Shangai Industries (Shanghai Series)

SHANGHAI INDUSTRIES Sponsored by The Information Office of the State Council, The People’s Republic of China Supporte...

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SHANGHAI

INDUSTRIES

Sponsored by The Information Office of the State Council, The People’s Republic of China

Supported by The Information Office of Shanghai Municipality Shanghai Series Editorial Committee General Consultant: Wang Zhongwei Editor-in-chief: Song Chao Deputy Editors-in-chief: Wang Jianjun and Hu Dawei

SHANGHAI

INDUSTRIES XU JIANGUO

(Shanghai Century Publishing Co., Ltd.)

Australia • Canada • Mexico • Singapore • Spain • United Kingdom • United States

SHANGHAI INDUSTRIES by Xu Jianguo Copyright © 2008 by Cengage Learning (a division of Cengage Learning Asia Pte Ltd). Cengage Learning™ is a trademark used herein under license. Original Chinese Edition © Shanghai Century Publishing Co., Ltd.

For more information, please contact: Cengage Learning (a division of Cengage Learning Asia Pte Ltd) 5 Shenton Way #01-01 UIC Building Singapore 068808 Or visit our Internet site at http://www.cengagelearningasia.com ALL RIGHTS RESERVED No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, web distribution or information storage and retrieval systems—without the written permission of the publisher.

For permission to use material from this product, contact us by Tel: (65) 6410 1200 Fax: (65) 6410 1208 Email: [email protected]

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Printed in Singapore 1 2 3 4 5 SLP 11 10 09 08 07 ISBN-13: 978-981-4195-54-6 ISBN-10: 981-4195-54-5

Contents

List of Figures

vii

List of Tables

ix

Foreword

xi

Chapter 1 1. 2. 3.

Overview of Industrial Development Industrial Restructuring Shift of Focus in Industrial Development

Chapter 2 1. 2. 3.

2. 3.

Development of Shanghai’s Modern Service Industry

Status Quo and Features Distribution of Shanghai’s Modern Service Industry

Chapter 4 1.

Development of Shanghai’s Advanced Manufacturing Industry

Status Quo and Features Distribution of Shanghai’s Advanced Manufacturing Industry Emerging Industries

Chapter 3 1. 2.

History of Industries in Shanghai

Shanghai’s Industry Policies and Associations

Guiding Policies for the Development of the Modern Service Industry Guiding Policies for the Development of the Advanced Manufacturing Industry Policies on Industrial Structure

1 2 14 36 43 43 68 76 81 81 97 101 103 112 117

Contents

vi

4. 5.

Policies Supporting the Development of Small- and Medium-sized Enterprises The Role of Industry Associations in Boosting Shanghai’s Industries

Chapter 5 Shanghai Industries and the Yangtze Delta Megalopolis 1. 2. 3. 4. 5.

Formation of the Yangtze Delta Megalopolis Industrial Division of Labor in the Yangtze Delta Megalopolis Industrial Planning in the Yangtze Delta Megalopolis The Radiation Function of Shanghai’s Industries Internationalization and the Competitiveness of Shanghai Industries

Chapter 6 1. 2. 3. 4. 5. Index

Development Prospects

Future Directions Open Industries Sustainable Industries Circular Economy Resource-efficient Economy

121 124 127 127 135 138 144 147 159 159 163 164 166 168 173

List of Figures

Figure 1.1

Shanghai’s industrial development (1978–1984)

22

Figure 1.2


23

Figure 1.3

Positions of six pillar industries in Shanghai’s industry in 1999

24

Figure 1.4

Indices for Shanghai’s six pillar industries in 2004

25

Figure 1.5

Layout of Shanghai’s industrial zones and high-tech parks

27

Figure 1.6

Gross output value of Shanghai’s construction industry since opening-up and reform

32

Figure 1.7

The changing proportion of tertiary industry in 33 Shanghai’s GDP

Figure 1.8

The changing proportion of tertiary industry in 35 Shanghai’s GDP (1999–2005)

Figure 1.9


38

Figure 1.10

The changing proportion of the value added of Shanghai’s tertiary industry in GDP during the 1990s

38

Figure 1.11

Shanghai’s manufacturing output value and growth rate (2001–2004)

41

Figure 2.1

Proportion of Shanghai’s automobile industry in gross industrial output value

45

Figure 2.2

Composition of Shanghai’s car production in 2005

47

viii

List of Figures

Figure 2.3

Growth margin of the industrial output of Shanghai’s electronic information product manufacturing industry and its percentage in the city’s total

55

Figure 2.4

Output of Shanghai’s petrochemical and fine chemical manufacturing industry during the Tenth Five-Year Plan period

61

Figure 2.5

Total profit of Shanghai’s petrochemical and fine chemical manufacturing industry during the Tenth Five-Year Plan period

61

Figure 2.6

Output and growth of Shanghai’s shipbuilding industry in the Tenth Five-Year Plan period

64

Figure 2.7

Composition of gross output value of Shanghai’s 64 shipbuilding industry in 2005

Figure 2.8

Distribution of Shanghai’s six advanced manufacturing industries

69

Figure 2.9

Gross industrial output value of biomedical industry and its contribution to Shanghai industry (2000–2005)

77

Figure 3.1

Proportion of tertiary industry in GNP (1996–2005)

81

Figure 3.2

Layout of commercial areas in urban Shanghai

99

Figure 5.1

Geographical scope of the Yangtze River Delta 129

Figure 5.2

Proportion and contribution of Shanghai, Jiangsu, and Zhejiang in China’s GDP

131

Figure 5.3

Distribution of core cities in the Yangtze Delta

133

Figure 5.4

Circular distribution of cities in the Yangtze Delta

134

List of Tables

Table 1.1

Gross output values and proportions of 19 Shanghai’s light and heavy industries (1957–1965)

Table 1.2

Shanghai’s industrial structure during the Cultural Revolution

20

Table 1.3

Proportions of Shanghai’s light and heavy industries during the Cultural Revolution

20

Table 1.4

Summary of output values of Shanghai’s six pillar 24 industries

Table 1.5

Comparison of Shanghai’s high-tech industries, 1999 vs. 2003

28

Table 1.6

Comparison of Shanghai’s metropolitan industry, 1998 vs. 2004

30

Table 1.7

Development of Shanghai’s tertiary industry in 2004

36

Table 1.8

Shanghai’s outputs by industries in the 1990s

37

Table 1.9

Structural changes of the main sectors in Shanghai’s tertiary industry

39

Table 2.1

Investment in the automobile manufacturing industry (2003–2005)

44

Table 2.2

Gross industrial output value and industrial product sales of Shanghai’s automobile industry in 2005

45

Table 2.3

Comparison of China’s main steel producing provinces or municipalities

48

x

List of Tables

Table 2.4 Investments in various sectors of Shanghai’s equipment manufacturing industry in 2005

52

Table 2.5 Shanghai’s shares of some major information products in China

56

Table 2.6 Overview of Shanghai’s electronic information product manufacturing industry in 2005

57

Table 2.7 Shanghai’s integrated circuit production during the Tenth Five-Year Plan period

58

Table 2.8

Summary of foreign-funded petrochemical and fine chemical enterprises in Shanghai during the Tenth Five-Year Plan period

60

Table 2.9

Main economic indicators of six provinces/ municipalities in 2005 for their petrochemical and fine chemical manufacturing industry

62

Table 3.1

Logistics centers planned or under construction in Shanghai

98

Table 5.1

Proportion of the Yangtze Delta region in China’s GDP (1978–June 2004)

131

Table 5.2

Distance-based circular structure of the Yangtze Delta Megalopolis

135

Foreword

Shanghai is China’s largest industrial and commercial city and also one of its economic centers. Its industrial development, urban expansion, and functional improvement are mutually promoting. The opening-up of Shanghai in 1843 as a commercial port marked the birth of its modern industry and commerce. In the 1860s, with the establishment of Jiang’nan Manufacturing Bureau, the scale of industries in Shanghai was continuously expanded, paving the way for the rise of its heavy industry. In the 1930s, quite a number of overseas Chinese students returned to China after completing their studies, and devoted themselves to the development of China’s national industry. They brought Western management concepts and technologies to China, fused Chinese and Western cultures, and built up a number of name brands. The highly developed commerce and trade in Shanghai at that time turned the city into the economic and trade center of the Far East. After the founding of the People’s Republic of China in 1949, Shanghai established a fairly complete industrial system and energetically boosted its heavy industry through self-reliance, making itself into China’s largest industrial city. After China initiated opening-up and reform in the late 1970s, Shanghai’s industries underwent drastic market-oriented adjustments in the 1980s. The commerce and trade sectors experienced rapid growth in this period. In the 1990s, the reform, opening-up, and development of Pudong ushered Shanghai’s industries into a new stage of strategic adjustment. Shanghai has since enjoyed a two-digit rate of economic growth for 16 straight years and its urban functions have been continuously improved. The city has provided support, in technology, human resources, and capital, to facilitate the shift of international industries to Shanghai. Undoubtedly, Shanghai’s rapid development will create tremendous opportunities of cooperation and development for investors from all over the world. This book or rather Shanghai Industries reviews the evolution of Shanghai’s industries since 1840, and elaborates systematically

xii

Foreword

on the status quo of industrial development in Shanghai. It aims to present a general picture of the major industries in Shanghai, covering their spatial distribution as well as their relationship with the Yangtze Delta Megalopolis. It also analyzes the crucial role of Shanghai’s industry policies in enhancing the competitiveness of its industries and propelling the city’s fast economic growth, as well as envisions the prospects of industrial development in Shanghai. Substantiated by a huge amount of detailed and accurate data, the book might be a useful reference to all who are interested in the development of Shanghai’s industries. This book is an embodiment of the work of many people. Thanks must go to Shen Guilong, Yu Lei, Zhang Laichun, Li Shuangjin, and Wang Guo from the Shanghai Academy of Social Sciences as well as Mr. Xia Yu and Dr. Li Qingjuan from the Shanghai Municipal Economic Commission for their considerable help. Last but not least, I would like to thank Ms. Xin Yanxiang of Shanghai Century Publishing Co., Ltd. and Mr. Yang Liping of Thomson Learning Asia for their editorial support, without which this book would not have been possible. All errors are mine. Xu Jianguo 2007

CHAPTER

1


O

n a map of China, trace your finger along the country’s great coastline until you reach its centre. There you will find the city of Shanghai. With its strategic position, at the estuary of the Yangtze River, known as China’s “Golden Watercourse,” and on the banks of the Huangpu River, which connects the interior and the coastal area, it is easy to see how this city is enjoying rapid development. As early as the reign of Emperors Qianlong (1736–1795) and Jiaqing (1795–1820) of the Qing dynasty, it was changing from a sleepy little fishing town into one of southeast China’s most renowned cities. It was even given the titles of “Gateway between the Yangtze River and the sea,” and the “Metropolis of Southeast China.” By the late 1940s, Shanghai had grown into China’s largest industrial, commercial, and economic center. Its position was significant not only in terms of industry and transportation, but also in terms of domestic and international trade, and finance. When the People’s Republic of China was founded in 1949, Shanghai changed its focus of economic development to domestic markets. After recovering from World War II, and entering a stage of planned development, Shanghai evolved into a large-scale comprehensive industrial base. This change was brought about by efforts to improve industry, continuous adjustments to industrial structure, a highly centralized planned economic system, and a selfreliance development strategy.

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After China had adopted its reform and opening-up policy, Shanghai’s economy was reborn and its industrial structure was continuously optimized. Primary and tertiary industries have been Shanghai’s mainstay, taking its economy from one level to the next. In the 21st century, giant leaps in industrial optimization have thrust the city into a new stage of strategic growth.

1. Overview of Industrial Development After the Opium War in 1840, Shanghai became one of the five open ports specified in the Nanjing Treaty. The city officially opened to international trade when George Balfour, the first British consul in Shanghai, issued the No. One Circular of the British Consulate on November 17, 1843. Shanghai rapidly adopted modern production technology and management systems from the West, and began to operate with an essentially capitalist mode of production. In the late 1930s, its foreign trade amounted to half of China’s total; Shanghai also contributed to more than half of China’s modern industry. Before 1949, Shanghai was not only China’s industrial center, but also the biggest trade and financial center in the Far East. In 1949, the ratio in terms of total output between Shanghai’s light and heavy industries was 86.4% versus 13.6%. Textiles and food were the main players for light industry, accounting for 68.8% and 17.5% respectively in total output.

1.1 First Stage (1949–1978) Shanghai was liberated on May 27, 1949. After the founding of the People’s Republic of China, Shanghai began to streamline its market economy, and quickly restored normal financial circulation and the supply of daily necessities. In 1952, Shanghai’s total industrial and agricultural output increased to RMB 6.357 billion from RMB 3.336 billion in 1949, and the ratios of primary, secondary and tertiary industries in its GNP were adjusted to 3.8%, 53.9%, and 42.3%. Subsequently, the First Five-Year Plan provided the foundation for Shanghai’s industry and had an influence on its economic development for some time to come.


3

At that time, China faced a complex international situation and such political issues as Taiwan’s liberation. An analysis of the internal and external situation indicates that there were three main factors affecting Shanghai’s economic development during this period. The first factor was China’s strategy to leave its coastal region undeveloped, affecting Shanghai and the coastal cities of Guangdong, Fujian, and Jiangsu. For instance, none of the 156 prioritized projects in the First Five-Year Plan was put in Shanghai. This strategy was a substantial restriction on investment needed for economic development. The second factor was the guiding ideology, which aimed to convert Shanghai from a consumer city into a producer city. In the immediate post-1949 period, Shanghai’s tertiary industry was fairly developed; light and textile industries formed a large proportion in secondary industry, and the city was regarded as a typical consumer center. At that time, the conversion from a consumer city to a producer city implied the sacrifice of tertiary industry in support of the development of secondary industry. The third factor was Shanghai’s internal development strategy. Shanghai’s industrialization during this period was characterized by the internal development strategy of “self-reliance.” This strategy followed the experience of socialist industrialization in the Soviet Union, where priority was given to the development of heavy industry. That is why this period saw an economic priority shift from a backward industrial structure with light industry as the mainstay, to heavy industry. Therefore, the ratio of light to heavy industries, in terms of fixed asset investment, remained at 1:8 for some time. Massive investment in heavy industry pushed forward its development in terms of both supply and demand. Another indirect effect of the internal strategy was to establish a mature industrial system. Hence, in the process, an improved and integrated industrial system was set up to provide a wide variety of industrial sectors. As a result, Shanghai’s industry covered almost every industrial sector, except for a limited number of energy sources, and industrial raw materials. These were the three factors that helped Shanghai grow gradually into China’s largest industrial base. The specific measure taken at that time to speed up heavy industry was to invest in key areas, bringing rapid development to the steel,

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SHANGHAI INDUSTRIES

machinery and electricity industries. A dramatic transformation took place in 1960, when the percentage of heavy industry surpassed that of light industry for the first time. During the 1960s, the priority of development was given to 18 significant technologies, in order to set up six new industries. Such an adjustment played a decisive role in molding Shanghai’s basic industrial structure. This momentum continued into the 1970s, leading to the formation of a comprehensive, integrated, industrial system, with metallurgy, chemicals, machinery and textiles as the four main industries. Despite the strategy of leaving the coastal regions undeveloped in the first stage, Shanghai still enjoyed a high position in the domestic economy, and received much attention from the central government. During 1949–1978, with 0.00067% of the land and 1% of the population in China, Shanghai contributed 16.7% of the national fiscal income and 10% of industrial output. In terms of per capita labor productivity in fully state-owned enterprises, Shanghai was 1.3 times the national average in 1952, and this figure rose to 2.4 times in 1978. In the same year, Shanghai accounted for 7.5% of the national GDP, 19.6% of national fiscal income, 29.6% of the total exports and 4.2% of investment. In other words, Shanghai, with just 4.2% of investment, contributed 7.5% to the country’s GDP, 29.6% to exports, and 16.9% to fiscal income. At that time, a very important external factor for Shanghai’s development was the access to the cheapest raw materials from across the country, which guaranteed economic efficiency. Shanghai lacked mineral resources, and its industrial development depended mainly on a consistent supply of raw materials and energy from the interior. Shanghai was known nationwide for its leading technology; thus, it was more efficient to provide Shanghai with a secured resource supply. Admittedly, low feedstock prices and the relatively high prices of finished products put Shanghai at an advantageous position in the division of labor in the country, and played a pivotal role in its development. A lack of resources resulted in an inherent requirement for more sophisticated processing, which in turn brought about an increasing number of new industrial sectors, and continuously improved the city’s industrial system. Shanghai’s strategic position in the domestic division of labor assured this change. In summary, leading technologies and the favorable position


5

in terms of resource allocation were the driving forces for its industrial development. Moreover, the rapid growth in Shanghai’s industry had also benefited from the secondary multiplier effect in the 1930s. The boom in the 1930s provided the city with the best infrastructure in China, and in the 1950s and 1960s, brought about relatively high investment returns in Shanghai’s industrial development. This was also the main internal factor for Shanghai’s rapid industrial growth in this period. However, Shanghai’s sudden industrial expansion was not accompanied by large investments in urban construction, resulting in a serious lag in infrastructure. For 30 years, prior to China’s reform and opening-up, Shanghai only accounted for 3.6% of the country’s total infrastructure expenditure. Its total spending on urban infrastructure from 1950–1978 was a mere RMB 6.008 billion. Apart from a few industrial satellite towns, the main approach was to develop almost 200 factories in the downtown area, with very little spending on infrastructure facilities. The resulting high returns from investment were almost impossible for other countries in the same period. But this also created environmental and transportation pressure on Shanghai’s future city development, and these factories were relocated during the structural adjustment carried out in the 1990s. During the 1970s, technical equipment in many enterprises became increasingly outdated as a result of a lack of continued investment. At the beginning of the period of reform and opening-up, the authorities conducted an extensive survey of Shanghai’s industry, and the findings were shocking. According to a survey of 88,000 items of equipment in light industry, 40% of the equipment remained at the technical level of the 1930s/1940s, 50% was at the technical level of the 1950s, and only 10% was at the level of the 1960s/1970s. 43% of dyeing and finishing equipment for wool in the textile industry was installed before 1949. Most machining tools were still of the primary processing type, such as planes and lathes. In addition, Shanghai’s factory buildings were badly congested. For example, the passages, corridors, and workshops at the Shanghai Watch Factory were packed with cocklofts. With outdated and inefficient technical equipment, it was very difficult to fabricate high quality products.

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SHANGHAI INDUSTRIES

In this period, the development of Shanghai’s three industrial sectors was unbalanced. From 1952–1978, Shanghai’s average annual GDP growth was 8.76%, with 2.71% for primary industry, 10.7% for secondary industry, and 4.57% for tertiary industry. The proportion of primary industry in GDP dropped from 5.9% to 4%; secondary industry rose from 52.4% to 77.4%, and tertiary industry dropped from 41.7% to 18.6%. In other words, tertiary industry shrank while secondary industry grew rapidly, and this imbalance seriously hindered Shanghai from functioning as a comprehensive city. Shanghai’s transformation from a comprehensive to a producer city came about at the loss of some key urban economic functions, such as finance and trade. Moreover, industries of high energy and material consumption as well as high capacity, such as chemicals and metallurgy, took the lion’s share. This imbalance had negative consequences for a city which was seriously short of materials. Yet from 1940–1979, its GDP grew 9.5 times, with energy consumption rising 24 times, and steel consumption jumping 75 times. Secondly, the city suffered from acute traffic congestion due to its industrial growth. Every year, huge consignments of materials from different places were transported to Shanghai for industrial production and processing, while large quantities of finished industrial products were shipped out, to all parts of the country.

1.2 Second Stage (1978–1991) The second developmental stage was a period of slower growth for Shanghai’s economy, with an average annual GDP growth of 7.4%, 1.6 percentage points lower than the national average. For 30 years after the founding of the People’s Republic of China (PRC), it was the unusually high returns from industry that underlay an exceptional turnover rate of Shanghai’s fiscal revenue to the central government. It is estimated that the average annual turnover rate was as high as 87%. Since the 1980s, a fiscal revenue responsibility system had been implemented in other regions of China, but for Shanghai, the central government still followed the old system, resulting in as high a fiscal turnover burden as ever. On the other hand, as the secondary multiplier effect had diminished, Shanghai’s industry experienced a reduced economic influence on outlying regions. With


7

fundamental changes in the planned economic system, Shanghai’s high industrial returns began a reverse trend. Firstly, the lag in infrastructure resulted in a sharp decline in investment returns. The historical advantage gained in infrastructure had been used up within the 30 years of industrial expansion. Moreover, for 35 years, during which a uniform collection and spending system was adopted for fiscal revenue, the central government funneled only 1% of the city’s fiscal turnover as investment in municipal facilities. Secondly, the price transfer effect experienced a reverse trend. After 1978, China reformed its planned material supply system, and gradually established a “double-track” price system for means of production. “Double-track” refers to two economic systems: one was the planned economy controlled by the central government; the other was the market economy. Mandatory national planning had been decreasing for some time, leading to fewer materials being allocated to Shanghai both in quality and variety. More specifically, the proportion of planned supply of energy resources and materials to Shanghai dropped sharply from 80% in 1978, to about 25% in 1988. A rapid drop in the supply of raw materials and resources at par caused a continuously increasing cost to Shanghai’s industry and a gradual decrease in economic efficiency. While the prices of energy and raw materials went up sharply, it was hard to get a corresponding price raise for Shanghai’s industrial products, because of price controls and intervention from the main places of origin and sale. This price difference resulted in accumulated tax and profit of over RMB 5 billion flowing from Shanghai to other places in China. Thirdly, the economy of scale dwindled in most areas. Overall, the reputation of Shanghai’s products as the country’s finest was challenged, and the share of Shanghai products at home and abroad decreased dramatically. As Shanghai’s conventional market scope was gradually shrinking, products from other places were flooding the Shanghai market. The 1980s was a painful decade when Shanghai’s long-term dominant industries gave way to others, and little by little, the city lost its prominence in the domestic market. Moreover, the early-starter advantage gained by sister provinces and municipalities during the gradual nationwide reform put severe pressure on Shanghai, accelerating the decrease in the share of Shanghai’s products in the domestic market.

