for 3 years and the salary is just satisfying. You really want to buy a small apartment near your company, but your saving can only cover 30% of it. What can you do now? 0-15 Role of Financial Assets • Transfer funds from surplus units to deficit units. – Example 2: In your late 40s, you have repaid all your mortgage and your income is more than enough to raise the family. What can you do with the surplus money? 0-16 Role of Financial Assets • Transfer funds from surplus units to deficit units. – Example 3: You retire at age 65. Since you don’t work, you have no salary. However, you can support your own living with your pension and your saving. – Who contributes to your pension and your saving? – And how? 0-17 Role of Financial Assets • Transfer funds so as to redistribute unavoidable risk associated with cash flows generated from both tangible and intangible assets. – Example 4: You and your cousin are considering personal investments in the security market. You prefer safe return and invest on government bonds, while he is apparently more aggressive and invests in the stock market with leverage. – Whose investment is better? 0-18
2016/9/8 Principles of Pricing Financial Assets Principles of Pricing Financial Assets The market price of an asset equals The appropriate discount rate is equal to r=RR +IP+ DP MP+ LP + EP +r)(+r2(1+r)3(1+r) where: RR the real rate of interest IP =the inflation premium where: P= the price of the financial asset P= the default risk premium CFr cash flow at end of year t(61, 2,N) MP=the maturity premium N= maturity of the financial asset LP the liquidity premium r appropriate discount rate P= the exchange-rate risk premium Role of financial Markets Role of financial markets Intuitively, the financial markets are where we can Should financial markets be issue, buy or sell financial assets. If not, how do you search for potential buyers or Role of financial markets Determine price or required rate of return of asset What is the cost associated? What about the credit risk? Reduce transactions costs which consists of earch costs and information costs Classification of Financial Markets Financial Market Participants Various ways in classifying financial markets Household Sector Debt vs equity markets -Primary Need: Invest Funds Money market vs capital market · Business secto Primary vs secondary market Primary Need: Raise Funds Cash(or spot)vs derivatives market Government sector Over-the-counter vs intermediated market Primary Need: Raise Funds But they can have other needs too
2016/9/8 4 0-19 Principles of Pricing Financial Assets • The market price of an asset equals: N N r CF r CF r CF r CF P (1 ) ... (1 ) (1 ) (1 ) 3 3 2 2 1 1 where: P = the price of the financial asset CFt = cash flow at end of year t (t=1,2,…,N) N = maturity of the financial asset r = appropriate discount rate 0-20 Principles of Pricing Financial Assets • The appropriate discount rate is equal to: r = RR + IP + DP + MP + LP + EP where: RR = the real rate of interest IP = the inflation premium DP = the default risk premium MP = the maturity premium LP = the liquidity premium EP = the exchange‐rate risk premium 0-21 Role of Financial Markets • Intuitively, the financial markets are where we can issue, buy or sell financial assets. • Role of financial markets – Determine price or required rate of return of asset. – Provide liquidity. – Reduce transactions costs, which consists of search costs and information costs. 0-22 Role of Financial Markets • Should financial markets be organized? • If not, how do you search for potential buyers or sellers? • What is the cost associated? • What about the credit risk? Classification of Financial Markets • Various ways in classifying financial markets –Debt vs. equity markets – Money market vs. capital market – Primary vs. secondary market – Cash (or spot) vs. derivatives market –Over‐the‐counter vs. intermediated market 0-23 Financial Market Participants • Household Sector – Primary Need: Invest Funds • Business Sector – Primary Need: Raise Funds • Government Sector – Primary Need: Raise Funds But they can have other needs too. 0-24
2016/9/8 Financial Market Participants Instruments, Institutions and Variables in the financial Markets Everyone can be a participant in the financial market Central bank, treasur What does each of the following do in the financia Commercial banks, investment banks, security Households firms, insurance companies, mutual funds Business units Benchmark interest rate, required reserve Central and local governments ratio, capital adequacy ratio, interest rate Government agencies Stock exchange, stocks, warrants, ETF nationa Commercial Paper, Bonds, T-bonds, T-bills Regulators convertibles, Repo Options, futures, swap forward, NDF Globalization of financial Markets Classification of Global Financial Markets Since 1970s the financial markets have ecome more and more integrated Market Deregulation or liberalization of financial also called national markets market) Technological advances Increased institutionalization What are the benefits and costs of financial Domestic I Foreign Market markets becoming global and integrated? Classification of Global Financial Markets The Chinese Characteristics Examples For chinese financial markets McDonald's issues uS dollar bond in the us Are financial markets all the same over the world? McDonald s issues Japanese Yen bond in Japan Are there any"types" of financial markets? In 2005, IFC and ADB issued RMb bond in Chinas Are Chinas financial markets special? Why or why inter-bank market In 2010, McDonalds issues RMB bond in Hong How did the china' s financial markets evolve in the transition from a planned economy to the What's the purpose of financing in the foreign market economy? market and Euromarket? How do we predict the future? 5