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SHANGHAI INDUSTRIES

In the 1980s, Shanghai played the role of “backfielder” in reform and opening-up to the outside world, slowing down its pace of development. When Shenzhen, together with Hainan and other cities, was first opened up in a pilot project, Shanghai was brushed aside in the early stages of the opening-up and reform in view of its special position in China’s economic structure. Therefore, the policy barrier restricted Shanghai’s economic development. With regard to the development of the three industries, Shanghai’s GDP grew at an average annual rate of 9.9%, from 1979–1991, with 9.4% in primary industry, 7.9% in secondary industry, and 15.7% in tertiary industry. Rapid growth in tertiary industry led to its increasing proportion in the national economy. During the initial stage of opening-up and reform in 1979, tertiary industry contributed to 18.8% of the GDP, which jumped to 34.6% in 1991 after experiencing a rapid growth in the 1980s. The proportion of secondary industry decreased from 77.2% in 1979 to 61.7% in 1991 and that of primary industry dropped from 4.0% to 3.7%. Shanghai is China’s largest economic center, but its primary industry, agriculture, has always made up a small share of the national economy. For example, in 1978, its gross agricultural output only accounted for 3% of the city’s GDP. However, the city’s reforms in industry and the economic system began with agriculture. At that time, the suburbs accounted for more than 95% of the city’s total land area and 49% of the total population. These suburbs were mainly responsible for supplying nonstaple food to the entire Shanghai municipality. That is why structural adjustments in agriculture were of special significance to Shanghai. When the household contract responsibility system was implemented in some provinces and municipalities, Shanghai was unsure how to reform its rural economic system. In Shanghai’s countryside, production was arranged in three administrative tiers: the lowest level was the production team, the next was the production brigade, and the third was the people’s commune. These levels had already developed into economic units, which possessed a fair amount of fixed assets, such as agricultural machinery and facilities. For example, in 1979, fields ploughed by tractors, and those mechanically drained and irrigated in Shanghai accounted for 86.9% and 98.2%, respectively, of Shanghai’s farming area. Additionally, industrial


9

enterprises set up by production teams in the countryside contributed to 35% of the gross agricultural output, which was far higher than the national average. That was why the household contract responsibility system was not implemented in Shanghai’s rural areas until 1983. Two key factors for Shanghai’s countryside were the implementation of the household contract responsibility system and the reorganization of the people’s commune system. These changes motivated a vast number of farmers to improve productivity, raise production levels, and improve the marketability of agricultural products. For instance, labor productivity improved 1.57 times in 1985 over 1982, and the marketability of cotton, oil seeds, vegetables, and other nonstaple food products stayed above 95%. In 1988, Shanghai promulgated “Decision to Construct Nonstaple Food Production Bases in Shanghai and Reform Production and Sales Systems” in order to ensure a stable supply of agricultural products to the city. This reform was designed to adjust the agricultural structure in light of the new trends of suburban agriculture. In 1992, animal husbandry output reached RMB 3.72 billion, exceeding crop production for the first time by six percentage points. Animal husbandry contributed to 47% of the total agricultural output. Shanghai’s industry went through two development periods within 13 years. The first period (1978–1984) was mainly characterized by economic rehabilitation and adaptation, with an emphasis on developing products with short investment cycles in order to increase production supply capacity, upgrade product quality, and fill the market gap. Through two years of rectification (1977–1978), Shanghai’s industry recuperated somewhat, but overall improvement in industrial structure only began in 1979. In accordance with the policy of “adjustment, reform, rectification, and improvement” made by the central government in April 1979, Shanghai formulated a three-year economic adjustment plan. Adjustment measures adopted included speeding up consumer goods production, reorienting the service of heavy industry, and conducting industrial restructuring. Thus, the gross industrial output value of the city increased to RMB 72.812 billion in 1984, representing a growth of 47.7%, in terms of the gross industrial output value index, over the previous seven years. The proportion of light industry in Shanghai’s industrial system continuously increased, from 51.8% in 1978 to the highest

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point of 58.1% in 1981. During this period, there was a reasonable increase in the output of such main industrial products as bicycles, sewing machines, watches, and music recorders. From 1978–1988, seven industries grew rapidly at a rate of over 10%. These were fodder, electronics and communication equipment manufacturing, garments, arts and crafts, beverages, plastic products, and chemical fibers. All of these were in light and electronics industries, which conformed to the country’s policy of giving priority to the development of light industry. The second period (1985–1991) focused on fostering the pillar industries. In order to achieve a transformation from extensive to intensive industry, Shanghai embraced the principle that its industry should aim to be energy- and material-efficient, and technology-intensive. From 1986, Shanghai restructured 19 sectors, including automobiles, power station equipment, iron and steel, petrochemicals, tires, and household appliances. At the end of 1990, it prioritized development in such sectors as sedan manufacturing, communication equipment, microelectronics and computer making, power station equipment, petrochemicals, electromechanical and chemicals, mechatronics, equipment, household appliances, and refined chemicals. This adjustment continued into the eighth FiveYear Plan period, when Shanghai was still focusing its efforts on fostering its six pillar industries. In addition, through several major adjustments in the 1980s, Shanghai set up eight industrial zones, such as Pengpu and Beixinjing, in its immediate outskirts. In the remote outskirts, priority was given to the construction of seven industrial satellite towns, such as Wusong and Jinshan. However, although the urban area continuously grew, there was no overall geographical redistribution of industries; most were still located in the vicinity of the city center. By the end of 1987, within a 261-kilometer downtown area of Shanghai (excluding Wusong and Minhang Districts) were stationed 5,603 industrial enterprises, employing 2,162,400 people and generating a gross industrial output value of RMB 61.028 billion. This accounted for 47%, 60%, and 66%, respectively, of the city’s gross output value. On average, there were 22 enterprises per square kilometer, with 8,285 employees, and a gross industrial output value of RMB 234 million. In the 149-kilometer old city area, which was composed of


11

ten districts, each square kilometer typically held 34 enterprises, with 13,965 employees, and a gross industrial output value of RMB 360 million. Various industries took up 53.5 kilometers of the inner city, which represented 20.5% of the total downtown area. This shows that the key problem was the industrial layout, with overcentralization in central Shanghai, particularly in the old city area. Large factory buildings located along the Huangpu River and in other downtown areas hindered tertiary industry from full development.

1.3 Third Stage (1992–Present) After Deng Xiaoping made his inspection tour of southern China in 1992, Shanghai made a decision to conduct strategic adjustments to its industrial structure. This was in accordance with the strategies formulated at the CPC Fourteenth National Congress to build Shanghai into “One Leader and Three Centers.” A clear-cut industrial development principle was put forward, giving priority to tertiary industry, adjusting secondary industry, and steadily improving primary industry. In the Eighth Five-Year Plan period (1991–1995), Shanghai persistently followed this principle in stepping up its efforts to promote industrial upgrading through restructuring. An idea was put forward that industrial structure should be adjusted in light of the city’s function and social environment. Shanghai explored new approaches to achieve harmony between economic development, social progress, and the city’s prosperity, making Shanghai’s industrial structure increasingly efficient. The proportions between primary, secondary, and tertiary industries were adjusted from 4.3:64.9:30.8 in 1990 to 2.3:57.6:40.1 in 1995. Tertiary industry, the new growth points were high-tech industry, and the six-pillar manufacturing industries (automobiles, communication equipment,1 power station equipment,2 petrochemicals and refined chemicals, iron and steel, and household electronic and electrical appliances). Tertiary industry continued to grow fast, as its portion of GDP

Changed to information and communication equipment in 1996. Changed to power station equipment and large electromechanical equipment in 1996. 1 2

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SHANGHAI INDUSTRIES

increased from 34.5% in 1990 to 45.1% in 1995. The high-tech industry also experienced fast development, accounting for about 10% of the city’s gross industrial output value in 1995. A golden opportunity appeared for the construction industry with the astonishing advances in city construction centered on urban road networks and the development of the district of Pudong. In 1995, the city’s construction industry achieved a gross output value of RMB 39.1 billion, with areas under construction amounting to 35,130,000 square meters, and completed areas reaching 11,810,000 square meters. Suburban agriculture developed rapidly, with a secured supply of staple food to the suburbs and nonstaple food to the city. Meanwhile, the city speeded up the pilot project of building large-scale and intensive installation agriculture bases. In the Ninth Five-Year Plan period (1996–2000), Shanghai continued to implement its industry development policy for tertiary, secondary and primary industries. In accordance with the principle of “informed decisions and calculated choices,” it made further efforts to adjust its industrial structure and the internal structure of different sectors. According to the government requirement to integrate the city and the countryside, the productivity configuration and the city’s functional layout were continually optimized to drive industries to become more efficient, advanced, and modern, to add more stamina to Shanghai’s economic development, and to improve its service standards in connection with the city’s position as a dynamic economic center. The industrial growth rate continued to slow down, but remarkable results were obtained for some pivotal industries by aiming for higher targets. The six pillar industries (namely, automobiles, information and communication equipment, packaged power station and large electromechanical equipment, petrochemicals and refined chemicals, iron and steel, and household appliances) contributed more than 50% of gross industrial output value. The hightech industry developed rapidly, accounting for approximately 20% of gross industrial output value. It is worth mentioning that tertiary industry contributed to 49.59% of the GDP in 1999, exceeding secondary industry for the first time in history. And in 2000, the last year in the ninth Five-Year Plan period, the proportion of tertiary industry reached as high as 50.63%. This indicates that the driving force for Shanghai’s economic growth had changed from secondary


13

industry to a combination of secondary and tertiary industries. In the meantime, agriculture began a new path, changing from suburban agriculture to modern metropolitan agriculture. In the Tenth Five-Year Plan period (2001–2005), Shanghai’s top task was to improve its international competitiveness, to stress the development of primary and tertiary industries, and to encourage the growth of secondary industry. The city also continued its policy of developing industry in the sequence of tertiary, secondary, and primary. A great deal of effort went into the development of industries promising high value added and more job opportunities. Furthermore, the role played by scientific and technological progress and informatization in pushing forward industrial progress and the transformation of traditional industries, the role played by pillar industries in driving economic growth and structural upgrades, and the role played by the integration of different industries to promote industrial innovation, were strengthened to promote structural and industrial optimization. The six pillar industries established in this period were information, finance, business and trade, automobiles, packaged equipment, and real estate. In addition, the city made concerted efforts to develop four emerging industries as new areas of economic growth; the four were biomedicine, new materials, environmental protection, and modern logistics. Shanghai adopted a policy of highlighting key areas in traditional industries, and kept the policy flexible according to the actual status of a particular industry. For example, Shanghai encouraged the use of information technology to improve the process control level for large-scale and continuous processing industries, and continually optimized and developed petrochemicals and steel as the two basic industries. This method further compelled enterprises to adopt advanced, applicable technologies to transform traditional industries. An outstanding feature of this period was that a great deal of emphasis was placed on the development of metropolitan industries. Firstly, these industries included metropolitan agriculture, such as export-oriented agriculture, tourism agriculture, installation agriculture, and ecological agriculture. Secondly, to stay market-oriented, Shanghai also encouraged entrepreneurship in such metropolitan industrial sectors as clothing, food processing, interior decoration, packaging and printing,

14

SHANGHAI INDUSTRIES

cosmetics and detergents, diamond processing, arts and crafts, and cultural and sports products. Thirdly, metropolitan tourism was developed as a complement to business, culture, sports, and exhibitions. The Suggestions by CPC Shanghai Municipal Committee for Formulating the Eleventh Five-Year Plan for Shanghai’s Economic and Social Development was adopted in December 2005. This document outlined the importance of establishing a top-notch service industry and an advanced manufacturing industry in Shanghai and enhancing the city’s reputation as an international financial and shipping center. The document also placed particular emphasis on improving overall industrial standards through innovation.

2. Industrial Restructuring 2.1 Overall Analysis of the Structural Evolution in Shanghai’s Primary, Secondary, and Tertiary Industries To define and improve a city’s industrial structure, the first step is to analyze its current orientation and function. In stepping up its industrial restructuring, Shanghai acted in accordance with the policy of “One Leader, Three Centers” put forward by the central government. The city’s objectives for industrial restructuring were as follows: vigorously developing tertiary industry to expand its scale and improve its structure, actively adjusting secondary industry to upgrade its economic strength, and steadily improving primary industry. When China first established its industrial and national economic systems in the initial period after 1949, there was no competition at all, as the entire economy came under the planned system. Efficiency in the economic system was maintained largely by means of propaganda, motivation, and administrative directives from upper to lower levels. These factors, together with the disruptive effects of various shifts in government policies, resulted in volatile fluctuations followed by major restructuring; all these made it hard to break through regional barriers. Shanghai enjoys considerable geographical and historical advantages: it is located on the banks


15

of the Yangtze River, at the mouth of the Huangpu River, affording it access to both river and marine transportation; it is also rich in human and information resources. Its disadvantages lie in its limited land and natural resources. These characteristics determined Shanghai’s pattern of economic development in the years of the planned economy. Shanghai was once the jewel of China and the Far East, and a renowned financial, trade, and economic center. In 1952, shortly after the founding of the People’s Republic of China, the proportions of Shanghai’s primary, secondary and tertiary industries in GDP were 5.9:52.4:41.7, a figure similar to other internationally advanced cities. Due to a difficult international political climate, particularly economic sanctions imposed by the United States, China lost most of overseas markets, and was forced to foster relationships solely with socialist countries, such as the Soviet Union. Together with these vanished markets was also diminished the possibility of obtaining global financing and conducting international trade. As a result, Shanghai’s economy was largely focused on industrial development in order to adapt to socialist industrialization and implement a planned economy. As Shanghai’s function in the economy changed, the city gradually evolved from a multifunctional cosmopolis into a single-functional city, and from a comprehensive city into a producer city. From 1952–1978, Shanghai’s average annual GDP growth was 8.78%, with 2.71% for primary, 10.7% for secondary, and 4.57% for tertiary industries. In this period, the proportion of secondary industry in GDP increased from 52.4% to 77.4%, while the figure for tertiary industry dropped from 41.7% to 18.6%. A shrinking tertiary industry and a rapidly expanding secondary industry resulted in competition between these two industries. In 1949, the number of financial institutions shrank from 648 to four, and the financial market disappeared. Shanghai not only lost its strength in finance and trade, but also its advantage in secondary industry, in which industries with high energy and material consumption and high transport volume, such as chemicals and metallurgy, had had a substantial share. The real estate industry collapsed, after public ownership of land was adopted, and housing was incorporated into the welfare system in the 1950s. The service industry, including

16

SHANGHAI INDUSTRIES

such sectors as transport, post and telecommunications, and tourism, dragged its foot. In 1978, the city’s GDP split into primary, secondary, and tertiary industries was 4.0:77.4:18.6. In 1985, the State Council approved the Outline of the Report on Shanghai’s Economic Development Strategies. Subsequently, Shanghai treated industrial restructuring as a significant measure in its economic development. Finance, tourism, real estate, and consulting grew rapidly, helping the city rebuild its reputation as an economic hub. In the 1990s, a major turning-point opportunity appeared for Shanghai to boost its economic take-off. In view of the upbeat situation both at home and abroad at the turn of the millennium, Shanghai kicked off the development of Pudong. This was in part inspired by Deng Xiaoping’s initiatives, and later obtained considerable support from the central government. In June 1990, the central government announced a series of policies to support Pudong’s rapid infrastructure development and attract more foreign investment. Guided by the concept of relying on Puxi (the old city area), and seeking interactive development between Pudong and Puxi, Pudong could upgrade its industry by relying on Puxi’s industrial base. It could also tap idle assets, especially existing land assets, for the rebuilding of Shanghai into a modern financial and trade center, and for the optimization and adjustment of the city’s industrial structure. All these factors would attract large development investments and promote structural optimization. In December 1992, in light of the goal to build an international metropolis, the Shanghai Municipal Government decided to make strategic adjustments in the city’s industrial structure. The previous development sequence of “secondary, tertiary, and primary” was adjusted to “tertiary, secondary, and primary.” In other words, the order of priority was to prioritize tertiary industry, actively adjust secondary industry, and steadily upgrade primary industry. Through adjustment and relocation, land use for secondary industry was reduced while that for tertiary industry increased. Shanghai’s strategic objective was to reinvent itself as an international economic center with five basic functions: distribution, production, management, service, and innovation. Shanghai had to


17

make sure that its industrial structure was compatible with these core functions. Thus, Shanghai has persistently pursued the principle of “high added value, high technological content, increased integration between industries, low labor cost, and less pollution.” Industrial structure was adjusted on three levels: prioritizing tertiary industrial development, retaining part of the light and textile industry in the inner city, centralizing the development of some industries in the immediate suburbs (including machinery, electronics, automobiles, textile, heavy chemicals, and urban supporting industries), and developing basic and raw material industries in the outlying suburbs. In December 1995, Shanghai Municipal Government further specified the key areas for industrial development. For tertiary industry, focus was placed on six sectors: finance and insurance, commodity circulation, real estate, tourism, and consulting. For secondary industry, automobiles, information equipment for communication, packaged power station equipment and large electromechanical equipment, household appliances, petrochemicals and refined chemicals, and steel were treated as the six pillar sectors. Priority was also given to three high-tech industries: modern biology and new medicine, computer and large-scale integrated circuits, and new materials. The development of these 15 industries was designed to drive primary industry toward metropolitan agriculture, and bring substantial changes to the indices of Shanghai’s aggregate economic strength. Accordingly, tertiary industry, the six pillar industries and high-tech industries in secondary industry soon became the new growth areas in Shanghai’s economy. The Outline of the Eleventh Five-Year Plan for Shanghai’s National Economic and Social Development, passed in January 2006, further stressed the importance of forming an industrial structure with a service-based economy as its mainstay. Continuous efforts will also be made to transform the city’s development mode and improve its competitive strength. Priority was given to the development of a modern service industry and advanced manufacturing industries. The outline also highlighted a shift toward innovation-driven development, which would play an important role in promoting structural optimization and upgrading.

18

SHANGHAI INDUSTRIES

2.2 Analysis of Internal Changes in Shanghai’s Primary, Secondary, and Tertiary Industries Before the reform and opening-up of China, Shanghai’s industrial structure had three defining features: first, the production units were the main vehicle for economic activity; second, industrial output came last in the city’s GDP; and third, tertiary industry contributed little to the national economy. After 1978, a marketoriented economic reform started in China, which helped straighten out Shanghai’s irrational industrial structure. 2.2.1 Development of secondary industry According to “Industrial Categories in the National Economy” (GB/ T4754—2002), secondary industry refers to mining, manufacturing, production and supply of electricity, gas and water, and building industries. We will examine the development of Shanghai’s secondary industry by taking a look at the evolution of the city’s industrial structure. The stage of shifting emphasis from heavy industry to light industry (1949–1957) On the one hand, this was a recovery period for China’s national economy; on the other, it marked the implementation of China’s First Five-Year Plan (1952–1957). The identifying feature of this stage was that Shanghai’s industrial structure prioritized development in heavy industry, but light industry continued to develop. The production index for Shanghai’s heavy industry grew at an annual rate of 24%, far exceeding 11.3% for light industry. Heavy industry’s share increased from 11.8% to 29.1%. An important characteristic of a heavy industry-centered industrial structure is its dependence on the raw material industry. The proportion of raw materials within heavy industry rose from 28.1% to 41.4%, up 13.3 percentage points over 1949. Shanghai’s previous industrial structure was shaped by the order of light, textile, and heavy industries; after 1949, the order changed to heavy, light, and textile industries.


19

Table 1.1 Gross output values and proportions of Shanghai’s light and heavy industries (1957–1965)

1957 1958 1959 1960 1961 1962 1963 1964 1965

Light industry

Heavy industry

Gross industrial output value (RMB 100 mil.)

Gross Output value (RMB 100 mil.)

Proportion (%)

Gross Output value (RMB 100 mil.)

Proportion (%)

118.82 176.44 254.68 298.97 187.43 151.98 168.91 196.95 230.77

84.36 110.34 141.70 134.49 96.97 90.68 96.95 112.86 129.56

71.00 62.54 55.64 44.98 51.74 59.67 57.40 57.30 56.14

34.46 66.10 112.98 164.48 90.46 61.30 71.96 84.09 101.21

29.00 37.46 44.36 55.02 48.26 40.33 42.60 42.70 43.86

Source: Yearbooks of Shanghai Industrial Statistics for the years cited.

The stage of structural fluctuations (1958–1965) During this period, Shanghai’s industrial structure, impacted by two major industrial reorganizations and the “Great Leap Forward,” experienced extreme fluctuations, which were mainly reflected in the major ups and downs in light and heavy industries (Table 1.1). With regard to industrial layout, from 1959 to 1966, Shanghai established and expanded ten suburban industrial zones (Wusong, Yunzaobang, Pengpu, Taopu, Beixinjing, Caohejing, Changqiao, Gaoqiao, Qingningsi, and Zhoujiadu). These zones, along with the five satellite towns established in the 1950s (Minhang, Wujing, Anting, Jiading, and Songjiang), formed a circle around the city area of Shanghai. The stage of arduous development caused by severe industrial fluctuations (1966–1976) During the ten-year Cultural Revolution (1966–1976), political instability seriously disrupted Shanghai’s industry, causing enormous losses. However, there was still some progress in Shanghai’s industry

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21

the planned output values and volumes for steel, electricity, and other industries were still fulfilled or even overfulfilled. During the Fourth Five-Year Plan period, Shanghai’s industries registered an annual average growth of 7.48% despite economic fluctuations and political upheavals. The stage of industrial adjustment and recovery (1977–1983) The ten years of the Cultural Revolution brought enormous losses to Shanghai’s industry. In order to recover from the unrest and restore a normal order to production, China took remedial measures at the end of 1976 to get its industrial enterprises back on track. At that time, emphasis was placed on industries of all types in Shanghai. From October 1976 to the end of 1978, Shanghai adopted the following six measures to recover its industrial prowess: (1) Streamline leadership at various levels, and restore the director responsibility system under the leadership of the Party Committee; (2) Conduct an educational campaign to learn from Daqing; (3) Improve and enhance management in industrial enterprises; (4) Conduct a “Quality Month” campaign to improve product quality; (5) Promote a socialist labor excellence drive with a focus on economizing and increasing production; (6) Restore the bonus system to increase employees’ incomes. The implementation of these policies successfully restored Shanghai’s industry, yet problems remained with the industrial structure under the combined effect of the planned economy and the Cultural Revolution. In 1979, in order to carry out the central government’s policy of “adjusting, reforming, streamlining, and improving,” Shanghai formulated a Three-Year Economic Adjustment Plan to solve the conflict between industrial development and the people’s standard of living. It also emphasized the development of light and textile industrial products and encouraged more exports. The plan also called for a concerted effort to develop science and technology and propel the national economy with modern advanced technology. Through years of adjustment, Shanghai’s industry made some headway (Figure 1.1), and the ratio of light to heavy industries changed from 49.3:50.7 in 1978, to 55.1:44.9 in 1983.

22

SHANGHAI INDUSTRIES Figure 1.1


RMB 100 mil. 800

% 14

700

12

600

10

500

8

400 6

300

4

200

2

100 0

1978

1979

1980

1981

Gross industrial output value

1982

1983

1984

0

Growth rate

Source: Yearbooks of Shanghai Industrial Statistics for the years cited.

The stage of a market–oriented industrial economy (1984–1991) This was the stage when China developed toward a market economy in all aspects. In December 1984, the State Council approved the Outline of the Report on Shanghai’s Economic Development Strategies, which underlay Shanghai’s industrial policies in the mid- and late 1980s. In terms of structural adjustment, the outline favored a nonequilibrium industrial development strategy, which relied on leading industries to fuel the take-off of industry as a whole. It also proposed to shift Shanghai’s industrial growth pattern from extensive to intensive in light of the concept of “low energy and material consumption, low transport volume, low waste, high technological content, and high added value.” Shanghai entered a period of fostering its pillar industries and adjusting the mix of leading products. In 1988, there was an overheating in the national economy, leading to a fairly serious fluctuation in Shanghai’s industrial growth (Figure 1.2). On the whole, however, because of the industrial

History of Industries in Shanghai Figure 1.2

23


RMB 100 mil. 3,000

% 16 14

2,500

12 2,000

10

1,500

8 6

1,000

4 500 0

2 1985

1986

1987

1988

Gross industrial output value index

1989

1990

0

Growth rate

Source: Yang, Gongpu, and Xia, Dawei, A Report On Shanghai’s Industrial Development: A Course of Fifty Years, Shanghai: The Publishing House of Shanghai University of Finance and Economics, 2001.

restructuring in 1989 and 1990, the nationwide conflict between aggregate supply and demand was eased by 1991. The stage of strategic industrial adjustments (1992–1997) To build Shanghai into “One leader and Three Centers,” Shanghai Municipal Government decided to carry out strategic adjustments to the city’s industrial structure at the end of 1992. The development sequence of “secondary, tertiary, and primary” was adjusted to “tertiary, secondary, and primary,” which meant prioritizing the development of tertiary industry, actively adjusting secondary industry and steadily improving primary industry. Six pillar industries were also defined and established during this period from the end of 1993 to the beginning of 1994 (Table 1.4). The stage of continued optimization of industrial structure (1997–present) Despite the healthy growth pattern of the six pillar industries in the mid- and late 1990s (Figure 1.3), their head-start effect and stimulation of Shanghai’s economy began to wane by varying

24

SHANGHAI INDUSTRIES

Table 1.4

Summary of output values of Shanghai’s six pillar industries (Unit: RMB 100 mil.) 1994

1995

1996

1997

1998

1999

Iron and steel

584.01

625.73

526.72

542.40

501.58

520.32

Automobiles

258.10

376.23

412.65

476.33

494.81

593.15

Electronic communication equipment

96.47

134.40

133.06

195.60

287.82

309.75

Packaged power station equipment and large electromechanical equipment

94.27

204.93

286.78

249.66

223.50

243.45

Petrochemicals and refined chemicals

399.55

639.69

593.19

700.41

532.91

599.85

Household electric appliances

179.70

219.10

201.50

231.99

234.96

332.65

Source: Yearbooks of Shanghai Statistics for 1994–1999.