2016/9/8 5 Financial Market Participants • Everyone can be a participant in the financial market. • What does each of the following do in the financial markets? – Households – Business units – Central and local governments – Government agencies – Supranationals – Regulators 1-25 Instruments, Institutions and Variables in the Financial Markets • Central bank, treasury • Commercial banks, investment banks, security firms, insurance companies, mutual funds • Benchmark interest rate, required reserve ratio, capital adequacy ratio, interest rate • Stock exchange, stocks, warrants, ETF • Commercial Paper, Bonds, T‐bonds, T‐bills, convertibles, Repo • Options, futures, swap, forward, NDF 0-26 Globalization of Financial Markets • Since 1970s, the financial markets have become more and more integrated –Deregulation or liberalization of financial markets – Technological advances – Increased institutionalization • What are the benefits and costs of financial markets becoming global and integrated? 0-27 Classification of Global Financial Markets Internal Market (also called national market) External Market (also called international market, offshore market, and Euromarket) Domestic Market Foreign Market 0-28 Classification of Global Financial Markets • Examples – McDonald’s issues US dollar bond in the US. – McDonald’s issues Japanese Yen bond in Japan. – In 2005, IFC and ADB issued RMB bond in China’s inter‐bank market. – In 2010, McDonald’s issues RMB bond in Hong Kong. • What’s the purpose of financing in the foreign market and Euromarket? 0-29 The Chinese Characteristics • For Chinese Financial Markets – Are financial markets all the same over the world? – Are there any “types” of financial markets? – Are China’s financial markets special? Why or why not? – How did the China’s financial markets evolve in the transition from a planned economy to the market economy? – How do we predict the future? 0-30
2016/9/8 More about chinese characteristics The Chinese Financial System Some say that none financial theory in the text book holds in Chinal) Can we talk about financial markets without mentioning the economic reform? 圈= Can we talk about the financial markets without mentioning the legal environment? an we understand the Chinese financial market without putting it in a global background? How Do we learn about the How Do We learn about the Chinese characteristics? Chinese characteristics? What are these in china By supplementary readings and anecdotes in the PBoC, CSRC, CIRC, CBRC, SAFE, MOF market ABC, ICBC, CBC, BOC, BoCom, AMC Do you understand why these happen, the ckground and the implications Shanghai Stock Exchange, Shenzhen Stock Exchange, SME Board, GEM Board 1994: RMB managed floating Tradable shares and non-tradable shares 1998:RMB Corporate bonds, debentures 2005-2006: State-owned commercial banks Dim sum bond panda bond listed in Shanghai and Hong Kong No book on these issues available so far 2006: Reform of non-tradable share How Do we learn about the Combine the all Chinese Characteristics? 2005: RMB back to managed floating In mid 2007, Jack sold his house in California for $0.5 2007: 5.30"stamp tax doubled million, and bough an apartment in Beijing, which 2010: Stock index futures launched cost RMB 3 million($0. 4 million equivalent, exchange 2013: T-bill Futures trading restarted rate 7 2014: Shanghai-Hong Kong Stock Connect 2015: stock market collapse from June 2015: the bank deposit rate cap removed 2015: RMBs inclusion in SDr 2016: MSCl's delay of including China's a shares in 6
2016/9/8 6 More About Chinese Characteristics • (Some say that none financial theory in the text book holds in China!) • Can we talk about financial markets without mentioning the economic reform? • Can we talk about the financial markets without mentioning the legal environment? • Can we understand the Chinese financial market without putting it in a global background? 0-31 The Chinese Financial System 32 • What are these in China? – PBoC, CSRC, CIRC, CBRC, SAFE, MOF – ABC, ICBC, CBC, BOC, BoCom, AMC – Shanghai Stock Exchange, Shenzhen Stock Exchange, SME Board, GEM Board – Tradable shares and non‐tradable shares – Corporate bonds, debentures – Dim sum bond, Panda Bond • No book on these issues available so far How Do We Learn About the Chinese Characteristics? 0-33 How Do We Learn About the Chinese Characteristics? • By supplementary readings and anecdotes in the market • Do you understand why these happen, the background and the implications ? – 1992: “5.21” soaring (growing by 105.5%) – 1994: RMB managed floating – 1998: RMB pegged – 2005‐2006: State‐owned commercial banks listed in Shanghai and Hong Kong – 2006: Reform of non‐tradable shares 0-34 – 2005: RMB back to managed floating – 2007: “5.30” stamp tax doubled – 2010: Stock index futures launched – 2013: T‐bill Futures trading restarted – 2014: Shanghai‐Hong Kong Stock Connect – 2015: stock market collapse from June – 2015: the bank deposit rate cap removed – 2015: RMB’s inclusion in SDR – 2016: MSCI’s delay of including China’s A shares in emerging market index How Do We Learn About the Chinese Characteristics? 0-35 Combine the All • In mid 2007, Jack sold his house in California for $0.5 million, and bough an apartment in Beijing, which cost RMB 3 million ($0.4 million equivalent, exchange rate 7.5). 0‐36
2016/9/8 Combine the all Combine the all In 2012, he sold his apartment in Beijing for RMB 6.3 million(S1 million equivalent, exchange rate 6. 3). about So. 1 million in total. and went back to the US and bought back his house Jack found he now had a surplus of so. 6 million! How did he make it? Who paid for it Can Jack continue with the game in the following years? Why or why not?
2016/9/8 7 Combine the All • In 2012, he sold his apartment in Beijing for RMB 6.3 million ($1 million equivalent, exchange rate 6.3), and went back to the US and bought back his house with $0.4 million. 0‐37 Combine the All • The total living cost in Beijing from 2007 to 2012 was about $0.1 million in total. • Jack found he now had a surplus of $0.6 million! • How did he make it? Who paid for it? • Can Jack continue with the game in the following years? Why or why not? 0-38