Figure 1.3 Positions of six pillar industries in Shanghai’s industry in 1999 Iron & steel 10.07%

Others 49.70%

Household appliances 6.44%

Automobiles 11.48% Electronic communication equipment 6%

Packaged power station and large electromechanical equipment 5% Petrochemicals & refined chemicals 11.61%

Source: Yearbook of Shanghai Statistics for 2000.

degrees. It was against this economic backdrop that Shanghai set the strategic target to “face the new century with optimism, attain new heights, and create new splendors” with a view to further optimizing industrial structure. In manufacturing, new leading industries slowly emerged, including information, modern biology


25

and new medicine, and new materials. Shanghai accelerated the industrialization of scientific research findings while at the same time adopting high technologies in industries. The city continued to nurture its six pillar industries and increase the value added of their products; high technologies were employed to improve the development of traditional industries, fostering new economic growth areas. A new industrial structure featuring high-tech and advanced processing gradually took shape. In 2000, Shanghai Municipal Government adjusted the pillar industries for the Tenth Five-Year Plan as follows: electronic information equipment, automobiles, petrochemicals and refined chemicals, fine steel, power station equipment and large packaged equipment, and modern biomedicine. It can be seen that this adjustment put even more emphasis on the role of new technologies for the pillar industries. This structural optimization was rewarded with remarkable results. In 2004, these pillar industries achieved a gross industrial output value of RMB 832.38 billion, up 23.9% over the previous year, accounting for 64.6% of the total output value of industrial enterprises above the designated scale in Shanghai, and pushing the city’s industry up by 14.8% (Figure 1.4). Figure 1.4

Indices for Shanghai’s six pillar industries in 2004

RMB 100 mil. 4,000 3,500 3,000 2,500 2,000 1,500 1,000

Total Profit

Sales income

e ed icin Bio m

Pa eq ckag uip ed me nt

l Fin es tee

Pe ref troch ine em d c ic he als mi ca & ls

tom Au

El inf ectro orm ni ati c on

0

ob iles

500


Source: Data from Shanghai Statistic Bureau.

26

SHANGHAI INDUSTRIES

The Outline of the Eleventh Five-Year Plan for Shanghai’s National Economic and Social Development approved in January 2006 required that the level, quality, and competitive edge of the manufacturing industry should be further improved so as to fully utilize Shanghai’s unique advantage as a strong manufacturing base. The future of Shanghai depended on large industries, projects, and bases. Therefore, efforts would be redoubled to implement the branding strategies and enhance the city’s innovation capability in order to establish, as soon as possible, a group of internationally competitive large enterprises and top brands supported by their own intellectual property rights (IPR). At the same time the manufacturing base would be relocated to the suburbs (Figure 1.5). Development of high-tech and metropolitan industries In March 1999, Shanghai’s municipal government pointed out in a report titled Building New Heights for Shanghai’s Industry that Shanghai should form an industrial system made up of high-tech industries, pillar industries, and a metropolitan industry. These industries have now become important drivers of Shanghai’s economic development. Shanghai’s high-tech industry is mainly composed of such fields as electronic information, biomedicine, photo-mechanic-electronic (PME) integration, environmental protection, aerospace, geospace, marine engineering, and nuclear technology application. In 1992, Shanghai’s high-tech industry only took up 4% of the gross industrial output value; in 2005, the high-tech industry achieved a gross output value of RMB 482.667 billion, up 22% over 2004, and accounting for 28.6% of the city’s gross industrial output value. By 2006, Shanghai had formed a cluster of high-tech industries, with a focus on electronic information, biomedicine, and new materials. Meanwhile, one zone and six parks were established, including Zhangjiang High-Tech Park, Caohejing New Technological Development Zone, Shanghai University Science and Technology Park, China International Textile Science and Technology Industrial City, Jinqiao Modern High-Tech Park, and Jiading Technology Intensive Zone for Non Government Companies. This has enabled the city’s industrial layout to gradually move from a scattered pattern to a clustered one (Table 1.5).


27

Layout of Shanghai’s industrial zones and high-tech parks

Chongming Industrial Park

Jiading Industrial Zone

Waigaoqiao Bonded Area

Baoshan Urban Industrial Zone

Qingpu Industrial Park

Caohejing New-Tech Development Zone

Jinqiao Export and Processing Zone Zhangjiang High-Tech Park Kangqiao Industrial Zone

Xinzhuang Industrial Zone

Zizhu Science Park Songjiang Industrial Zone

Minhang Economic and Technological Development Zone

Comprehensive Industrial Development Zone

Spark Development Zone

Jinshan Industrial Zone Source: from the official website of Shanghai Municipal Economic Commission (http//www.shec.ov.cn/shec/jsp/gssj/shxdgyyq.jsp).

Metropolitan industry refers to an industry that can comply with the requirement for the sustainable development of a metropolis, sufficiently utilize the metropolitan means of production, create employment opportunities, and satisfy such unique needs and requirements as residents’ needs for consumption upgrading and urban environmental protection. The evolution of metropolitan industry requires a city to gradually phase out its traditional manufacturing industries, and upgrade the technical levels of urban industries. The period of 1996–1997 saw much preparation

6.84

0.61

0.04

Geospace & marine engineering

Nuclear technology application

Source: Yearbooks of Shanghai Statistics for the years cited.

2.22

Aerospace

219.26

New materials

Environmental protection

137.09

0.12

2.55

9.02

7.88

306.62

194.15

152.96

Biomedicine

P-M-E integration

2003 1997.70

1999

575.02

Year


0.02

0.36

1.4

0.76

34.15

42.84

149.88

1999

0.06

1.09

2.65

2.51

92.60

59.22

401.54

2003

Industrial value added

0.04

0.62

6.73

2.32

134.91

148.08

554.2

1999

0.13

2.46

8.78

7.46

305.92

186.38

1970.82

2003

Industrial sales

—

0.03

0.08

0.24

7.94

11.57

59.78

1999

0.01

0.24

0.11

0.59

25.54

15.25

50.08

2003

Total profit

Comparison of Shanghai’s high-tech industries, 1999 vs. 2003 (Unit: RMB 100 mil.)

Electronic information

Table 1.5

—

0.05

0.07

0.13

5.58

11.35

36.82

1999

0.01

0.12

0.19

0.25

11.01

12.35

25.40

2003

Total tax

28 SHANGHAI INDUSTRIES


29

and planning; by 1998, Shanghai officially announced its plan to develop metropolitan industry, while still optimizing and upgrading its existing industries. The metropolitan industry did not see a substantial kickoff in Shanghai until 2000. The focus was placed on clothing and apparel, food processing, packaging and printing, interior decoration, cosmetics and detergents, arts and crafts, tourism products, and small electronic and information products. Shanghai’s metropolitan industry witnessed fast development in the next few years (Table 1.6). During the Tenth Five-Year Plan period, Shanghai focused on the building of metropolitan industrial parks in the city center. Development of the construction industry As a constituent part of secondary industry, the construction industry covers buildings, civil engineering construction, architectural installation and decoration, among other things. As one of the world’s major cities, Shanghai boasts a well-developed construction industry. As early as the Ming and Qing dynasties, Shanghai was known as the “Metropolis of Southeast China.” The period from the founding of the People’s Republic in 1949 through the initiation of opening-up and reform in the late 1970s saw the birth and growth of the construction industry in Shanghai, which played an important role in socialist construction. Huadong Construction Engineering Co., established in November 1949, was the first large state construction company in Shanghai. In the first eight years after 1949, a total investment of RMB 928 million was channeled into Shanghai for the construction of industrial and transport facilities, with 78.7% going to the upgrading of existing facilities, and 21.2% to new projects. The rate of newly added fixed asset was 89.4%, paving the way for future development. During the “Great Leap Forward” period, when the guiding policy was to treat steel as the mainstay and put tremendous effort into the development of heavy industry, Shanghai’s construction industry made considerable progress, with a fair number of steel mills being newly built and remodeled. It also created a record by completing the construction of the Rotary Furnace Workshop of Shanghai Steel No. 5 Mill in just two months. With regard to

250

Small electronic information products

2004

4,758

220

691

239

893

768

641

1,306

Source: Yearbooks of Shanghai Statistics for 2001 and 2005.

2,330

996

Arts, crafts, and tourism products

Total

189

1,092

Cosmetic and detergents

1,191

Interior decoration

895

Packaging and printing

Food processing

1998

1,808

Year

Number of enterprises

70.91

3.37

12.11

2.54

8.71

8.15

11.48

24.55

1998

67.95

4.69

9.65

2.3

8.72

5.68

8.61

28.3

2004

Employees (10,000)

1,051.81

58.52

140.42

105.00

129.80

87.50

270.79

259.78

1998

1,570.55

140.43

198.51

130.36

196.41

130.86

361.47

412.51

2004

Total output (RMB 100 mil.)

22.67

2.25

3.57

3.97

2.33

3.73

3.98

2.84

1998

90.42

14.68

9.50

8.39

14.23

11.57

14.73

17.32

2004

Total profit (RMB 100 mil.)

Comparison of Shanghai’s metropolitan industry, 1998 vs. 2004

Clothing

Table 1.6

32.63

3.25

5.13

5.72

3.36

5.37

5.72

4.08

1998

54.08

4.01

4.17

9.36

4.31

6.06

18.78

7.39

2004

Total tax (RMB 100 mil.)



31

chemical industry, Wujing, Wusong, Gaoqiao, and Taopu were opened up as the four chemical bases. The three bases constructed for electromechanical industries were Minhang, Pengpu, and Anting. Light industry, textiles, and transportation also registered some development. The construction of satellite towns was an enormous achievement. Five satellite towns—Minhang, Wujing, Jiading, Anting, and Songjiang—were successively built. In sum, the construction industry contributed considerably to the development of Shanghai’s basic industries, changing its industrial structure and layout. At the beginning of the Cultural Revolution, the production commanding system was paralyzed for a time in enterprises, leading to a significant drop in production levels. Shanghai Construction Engineering Bureau and its subordinate organizations were in the red for three years straight (1967–1969) due to a bleak performance. From the 1960s to the late 1970s, Shanghai’s construction industry implemented a strict planned system. As statutory profit was not calculated, construction enterprises became non-profiting units with the sole goal of realizing state investments. The industry fluctuated with adjustments in national infrastructure construction, and its pace of development was seriously hindered. After China started opening-up and reform, the State Council announced the development of Pudong in 1990. During his visit to the city in 1992, Deng Xiaoping recommended that Shanghai should aim to “have a new look every year, and make big changes within three years.” This ushered Shanghai’s construction industry into a stage of sustainable, fast, and sound development (Figure 1.6). The rise of tall buildings is one of the remarkable features of Shanghai’s fast growing construction industry at this stage. By the end of 1994, Shanghai had a total of more than 1,300 high-rise buildings. High-rise industrial plants were also springing up rapidly. More than 70 companies in electronics, instruments, textiles, clothing, and pharmaceutical sectors had industrial plants of eight to sixteen levels. After entering the 21st century, Shanghai experienced robust economic growth, creating a conducive environment for Shanghai’s construction industry. In the Tenth Five-Year Plan period, investment in Shanghai’s municipal projects alone amounted to RMB 81.4 billion. In 2003, the project completion value for Shanghai’s construction

32


Gross output value of Shanghai’s construction industry since opening-up and reform

RMB 100 mil. 2,000 1,800 1,600 1,400 1,200 1,000 800 600

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

400 200 0

Source: Yearbook of Shanghai Statistics (2005).

enterprises exceeded the benchmark of RMB 100 billion for the first time, reaching RMB 119.58 billion; in 2005, this figure grew to RMB 189.297 billion. China’s success in the bid for the 2010 World Expo had brought unlimited opportunities to the city’s construction industry. Direct investment in the construction of the Expo Park would amount to US$3 billion; investments in city construction and related industries were estimated to range between US$15 and 30 billion. Clearly Shanghai’s construction industry was set to embrace a new round of quick growth. 2.2.2 Development of tertiary industry Tertiary industry refers to any industrial sectors other than primary and secondary industries, and it is also called the service industry. This section reviews the history of Shanghai’s tertiary industry. Prior to the War Against Japan (1937–1945), Shanghai remained a major trading, financial, and transportation center in South China and the Far East, boasting a well developed tertiary industry. After the founding of the People’s Republic in 1949, Shanghai’s tertiary


33

Figure 1.7 The changing proportion of tertiary industry in Shanghai’s GDP % 60 50 40 30 20 10 2004

2000

1999

1995

1990

1987

1980

1972

1950

0

Source: Yearbooks of Shanghai Statistics for the years cited.

industry experienced a checkered path of development (Figure 1.7). To understand its unique development, it is best to walk through the three stages of this industry. The First Stage: 1949–1978 After three years of economic recovery, primary, secondary, and tertiary industries accounted for 3.8%, 53.9%, and 42.3% of Shanghai’s GNP respectively in 1952. In 1957, the last year of the First FiveYear Plan, the proportion of tertiary industry dropped to 37.1%, yet its growth rate had not slowed down, and reached 11.4% that year. After that, due to the impact of the leftist guiding concept of turning a consumer city into a producer city, many commercial units were disbanded and combined, while numerous employees in tertiary industry were shifted to other industries. Thus, the proportion of tertiary industry in the national economy dropped continually from 21.1% in 1965 to 17.32% in 1972 and just 18.4% in 1978. The second stage: 1979–early 1990s After 1978, Shanghai’s role in opening-up and reform changed from a backfielder to a forward, and the proportion of its tertiary industry increased continuously from 18.4% in 1978, to 25.1% in 1984, and

34

SHANGHAI INDUSTRIES

then to 36.14% in 1992. During this period, vigorous development of tertiary industry became the heart of Shanghai’s industrial policy so as to improve the city’s attraction and enlarge its regional economic influence. Throughout the 1980s, the proportion of tertiary industry rose, on average, by one percentage point per year, coming close to 30% by the end of the decade. In terms of development areas, the reviving tertiary industry at this stage focused on restoring urban life conveniences, and the daily service sectors achieved allround growth. From the end of the 1980s to the beginning of the 1990s, Shanghai’s tertiary industry experienced four to five years of adjustment, and its contribution to GDP stood around 30%. The third stage: from the early 1990s to the beginning of the 21st century The 1990s was a period in which Shanghai made strenuous efforts to upgrade its industrial structure. Deng Xiaoping’s remarks during his inspection tour of South China, and the development and opening of Pudong, provided a strong boost to the development of Shanghai’s tertiary industry. After the implementation of the industrial development strategy of “tertiary, secondary, and primary” in 1992, the proportion of Shanghai’s tertiary industry, driven by finance, trade, and real estate sectors, grew by two percentage points per year. From 1990–2000, the added value of Shanghai’s service industry obtained an average annual growth of 13.8%, 1.6 percentage points higher than the growth of the city’s total output. Its proportion in GDP increased from 31.9% to 50.6%, representing almost two percentage points of annual improvement. This quantitative change triggered off a qualitative shift during 1998–2000. Added value of tertiary industry exceeded secondary industry by 1.2 percentage points in 1999, representing a leap in industrial structure. A second breakthrough in industrial restructuring came in 2000 with the output value of tertiary industry exceeding the sum of primary and secondary industries for the first time. The fourth stage: from the beginning of this century to today Shanghai’s tertiary industry entered a stage of steady development in the 21st century. Its proportion in GDP even declined in certain


35

Figure 1.8 The changing proportion of tertiary industry in Shanghai’s GDP (1999–2005) 52

%

50 48 46 44 42 40 1999

2000

2001

2002

2003

2004

2005

Source: Yearbooks of Shanghai Statistics for the years cited and the official website of Shanghai Statistics Bureau.

years (Figure 1.8) due in part to a weakened effect of land and financial development in Pudong. With a downward trend of the stock market and a tightened control on land approval and leasing, the industries that propelled Shanghai’s economy toward high growth entered a period of steady growth. In spite of these, the added value of Shanghai’s service industry reached RMB 302.711 billion in 2003, still ranking high among China’s top major cities. The big market system, centered on such factor markets as capital, currency, intellectual property rights, and human resources, obtained growth and improvement. The city’s clustering and regional economic influence further enhanced its capability to serve the whole country. By 2004, through internal adjustments, the proportion of the service industry in GDP dropped to 47.9% (Table 1.7). In the Eleventh Five-Year Plan, the productive service industry will be the focus of Shanghai’s industrial development. The plan also identified six key sectors for future development in Shanghai’s service industry: finance and insurance, business services, logistics, research and development, creative design, and occupational education.

36

SHANGHAI INDUSTRIES Table 1.7

Development of Shanghai’s tertiary industry in 2004 Employees (10,000)

Transport, warehousing, and postal services Real estate Wholesale and retailing Accommodation and catering Finance Others

Total asset (RMB 100 mil.)

Total profit (RMB 100 mil.)

47.7

3,411.3

245.4

33.2

13,097.7

422.7

146.6

8469.7

462.1

28.7

522.7

13.8

13.5186

31,645.6

299.5

199.1

15,832.1

633.2

Source: Based on the results of Shanghai’s first economic survey published by Shanghai Statistics Bureau.

3. Shift of Focus in Industrial Development Viewed from a historical perspective, Shanghai’s industries underwent numerous development stages, prioritizing heavy industry before 1990, speeding up the service industry during the 1990s, and shifting to a joint development of advanced manufacturing and the modern service industry in the 21st century. It is a process of continual exploration indispensable to the industrial development of a modern cosmopolis.

3.1 The Stage of Prioritizing Heavy and Chemical Industries (Before the 1990s) Heavy and chemical industries generally refer to the manufacturing of means of production, including such sectors as energy, machinery manufacturing, electronics, chemicals, metallurgy, and building materials. In the course of industrialization, internal industrial structure normally undergoes three stages: heavy industrialization, deep processing, and technological intensification. In the late 1940s, light and textile industries were the dominant industrial sectors with light industry taking up 88.2% of the city’s gross industrial output value and heavy industry only 11.8%. Beginning from the First Five-Year Plan, Shanghai focused its industrial investment on heavy industry. By 1965, Shanghai had evolved from a city with light and textile

History of Industries in Shanghai Table 1.8

37

Shanghai’s outputs by industries in the 1990s Primary

Secondary

Tertiary

1990

4.3

63.8

31.9

1995

2.5

57.3

40.2

1996

2.5

54.5

43.3

1997

2.3

52.2

45.5

1998

2.1

50.1

47.8

1996–1998

2.3

52.26

45.5

Source: Yang, Gongpu, et al, Industrial Structure: Shanghai’s Choice and Optimization, Shanghai: The Publishing House of Shanghai University of Finance and Economics, 2001.

industries as the mainstay, into a comprehensive industrial base, with a good mixture of light and heavy industries. After opening-up and reform were initiated, and before 1992, Shanghai gave priority to secondary industry, resulting in a constantly accelerating growth rate. Structurally the inclination of investment toward heavy and chemical industries led to a bigger market share for these industries. Shanghai’s industrialization, as reflected in the industrial sector’s proportion of GDP, had reached the middle and late stages of industrialization by the end of the 1990s (Table 1.8). Shanghai completed its heavy industrialization centered on raw materials before the 1990s. After that, the structural upgrading of Shanghai’s industries shifted toward deep processing. Throughout the 1990s, Shanghai’s industries reentered a fast growth period, but its growth showed a trend of deceleration (Figure 1.9).

3.2 The Period of Speeding up the Services (1990s) Currently, almost all metropolises in the world have a strong tertiary industry, which accounts for an average 80% of their GDP and has such prominent features as being light, service-oriented, and internationalized. Along with the adjustment of industrial structure, Shanghai’s secondary industry found its proportion decreasing constantly from 75.24% in 1981 to 47.42% in 2002 while the proportion of tertiary industry experienced a steady rise. In the

38



RMB 100 mil. 7,000

%

6,000

25 20

5,000 4,000

15

3,000

10

2,000 5

1,000 0

1991 1992 1993 1994 1995 1996 1997 1998 1999

Index of gross industrial ouput value

0

Growth rate

Source: Data from Yearbooks of Shanghai Statistics for the years cited.

1990s, Shanghai’s economy underwent rapid growth, resulting in a continuous improvement in the service industry (Figure 1.10). In December 1992, Shanghai adjusted its order of priority in industrial development from “secondary, tertiary, and primary” to “tertiary, Figure 1.10

60

%

The changing proportion of the value added of Shanghai’s tertiary industry in GDP during the 1990s

50 40 30 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: Yearbook of Shanghai Statistics (2000)


39

secondary, and primary.” Moreover, such sectors as finance, logistics, trade, real estate, tourism, and information services, gradually grew into the mainstay of Shanghai’s service industry. During the Eighth Five-Year Plan, Shanghai focused on fostering a big modern market for the development of its service industry, and made more effort to reform its investment structure. It also gave priority to the pillar industries, and quickened the pace of infrastructure development. Amongst its pillar industries, finance and insurance, real estate, transportation, information, trade, and distribution all witnessed rapid development. During the Ninth Five-Year Plan period, Shanghai persistently adhered to the concept of “finance and insurance as the mainstay, trade as the pioneer, and transportation, postal, and telecommunications as the foundation” in promoting the all-round development of its tertiary industry. A significant feature of this period was the surge of the real estate sector, with its contribution to the total added value of tertiary industry jumping from 0.5% in 1985 to 24.7% in 1995 (Table 1.9). By 2000, Shanghai’s strategic thinking for the development of its service industry had crystallized to include the following aspects: (1) Informatization should be used as the platform for infrastructure development; (2) Finance and logistics should be the main sectors in driving interactive development; (3) Clustered zones should become the breakthrough point for accommodating the service industry; (4) Large service enterprise groups should Table 1.9 Structural changes of the main sectors in Shanghai’s tertiary industry (Unit: %) 1978

1980

1990

1996

100

100

100

100

100

Transportation, postal services, communication, & warehousing

23.72

23.52

25.89

16.37

13.86

Wholesale, retailing, & catering

45.61

48.14

21.49

25.33

23.38

Finance & insurance

13.83

11.90

29.47

27.87

29.06

Real estate

0.53

0.55

1.56

9.96

10.52

Social services

5.72

5.45

0.14

7.70

9.10

Tertiary Industry

Source: Yearbooks of Shanghai Statistics for 1996–1999.

1998

40

SHANGHAI INDUSTRIES

be the leaders in enhancing the industry’s competitiveness; and (5) Professionals (human capital) should be mobilized in developing the core advantages of Shanghai’s service industry.

3.3 The Period of Common Development for Advanced Manufacturing and Modern Service Industry (the early 21st Century) The beginning of the 21st century saw the simultaneous development of Shanghai’s advanced manufacturing and service industry. While persisting in the integrative development of tertiary, secondary, and primary industries, Shanghai has prioritized the service industry and advanced manufacturing. The proportion of Shanghai’s service industry in GDP in terms of added value surpassed that of secondary industry for the first time in 1999, and this proportion exceeded 50% between 2000 and 2003. The development of the manufacturing industry boosted the rapid growth of Shanghai’s economy and paved the way for the further development of the service industry. To develop the advanced manufacturing industry during the Tenth Five-Year Plan at the beginning of the 21st century, six new pillar industries were defined: electronic information equipment, automobiles, petrochemicals and refined chemicals, fine steel, power station and large-scale packaged equipment, and modern biomedicine. The manufacturing industry continued to operate well (Figure 1.11) after its output value broke the record of RMB one trillion. In recent years, the manufacturing industry has been the main driver of Shanghai’s economic growth in terms of both absolute figures and total contribution rate. The service industry represents an inevitable trend of modern economic development. Figures from around the world as well as from China indicate that as people’s incomes increase, the demand for service products outstrips that for manufactured products. Worldwide tendencies in industrial development show that servicecentered sectors form the mainstay of the industrial structure in developed countries, where both the added value and the number of employees in the service industry make up 70% or more of the market. The service industry has become an important benchmark for


41

Shanghai’s manufacturing output value and growth rate (2001–2004)

RMB 100 mil. 16,000

% 1 0.9

14,000

0.8

12,000

0.7

10,000

0.6

8,000

0.5

6,000

0.4 0.3

4,000

0.2

2,000

0.1

0

0 2001

2002

2003

2004

Gross industrial output value Gross output value of manufacturing (above the designated scale) Growth rate of manufacturing Source: Yearbook of Shanghai Statistics for the years cited.

measuring the overall industrial development and competitiveness of a country, region, or city. Shanghai is currently at the late stage of industrialization, moving toward post-industrialization. The sectoral structure of its service industry shows a clustering trend, with finance, logistics, business and trade, real estate, tourism, and information services growing into six pillar sectors. In addition, consumer service sectors, such as education, healthcare, and entertainment, have also made considerable progress. According to the Outline for Boosting Shanghai’s Modern Service Industry, Shanghai’s service industry must vigorously develop the financial sector through resource clustering and financial innovation, actively develop the cultural service industry by seizing opportunities offered by pilot reform projects, speed up modern logistics and shipping services by expanding and opening air and sea ports, integrate convention, exhibition, and tourism by taking advantage of the 2010 World

42

SHANGHAI INDUSTRIES

Expo; and foster and expand information services by implementing urban informatization. Shanghai’s service industry should be marketoriented and specialized while striving to upgrade its quality. In the long run, it is inevitable that an industrial structure will take shape in Shanghai that is centered on the service industry. Shanghai has formulated the following guidelines for the development of its manufacturing industry in the next five years. The city will upgrade its manufacturing industry through new technologies, equipment, and techniques based on enhanced innovation capability. The development of industrial clusters will also be boosted. For the service industry, Shanghai will take informatization as the base, finance, logistics, and culture as the focus, service industry clusters as the breakthrough point, and large service enterprise groups as the vehicle. The city will work hard to pool top-notch talents, strengthen comprehensive integration, and undertake international service outsourcing in order to improve the size and level of the service industry. Since the beginning of the 21st century, the degree of mutual reliance has increasingly intensified between the manufacturing and service industries. Shanghai’s service industry will serve as the gateway for improving its urban functions while its fast growing manufacturing industry will create a tremendous demand for its service industry. A developed service industry will, in turn, provide more solid support for the development of the manufacturing industry. Placing equal emphasis on advanced manufacturing and service industries will become the general policy for Shanghai’s future development.

CHAPTER

2


1. Status Quo and Features

S

hanghai’s manufacturing industry has long played a supporting and driving role in the city’s economy. Although there is a decrease in the ranking of its total output in China, its key industries enjoy a number of advantages in scale, industrial structure, labor productivity, comprehensive matching capacity, talent pool, and resource allocation. Firstly, its well-developed iron and steel, automobile, and petrochemical industries are obviously more competitive in China. Secondly, Shanghai enjoys a full-range industrial chain in manufacturing, which is unique, even amongst the world’s major industrial cities. Thirdly, industry in Shanghai has a balanced structure, with an appropriate heavy-to-light industry ratio and suitable shares between primary, secondary and tertiary industries. Fourthly, Shanghai ranks top in China, in terms of labor productivity and profit. Fifthly, the overall level of service in Shanghai’s manufacturing industry ranks amongst the best in China.

1.1 Pillar Industries In keeping with the economic climate, the Shanghai municipal government selected its pillar industries for the Tenth Five-Year Plan period as: electronic information equipment manufacturing, automobiles, petrochemical and fine chemical, top-quality steel, power station equipment and large packaged equipment, and modern biomedicine.

44

SHANGHAI INDUSTRIES Table 2.1 Investment in the automobile manufacturing industry (2003–2005) (Unit: RMB 100 million) Investment

Finished vehicles

Auto parts

2003

44.04

19.59

24.18

2004

65.65

33.66

31.11

2005

81.59

33.23

44.87

Source: Shanghai Municipal Economic Commission, Shanghai Industrial Development Report for 2006, Shanghai: Shanghai Science and Technology Document Press, 2006.

Automobile manufacturing industry Since the 1990s, automobile manufacturing has spearheaded Shanghai’s industrial development. A stupendous boom in the domestic car market in 2002 further saw investment in Shanghai’s automobile industry grow rapidly (see Table 2.1). After more than ten years of development, Shanghai has become the home of Volkswagen, GM, and SMA, as well as of some auto parts manufacturing companies. The automobile product range has also developed, from past dominance by the ordinary Santana, to a more diversified series today, including the Buick Regal, Buick Excelle, Passat, and SMA Marindo. During the Tenth Five-Year Plan period, Shanghai’s annual automobile production increased from 290,000 vehicles in 2001 to 490,000 vehicles in 2005, and the accumulative total for this period amounted to more than 2.32 million vehicles. The boom in the industry lasted from 2001 to 2003, and then underwent a backward slide during 2004–2005. When viewed from an overall perspective, the development of Shanghai’s automobile industry has the following features: •

On the whole, the automobile manufacturing industry shows a downward trend. In 2005, the output value was RMB 102.6 billion, down 8% from 2004. Industrial product sales were RMB 1,000.9 billion, down 14%. The main business income was RMB 116.8 billion, a 6% decrease. Total profit earned was RMB 9.8 billion, a drop of 47%, which was the biggest decrease, among the six industries prioritized for development (see Table 2.2).


45

Table 2.2 Gross industrial output value and industrial product sales of Shanghai’s automobile industry in 2005 Output (RMB 100 mil.) Total of auto industry

Growth (%)

Industrial product sales (RMB 100 mil.)

Growth (%)

1026.48

–8.3

1,009.35

–14.0

Finished vehicles

589.96

–17.2

579.91

–20.1

Auto parts

423.12

5.6

416.71

–3.1


Figure 2.1

Proportion of Shanghai’s automobile industry in gross industrial output value

% 14

11

8

5

2001

2002

2003

2004

2005


In the past two years, the proportion of the automobile manufacturing industry in the city’s total industrial output showed a downward trend year by year. In 2005, the industry accounted for only 6.5% of Shanghai’s total industrial output, the lowest during the Tenth Five-Year Plan period (see Figure 2.1).

46

SHANGHAI INDUSTRIES

•

•

•

•

While there was negative growth in automobile production and sales for two consecutive years, there were obvious signs of recovery. In 2005, neither production nor sales achieved any growth, and Shanghai’s automobile industry declined for two years. The production to sales ratio was 98% and the ratio of profit to sales was about 8%. Car sales had a general trend of first going down and then recovering. Monthly production and sales dropped by double digits in the first half of the year, and then improved in the second half (except for November). The automobile retail and maintenance industry is clearly on the upbeat. In 2005, Shanghai sold 90,000 vehicles, a close to 2% increase from 2004. Car sales accounted for 80,000 units of this figure, up 0.3%. In 2005, Shanghai’s automobile maintenance industry serviced 4.9 million vehicles and tested 250,000, earning an operating income of RMB 5 billion. Apart from the traditional comprehensive maintenance, new developments had emerged such as designated maintenance, auto care and decoration, which were provided by fast service and chain shops. Car production currently enjoys an important position in China. Cars are the main product of Shanghai’s automobile manufacturing industry. Car production and sales respectively contribute 99.2% and 99.1% of the totals in Shanghai’s automobile industry. At present, Shanghai-made cars appear in a product series, with medium cars as the main part, and luxury and common cars as the supplement (see Figure 2.2). In 2005, Shanghai produced 480,000 cars and ranked number one in China, Guangdong produced 400,000 cars, and took second place, followed by other provinces and municipalities. However, Shanghai’s share of China’s car market showed a year-by-year decreasing trend during the Tenth Five-Year Plan period. The export of automobile products is rapidly increasing. In 2005, Shanghai’s automobile industry achieved an export delivery value of RMB 9.4 billion, up 34% from 2004. Of this figure, the manufacture of finished vehicles reached RMB 2.8 billion, or up 30%, while the auto parts industry attained RMB 6.5 billion, up 36%.

Development of Shanghai’s Advanced Manufacturing Industry Figure 2.2

47

Composition of Shanghai’s car production in 2005 10.2%

3.4%

86.3% Luxury

Medium

Common


Top-quality steel industry During the Tenth Five-Year Plan period, Shanghai’s top-quality steel industry held back from the blind expansion seen elsewhere in China. Instead, it concentrated its efforts on improving the product mix. As a result, this industry grew 13% annually during the period, and accounted for 8.5 of the city’s total industrial output. In 2005, the top-quality steel industry ranked number four in Shanghai’s six pillar industries in terms of total output, and its total profit accounted for nearly 20% of Shanghai’s industrial total. Among the six pillar industries, the top-quality steel industry has climbed from third place in 2001 to first in 2005 in terms of contribution to profit. Its industrial output was RMB 133.98 billion, up 15%, accounting for 8.5% of Shanghai’s total industrial output. The main business income was RMB 148.89 billion, up 38.7%, and accounting for 9% of Shanghai’s total business income. Production to sales ratio was 98.8%, profit RMB 17.83 billion, up 7%, and accounting for 19%, and tax payment was RMB 7.19 billion, accounting for 11.9%.

48

SHANGHAI INDUSTRIES Table 2.3 Comparison of China’s main steel producing provinces or municipalities Main business Output income Profit Production (RMB 100 (RMB 100 Proportion (RMB 100 Proportion to sales mil.) mil.) (%) mil.) (%) ratio (%)

National total

19,789.67

19,958.88

100

996.42

100

98.1

Hebei

3,087.75

3,058.87

15.3

162.22

16.3

98.1

Jiangsu

2,922.78

2,904.62

14.6

131.22

13.2

98.2

Liaoning

1,666.33

1,785.56

8.9

137.77

13.8

97.0

Shandong

1,609.53

1,678.08

8.4

70.34

7.1

98.2

Shanghai

1,339.84

1,488.87

7.5

178.33

17.9

98.2


Shanghai’s steel industry ranks number five in China in terms of output value and main business income, but it has the strongest profitability, and its total profit ranks first in China. Its profit ratio of main business income is 12%, much higher than the national average of 5%. Its production to sales ratio is also the highest among the five provinces and municipalities (see Table 2.3). During the Tenth Five-Year Plan period, the top-quality steel industry of Shanghai focused on upgrading the quality of its products, and implemented a top brand strategy. A series of adjustments and revamps were conducted to eliminate outdated production techniques and facilities. A number of high-quality steel production lines were installed by applying state-of-the-art technology. The product mix was improved and optimized. Great progress was made in building R&D bases for new processes, new equipment, and new products. All these factors changed Shanghai into China’s most competitive production base for top-quality steel.


Insight 2-1 Baosteel—A Flagship Enterprise of Shanghai’s Iron and Steel Industry Baosteel is the leader of Shanghai’s iron and steel industry. It is the largest, most modernized, and most competitive iron and steel complex in China. The company’s first phase construction project began on December 23, 1978, and was completed and went into production on September 15, 1985. Its second phase project went into operation in June 1991, and the third phase project was completed by the end of 2000. On February 3, 2000, the company floated its shares on China’s stock market on December 12 of the same year. Baosteel has been one of the world’s top 500 companies for two consecutive years. In the fields of general-purpose steel, stainless steel, and specialty steel, Baosteel has become a major steel production base, covering steel for automobiles, household electric appliances, oil exploitation and piping, novel buildings, as well as electrical and special metal materials. In 2005, it achieved an output of RMB 117.5 billion, accounting for 88% of Shanghai’s top-quality steel industry, a main business income of RMB 132 billion, accounting for 89%, and paid taxes amounting to RMB 6.9 billion, accounting for 96%. Its production volume made up more than 95% of the city’s total. With its comprehensive advantages in credibility, talent, innovation, management, and technology, Baosteel was ranked among the top three of the most competitive steel producers globally according to Guide to the World Steel Industry, and was believed by this guide to be the most promising steel enterprise.

49

50

SHANGHAI INDUSTRIES

Baosteel specializes in producing high-tech and high-valueadded steel products. The company has become China’s main supplier of steel products for the automobile, household appliance, oil and natural gas exploration, and the pressure vessel and container industries. Meanwhile, its products are exported to over 40 countries and regions, such as Japan, Korea, Europe, and the United States. The company has adopted an advanced quality control system. Its main products have passed the ISO9001 quality certification, the certification of API and JIS, and the QS9000 certification by GM, Ford, and Chrysler. In addition, its products have also been recognized by ship classification societies in seven countries: China, France, the United States, the United Kingdom, Germany, Norway, and Italy. The company possesses strong R&D capabilities for developing new technologies, products, processes, and equipment. This will ensure vigorous future development for the company. Baosteel devotes a great deal of attention to environmental protection in its pursuit of sustainable development. It is the first Chinese steel producer to gain the ISO 14001 environmental certification.

Equipment manufacturing industry Shanghai’s equipment manufacturing industry is composed of seven sectors or 33 sub-sectors. The seven sectors are: metal products, general-purpose equipment, specialized equipment, transportation equipment, electrical equipment, communication equipment, and computers and instruments. Shanghai’s equipment manufacturing industry focuses on ten key industries: power generation, power transmission and distribution, track transportation, microelectronics, heavy machinery, CNC machine tools, mechatronics, instrument and


51

control equipment, nuclear power, coal liquefaction, and advanced coal mining facilities. During the Tenth Five-Year Plan period, there was a nationwide electricity shortage, due to accelerated economic growth. This triggered off a series of power station projects in various parts of the country, which provided opportunities for Shanghai’s packaged equipment manufacturing industry. This industry, which includes ship and power station equipment manufacturing, is a leading industry in China, and has enjoyed the most stable development in recent years. Although the rising price of steel, its main raw material, led to a considerable increase in cost, the industry still showed continual growth, and was Shanghai’s second largest profit maker. In 2005, Shanghai’s packaged equipment manufacturing industry achieved an industrial output of RMB 153.263 billion, up 21.2% over the previous year, representing an increase 2.3 times over that in 2000. Its average annual growth was 26.9% during the Tenth FiveYear Plan period. It gained a main business income of RMB 154.89 billion, up 24.3% from the previous year; it earned a profit of RMB 11.56 billion, up 36.8%; its tax payment reached RMB 4.077 billion, an increase of 8.8%. Within the industry, boiler equipment, lifting and transportation equipment, general-purpose instruments, specialized equipment for electronic and electrical machines, ship manufacturing, and electrical motors, each maintained over 20% in annual growth in their industrial output value. Within the equipment manufacturing industry, Shanghai prioritized the development of such sectors as power-generating equipment, power transmission and distribution equipment, track transportation equipment, and microelectronic equipment. In 2005, Shanghai’s equipment manufacturing industry experienced stable and rapid production growth. The total production value reached RMB 740.91 billion, an 18% increase over the previous year, sales were RMB 764.4 billion, up almost 14%. Its contribution to the city’s total industrial output rose to 47%. Despite a slight decline from the previous year, the industry has a clear leading advantage. There was a decline in profit. The industry was impacted by the fierce competition and profit slip of the domestic automobile industry as well as a weakening demand in international electronic

52

SHANGHAI INDUSTRIES

equipment. The 2005 full year profit was RMB 37.6 billion, down 15% from the previous year. This figure included a sharp decrease for transportation equipment, communication equipment, computer, and other electronics. However, a high production to sales ratio was maintained. In 2005, Shanghai’s equipment manufacturing industry achieved product sales of RMB 726.7 billion. With stable growth in market demand, its production to sales ratio was 98%. At the same time, there was a robust export growth. In 2005, the industry achieved an export volume of RMB 334.4 billion, up by nearly 43% from the previous year. The export delivery value accounted for up to 46% of the industry’s sales. Investments accelerated in the industry. In 2005, Shanghai’s equipment manufacturing industry made a total investment of RMB 132.6 billion, up 49% from the previous year. Of this figure, electronic equipment manufacturing (such as communication, computer, etc.), and transportation equipment manufacturing accounted for 46% and 40% respectively, while instruments and office equipment only had a share of 0.4%. Investment was thus fairly centralized, with an unbalanced structure (see Table 2.4) Table 2.4 Investments in various sectors of Shanghai’s equipment manufacturing industry in 2005 (Unit: RMB 100 mil.) Investment

Percentage

1,325.59

100

Metal products

17.90

1.4

General-purpose equipment

61.83

4.7

Specialized equipment

66.44

5.0

526.55

39.7

39.51

3.0

608.06

45.9

5.30

0.04

Total

Transportation Electrical equipment Communication and computers Instruments



53

In 2005, the output of Shanghai’s equipment manufacturing industry took third place in China behind that of Guangdong and Jiangsu. However, Shanghai continued to be a technical leader in high-end fields, including packaged power generation equipment, automobiles, ships, medium- and high-grade machine tools, printing presses, and large petrochemical equipment. In 2005, Shanghai’s equipment manufacturing industry had a total of 227 R&D institutions employing nearly 50,000 researchers. The expenditure on technology development was RMB 18.9 billion, almost two times that of 2000. Of this figure, R&D, at the core of science and technology activities, accounted for around RMB 8.6 billion, up by 3.3 times over 2000. Insight 2-2 Shanghai Electric—China’s Largest Equipment Manufacturer Shanghai Electric Group Co. Ltd. (hereinafter referred to as Shanghai Electric) is the largest equipment manufacturer in China with a history going back to 1880. The group was restructured in March 2004 before floating its shares as H shares on Hong Kong’s stock exchange in April 2005. As the largest corporation engaged in design, manufacturing, and sales of power generation equipment and heavy machinery, Shanghai Electric has a total asset worth more than RMB 70 billion. It has six listed companies and 134 joint ventures. Its products include: packaged power station equipment, packaged power transmission and distribution equipment, industrial automation equipment, CNC machine tools, equipment for information industry, printing and packaging machines, light industry machinery, textile machinery, track transportation equipment, refrigeration and air-conditioning equipment, environmental machinery, general and petrochemical equipment, engineering power machines, heavy mining machines, basic machine parts, modern agricultural machinery, elevators, household appliances, and other products.

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The development of Shanghai Electric is a miniature version of China’s heavy industry development. By upholding independent innovation, the group has maintained doubledigit growth for over 20 years, and its main products have long enjoyed a leading position in China’s market. In addition, Shanghai Electric has also established an international presence by building strategic international partnerships and continuously raising its technical standards. With innovations in its systems and facilities, the group has focused on its core businesses, namely, equipment for power generation, transmission and distribution, mechatronics, transportation, environmental facilities, and heavy industry. The group has also become more competitive in packaged equipment supply, project contracting, and modern integrated services. The group has its own financial company, information center, research center, and 19 technology centers that specialize in developing automation and informatization products for the whole corporation. As the leader of Shanghai’s equipment manufacturing industry, Shanghai Electric has scored remarkable achievements in research and development. In 2005, the group invested more than 4% of its sales in R&D. More than 50% of its products that year were covered by its own intellectual property rights, and were dominant in the product mix. Besides these successes, the group has also established its own brands. It has established a central research institute to carry out critical research projects and technical missions. Over the years, Shanghai Electric has explored new ways to establish joint ventures for mutual benefit with world-famous companies such as Carrier, Siemens, ABB, Schneider, Alstom, Alcatel, Morgan, Mitsubishi, Panasonic, and Toshiba. Such alliances have significantly enhanced the group’s competitive edge both at home and abroad.


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Electronic information product manufacturing industry Shanghai’s electronic information product manufacturing industry made rapid development during the Tenth Five-Year Plan period, with an average annual growth of 34%. Its contribution to the six prioritized industries reached 40.3%, and its proportion in Shanghai’s total industrial output rose from 12.7% in 2000 to 25.5% in 2005. It is the fastest growing industry in Shanghai, and has become the largest contributor to Shanghai’s total industrial output. In 2005, the industry achieved an industrial output of RMB 402.895 billion, accounting for 25.5% of Shanghai’s total. Its growth stood at 25.9%, 12 percentage points higher than the overall industrial increase for the city, and its contribution to GDP was almost 9%. It gained a main business income of RMB 410.595 billion, up 21.8%. Figure 2.3

Growth margin of the industrial output of Shanghai’s electronic information product manufacturing industry and its percentage in the city’s total

% 50 45 40 35 30 25 20 15 10 5 0 2001

2002

2003

percentage

2004

2005

growth margin


56

SHANGHAI INDUSTRIES Table 2.5 Shanghai’s shares of some major information products in China (%) Product

2001

2002

2003

2004

2005

5.4

5.1

23.8

16.3

26.9

Program-controlled switchboards

24.3

20.9

25.5

24.3

28.9

Semiconductor integrated circuits

35.4

35.3

28.6

18.8

25.5

Large integrated circuits

48.1

45.0

40.9

28.1

38.9

Microcomputers


To be specific, Shanghai’s electronic information product manufacturing industry exhibits the following features in development: •

•

•

Development of integrated circuits is at the core, and is the key for the development of an information technology industry cluster. Shanghai has become China’s largest and most advanced center for integrated circuit design, manufacturing, and packaging. In 2005, integrated circuit manufacturing achieved a main business income of RMB 25 billion, up by 4 times over that of 2000 (see Table 2.7). In 2005, the main business income of the electronic computer manufacturing sector reached RMB 187.8 billion, increasing 13.7 times from the end of the Ninth Five-Year Plan period. A total of 21.76 million microcomputers were made, increasing 51 times from the end of the Ninth Five-Year Plan period. Quanta Group, the world’s largest notebook computer maker, invested in Songjiang Export and Processing Zone, and set up its Quanta Shanghai Manufacturing City (QSMC), with Dafeng (Shanghai) Computer Co. Ltd. as its spearhead. In 2005, while growth in Shanghai’s electronic information product manufacturing was slowing down, the communication equipment manufacturing sector achieved a main business income of RMB 62.2 billion, up 65% over the previous year, contributing to 33% of growth in the electronic information product manufacturing industry, and increasing 1.4 times over 2000. Cell phone production was 19.39 million units, up by 1.9 times of the 2000 volume.

250.05 311.90 24.60

Integrated circuits

Electronic machinery products

Specialized electronic materials

0.6

7.6

6.1

11.7

9.3

2.0

21.21

244.19

560.13

914.87

381.59

89.89

70.18

183.91

579.51

10.71

417.54

2,913.60

Total asset

0.7

8.4

19.2

31.4

13.1

3.1

2.4

6.3

19.9

0.4

14.3

100

Proportion (%)

4.51

20.75

1.13

–3.24

31.49

6.92

8.91

1.77

21.76

0.08

7.61

100.56

Total profit

4.5

20.6

1.1

–3.2

31.3

6.9

8.9

1.8

21.6

0.1

7.6

100

Proportion (%)


479.61

Electronic devices

80.84 380.35

Electronic components

Specialized electronic equipment

1.9

5.7

235.52 76.18

45.7

0.4

15.2

100

Proportion (%)

1,878.12

16.55

Electronic measurement instruments

Home audio-visual equipment

Electronic computers

Radio & TV broadcasting equipment

622.28

4,105.95

Electronic information product manufacturing industry

Communication equipment

Sectors

Overview of Shanghai’s electronic information product manufacturing industry in 2005 (RMB 100 mil.) Main business income

Table 2.6

Development of Shanghai’s Advanced Manufacturing Industry 57

58

SHANGHAI INDUSTRIES Table 2.7

Shanghai’s integrated circuit production during the Tenth Five-Year Plan period (100 mil. pieces)

Semiconductor integrated circuits

Y-o-Y growth (%)

Large integrated circuits

Y-o-Y growth (%)

2001

22.53

—

10.70

—

2002

33.95

50.7

18.60

73.8

2003

39.73

17

21.94

18

2004

54.87

38.1

33.75

53.8

2005

67.70

23.4

38.19

13.2


•

Information product manufacturing was the first industry in China that was brought in line with international practices. With its advantages in geographical location and talent, Shanghai has attracted large volumes of overseas capital. In 2000, 90% of the main business income of Shanghai’s electronic information product manufacturing industry was generated by enterprises with investments from foreign countries and the regions of Hong Kong, Macao, and Taiwan. In 2005, this proportion increased by 3 percentage points. During the Tenth Five-Year Plan period, those enterprises with Hong Kong, Macao, and Taiwan investments increased rapidly, and their contribution to Shanghai’s electronic information product manufacturing industry rose from 13% to 25%.

Insight 2-3 SMIC—One of China’s Top Makers of Integrated Circuits Established in 2000, SMIC has its headquarters in Shanghai, China. It has three chip fabs, including one dedicated copper backend line. In May 2003, its Fab 1 was awarded the “Top Fab of the Year, 2003” by Semiconductor International, a leading publication in the semiconductor industry.


59

SMIC is one of the most advanced IC enterprises and the only enterprise capable of making 12-inch chips in China. It can also provide OEM services for chips of 0.35μm to 90 nm, and more advanced 8-inch and 12-inch IC manufacturing services. Currently, the company has a strong R&D team of more than 800 engineers, and it is continuously stepping up R&D investment to drive its products to the high end of the market. SMIC’s technology capabilities cover logic, mixed signal/RF, high-voltage circuits, system-on-chip, embedded and other memories, LCOS and CIS, among others. CMIC owes its rapid technological development and excellent fab management to a team of highly qualified and experienced engineers from North America, Europe, and Asia as well as a network of leading international technology and manufacturing partners. More than just a wafer OEM, SMIC provides its customers with a full set of value-added services that range from design, mask making, and IC manufacturing, to testing, while packaging and final testing services are offered through third-party suppliers. With strong internal offerings and collaboration with a global network design service, IP, standard cell library, and EDA providers, SMIC provides its customers with wideranging and highly flexible design support. To better serve its worldwide customers, SMIC has customer service and marketing offices in China, the United States, Europe, and Japan in addition to partners in Korea and Israel.

Petrochemical industry During the Tenth Five-Year Plan period, the petrochemical and fine chemical manufacturing industry further expanded its production scale and played a significant role in Shanghai’s industrial development. It has become Shanghai’s second largest industrial sector. The

60

SHANGHAI INDUSTRIES Table 2.8 Summary of foreign-funded petrochemical and fine chemical enterprises in Shanghai during the Tenth Five-Year Plan period (RMB 100 mil.) Number enterprises

%

2001

266

32.3

2002

216

2003

249

2004 2005

Main business income

%

Total profit

%

Total asset

%

439.46

55.2

13.03

51.6

559.64

59.9

33.2

484.03

56.9

23.38

58.6

570.30

58.8

35.8

621.47

56.8

34.07

62.4

623.75

59.9

286

37.4

797.06

57.7

73.81

73.7

689.40

59.8

339

38.1

1,022.35

57.5

41.97

72.2

875.63

61.8


building of Shanghai Chemical Industrial Zone has attracted investment of global petrochemical giants, such as Bayer, BASF, and BP. At the initial stage in the construction of the zone (2000–2010), the average investment per square kilometer reached US$1.38 billion, three to four times that of other zones around China. The fixed-asset investment in Shanghai’s petrochemical and fine chemical industry will be concentrated in the zone upon its completion, which will optimize the investment distribution system and add more prestige to the zone’s high-quality projects. In 2005, the petrochemical and fine chemical manufacturing industry achieved an industrial output of RMB 178.399 billion, up 12.6% over 2004 and 69.5% over 2000, representing an annual average growth of 11.1% during the Tenth Five-Year Plan period. Major business income was RMB 177.905 billion, up 26.8% from the previous year, profit was RMB 5.813 billion, down 42.7%, and tax payment was RMB 6.776 billion, down 5.5%. The newly established chemical zone achieved an industrial output of RMB 14.99 billion, up 38.5 times from the previous year, and contributing 35.1% to the growth of the entire industry.


61

Figure 2.4

Output of Shanghai’s petrochemical and fine chemical manufacturing industry during the Tenth Five-Year Plan period

RMB 100 mil.

%

2,000 1,500 1,000 500 0

2001

2002

2003

Gross output value

2004

2005

16 14 12 10 8 6 4 2 0

YoY growth


Figure 2.5 Total profit of Shanghai’s petrochemical and fine chemical manufacturing industry during the Tenth Five-Year Plan period 100

%

50

0 2001

2002

2003

-50 YoY growth Source: Shanghai Municipal Economic Commission.

2004

2005

3,302.89

2,610.19

2,386.62

2,063.79

1,783.99

Zhejiang

Guangdong

Liaoning

Shanghai

7.2

8.4

9.6

10.6

13.4

14.9

1,779.04

2,118.40

2,332.54

2,648.99

3,269.26

3,667.99

15,816.23

24,581.91

7.2

8.6

9.5

10.8

13.3

14.9

64.3

100

%

58.13

–84.14

137.95

120.78

177.16

127.43

537.31

516.38

Total profit

11.3

—

26.7

23.4

34.3

24.7

104.1

100

%

67.66

71.92

120.83

88.68

129.69

113.26

592.05

1,018.11

Tax payment

6.6

7.1

11.9

8.7

12.7

11.1

58.2

100

%

1,417.73

1,117.99

1,443.27

1,767.76

1,924.31

2,459.77

10,130.83

16,948.99

Total asset

8.4

6.6

8.5

10.4

11.4

14.5

59.8

100

%


3,671.52

15,819.01

Total for the six

Shandong

100

64.1

24,695.85

National total

Jiangsu

%

Main business income

Main economic indicators of six provinces/municipalities in 2005 for their petrochemical and fine chemical manufacturing industry (RMB 100 mil.)

Industrial output

Province/ municipality

Table 2.9



63

1.2 Strategic Industries Strategic industries refer to industries bearing on a country’s national security, such as shipbuilding, offshore oil and gas exploration and production facilities, and aviation and aerospace industries. Aviation and aerospace manufacturing industry Shanghai’s civil aviation industry developed very slowly during the Tenth Five-Year Plan period. Its research and fabrication resources were not fully utilized, and no great breakthroughs were made in major projects. Moreover, the sales volume of aviation industrial products did not improve significantly, and the industry’s total sales revenue during the period was a mere RMB 980 million. However, Shanghai’s aerospace industry had won renown for the country and the city with such projects as missile-guided weapon systems, human space flights, Fengyun Meteorological Satellites, military remote sensing satellites, and carrier rockets. In addition, it had made good progress in mini-satellite technology, aeronautical machinery and electronics, and in the development and commercialization of remote sensing and information systems. In 2005, Shanghai’s aviation and aerospace industry developed rapidly. It achieved a gross industrial output of RMB 1.74 billion, up by 31.6% over 2004, a total asset worth RMB 3.03 billion, up 17%, a total profit of RMB 100 million, up 88.9%, and a sales income of RMB 1.64 billion, up 31.8% Shipbuilding industry During the Tenth Five-Year Plan period, the industry’s output improved from 741,000 deadweight tons in 2000 to 2.356 million deadweight tons by the end of the period, increasing 2.2 times with an average annual growth of 26% (see Figure 2.6). Metal ship building, auxiliary ship equipment manufacturing, and ship repair and breaking became the mainstay of Shanghai’s shipbuilding industry and contributed to 99% of its total output (see Figure 2.7). In 2005, the total industrial output of Shanghai’s shipbuilding industry reached RMB 24.16 billion, up about 24% from 2004, with an industrial sales output of RMB 23.95 billion, up 19% from

64


Output and growth of Shanghai’s shipbuilding industry in the Tenth Five-Year Plan period %

RMB 100 mil.

300

50

250

40

200

30

150

20

100

10

50 0

0 2001

2002

2003

Gross output value

2004

2005

YoY growth


Figure 2.7

Composition of gross output value of Shanghai’s shipbuilding industry in 2005 13%

1%

13%

73% Metal ship building Auxiliary ship equipment manufacturing Ship repair & breaking Others Source: Shanghai Municipal Economic Commission, Shanghai Industrial Development Report for 2006, Shanghai: Shanghai Science and Technology Document Press, 2006.


65

2004. In 2005, the industry achieved a main business income of RMB 27.14 billion, up 39.3% from 2004, with a total profit of RMB 850 million, increasing 2.2 times that of the previous year. The industry also witnessed vigorous increase in exports. In 2005, it achieved an export delivery value of RMB 11.15 billion, up 55.8% over 2004. At the end of 2005, the whole industry had a total in-hand purchase order of 8.552 million deadweight tons, up 26% from the previous year. And 85.5% of the order was from outside China. Currently, Shanghai’s shipbuilding industry is number one in China in terms of productivity. In 2005, the industry contributed as much as 20.8% to China’s total shipbuilding industry. It achieved a main business income of RMB 27.144 billion, accounting for 24.5% of China’s total; its profit was RMB 845 million, which placed it third nationally. Shanghai’s shipbuilding industry leads the country both in terms of its total output and economic indicators. Shanghai’s shipbuilding industry has expanded its number of scientific research personnel and its funding for R&D in recent years. In 2005, the industry had a R&D team of 2,465 people, up 13.9% from the previous year, with an average annual growth of 3.4% in the Tenth Five-Year Plan period. R&D expenditure reached RMB 870 million, up 32.4% from the previous year, with an average annual growth of 36.6%. The increased investment in science and technology has clearly upgraded the industry’s technical capability. During the Tenth Five-Year Plan period, Shanghai’s shipbuilding industry developed and built a good number of high-tech and high added-value LNG ships, chemical ships, oil product ships, large and high-speed container ships, train ferries, large container ships, and large bulk carriers. The industry also adopted and applied leading technologies relating to the building of high-tech ships such as LNG ships, and key auxiliary products such as the 50,000 kW diesel engines.

66

SHANGHAI INDUSTRIES

Insight 2-4 Asset Restructuring of Shanghai’s Shipbuilding Industry In the Tenth Five-Year Plan period, Shanghai’s shipbuilding enterprises underwent a series of effective restructuring efforts in asset management and resource reallocation, thus forming a new development pattern. Jiangnan Shipyard and Qiuxin Shipyard were consolidated and restructured as the new Jiangnan Shipbuilding Group. Hudong Shipyard and Zhonghua Shipyard were combined into Hudong-Zhonghua Shipbuilding (Group) Co. Ltd. The more than 140-year old Shanghai Shipyard was restructured and merged with Jiangsu Chengxi Ship Repair and Building Yard to form Shanghai Shipyard and Chengxi Shipyard Co. Ltd. Waigaoqiao Shipbuilding Co. Ltd was formed and went into operation in 2002. In 2005, these four major shipbuilding companies attained an industrial output of RMB 16.9 billion, growing 20.7% from the previous year, and accounting for 71.8% of Shanghai’s total shipbuilding industry, with a profit of RMB 360 million, accounting for 88% of the city’s total. After the restructuring, these four companies became the chief driver of Shanghai’s shipbuilding industry, and represent the development trend for the entire industry. Shanghai’s shipbuilding industry has become an important part of the global shipbuilding market, and an important pillar of Shanghai’s foreign trade. Ships built in Shanghai’s four shipbuilding bases have sailed to nearly 80 countries and regions across five continents, including such countries as Greece, Norway, the United States, the United Kingdom, and major global shipbuilding countries as Japan, Korea, Germany, Denmark, Poland, and Italy.


Shanghai’s shipbuilding industry has become an important part of the global shipbuilding market, and an important pillar of Shanghai’s foreign trade. Ships built in Shanghai’s four shipbuilding bases have sailed to nearly 80 countries and regions across five continents, including such countries as Greece, Norway, the United States, the United Kingdom, and major global shipbuilding countries as Japan, Korea, Germany, Denmark, Poland, and Italy. Shanghai’s four shipbuilding bases are advancing together toward the objective of becoming the “flagship” of China’s shipbuilding industry. Waigaoqiao Shipbuilding Co. Ltd completed its Phase One project during the Tenth Five-Year Plan period, and started its Phase Two during the Eleventh Five-Year Plan period to build large ships. The HudongZhonghua Shipbuilding Group completed technical upgrading during the Tenth Five-Year Plan period, and is currently developing a large high-tech shipbuilding base. The Jiangnan Shipbuilding Group plans to start its Phase One construction during the Eleventh Five-Year Plan period. The objective is to build China’s largest and most advanced comprehensive shipbuilding base for the 21st century. Shanghai Shipyard completed Phase One of its Chongming project during the Tenth Five-Year Plan period, and will start Phase Two during the Eleventh Five-Year Plan period. At the same time, Shanghai’s shipbuilders, through their overseas offices, will further strengthen and improve their overseas marketing and service system. They will also set up R&D institutions in other countries, and even establish an overseas presence in ship repair and shipbuilding, through shareholding, acquisition or the building of new facilities; these activities should gain them a fair share of the international shipbuilding market.

67

68

SHANGHAI INDUSTRIES

2. Distribution of Shanghai’s Advanced Manufacturing Industry After over ten years of adjustment, a new industry structure has been formed in Shanghai, with key industry bases serving as spearheads, district or county-level industries as the main body, and industrial parks or zones as important carriers. Industrial distribution has been reorganized in order to become more efficient. In 2005, the clustering of enterprises in Shanghai’s “one+ three+nine”1 parks and zones began to take effect. Over 80% of the main industries were grouped together in industrial parks or zones at or above municipal level. Within these parks or zones, a new development pattern emerged, featuring a few key clusters at the core. For instance, three clusters were formed in Minhang Development Zone: electromechanical, pharmaceutical and medical treatment, and food and beverage industries. Clusters of electronic information, new materials, biomedicine, aviation and space industries occupied Caohejing New Technology Development Zone. Jinqiao Processing Zone concentrated electronic information, automobiles and parts, and modern household appliance industries. In Songjiang, the electronic information industry grew rapidly, with computer manufacturing as the mainstay. In 2005, industrial output from state- and municipality-level industrial parks or zones hit RMB 691.6 billion, up 43.8% over the previous year. During the Tenth Five-Year period, the industrial output value of Shanghai’s six pillar industries (electronic information equipment, automobile, petrochemical and fine chemicals, top-quality steel, equipment manufacturing and shipbuilding) accounted for 63.4% of the municipality’s total compared to 48.6% at the end of the Ninth Five-Year Plan period. Hi-tech industry enjoyed rapid growth and gradually became one of Shanghai’s main industries. With an “One” refers to Pudong New area; “three” refers to three state-level development zones: Caohejing New Technology Development Zone, Minhang Economic and Technological Development Zone, and Songjiang Export Processing Zone; “nine” refers to nine municipal-level industrial parks: Xinzhuang, Kangqiao, Jiading, Fengpu, Songjiang, Qingpu, Jinshanzui, Baoshan, and Chongming.

1


69

Figure 2.8 Distribution of Shanghai’s six advanced manufacturing industries BAOSHAN DISTRICT

Automobiles

JIADING DISTRICT

Steel

Shipbuilding

CITY CENTER

Pudong New Area Microelectronics

QINGPU DISTRICT

SONGJIANG DISTRICT

MINHANG DISTRICT

NANHUI DISTRICT

FENGXIAN DISTRICT

Equipment

JINSHAN DISTRICT Petrochemical & fine chemical

Source: China Industry Atlas — Shanghai (2004–2005), Beijing: China Social Science and Documentation Press, 2005.

annual growth of 56%, the electronic information industry became the number one pillar industry and the driver of the city’s output growth. Basic industries such as petrochemicals, and iron and steel, quickly underwent major upgrading and restructuring that brought them in line with the high-tech industry. The Tenth Five-Year Plan period saw a continued large-scale adjustment of Shanghai’s industrial structure and a further extension of its industrial area from 600 square kilometers to 6,000 square kilometers within the municipality. Statistics show that the six major industrial bases and industrial parks/zones at or above municipal level had an industry concentration rate of 50%. The distribution of the six advanced manufacturing industries is shown in Figure 2.8.

2.1 Microelectronics Industry Base The clustering of Shanghai’s microelectronics industry in Pudong, Caohejing, Songjiang, and Qingpu is accelerating. The “one belt,

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two zones” layout of the microelectronics industry has taken shape. Shanghai has bloomed into one of the most attractive investment destinations for the integrated circuit (IC) industry. Shanghai’s IC industry has achieved a historic breakthrough in recent years. It has taken its preliminary shape as a well-structured chain with clear division of labor for the IC industry, covering design, packaging, testing, and other upstream and downstream activities. Represented by Huahong NEC, SMIC, Grace, ASMC, TSMC, Hanshengke, and Xuqing, Shanghai’s IC industry will have eleven 8-inch IC production lines, and six 4- to 6-inch production lines. The industry also boasts some highly competitive design providers, such as Huahong Design and Via Technologies. In addition, world leading IC packaging and testing giants, such as Intel, Amkor, ASE, STATS ChipPAC, and GAPT, have also established their offices and operations in Shanghai. With Zhangjiang as the core and Shenjiang Road as the axis, the Pudong microelectronics belt stretches toward Jinqiao Export Processing Zone and Waigaoqiao Bonded Zone, and expands into their vicinity. As a south–north base, the belt measures 25 square kilometers of the planned area. In 2003, the IC industry sales of the Pudong microelectronics belt grew by more than 100%. Five 8-inch IC production lines were in operation, 600,000 8-inch wafers were produced, and an output of nearly RMB 7 billion was generated from wafer production. The Caohejing New Technology Development Zone has become an ideal place for the IC industry. Sales revenue of Caohejing’s microelectronics industry exceeded RMB 8 billion in 2003, up 40% over the previous year. Currently, there are over 70 IC companies in Caohejing, employing more than 7,000 people. Caohejing is one of the largest bases for chip R&D and manufacturing in China. With a planned area of 18 square kilometers, the western part of Songjiang Industrial Zone primarily focuses on IC packaging. TSMC, the leader of the global chip OEM services, decided to build a plant here. The first phase of this project, involving a total investment of US$898 million, was completed and went into operation in 2004. The Qingpu Industrial Zone for Taiwanese Enterprises, measuring 9.9 square kilometers in area and currently under construction, serves as the core area for developing the microelectronics industry.


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A number of microelectronics companies, such as ChipMOS (total investment US$3.6 billion), Hanshengke (total investment US$3 billion), and Xuqing Semiconductors (total investment US$5 billion), have flocked in. Datang Mobile and Chenxian Electronics have also settled down in this zone.

2.2 Automobile Industry Base Shanghai’s automobile industry is moving rapidly toward three strategic objectives: to sell 1 million locally manufactured cars annually by 2007; to rank among the world’s top 500 companies; and to produce another 50,000 self-branded cars. While maintaining momentum amidst fierce market competition, it has gradually developed a fullrange industry chain. The clustering of most automobile enterprises has positively impacted the development and growth of such bases as Shanghai International Automobile Town and Pudong Jinqiao. In 2003, more than 600,000 cars of various models came off production lines in Shanghai and 390,000 of them were from Shanghai Volkswagen, and 200,000 from Shanghai GM. Shanghai Automotive Industry Corporation, with sales revenue of RMB 109.56 billion, was listed in the world’s top 500. Shanghai International Automobile Town is located in Anting, covering an area of 68 square kilometers. It comprises five districts: the core district, the finished vehicles and auto parts manufacturing district, the international circuit, the vocational education district, and Anting’s new town. After three years of development since its inception on September 28, 2001, the town has now entered the stage of comprehensive development. Important progress has been made in the development of various functional districts, such as manufacturing, trade, international circuit, R&D, auto parts, Tongji Automobile College, and the new town. Shanghai Volkswagen, situated in the industrial district of the automobile town, renewed its cooperation agreement with German Volkswagen for 20 years in 2002. A number of major projects were initiated, such as a project to add a manufacturing capacity of 100,000 cars per year to its third plant, and a project involving the production of 300,000 engines per year for economy cars. A state-of-the-art car testing area at Shanghai Volkswagen went into

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operation in 2003. All facilities were completed for the planned 8-square-kilometer auto parts area. By the end of 2003, more than 200 domestic and overseas enterprises had invested in the automobile town, representing a total contractual investment of RMB 25 billion. The circuit was fully completed and was used for the Formula One China Rally in September 2004. Shanghai GM’s Jinqiao base covers an area of 550,000 square meters. Its maximum capacity was increased to 180,000 vehicles per year in 2003. Shanghai GM has adopted a differentiated development strategy, and its 2007 target is to achieve 450,000 finished vehicles per year. Within the next few years, Shanghai will build and maintain three automobile manufacturing bases in Anting, Jinqiao, and Lingang. It is estimated that the planned and in-progress automobile-related projects will make up some 15% of the total industrial investment for the coming three years. Shanghai’s automobile industry will achieve a total output of RMB 280 billion in 2007. By 2010, China’s automobile industry will have reached a capacity of two million vehicles per year, of which 1.5 million will be made in Shanghai, and the industry’s total output will have surpassed RMB 400 billion.

2.3 Petrochemical Base Centered on Shanghai Chemical Industry Park and connected with the Shanghai Petrochemical Company, Shanghai’s Petrochemical and Fine Chemical Base forms a belt of 60 square kilometers on the northern flank of Hangzhou Bay. Shanghai Chemical Industry Park has a planned area of 29.4 square kilometers. It was one of China’s biggest investment projects during the Tenth Five-Year Plan period, and will involve a total investment of RMB 150 billion for its Phase One. After completion, the park will achieve a RMB 100 billion industrial output. The Shanghai Chemical Industry Park is located at the junction of Jinshan and Fengxian districts in Southern Shanghai. The park is connected to Shanghai’s inner city by Expressway A4, which has access to the Shanghai–Nanjing and Shanghai–Hangzhou Highways. It is about 50 kilometers away from both Pudong and Hongqiao airports, and a dedicated within-the-zone branch railway connects


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it to the 113 kilometer-long Pudong Railway. Through dredged inland waterways, it is also linked to the Huangpu and Yangtze rivers. In addition to its own dedicated shipping dock, the chemical zone is just 55 kilometers away from the Yangshan Deep Water Port under construction. This efficient integrated transport network ensures convenient transportation for all investors. The park offers the best possible investment environment to its investors, with in-park facilities for product-based projects, public utilities, logistics and transfer, environmental protection, and administrative services. The park has attracted such multinationals as BP, BASF, Bayer, Degussa, Huntsman, Mitsubishi Gas Chemical, and Mitsui, as well as such utilities giants as Suez, Vopak, Air Liquide Group, and Plexus. By the end of 2004, a total of US$8.82 billion had been invested in the park, launching it on the way to becoming Asia’s largest, most advanced world-class petrochemical base.

2.4 Top-quality Steel Base Backed by Baosteel, Shanghai’s top-quality steel base is China’s largest and most modern steel production base. Its core area is in the Baoshan District of northern Shanghai, bounded by the Yangtze River on its north side and the estuary of the Huangpu River on the east. During the Tenth Five-Year Plan period, the concentration of Shanghai’s top quality steel industry intensified, with Baosteel accounting for over 95% of Shanghai’s total steel production. The remaining 5% went to Shanghai Krupp (Sino-German joint venture), Shanghai STAL (Sino-US joint venture), Walsin Lihwa (wholly Taiwan-funded), Shangshang Steel Pipe (private), Shanghai Heavy Machinery, and castings at certain shipyards. As a model of Shanghai’s top-quality iron and steel base, Baosteel Group has made considerable structural adjustments in recent years to concentrate melting, hot-rolling, and large-scale extended processing operations in the Baoshan district in order to form three specialized production centers and develop a northern processing base. The three centers and one base are: the carbon steel plate and pipe manufacturing center in the Baosteel Co. Ltd. Area, the stainless steel manufacturing center in the No. 1 Steel Plant and its vicinity, the special steel manufacturing center in the No. 5 Steel

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Plant, and the Luojing extended steel processing base in Luojing of the Baoshan district.

2.5 Equipment Manufacturing Base In order to promote the development of its equipment manufacturing industry, Shanghai planned the building of the Lingang Industrial Zone. The zone has considerable advantages in location. Lying close to Yangshan Deep Water Port and right next to Pudong Airport, Lingang New City is a comprehensive coastal city, integrating a seaport, an industrial district, and well-developed infrastructure and services. Lingang New City has two functional areas: Haigang New City and Lingang Industrial Zone. Located on the Yangtze estuary and Hangzhou Bay in southeastern Shanghai, and 50 kilometers away from the city center, Haigang New City has a planned area of 293 square kilometers. With Dishuihu Lake as its center, the urban living and comprehensive service region of Haigang New City has a planned area of some 100 square kilometers, of which 50 square kilometers is set aside for intensive urban development for a population of 500,000–600,000. Focusing on industrial development, the Lingang Industrial Zone has a planned area of about 200 square kilometers, 120 square kilometers of which will be earmarked for urban development for a population of nearly half a million. The main objective of the Lingang Industrial Zone is to develop a world-class modern equipment manufacturing industry. The zone will develop such industries as advanced manufacturing, modern logistics, R&D services, vocational education and training, export processing, and domestic and foreign trade so as to build itself into a comprehensive industrial zone with distinctive industry features and competitive advantages. The Lingang Industrial Zone comprises three main functional areas: the industrial area, the modern logistics park, and the auxiliary area. The industrial area features automobile, equipment and logistic sectors, and consists of a heavy equipment manufacturing area, a medium-weight equipment area, and a high-tech industrial area. As a support for the industrial area and a complement to the Yangshan Deep Water Port, the modern logistics park is an


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important component of the Lingang Industrial Zone. The auxiliary area consists mainly of living facilities in addition to other functional regions for R&D, residence, and tourism. Phase I of the Lingang Industrial Zone was divided into three parts: the heavy equipment manufacturing, the high-tech industry, and the logistics park. These three parts are linked by the Pudong– Yangshan Expressway. Priority will be given to the manufacture of automobile equipment, auxiliary equipment for ships, large machinery, and electrical equipment. The high-tech industry will focus on urban industry and R&D. Phase One of the logistics park is mainly aimed at providing logistics services for the industrial zone and the Yangshan Deep Water Port.

2.6 Shipbuilding Base As the birthplace of China’s shipbuilding industry, Shanghai currently has 19 ship building and repairing enterprises, which include four major corporations: Jiangnan Shipyard, Hudong-Zhonghua Shipyard, Waigaoqiao Shipbuilding, and Chengxi Shipyard. There are also 23 enterprises engaged in auxiliary businesses, 11 research institutes, and two colleges. The current shipbuilding capacity stands at about 3.5 million deadweight tons per year, accounting for over 40% of China’s total. Its main products include civilian and offshore engineering vessels, such as oil tankers, bulk cargo carriers, chemical tankers, roll-on/roll-off ships, roll and dump ships, large LPG carriers, large container ships, large self-unloading ships and high-speed ships, as well as auxiliary equipment for ships, such as low- and mediumspeed diesel engines, large forgings and castings, and steel plates for ships. As set out in its new development plan, Shanghai’s shipbuilding industry is implementing an industry-wide strategy to relocate from the Huangpu River shore to the Yangtze River estuary. The plan slates Changxing Island as the main area, and Shanghai’s shipbuilding industry base will comprise Changxing Island shipbuilding base, Waigaoqiao base, and Chongming. The 8-kilometer-long coastline (starting one kilometer downstream from Xinkai Port) will be used for shipbuilding. The preliminary plan is to build seven large docks to form a capacity of eight million tons.

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Waigaoqiao shipbuilding base has a planned area of 2.1 million square meters. Phase I was completed on October 18, 2003. Involving a total investment of RMB 3.214 billion and covering an area of 1.44 million square meters, the base had a capacity of 1.05 million deadweight tons. Construction of Phase Two, with a planned area of 400,000 square meters with 300,000 square meters reserved for the future, started in 2004, and was completed in 2006, with a total capacity of up to 2.5 million deadweight tons. Shanghai Chengxi Shipyard’s Chongming Base has a planned area of 1.51 million square meters, stretching along 2,350 meters of coastal line. There will be three floating docks, rated at 150,000– 200,000 tons, 100,000 tons, and 40,000 tons, and one semi-dock type slipway, rated at 70,000 tons. The base’s eventual shipbuilding capacity will be 1.5 million deadweight tons.

3. Emerging Industries All countries across the world are striving to develop emerging industries because of their high value added, low energy consumption, and strategic significance. The emerging industries in China are mostly plagued by a low level of industrialization and outdated technologies. With enhanced investment in the past few years, Shanghai has stayed ahead of other domestic cities, but there is still a big gap for Shanghai to bridge to meet global standards.

3.1 Biomedical Industry As one of the four emerging industries, the biomedical industry underwent intensive restructuring in terms of aggregate planning, overall layout, industrial composition, and performance during the Tenth Five-Year Plan period. Thus, a solid foundation has been laid for its sustainable development. Despite its year-by-year decline in its share of Shanghai’s economy during the Tenth Five-Year Plan period, from 2.7% in 2000 to 1.8% in 2005, Shanghai’s biomedical industry gradually moved to a fullrange system covering chemical raw drugs, pharmaceutics, finished Traditional Chinese Medicines (TCM), biological and biochemical

Development of Shanghai’s Advanced Manufacturing Industry Figure 2.9

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Gross industrial output value of biomedical industry and its contribution to Shanghai industry (2000–2005)

RMB 100 mil. 300

% 3.0

250

2.5

200

2.0

150

1.5

100

1.0

50

0.5

0

2000 2001 2002 2003 Gross industrial output value

2004 2005 Percentage

0.0


products, medical apparatus, and healthcare products. As the largest in scale of these sectors, chemical drug manufacturing was the most profitable, with an output of RMB 15.2 billion in 2005, accounting for 54% of the industry’s total. Sectors with an annual output value of more than RMB 2.5 billion included medical apparatus, finished TCM products, and biological products. Healthcare products, with the smallest output value, enjoyed the fastest growth. It achieved an output value of RMB 340 million, double the figure of 2000, and its profit grew 9.4 times to reach RMB 60 million. Investors from Hong Kong, Macao, Taiwan, and foreign countries have played a leading role in building Shanghai’s biomedical industry. In the Tenth Five-Year Plan period, there was a huge influx of overseas investment into this sector, giving it a strong development impetus. The total output of foreign-invested enterprises reached RMB 13.4 billion in 2005, accounting for nearly 48.7% of the industry’s total as compared to 40% in 2000. At the same time, a large number of state-owned enterprises were transformed into joint-stock companies through restructuring. The output contribution of the state-owned section dropped from 18% in 2000 to 8% in 2005, while the figure

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for joint-stock companies rose from 27% to 38%. Private businesses also showed rapid growth with a total asset of RMB 2.5 billion at the end of 2005, increasing nearly 20 times. Their total industrial output reached RMB 2 billion, growing 6.2 times. In 2005, the biomedical industry in Shanghai achieved a gross output value of almost RMB 28.2 billion, up 14% over 2004. By the end of 2005, there were a total of 364 biopharmaceutical enterprises, with an asset of RMB 38 billion. The industry performed well in 2005, with a main business income of about RMB 29.4 billion, up 11% from 2004, and a profit of RMB 2.1 billion, up 1.3%. Also in 2005, the industry completed an export value of RMB 4.7 billion, up 44% over 2004, and accounting for 17% of total sales. High export proportions were seen in raw materials, with sales revenue for chemical drugs at 40%, and medical apparatus at 38%. However, the industry’s national proportion was not high. Output accounted for 5% of China’s total, putting Shanghai in fifth place, after Shandong, Jiangsu, Zhejiang, and Guangdong. Shanghai’s 5.5% market share and 7% profit rate, were also both in fifth position. In 2005, new products contributed RMB 4.7 billion, or 16.6%, to the industry’s total output, five percentage points lower than the city’s average. Investment in science and technology development totaled RMB 1.1 billion, up 79% from 2000, of which RMB 400 million went to R&D, up 75%. Both growth rates were below Shanghai’s average level. R&D investment accounted for 1.4% of main business income, 0.7% higher than the average, but still far below that of developed countries.

3.2 New Energy Industry New energy is obtained through the utilization of new technologies and new materials, such as solar energy, wind energy, and ocean energy. As conventional energy sources, such as coal and oil, are very limited, and their use causes serious pollution, Shanghai has made vigorous efforts to develop new and clean energy. By the end of 2005, Shanghai had established five solar heat and light utilization units, and seven photovoltaic power stations as pilot projects, with a total generating capacity of 200 kW, and an annual power generation of 200,000 kWh. Eighteen wind power


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generators had been installed. The wind farm in Fengxian District generates 7.48 million kWh each year. In Yuqiao of Pudong and Jiangqiao of Jiading, resource-efficient power stations were set up to generate power by incinerating garbage. Since 2000, Shanghai has given its full support to projects using solar energy and its applications. Shanghai has developed a thirdgeneration, battery-powered prototype car and integration platform. Batteries for buses have proven to be reliable, and integration technology for finished battery-powered vehicles has reached an initial stage of development. Despite rapid development in recent years, Shanghai’s new energy industry has yet to strengthen itself in technology and competitive edge. In addition, obstacles in the way of development, such as insufficient material supplies, an immature market, financing difficulties, and so on, still lie ahead as a challenge to be overcome in the coming years.

CHAPTER

3


1. Status Quo and Features

D

uring the Ninth and Tenth Five-Year Plan periods, there was general growth in Shanghai’s tertiary industry. At the end of the Ninth Five-Year Plan, the tertiary industry’s output accounted for over 50% of the city’s GDP. During the Tenth Five-Year Plan period, the figure once dived below 50% due to an impact from the SARS outbreak, but rose to 50.2% by the end of the period (see Figure 3.1). Figure 3.1

Proportion of tertiary industry in GNP (1996–2005)

% 52 50 48 46 44 42 40 38

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Shanghai Statistical Almanac for the years cited.

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1.1 Financial and Insurance Services After opening-up and reforms began in 1978, China has piloted many of its financial reforms in Shanghai, particularly in the 1990s. The tremendous changes and growing competitive strength of Shanghai’s financial industry can be seen in the new banking street on the Bund and the modern Lujiazui Finance and Trade Zone in Pudong. In 2005, Shanghai’s financial industry strove to become more market-oriented, and further progress was made in building a strong financial center. The industry achieved an incremental output value of RMB 68.987 billion, representing a growth of 11.6% over the previous year. Accelerated clustering of financial institutions In 2005, Shanghai had 73 newly established financial institutions, of which 11 were in banking, 59 in insurance, and three in securities. By the end of 2005, the total number of financial institutions reached 527, with 130 in banking, 227 in insurance, and 91 in securities. Foreign-invested operating financial institutions totaled 123, of which 14 were established in 2005. The 84 foreign banks and financial companies operating in Shanghai had a total asset of US$48.43 billion; 65 of these were granted RMB business licenses, and had a total RMB asset of RMB 114.455 billion. Twenty-nine foreign banks designated their Shanghai offices as the leading reporting branches for business operations in China. Since the second head office of the Central Bank of China was set up in Shanghai, the city has been striving to introduce RMB open market operations or to provide a window for RMB open market operations in Shanghai. At the same time, efforts have also been made to attract financial institutions, in particular state-owned commercial banks, nationwide securities, futures, and insurance businesses, to set up their head offices (or their intensive business centers, operation centers, or functional centers) in Shanghai. Continuous boosting of financial service functions At the end of 2005, Shanghai’s financial institutions had a savings deposit balance of RMB 2.33 trillion, with an annual increase of


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RMB 314.28 billion, as well as an outstanding balance of loans of RMB 1.67 trillion, with an annual increase of RMB 178.59 billion. The outstanding balance of individual consumption loans was RMB 281.416 billion, with a yearly increase of RMB 14.15 billion. Of these loans, RMB 264.49 billion went to housing mortgages, up by RMB 19.94 billion. In 2005, the cash income of financial institutions amounted to RMB 2.12 trillion, and cash expenditure hit RMB 2.17 trillion. With income against expenditure, the net currency issuance was RMB 50.565 billion. The NPL ratio of Chinese banks in Shanghai was 3.39%, down 0.58 percentage points from the beginning of the year. Quickened innovation and steady development in the financial factor market In 2005, Shanghai Stock Exchange’s total turnover was RMB 4.97 trillion, down 35.2% from the previous year. Out of the total turnover, RMB 1.92 trillion went to equity, decreasing 27.3%, RMB 2.81 trillion went to bonds, going down 43.4%, and RMB 15.58 billion went to funds, falling 37.4%. The types of securities on the securities market were on constant rise. Throughout 2005, the total listings stood at 1,069, an increase of 73 from the previous year, with stock listings dropping by three to 878. A total of RMB 29.97 billion was raised through the capital market, down 49.1 % from 2004. From this total, RMB 2.855 billion was raised from new issues, dropping 88% from the previous year. Reissued shares (including secondary offerings, right issue, and displacement of state-owned shares) raised RMB 27.12 billion, an increase of 23.5% from 2004. By the end of 2005, 125 companies had completed the reform of non-tradable shares, accounting for 14.2% of the total number of listed companies on the Shanghai Stock Exchange. The city worked to stimulate innovation in the financial industry. New products, such as the Shanghai-Shenzhen 300 Index, forward bonds, and short-term corporate bonds, were introduced. Turnover of the interbank lending market stood at RMB 23.21 trillion, an increase of 73.3% from the previous year. The futures market had a turnover of 67.57 million board lots, decreasing 16.7%, and a total transaction of RMB 6.54 trillion, down by 22.4%. Trading on the gold market was brisk, with

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a yearly transaction of RMB 116.843 billion, increasing 46.7%. The diamond market figure was US$410 million, an increase of 11.4% over the previous year. Sound development in the insurance industry By the end of 2005, Shanghai had a total of 70 insurance companies, 12 more than in 2004, and 157 insurance agencies, of which 47 were new that year. The annual income from insurance premiums was RMB 33.36, up 8.8% from the previous year. Of this sum, RMB 8.78 billion was from property insurance, increasing by 18.2%, and RMB 24.57 billion was from life insurance, increasing by 5.8%. Of the total premium income, RMB 27.5 billion went to Chinese insurance companies, increasing by 5.6%, and RMB 5.822 billion to foreign insurance companies, increasing by 27.1%. The total settlement from the insurance industry amounted to RMB 8.746 billion, an increase of 23.2% over the previous year, with RMB 4.726 billion contributed by property insurance, an increase of 38.8%, and RMB 4.02 billion from life insurance, an increase of 8.9%. Enhanced competitiveness for the financial industry The clustering effect and competitiveness of Shanghai’s financial industry have proved not only in attracting foreign financial institutions, but also in securing non-financial organizations from all over China. Over more than ten years of hard work, Shanghai has developed the framework necessary to becoming the country’s financial center. An effective financial service system has emerged, and finance has become one of Shanghai's pillar industries. Shanghai's key position in China’s financial business and the city’s standardized operations reflect the development level of Shanghai’s financial system and institutions. The main competitive edge of Shanghai’s financial industry lies in the high quality of its human resources, the presence of a large number of multinationals, and its role as the base for most of China’s major financial markets. Other advantages include relatively low business costs, preferential policies, and even more powerful competitors.


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In the face of intense international and domestic competition, Shanghai plans to develop unique commodity futures so as to assure the city’s reputation as an innovative international financial center. The city’s financial center is constantly on the lookout for strategic innovations to ensure that its influence and competitive edge remain strong both at home and abroad. Shanghai is taking well-planned steps to enhance its development of new commodity futures, and to establish a commodity futures system, focusing on metals, precious metals, energy, and grain. This will make the city an important pricing and trading center domestically and globally, and pave the way for the introduction of financial derivatives in the future.

1.2 Logistics Services Shanghai’s modern logistics services have been developing rapidly since opening-up and reforms began. During the Tenth Five-Year Plan period (2000–2005), modern logistics became one of the pillars of Shanghai’s modern service industry. In 2005, Shanghai’s total freight transportation was 687 million tons, an increase of 8.8% over the previous year. Its port handled 443 million tons of cargo, up 16.9%, making Shanghai the world’s largest cargo port. A total of 18.08 million TEUs were handled, an increase of 24.3% over the previous year, which made Shanghai the world’s third largest container port. Its airfreight throughput reached 2.21 million tons, increasing by 13.9%, ranking Shanghai No. 1 in China. Shanghai’s logistics industry is expected to reach a total output value of RMB 255 billion in 2005, increasing by about 18% from the previous year. The industry’s projected value added is RMB 118.9 billion, up about 15%, and accounting for 13% of Shanghai’s GDP and 25% of the service industry’s value added, 1 and 0.8 percentage points higher respectively than the previous year. The modern mode of logistics management, characterized by IT application and a supply chain management, has been adopted in such industries as steel, automobile, pharmaceuticals, chemicals, and chain stores. Baosteel has signed a “Strategic Cooperation Agreement” with China Shipping, and an “Integrated Management Cooperation Agreement” with FAW Group and Sumitomo. Through

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such agreements, the group’s position as a strategic supplier has been reinforced and enhanced. Large commodity circulation enterprises, such as Brilliance Group and Nonggongshang Supermarket, have established logistics and distribution networks to support the development of chain stores as their core business. The integration of commercial, commodity, and information flows has prompted the formation of the modern logistics and distribution networks in support of the pillar industries and chain stores in Shanghai. During the Tenth Five-Year Plan period, Shanghai aimed to build four logistics parks. Phase I of the Yangshan Deep Water Port has been successfully completed, and the Yangshan Bonded Port is now in operation. The Lingang International Logistics Park has actively attracted world-famous logistics companies, such as Prologis and Caterpillar, as well as large domestic logistics enterprises. Waigaoqiao, Airport, and Northwest Comprehensive Logistics Parks have gradually improved their service functions. Thirty-eight logistic projects with investments from 15 well-known domestic and foreign logistics companies have settled down in the Waigaoqiao Bonded Logistics Park. A new round of planning and construction has begun for Pudong Airport Logistics Park. The Northwest Comprehensive Logistics Park has already attracted 59 domestic and foreign logistics companies, comprising 60% of China’s pharmaceutical logistics and distribution, and 75% of Shanghai’s retail logistics and delivery. Also during the Tenth Five-Year Plan period, Shanghai’s stateowned logistics enterprises, such as the International Port Authority, J.Y. Group, Orient International, Jihaijieya, and Brilliance Modern, were restructured and developed. Global logistics enterprises such as Federal Express, TNT, Maersk, and UPS, set up modern logistics services in Shanghai. A considerable number of privateowned domestic logistics enterprises, such as Beifang, Hongxin, Yuancheng, and Jiaji, focused on supply chain management and IT-based logistics, and formed a unique mode of logistics services, providing outsourced logistics services to trading firms as well as wholly foreign-invested or Sino-foreign joint venture manufacturing enterprises. A number of joint venture logistics enterprises with modern logistics management experience and technology grew rapidly, providing comprehensive logistics services for advanced manufacturing, such as ANJI-TNT. In sum, Shanghai has established


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a common development platform for enterprises of different ownerships and those providing specialized logistics services. It is true that Shanghai’s modern logistics services have made great progress. However, given the fast increasing demand for such services generated by the city’s sustained and rapid economic and social development, the industry still needs to improve in such aspects as the structural conflict between supply and demand, the inefficient use of logistics facilities, and a lack of qualified professionals. Being an international shipping center is a key asset for any world-class city. Shanghai set the target to become an international shipping center years ago and adopted many effective measures in that regard. The essential conditions to build an international shipping center are: a solid economic foundation, sufficient supply for import and export and container transport, a developed and sound shipping market, an advantageous geographical location with ports near international shipping lines and supported by a highly developed river shipping system, deep water terminals and good quality terminal facilities suitable for berthing international ocean shipping vessels, and first-class comprehensive services. After nearly 200 years of development, Shanghai Port is now evolving from a second-generation port (value addition through processing) into a third-generation port (comprehensive resource allocation). It is qualified to become an international shipping center. Firstly, the port handles nearly 90% of the goods for Shanghai’s foreign trade. The port is not just a place for loading, unloading and transfers, but also the platform for logistics, and a center for the distribution of imports and exports. Official analysis shows that 90% of Shanghai’s logistics falls into the category of port logistics. Secondly, Shanghai Port has achieved sustained growth in its cargo throughput, and has shown a sharp increase in container handling. Accordingly, its world ranking has risen quickly. Total cargo throughput stood at 220 million tons in 2001, and rose to 260 million tons in 2002, which took Shanghai Port to third place worldwide in 2002. In 2004, cargo handling amounted to 379 million tons, up 19.8% over the previous year, making it the second busiest port in the world. Container handling for the same year reached 14.55 million TEUs, representing a net increase of

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3.272 million TEUs, or 29% growth over the previous year. By the end of 2004, Shanghai port had 19 international container shipping lines connected to 500 ports in 200 countries and regions in the world. The number of container liners docking at Shanghai Port each month reached 1,716, up 222 from the previous year. In 2005, Phase I of Yangshan Deep Water Port was completed and put into operation, marking another step toward elevating Shanghai’s status as an international shipping center. That year, Shanghai Port achieved an annual cargo throughput of 443 million tons, rising 16.9% from the previous year, and making it the world’s largest port. Annual container handling reached 180.84 TEUs, representing a net increase of 3.53 million TEUs, or a growth of 24.3%, assuring Shanghai a place among the world’s top three ports. Thirdly, Shanghai Port has improved its infrastructure to comply with the requirements of international shipping. A port structure has emerged in which main hub terminals play a key role, supplemented by vital regional terminals and small terminals. The Shanghai Shipping Exchange has been set up, and deep water dredging has been conducted at the Yangtze estuary. This has greatly improved the port’s capability in terms of vessel tonnage and container transfer systems. Large specialized container terminals, such as Waigaoqiao, are now ready for use. The completion of the first phase of Yangshan Deep Water Port has considerably increased the port’s navigability and efficiency. With improved efficiency in loading and unloading facilities and customs clearance, the vessel berth time has been dramatically reduced.

1.3 Business Services By the end of 2004, there were a total of 19,000 providers of business services in Shanghai, accounting for 15% of the producer service industry. The business service sector had a work force of 480,000, accounting for 26% of the producer service industry, and with an annual main business income of RMB 20.74 billion, accounting for 11%. Within the business services sector, legal, accounting, auditing, and taxation services are developing very rapidly. In 2004, a total of over 1,300 institutions employing 24,000 people were engaged in

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After the founding of the People’s Republic of China in 1949, Shanghai’s insurance industry experienced ups and downs just as other cities in the country. However, its domestic insurance business survived for nearly ten years, despite the nationwide suspension in 1959, and its overseas insurance business never ceased. Even during the turmoil of the Cultural Revolution, more than 100,000 insurance policies linked China to the rest of the world. China’s insurance business took some shares in the international market and made great contributions in earning non-trade foreign exchange income for the country. It also accumulated some experience in underwriting, adjustment, and recovery. Therefore, the People’s Insurance Company of China (PICC) held that Shanghai boasted a good concentration of professionals, and hoped that the domestic insurance business would be first restarted in Shanghai on a pilot basis. Beginning January 1, 1980, the Shanghai branch of the PICC, and its affiliated district and county institutions, officially resumed the domestic insurance business. In the first year, five types of insurance—corporate property insurance, family property insurance, domestic cargo transportation insurance, domestic hull insurance, and auto insurance—were handled with a premium income of RMB 35.42 million, surpassing the record of RMB 29.11 million in 1965. The smooth progress in the resumption of the domestic insurance business in Shanghai paved the way for the all-round resumption of the domestic insurance business across the country. After the 1980s, four major categories of insurance emerged in Shanghai’s insurance industry: property insurance, life insurance, liability insurance, and credit and bond insurance. During the 1980s, the Shanghai branch of the PICC was basically the sole insurer in Shanghai. In November 1987, the Shanghai branch of the Bank of Communications took the lead in setting up an insurance division, breaking the 30-year monopoly of the Shanghai branch of the PICC. Then, in April 1991, the China Pacific Insurance Company, controlled by the Bank of Communications, was incorporated. In November 1993, with the approval of the PBOC, the China Ping An Insurance Company, headquartered in Shenzhen, set up a branch in Shanghai. In 1992, Shanghai approved the founding of the American International Group, which included the American International Assurance Company and AIU Insurance Company. It was the first foreign-funded insurance company set up in China since 1949. In 1994, a second

The Insurance Industry of Shanghai

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foreign-funded insurance company, the Japanese Tokyo Maritime Fire Insurance Corporation, started business in Shanghai. Not long after that, Shanghai also approved two regional insurance companies, the Tian’an Insurance Company and Dazhong Insurance Company With the promulgation and implementation of the Insurance Law of the PRC and further reforms, the PICC and China Pacific Insurance Company operated property insurance and life insurance separately, and established a self-disciplinary organization. Marketing methods of insurance companies have also changed from relying on company employees or agencies to using multiple channels including life insurance marketing by sales representatives. A variety of insurance products aimed at well-defined clients were offered, and both the management and service were greatly improved. After over 20 years of efforts, a market pattern featuring an coexistence of Chinese, Chinese-foreign joint ventures, and foreign-funded insurance companies, fair competition, and common development have emerged in Shanghai’s insurance market.

2. The Current State and Development Prospects of Shanghai’s Insurance Industry 2.1 Current State 2.1.1 A steady increase of market players By the end of 2005, Shanghai had 67 insurance companies and three insurance asset management companies, including 28 property insurance companies, 30 life insurance companies, two pension insurance companies, three health insurance companies, three reinsurance companies, and one insurance group corporation. There were altogether 157 insurance intermediaries, 76 insurance agencies (including six branches), 28 loss adjusters (including six branches), and 53 insurance brokerages (including 19 branches). 2.1.2 Rapid growth of premium income In 2005, the Shanghai insurance industry earned a total premium income of RMB 33.362 billion, accounting for 6.77% of the total of

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China and ranking No. 4. Shanghai takes a leading position with an insurance penetration of 3.66% and a density of RMB 2,452. In 2005, the premium income from property insurance amounted to RMB 8.786 billion, up 18.24%, accounting for 26.34% of the total. Table 4.1

Insurance penetration and density of Shanghai and China (2000–2005) (RMB %) China

Shanghai

Insurance Penetration

Density

Insurance Penetration

2000

1.80%

127

2.86%

886

2001

2.30%

168

3.68%

1,355

2002

3.00%

238

4.43%

1,803

2003

3.33%

287

4.64%

2,159

2004

3.39%

332

4.13%

2,272

2005

—

—

3.66%

2,452

Figure 4.1

Density

Growth of premium in Shanghai (2000–2005)

(100 mil. yuan) 400 350

333.62

307.11 300 290.10 250

239.34 232.49

200 150 100

180.25 127.22

193.30 140.30

92.13

57.61

50 0

35.09 2000

243.88

231.30

39.95 2001

89.74 75.81

46.04 2002

Property insurance Total insurance premium

2003

2004

2005

Life insurance

Jiangsu

Guangdong

Shanghai

Shandong

Zhejiang

2

3

4

5

6

China

Beijing

1

Region

4,931.28

262.16

291.23

333.62

392.84

437.34

497.73

Premium

14.04%

7.25%

7.54%

8.80%

14.11%

4.92%

78.20%

Increase

Premium Income

3

5

4

1

2

6

Place

1,282.74

91.69

74.54

89.74

118.41

97.49

68.57

Premium

13.06%

19.07%

18.75%

19.20%

11.40%

13.82%

1.26%

Increase

Property Insurance

6

5

4

3

2

1

Place

3,648.54

170.46

216.69

243.88

274.43

339.84

429.15

Premium

Life Insurance

Table 4.2 Ranking of Shanghai’s premium income in China in 2005 (RMB 100 mil.)

14.38%

2.08%

4.30%

5.42%

15.24%

2.73%

102.12%

Increase

The Insurance Industry of Shanghai 89

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The premium income from life insurance amounted to RMB 1.425 billion, up 5.02%, accounting for 64.22% of the total. Also, the premium income from health insurance amounted to RMB 2.351 billion, up 8.95% and accounting for 7.05% of the total, and the premium income from accident insurance amounted to RMB 0.8 billion, surging 18.59%, accounting for 2.40% of the total. 2.1.3 Compensations and payouts In 2005, Shanghai’s insurance companies paid out in total RMB 8.746 billion in claim settlements, an increase of RMB 1.649 billion from 2004, representing a growth of 23.23%. Out of this, RMB 4.726 billion was paid out for property insurance, an increase of 38.83% over 2004; RMB 3.187 billion was paid out for life insurance, a growth of 6.38% from 2004; RMB 0.690 billion was paid out for health insurance, with a growth of 20.34%; and RMB 143 million was paid out for accident insurance, representing a growth of 15.56% from the previous year. 2.1.4 Assets of legal entities By the end of 2005, the total assets of legal insurance entities in the Shanghai area registered RMB 202.446 billion, an increase of 42.67% over the previous year. The assets of the Pacific Insurance Group stood at RMB 156.201 billion, representing an increase of 34.57% over the previous year. The total assets of legal insurance entities in the Shanghai area added up to RMB 358.647 billion, accounting for 23.55% of the total for the country.

2.2 Development Features The rapid development of Shanghai’s insurance industry since the late 1970s has fostered the economic and social development of Shanghai and China and played an exemplary role in boosting the insurance sector of China.


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2.2.1 High level of development In 2005, the premium income of Shanghai’s insurance market accounted for 6.77% of the total of China, and its market share ranked the fourth. Shanghai’s insurance sector has become one of the effective points of fast growth in Shanghai’s economy. Shanghai’s insurance density is RMB 2,452, based on its registered population, ranking high among all provinces and cities of China. 2.2.2 High degree of opening-up As the first city in China to open its insurance sector to the outside world, Shanghai has received investments by foreign-funded insurance companies from more than ten countries and regions with a wide scope of business. Their business volume accounts for about 15% of the total, and the foreign-funded intermediaries and reinsurance institutions also conduct their business in Shanghai. Shanghai has become a bridgehead for introducing overseas insurance capital into the Chinese insurance market. 2.2.3 Significant improvements in business operation and management With the further deepening of the reform of insurance systems and mechanisms, the ability of Shanghai’s insurance sector to operate business and control risks has been incessantly enhanced. The operating efficiency of Shanghai’s insurance companies is much better than the average of the whole country. Compared with their Chinese counterparts, local branches of regional insurance companies enjoy higher operating efficiency. In terms of service, each company has generally set up and improved its customer-centered business and service systems. 2.2.4 Diversified insurance coverage Shanghai’s insurance market sells several hundred kinds of insurance products, such as short-term, long-term, domestic, or foreign policies

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to cover property, life, and many other aspects. The insurance industry’s business line is complete with a wide coverage, catering to the needs of different social groups. New products keep emerging and some products have filled in the gaps of the domestic market. For example, property insurance companies have developed various types of professional liability insurance, such as lawyer liability insurance, accountant liability insurance, and architect liability insurance. Additionally, life insurance companies have launched a great number of group insurance products. 2.2.5 Enhanced public awareness of insurance In view of the people’s increasing insurance needs, all levels of the government and enterprises have shifted various economic risks by purchasing insurance. The voice of the public for simplifying the insurance clauses is becoming louder, which shows a wide acceptance and deep understanding of insurance among the public.

2.3 A Shift of Operational and Managerial Concepts 2.3.1 A shift from extensive to intensive and unified management A major trend of modern operations and management theory is that corporate organizational structure evolves from pyramid management with decentralized decision-making centers to flattened management with relatively concentrated decision-making centers, thanks to advanced information and quick services. The advantages of this structure lie in the rise of the operating efficiency, the reduction of corporate demand for professionals, and the prevention of risks. Insurance companies are enterprises that run risks with currency, and the efficient concentrated management of risks is in great need. Upon entering the Chinese market, foreign-funded insurance companies in Shanghai began to carry out strictly concentrated management systems. Product development and use of funds are managed by product development and fund application committees,


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or are examined and approved by the upper-level company. Both underwriting and adjustment have been separated and a strict authorization system has been implemented. Meanwhile, internal and external auditing has been conducted either irregularly or regularly. For example, the Shanghai branch of the AIU Insurance Company adopted a rectangular system that separates administrative management from business management. Business departments that recheck insurance and indemnity shall be responsible to the regional head office in Hong Kong, which assesses the performance of each type of insurance and makes decisions on the coverage and ceding on each type of insurance. Even the general manager of a branch has no power to undertake insurance. This rectangular management system integrating vertical business leadership with parallel administrative leadership can avoid interference with business operations by nonprofessionals and the overdependence on the management of local branches by business departments. Unlike the foreign-funded insurance companies, the Chinese insurance companies generally adopted an extensive management method that delegated power to the lower level in the initial period, easily giving rise to a lot of operational risks. For example, branches of some Chinese insurance companies handled high-interest types of insurance without permission, acted as guarantors illegally, and undertook insurance in excess of the quota without adoption of any ceding measures. As a result, the management was out of control and NPLs were generated unduly. With a series of major risks brought to light, China’s insurance companies gradually realized that such an extensive management was not conducive to further growth. They started to adopt the intensive unified management, making full use of networking technology and bringing insurance risks under better control. 2.3.2 Investment shifting from traditional production factors to modern production factors According to statistics, IT expenditure has accounted for 10%–20% of the total cost of foreign insurance companies, and 2%–3% of their total premium income. From 1990 to 2000, the IT cost of foreign

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insurance companies in the world rose at an annual rate of 13%. IT has become a major factor for an insurance company to deal with competition and maintain rapid and sustainable development. At the same time, it has also become an integral part of operating cost. The application of call centers, customer relation management tools (CRM), management information systems (MIS), and e-commerce has exerted a profound effect upon the development of international insurance industry. Foreign-funded insurance companies in Shanghai generally invest heavily in modern production factors like IT. For example, since the American International Assurance Company went into operation, the company has updated its hardware equipment regularly and computers are replaced every three to four years. Also, investments have been made to improve the working environment and safety facilities of the computer department, and software development has been encouraged. At present, employees of the computer department account for 20% of the total working staff. The Chinese insurance companies have taken a different approach. They see insurance as a capital-, technology-, and laborintensive enterprise, and therefore they always develop insurance business by following the path of expansion of capital leading to an increase of fixed assets, an addition of outlets, and an expansion of labor. As the IT-based knowledge economy becomes a critical new production factor, knowledge productivity will be a more important criterion for efficiency than labor productivity. Thus corporate personnel training and informed investment have become a major driver of development. The application of high-technology, such as remote billing, network insurance, e-commerce, and new electronic payment methods are emerging constantly, which will bring about a revolutionary change to the traditional insurance industry in terms of operational concepts and methods. In recent years, Chinese insurance companies in Shanghai have generally abandoned the mode of business expansion characterized by increasing outlets and labor intensity, and have sought to improve their operations, management, and service by the application of IT. For example, the Shanghai branch of the Pacific Insurance Company has invested a sum of RMB 2.5–3.0 million in computers since 1994, and established a three-layer computerization plan comprising insurance data processing, comprehensive management


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control, and auxiliary decision support. This investment has greatly boosted the corporate business development and improvement of operations and management. 2.3.3 A shift from premium to efficiency In Shanghai’s insurance market, most of the foreign-funded insurance companies stress that market expansion and insurance undertaking must be predicated on the maximization of corporate profit. As a result, management by all-round budget control and profit orientation is carried out universally. For instance, the AIU Insurance Company, except for its branches being regarded as profit centers for performance assessment, set up six secondary profit centers within the company in terms of property insurance, the insurance of works, liability insurance, cargo insurance, private property insurance, and special financial insurance according to the unified arrangement by the head office. These centers are separately assessed by their performance, covering the premium income, reinsurance receipts and payment, indemnity payments, and related expenses. Meanwhile, the financial department compares the actual and expected operations of each profit center with the budget in combination of all-round budget control, disclose difference, and compile a liability report for each profit center so that the latter may adopt appropriate measures promptly. By these methods, the profit-oriented operating concept can be effectively practiced, and all departments of the company can know their operating goals. Additionally, problems in the business operations of each department can be found, liability clarified, and appropriate measures adopted in time. In contrast, Chinese insurance companies used to take the premium income as the core of assessment with little understanding of the cost concept. For some time, the insurance regulatory organization also regarded the premium income as a most important basis for the increase of business outlets. As a result, there have emerged several problems such as the business size being valued over quality, the spreading of the life insurance rate, high commission charges and return premiums, and low rates. All these can all be attributed to the failure to carry out the profit-oriented assessment

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system, establish an effective early warning system for risks, and adopt the cost method of all-round budget control. With the growth of joint-stock enterprises in China, such Chinese insurance companies as Pacific Insurance and Ping An have taken the lead in setting up the profit-oriented assessment system, tightening the all-round budget control system. 2.3.4 A shift from the product-centered to market-oriented concept The market concept adopted by foreign-funded insurance companies emphasizes market demand and services. Potential demand is found through market segmentation. For example, the Federal Insurance Corporation conducts a market appraisal each year to formulate a business development plan. Then its product advantages and service functions are publicized through various product briefings, symposia, and risk appraisal promotion fairs. At the same time, with customers’ increasing demand for insurance products, insurance companies are also required to continuously expand their products with advanced technology. In addition, risk control, financial management, and investment portfolios are widely used. Foreign-funded companies generally highlight the provision of all-round services. For instance, the Shanghai branch of the AIU Insurance Company increased the real value of its insurance business by implementing a blanket policy, which helped it gain more market share and customers. Despite the advantages of the market-orientated concept, Chinese insurance companies have long neglected differentiated market demands, and have always focused on some traditional types of insurance. Competition in some markets is fierce with reduced profit margin, while at the same time insurance applicants cannot find products that suit their needs. A good example is that up till now, the auto insurance in Shanghai still takes up over 50% of the whole property insurance. Over the past few years, however, as the competition in Shanghai’s insurance market has become fiercer day by day, Chinese insurance companies have also made some efforts to change this condition. For example, the property insurance companies have developed some products, such as lawyer liability insurance,


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accountant liability insurance, and architect liability insurance in line with the market needs and also designed some comprehensive family insurance products, such as family property, decoration design, and third party liability. The life insurance companies also launched numerous types of group insurance products.

3. The Development of Foreign-Funded Insurance Companies In September 1992, with the approval of the PBOC, the American International Assurance Company set up a branch in Shanghai, marking the opening-up of China’s insurance market on a trial basis. The presence of foreign-funded insurance companies has introduced advanced risk control expertise, operating concepts, and marketing methods, broken the original monopolized market pattern, promoted competition, standardized the market, increased the insurance awareness of urban residents, trained a group of insurance professionals, and played a vital role in boosting the growth of Shanghai’s insurance market.

3.1 The Process of Opening-up of Shanghai’s Insurance Market First is the preparatory stage, which extended from 1980 to 1992. With China’s further economic reform and opening-up, some foreign insurance companies were allowed to set up their representative offices in Shanghai. Their main functions were to link their parent companies to the Chinese insurance industry, coordinate the business relationship between their parent companies and the Chinese insurance companies, survey and investigate the Chinese insurance market, train personnel for insurance companies, and support insurance and education undertakings. Representative offices of foreignfunded insurance companies enhanced the exchange between the Chinese insurance industry and the world through these activities, and also expanded the influence of their parent companies in China, laying a solid foundation for their further presence in China.

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Second is the pilot stage, which lasted from 1992 to China’s accession to the WTO. After the State Council selected Shanghai as the pilot city for opening up the Chinese insurance sector to the world, the American International Assurance Company became the first foreign insurance company to obtain an insurance business license. The number of foreign institutions operating in Shanghai had been increasing with each passing year and the competition in the market had become fiercer. The Chinese counterparts refused to yield and joined the competition. Foreign-funded insurance companies developed quite steadily in Shanghai and in the last one or two years took up over 15% of the market with desirable results. During this pilot period, the business line and geographical restrictions were imposed on foreign insurers. Third is the stage of all-round opening-up, which started with China’s WTO accession. China’s insurance sector was opened in an all-round way from November 2005. Shanghai’s insurance sector is now participating in the international cooperation. Legal examination, approval, and supervision are prerequisites for market operation. Therefore, before opening up the market, the PBOC formulated The Interim Measures of Shanghai for the Administration of Foreign-funded Insurance Institutions in July 1992 to ensure orderly market regulation. The Measures absorbed some experiences of developing countries in Southeast Asia, with reference to international common practices, and took into full consideration a company’s record of consecutive profit-making, asset size, and operating strategies in examining and approving the entry of foreign insurance companies into the Chinese insurance market. With respect to the management of fund utilization, proportional supervision and control were adopted to address different asset risks. This is the beginning of standardized management by administration and supervision according to law in the Chinese insurance sector. Therefore, at the pilot stage of opening up Shanghai’s insurance sector, The Measures were implemented for the supervision of foreign-funded insurance institutions, becoming a milestone in the efforts to manage the opening-up of the insurance sector by law.


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3.2 Fair Competition and Joint Development of Chinese and Foreign Insurance Companies In 2005, the premium income of foreign insurance companies in Shanghai came to RMB 5.822 billion with a market share of 17.45%, of which foreign property insurance companies earned a premium income of RMB 0.99 billion with a market share of 2.99% and foreign life insurance companies obtained a premium income of RMB 4.82 billion with a market share of 14.46%. The changing market shares of Chinese and foreign insurance companies indicate that foreign insurance companies have become a major force in Shanghai’s insurance market. The competition between Chinese and foreign insurance companies has gone through five phases: The first phase: 1992–1995. As foreign insurance companies, such as the American International Assurance Company (AIA) and Tokyo Maritime, started business in Shanghai successively, the market share of foreign insurance companies rose rapidly from 0.51% in 1993 to 9.35% in late 1995. This was because AIA took the lead in introducing the agent marketing method, and Tokyo Maritime won over a large number of Japanese enterprises in Shanghai. The impact of foreign-funded insurance companies on Shanghai’s insurance market was strongly felt. At the same time, the arrival of foreign-funded companies had also brought in a breath of fresh air, breaking the original monopolized market. The second phase: 1995–1997. The Chinese insurance companies adopted the marketing method of using life insurance agents and gradually established a set of marketing training and management systems. However, Chinese insurance companies launched some types of insurance based on high preset interest rate due to their lack of experiences, while foreign insurance companies enjoyed no remarkable advantages in competition by implementing strict and scientific management and internal control systems. The Chinese insurance companies gained some advantage in competition for the time being, but the situation did not last long. Their market share expanded, but hidden dangers remained.

Total

Foreign life insurance

Foreign property insurance

22.87%

28.02%

27.11%

14.46%

100.00%

Life insurance

Of which: property insurance

Premium of foreign insurance companies

5.58%

2.99%

Life insurance

1.02%

58.64%

Chinese life insurance

Total

Of which: property insurance

18.75%

23.91%

Chinese property insurance

Premium of Chinese insurance companies

Growth rate

82.88%

17.12%

100.00%

71.03%

28.97%

100.00%

Percentage

Foreign insurance companies

Of which: Chinese insurance companies

Premium of property insurance

Foreign insurance companies

Of which: Chinese insurance companies

Premium of life insurance

A structural contrast of Chinese and foreign insurance companies in premium income

Percentage

Table 4.3

11.10%

88.90%

100.00%

19.79%

80.21%

100.00%

Percentage

100 SHANGHAI FINANCE


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The third phase: 1998–2000. The decreased bank interest rate reduced the preset interest rate below 2.5%, greatly impacting the traditional savings-oriented products. Chinese insurance companies lost their price advantage. The competition in this period found expression mainly in management, service, and innovation, and the market share of foreign insurance companies rose again to 13.92% at the end of 2000. Chinese insurance companies gradually recognized the importance of comprehensive competition and began to sharpen their competitive edge through improved business operations and fresh products. The fourth phase: 2001–2003. At the end of 1999, the market share of Chinese insurance companies increased quickly as they launched many new products, such as those on personal dividends and personal investment. Also, the reform of social security system in Shanghai prompted Chinese insurance companies to take full advantage of the restrictive policy on foreign insurers in developing all-purpose life and group investment insurance, as well as group all-purpose insurance. By the end of 2003, the market share of foreign insurance companies dropped to 12.89%. The fifth phase: 2004 to present. Since 2004, with the slowdown in the life insurance business, and the downturn of dividend and bank insurance of Chinese insurance companies, foreign insurance companies have experienced a steady rise. With the expiration of WTO-based industry protection, more and more foreign insurance companies have joined the competition in Shanghai’s insurance market. By the end of 2005, the market share of foreign insurance companies in Shanghai had increased to 17.45%.

CHAPTER

5

Interbank Borrowing, Lending, and Bonds

1. The Process of Development

A

t present the interbank market in local currency is composed of the borrowing and lending market and the bonds market. Financial institutions adjust asset-liability structure, make investments, and conduct the management of financial affairs by using the interbank market control monetary position through such channels as credit borrowing and lending, bond repurchase (including collateral repurchase and buyout repurchase), the trading of bonds, and the forward transaction of bonds. The interbank market is the core of the financial market system with the character of wholesale trading. The indices of the interbank market cover the borrowing and lending interest rate, bond repurchase, and bond yield. They are the basis for the pricing of other financial products and derived instruments and an important weathervane upon which a macro-control decision is made. Transactions in the interbank market in local currency include two parts: the electronic transaction system and off-system transactions. The transaction volume of the electronic system accounts for over 90% of the entire interbank market transactions in terms of credit borrowing and lending, repurchase of bonds, or the trading of bonds. Being able to join the electronic transaction system and become a member of the interbank market is a sign of competitiveness for financial institutions.

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1.1 The Credit Borrowing and Lending Market Credit borrowing and lending refer to the short-term financing between financial institutions with their respective credit as guarantee, and the market thus formed is the so-called credit borrowing and lending market, or borrowing and lending market for short. The interbank credit borrowing and lending in China began in 1984, and has since experienced many ups and downs. In early 1996, the PBOC decided to set up the National Interbank Funding Center on the basis of the China Foreign Exchange Trade System (CFETS). Both the China Foreign Exchange Trade System and the National Interbank Funding Center were under the control of one legal entity, and the leadership of one management team, yet they had two signboards. On January 3, the credit borrowing and lending electronic trading system went into operation, signifying the birth of the unified national interbank borrowing and lending market in China. The development of the interbank borrowing and lending market in China can be divided into the following four phases. The 1984–1992 phase features natural development. In 1984, when the PBOC functioned as the central bank, other specialized banks such as the ICBC, ABC, BOC, and CBC conducted capital operations independently and financing between specialized banks gave rise to the interbank borrowing and lending business. With the establishment of non-bank financial institutions such as trust companies and financial companies, the interbank borrowing and lending business developed steadily. The PBOC offered strong support and encouragement to the interbank borrowing and lending business during this period. However, due to limited understanding of the business, both management and operation were not standardized. The local governments’ administrative intervention, in particular, resulted in vicious development of the short-term borrowing and lending business. The borrowing and lending were invested in the stock market and real estate industry, and acts of illegal fund-raising, borrowing, and lending were rampant. In 1993, the PBOC began to straighten out the borrowing and lending market. The 1993–1995 phase features a loose development with a focus on the regional interbank borrowing and lending business. In 1993, with the setting up of financial centers across the country, regional


105

interbank borrowing and lending markets emerged and developed until January 3, 1996, when a unified national interbank borrowing and lending market was established. During this period, the business volume of interbank borrowing and lending rose rapidly and the rise of financial centers relying on the PBOC played a decisive role in enlivening the market. The PBOC managed to meet the financing demands between financial institutions by conducting direct interbank borrowing and lending business through financing centers. However, this method was in conflict with the function of the PBOC as the central bank and the financing centers took over a large amount of overdue fund in various capital markets carried over from before 1993, resulting in a great pressure. The 1996–1998 phase witnessed the formation of unified national interbank borrowing and lending market. On January 3, 1996, a national interbank borrowing and lending market was formed. However, local financing centers still played a role in the borrowing and lending transactions. At this phase, with the overall winding up and rectification of the financial centers, the business volume of borrowing and lending dropped by a big margin. After financing centers exited from the interbank borrowing and lending market, the unified national borrowing and lending market was formed in its true sense. From 1999 through today, the unified borrowing and lending market has developed steadily. In 1999, with a rationalized market relationship in place, transactions began to recover gradually and grow quickly. The transaction volume kept rising and the market size expanded gradually. The main market players grew steadily in variety and quality and the function of the borrowing and lending system was further improved. Legal entities of financial institutions, and their authorized branches with the qualifications for interbank borrowing and lending business, may engage in the credit interbank borrowing and lending business. Financial institutions can engage in credit interbank borrowing and lending business through the electronic trading system of the Trade System, or make a deal off the trading system. The financial institutions, which join the electronic trading system of the Trade System, are members of the Trade System and are subject to the approval of the PBOC. The financial institutions making a deal

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off the system are usually those with small business volume and low frequency, and they must report their transactions to the local branches of PBOC for records. In the process of borrowing and lending by the recording system, market information can be obtained from the China Currency Net of the Trade System in addition to making quotations and keeping electronic records. Financial institutions first have to obtain the approval of the PBOC for joining the interbank electronic trading system. After this, the financial institutions apply to the Trade System for networking and send salespersons to the Trade System to receive training as traders. After networking to the electronic trading system is completed, trading can be done in the interbank borrowing and lending market. In the process of trading, financial institutions can quote through the electronic trading system independently, make formatted inquiry of other members, and conclude a deal after final confirmation. The transaction advice printed by the trading system is a contractual document with legal effect that confirms a deal between financial institutions. Both parties make settlements through the payment system in line with the advice on the principle of independent settlement with each party assuming its own risks. To ensure a healthy and orderly development of the borrowing and lending market, the PBOC carries out strict examination of the market access and sets forth the loan size and length of maturity for each type of financial institution. The Trade System can convert the regulatory requirements of the PBOC to electronic monitoring through the electronic trading system to ensure that its members do not go against the requirements, and provide facilities for financial institutions to avoid the risks brought by policies and systems. The indicator of borrowing and lending interest rate generated in the electronic trading system is called CHIBOR. CHIBOR is the weighted average interest rate of each transaction variety for credit borrowing and lending released by the National Interbank Borrowing and Lending Center at the end of each business day. Its generation mechanism is as follows: with the turnover of each deal as the weight, the weighted average interest rate of each variety traded on the same day and the weighted average rate of each variety are calculated. CHIBOR is now made of the interest rate indicators of eight varieties, such as one day, seven days, 14 days, 21 days, one


107

month, two months, three months, and four months. The credit borrowing and lending of members and financial institutions off the trading system can be realized through the local overnight borrowing and lending system, and the electronic recording quotation system, under the supervision of the PBOC.

1.2 The Bonds Market The bonds market has two divisions: the repurchase market and the current bonds market. Conventionally, it is divided into the exchange market and the curb market. The exchange market is mainly for small and medium investors, and its trading method suits small business engagements. According to international experiences, bond trading focuses chiefly on the curb market as opposed to the exchange market, whereas the interbank bonds market is the main body and core of the curb market. The bond repurchase business in China began in 1991. In order to increase the liquidity of treasury bonds, STAQ systems announced in July 1991 that it would handle treasury bonds repurchase trading on a pilot basis, and closed its first repurchase deal on September 14 of that same year. Afterwards, the T-bonds market developed rapidly, but due to poor market management and other reasons, many problems cropped up in the repurchase market. The trading form, the main players, and the capital use were nonstandard with too high an interest rate for the repurchase transactions. In view of this, the PBOC, the Ministry of Finance, and the CSRC jointly issued a notice to standardize the repurchase business, and thus the repurchase market began to be rectified on August 8, 1995. Also, after the implementation of a series of rectification measures, the curb exchange was basically contained, disorder in the repurchase market remarkably decreased, and the repurchase market got back on the track of normal and healthy development. To meet the requirements for interbank trading and improve the bonds market system in China, the PBOC decided to draw upon its previous experience in building the interbank borrowing and lending market, and established the interbank bonds market in early 1997. On June 16, 1997, in line with the plan of the PBOC, the Trade System presented the bond electronic trading system to the

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financial institutions, signifying the founding of a unified national interbank bonds market. The interbank bonds market deals in four transactions: bond trading, bond collateral repurchase, bonds buyout repurchase, and bond forwards. The bond trading and bond collateral repurchase transaction systems were launched on June 16, 1997. The buyout repurchase system was introduced on May 20, 2004, and the bond forward transaction system on June 15, 2005. Exchangeable bonds in the interbank bonds market refer to the book entry securities, such as government bonds, policy-based bonds, instruments of the central bank, financial bonds, junior bonds, corporate shortterm financing bonds, securities company’s short-term financing bonds, and corporate bonds that can be traded in the interbank bonds market with the approval of the PBOC. With the continuous development of the bonds market, the variety and type of bonds on sale have kept on increasing. For a time, the interbank bonds market implemented an examination and approval system. The financial institutions that had joined the electronic trading system and become members of the bonds market had to apply to the PBOC for approval. In April 2002, the PBOC abandoned that examination and approval system for a filing system. With the filing system, financial institutions can join the interbank bonds market as long as they have the qualifications for bond or portfolio investment, and submit relevant documents to the National Interbank Funding Center and the Central Treasury Bonds Registration & Settlement Company for filing purposes. To join the interbank electronic trading system, financial institutions have to send salespersons for training as traders in the Trade System, and apply for network access after they pass the filing examination. Bond trading can be done after network access is established to the electronic trading system. In terms of transactions, financial institutions can make a deal by quoting independently through the electronic trading system, making a formatted inquiry of other members, and obtaining final confirmation. The transaction advice printed by the trading system is a contractual document that confirms a bond deal concluded between financial institutions. Both parties make the bond delivery through the bond registration system and settle accounts through the payment system in line with the


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content in the advice on the principle of independent settlement, with each party assuming its own risks. To cater to the need for the development of the bonds market, the Trade System introduced a new trading system in early 2003, with trading facilities such as petty quotation on the basis of inquiry transaction. Petty quotation is a one-way go-between facility for direct transactions to be made in a given condition without making inquiries. The bond trading system generates the bond index each day and the repurchase interest rate indicator system, which includes the collateral repurchase and buyout repurchase rates. The repurchase interest rate indicator system shows the repurchase weighted average rate of each variety, and its generation mechanism is similar to that of CHIBOR, a weighted average rate calculated using each transfer quantity of every variety as the weight. The current collateral repurchase interest rate system is composed of 11 varieties and buyout repurchase of seven varieties. Due to small risks and large business volume of the bonds repurchase market, the repurchase interest rate system has gradually acquired the characteristics of a short-term interest rate base. Transaction members have to quote the initial transaction price of bonds and transaction price at maturity in the buyout repurchase business. As the repurchase interest rate is a reference rate calculated on the two prices, the trading system can also provide for the buyout repurchase the quotations of net prices for the initial and mature transactions of each bond variety traded. To cater to the need for the development of the bonds market, especially current bond transactions, the Trade System drew on its experience in formulating the world-famous bond index, and introduced the Interbank Bond Index on June 10, 2002. This index is made up of the Interbank Treasury Bond Index, representing the market base and Interbank Bond Composite Index representing the overall price trend in the market. At present, the index specimen of the Treasury Bond Index only includes the fixed rate treasury bonds circulated in the interbank bonds market. The purpose is to provide the market with one indicator, with one-year risk-free bonds as the benchmark for the return of risk-free bonds. The index specimen of a composite index covers all the treasury bonds, financial bonds,

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and corporate bonds with both fixed rates and floating rates that are circulated in the interbank bonds market. The aim is to provide the market with one indicator for the reward of over one-year integral bonds, which can really represent the value of the integral bonds market, and simultaneously serve as the base for the return of the integral bonds market. As an indicator of fluctuations in the bond price, the interbank bond index provides a basis for the market research and forecasting. It is also a standard for assessing investor’s performance and can help financial regulatory institutions obtain overall information about the bonds market.

2. The Rules for Market Operation 2.1 Interbank Borrowing and Lending in RMB When a mode of inquiry transaction is carried out for any quotation confirmed by a member, the trading system automatically issues a transaction advice as the valid voucher for the deal concluded between both parties. Both parties of the transaction can decide on the borrowing and lending duration through negotiation within a period of four months. The Trade System calculates and publishes the weighted average rate, namely, CHIBOR, in terms of eight varieties. This includes rates for one day, seven days, 14 days, 21 days, one month, two months, three months and four months. The transaction occurs from Monday to Friday (Beijing time), 9:00 a.m. to 12:00 noon and 13:30 to 16:30 (closed on public holidays in China). The main participants of the borrowing and lending transactions in RMB include relevant financial institutions, such as commercial banks and their authorized branches, rural credit associated cooperative, urban credit cooperatives, financial companies, and securities companies with an independent legal entity status approved by the PBOC, as well as foreign-funded financial institutions permitted by the PBOC to conduct the RMB business. Both parties of the deal make full settlement of funds in line with the transaction advice and specified date, with each party assuming its own risks. The fund settlement speed is T+0 or T+1.


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2.2 Transaction of RMB Bonds Transactions of bonds cover current bonds, bond collateral repurchase, bond buyout repurchase, and bond forward transactions. Bonds used for bond transaction include treasury bonds, policybased financial bonds, instruments of the Central Bank, junior bonds of commercial banks, short-term financial bonds, corporate bonds, and asset support securities. The time limit for the collateral repurchase is one day to one year, and the trading system counts and publishes the business volume and price of the transaction for the collateral repurchase in terms of 11 varieties. These varieties include one day, seven days, 14 days, 21 days, one month, two months, three months, four months, six months, nine months, and one year. The time limit to the buyout repurchase is from one to 91 days, and the trading system counts and publishes the business volume and price of the transaction for the buyout repurchase in terms of seven varieties, including one day, seven days, 14 days, 21 days, one month, two months, and three months. The time limit to the bond forward transaction is from one day to 365 days, and the trading system counts and publishes the business volume and the price of the transactions for the bond forward in terms of 11 varieties, including one day, seven days, 14 days, 21 days, one month, two months, three months, four months, six months, nine months, and one year. The transactions occur from Monday to Friday (Beijing time) 9:00 a.m. to 12:00 noon and 13:30 to 16:30 p.m. (closed on public holidays in China). Starting from April 2002, a filing system has been implemented for access to the bonds market. According to this system, deposit financial institutions with the qualifications for bond transaction and their authorized branches, rural credit associated cooperatives, urban credit cooperatives, non-financial institutions such as insurance companies, securities companies, and fund management companies, and along with their fund and financial companies, as well as foreignfunded financial institutions conducting RMB business, can transact in the market. Both parties of the transaction make full settlement of funds in line with the transaction advice and specified date. Custodian

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settlement of bonds is made through the Central Treasury Bond Registration and Settlement Company, and the fund settlement is made through the PBOC payment system. Three methods of payment are used, namely, Payment against Bond, Bond against Payment, and Delivery versus Payment (DVP).

2.3 Organizational Structure of the Market The interbank market is composed of the regulatory institution, the foreground for trading, the background for settlement, the background for liquidation, and transaction members. The PBOC is the regulatory institution in charge of formulating development plans and administrative regulations, exercising supervision and control over the market, as well as standardizing and promoting market innovations. The National Interbank Funding Center is an intermediary organization which provides the interbank market with three major platforms for transaction, information, and regulation. It also provides appropriate services by relying upon the trading system, the information system (China Currency Net), and the market analysis and risk management system (F-system). More specifically, it trains market traders, organizes market participants to engage in trading through the Internet, is responsible for the operation maintenance and development of the trading and information systems, conducts routine monitoring of the market transactions, discloses information necessary for the market transaction, provides the PBOC with a full range of market supervisory service facilities and basic information, actualizes relevant policies and measures for market administration, and ensures healthy and orderly market transactions. The Central Treasury Bonds Registration and Settlement Company is one of the background organizations of the interbank market in charge of bond custody and settlement. To join the bond transaction in the interbank market, financial institutions must open a custody account with the company in advance. After a transaction member finishes a bond transaction in the foreground, it must transfer the relevant factors of the transaction to the bookkeeping system for bond settlement.


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The Settlement Center is the public institution of the PBOC in charge of the operation of the electronic payment system and is another major background organization of the interbank market. When a transaction member finishes bond trading or credit borrowing and lending in the interbank market, it has to make fund settlement through the payment system.

2.4 The Basic Function of the Market With the diversification of the main participants in the interbank borrowing and lending market, the bonds market, and the expansion of products range, the transfer volume in the market has grown year by year and the liquidity of the interbank borrowing and lending market, as well as the bonds markets, continues to rise rapidly. The liquidity management function of the market, has been enhanced. The transfer quantity within less than seven days of the interbank borrowing and lending, and collateral repurchase, is the cornerstone of the whole market, and accounts for over 80% of the total quantity. The introduction of the buyout repurchase business into the interbank bonds further increases the market liquidity. Many financial institutions with good market operational performance have therefore significantly reduced their excess provision in the PBOC, and operated idle funds in the interbank borrowing, lending, and repurchase market for a higher return. Moreover, the CHIBOR rates of the interbank borrowing, lending, and repurchase market have gradually become an important reference for the cost and income accounting between the head office of a legal entity and its branches, the marginal factor for the investigation of other relevant businesses, and the main basis for the pricing of short-term funds across the country. Meanwhile, the diversified bond variety, improved internal incentive mechanism for institutional investors, and upgraded traders’ market operation have enabled the interbank bonds market to gradually play a role of investment, and investors, good at grasping opportunities, have earned considerable profits. This is especially true of medium- and long-term bonds, the reduction of interest rates, and the combination of the bond business with other businesses. After several years of extraordinary development,

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the function of the interbank bonds market has shifted from pure liquidity management to the combination of liquidity management and investment. At the same time, the interbank borrowing and lending market and the bonds market constitute a platform for immediate market supervision by the regulatory institution. It can provide the monetary policy department with necessary information concerning the implementation of monetary policies, such as trends of capital flow. Furthermore, the interbank borrowing and lending market, as well as the bonds market, are a major link in the transmission mechanism of monetary policy.

2.5 Market Access The borrowing and lending market differ somewhat from the bonds market with regards to their market access. Any financial institution, or its authorized branches with interbank borrowing and lending business or securities business indicated in their business licenses, can apply to the PBOC to join the national interbank funding market or the national interbank bonds market through filing. After approval, they can immediately become members of the interbank market. Interbank market transactions can be effected after the training of traders in the Trade System, and networking to the electronic trading and information systems. Financial institutions applying to join the national interbank bonds market must submit the following materials to the Trade System: • •

• •

A photocopy of their business license. Photocopies of relevant financial business licenses, including the license of financial institutions, the license of trust institutions, securities business license, and insurance business license. For commercial banks, the letter of authorization for bond transaction by their head offices. The application form for connecting to the trading system of the National Interbank Funding Center.


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A financial institution cannot become a member of the national interbank bonds market until after the above materials have passed the examination of the Trade System and a bond custody account is opened with the Central Settlement Company. A financial institution must file a record with the PBOC within three working days after going through the formalities of networking and account opening.

3. A Survey of Market Transactions By the end of 2005, exactly ten years after its founding, the local currency market of the Trade System had achieved an accumulated number of 426,959 deals, amounting to RMB 74.84 trillion. From 2000 onwards, the local currency market grew rapidly and, in 2005, the annual turnover stood at RMB 23.21 trillion, nearly 40 times that of 1996 when the market was set up. On February 9, 2006, the PBOC issued a notice on launching pilot projects for the RMB Interest Rate Swap Transaction. As the first RMB interest rate derivative, the interest rate swap has met the urgent needs of investors in the interbank bonds market for risk management of interest rates and asset-liability management, as well as accelerated the pilot deregulation of interest rates aimed to make them subject to market forces. Up to March 31, 2006, there were 18 institutions that had filed within the system, and seven deals had been recorded with a total nominal principal of RMB 9.51 billion.

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SHANGHAI FINANCE Figure 5.1

Turnover of interbank borrowing, lending, and bonds market in China (RMB 100 mil.)

(RMB100 mil) 250,000

200,000

150,000

100,000

50,000

0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: www.chinamoney.com.cn

Table 5.1 Business volume of national interbank borrowing, lending, and the bonds markets No. of deals

Business volume (RMB100 mil.)

Percentage

68,349

96,347.09

11.65

265,663

580,976.24

70.24

2,922

4,162.35

0.50

Current bond

124,463

145,116.46

17.54

Bond forward

191

Borrowing and lending Collateral repurchase Buyout repurchase

Total

461,588

Source: www.chinamoney.com.cn (as of March 31, 2006)

521.7 827,123.84

0.06 100.00

Interbank Borrowing, Lending, and Bonds Table 5.2

117

Credit borrowing and lending by duration

Code

Signification

Description

IB0001

overnight

Within 1 day

IB0007

7 days

1–7 days

IB0014

14 days

7–14 days

IB0021

21 days

14–21 days

IB001M

1 month

21 days–actual days of 1 month

IB002M

2 months

actual days of 1–2 months

IB003M

3 months


IB004M

4 months



Figure 5.2

Trend of price vector of interbank borrowing and lending

(RMB100 mil) 8,000

weighted interest (%) 15.00 12.50

6,000

10.00 4,000

7.50 5.00

2,000

2.50 0.00


Q 1 2006

Q 3 2005

Q 3 2004

Q 1 2005

Q 1 2004

Q 3 2003

Q 3 2002

Q 1 2003

Q 1 2002

Q 1 2001

Q 3 2001

Q 1 2000

Q 3 2000

Q 3 1999

Q 3 1998

Q 1 1999

Q 3 1997

Q 1 1998

Q 1 1997

Q 1 1996

Q 3 1996

0

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SHANGHAI FINANCE Table 5.3 Transactions of the interbank credit funding market by duration No. of deals


Percentage

IBO001

6,445

16,786.66

17.42

IBO007

31,133

58,283.10

60.49

IBO014

4,236

6,285.99

6.52

IBO021

2,627

3,362.35

3.49

IBO1M

6,304

3,902.90

4.05

IBO2M

9,330

4,679.76

4.86

IBO3M

5,387

2,056.58

2.13

IBO4M

2,887

989.75

1.03

68,349

96,347.09

100.00

Total


Table 5.4

Classification of collateral repurchases by duration

Code

Signification

R001

overnight

Within 1 day

R007

7 days

1–7 days

R014

14 days

7–14 days

R021

21 days

14–21 days

R01M

1 month

21 days–actual days of one month

R02M

2 months


R03M

3 months


R04M

4 months


R06M

6 months


R09M

9 months


R01Y

1 year



Description

Interbank Borrowing, Lending, and Bonds Figure 5.3

119

Trend of price vector of bond collateral repurchase

(RMB100 mil) 60,000

weighted rate (%) 12.00 10.00 8.00

40,000

6.00 4.00

20,000

2.00 0.00 Q4 2005

Q2 2005

Q4 2004

Q2 2004

Q4 2003

Q2 2003

Q2 2002

Q4 2002

Q4 2001

Q4 2000

Q2 2001

Q2 2000

Q2 1999

Q4 1999

Q4 1998

Q2 1998

Q4 1997

Q2 1997

0


Table 5.5 Class

Transactions of bond collateral repurchase by duration

No. of deals


Percentage

R001

34,186

157,829.56

27.17

R007

163,562

322,296.55

55.47

R014

38,774

64,411.61

11.09

R021

11,491

15,238.75

2.62

R1M

10,027

10,754.48

1.85

R2M

4,389

5,187.05

0.89

R3M

2,381

3,258.32

0.56

R4M

400

670.57

0.12

R6M

315

686.09

0.12

R9M

76

228.27

0.04

R1Y

62

414.99

0.07

Total

265,663

580,976.24

100.00


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SHANGHAI FINANCE Table 5.6

Code

Classification of buyout repurchases by duration

Signification

Description

OR001

overnight

Within 1 day

OR007

7 days

1–7 days

OR014

14 days

8–14 days

OR021

21 days

15–21 days

OR1M

1 month

22 days–actual days of the current month

OR2M

2 months

Actual days of the current month + actual days of 1–2 months

OR3M

3 months

Actual days of 2 months +1–91 days


Table 5.7 Class

Quotations of interbank bond buyout repurchase

No. of deals

Business volume (RMB100 mil)

Percentage

OR001

154

190.62

4.58

OR007

1,366

1,973.17

47.41

OR014

515

771.91

18.55

OR021

155

207.28

4.98

OR1M

355

420.42

10.10

OR2M

182

294.28

7.07

OR3M

195

304.68

7.32

2,922

4162.35

100.00

Total


9-20-2004

7-23-2004

5-20-2004


0

10

20

30

40

50

60

Price vector of bond buyout repurchase

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Weighted (%)

3-24-2006

(RMB100 mil.)

Figure 5.4

Interbank Borrowing, Lending, and Bonds 121

1-20-2006 11-23-2005 9-23-2005

7-26-2005

5-30-2005 3-28-2005

1-20-2005

11-23-2004


0

50

100

150

200

(RMB100 mil.) 250

6-10-2002 9-2-2002 11-28-2002 2-26-2003

Figure 5.5

5-23-2003 8-12-2003

Trend of price vector of interbank bonds market

11-7-2003

2-5-2004

4-29-2004 7-27-2004 10-22-2004 1-17-2005

4-14-2005 7-12-2005

10-9-2005 Composite index 1,200

12-30-2005 3-3-2006 800

900

1,000

1,100

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Interbank Borrowing, Lending, and Bonds Table 5.8

123

Distribution of business volume of bonds by duration No. of deals


0–1 year

47,681

68,703.43

47.34

1–3 years

18,266

18,839.57

12.98

3–5 years

20,539

24,526.72

16.90

5-years

15,689

13,678.21

9.43

7–12 years

15,564

13,890.14

9.57

12–20 years

5,515

4,510.51

3.11

20–30 years

1,206

967.38

0.67

Duration

Miscellaneous Total

Percentage %

3

0.50

0.00

124,463

145,116.46

100.00


Table 5.9

Distribution of business volume of bonds by class

Class

No. of deals


Percentage %

Junior bonds

2,391

2,953.57

2.04

Short-term financing bonds

8,962

4,460.05

3.07

43

17.40

0.01

34,244

29,284.21

20.18

International development institution bonds T-bonds

789

788.24

0.54

2,894

1,427.47

0.98

Instruments of central bank

33,604

59,478.47

40.99

Policy-based financial bonds

41,536

46,707.05

32.19

124,463

145,116.45

100.00

Ordinary financial bonds Corporate bonds

Total


124


Bond forwards by duration

Duration

Signification

7 days

3–7 days

14 days

8–14 days

21 days

15–21 days

1 month

22–actual days of 1 month

2 months

actual days of 1 month–actual days of 1–2 months

3 months

actual days of 2 months +actual days of 1–3 months

4 months


6 months


9 months


1 year



CHAPTER

6

The Foreign Exchange Market

T

he foreign exchange market is divided into two levels, based on the nature of the market participants: the foreign exchange retail market and the foreign exchange wholesale market. The retail market refers to the market formed by foreign exchange transactions executed between the banks, enterprises, and individuals. Driven by the different needs for trade, investment, foreign currency deposit, loans, or speculation, enterprises and individuals engage in the buying and selling of foreign currencies with commercial banks. This trade forms a decentralized invisible market. At present, China’s foreign exchange retail market mainly refers to the market of foreign exchange settlement and sales. A foreign exchange settlement occurs when enterprises and individuals with foreign exchange proceeds sell foreign currency to the authorized foreign exchange bank. A foreign exchange sale occurs when enterprises and individuals are in need of foreign currency and they purchase it from authorized banks with Renminbi. The authorized bank of foreign exchange sets the rate within a certain range of fluctuation every day, and engages in counter dealings with clients according to the middle price of the market exchange rate of the Chinese currency against the rate of major foreign currencies, as published by the PBOC. At present, the Chinese currency can only be converted under current accounts, and so the foreign exchange settlement and sales between banks and clients require a valid commercial circumstance.

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Besides foreign exchange settlements and sales, China’s foreign exchange retail market also includes another business item: the conversion between different foreign currencies for enterprises and individuals through the bank. There is basically no restriction imposed on this. For instance, enterprises can avert exchange risks by handling forward foreign exchange transactions and individuals can earn differentials in either the rate of exchange or the rate spreads by operating with the current exchange rates. The foreign exchange wholesale market is formed by the buying and selling of foreign currencies among financial institutions, such as commercial banks. As the foreign exchange transactions between commercial banks involve great amounts and small differentials in the buying and selling rates, they are often referred to as the foreign exchange wholesale market. Since it is a place where banks engage in the settlement and sales of foreign exchange and cover position, it is usually called the interbank foreign exchange market. According to state regulations, no financial institutions are allowed to make deals between Chinese and foreign currencies in the off-the-board market, and all the transactions for foreign exchange settlement and sales are conducted through the China Foreign Exchange Trade System (CFETS), a computer network of CFETS that has Shanghai as the main center and adopts a membership system for computer networking across the country. For transactions conducted through CFETS, on-site transactions are combined with distance transactions, and traders authorized by member entities of the market make quotations through online transaction terminals. Two transaction modes can be chosen voluntarily. One is the quote-driven mode, which is automatically brought together by the computer system on the principle of giving priority to price and time. The other is the inquiry mode, featuring bilateral credit extension and settlement, from which a single, managed, floating rate of exchange based on market supply and demand is generated. Currently, the main transaction players of the market are the authorized banks for foreign exchange. With the foreign exchange control system in China relaxed, the main participants in the interbank foreign exchange market are gradually expanding from commercial banks to non-bank financial institutions.


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With regards to another type of foreign exchange business, transactions between different foreign currencies, domestic banks can freely participate in the transaction of international market without any policy restrictions. The interbank foreign exchange market is the main part of China’s foreign exchange markets at present and is also the focus of this chapter because, under the present Chinese foreign exchange control system, the development of the interbank foreign exchange market will be of great economic and policy significance.

1. Establishment of the Interbank Foreign Exchange Market 1.1 Predecessor: The Foreign Exchange Swap Market The development of China’s foreign exchange market is closely related to the development of China’s foreign exchange control system. Before the reform and opening-up of China’s economy, China implemented a highly concentrated planned economic system. Due to the shortage of foreign exchange resources, China had long exercised strict foreign exchange control. With the implementation of the reform and opening-up strategy in 1978, China’s foreign exchange control system has shifted toward a system which is compatible with the socialist market economy in an orderly way. The new system aims for a gradual weakening of mandatory planning and the cultivation of market mechanisms. This new system covers the following aspects: •

Foreign exchange-earning entities have been allowed to retain an appropriate proportion of their exchange earnings. Measures for foreign exchange retention were implemented in 1979 in order to reform the unified revenue and spending system in foreign exchange distribution, bring into play the initiative of foreign exchange-earning entities, and improve the distribution of foreign exchange resources. These measures specify that while foreign exchange is controlled and balanced by the state in a unified and concentrated way,

128

•

•

SHANGHAI FINANCE

with priority given to key projects, foreign exchange earnings from trade and non-trade channels could be retained in light of concrete situations, and part of the foreign exchange earnings could be retained by the foreign exchange-earning localities and enterprises in an appropriate portion to meet their basic needs for foreign exchange. The use of retained foreign exchange earnings must conform to state regulations, and if the entities enjoying retained foreign exchange earnings do not need foreign currencies themselves, they can sell them to those who are in need of them through the foreign exchange swap market. The number of financial institutions conducting exchange operations has increased. Before 1979, the foreign exchange business was managed by the Bank of China (BOC) in a unified way. To adapt to the new situation after China’s economic reform, competition mechanisms have been introduced into the foreign exchange business. Other stateowned banks, several commercial banks, and a group of nonbank financial institutions are permitted to conduct foreign exchange business. Also, foreign-funded financial institutions are allowed to set up agencies to operate foreign exchange businesses. All these efforts have contributed to a pattern of multiple financial institutions participating in the foreign exchange business. Foreign exchange control over domestic residents has been relaxed. Individuals who keep foreign currencies at home are allowed to hold and deposit the currencies in a bank, though they are not allowed to trade or carry them out of China without permission. Foreign exchange earnings procured by individuals can be retained in part or in full. As of 1985, foreign currency remitted to domestic residents or carried in from abroad can be retained in full and a deposit account can be opened with a bank. Beginning in November 1991, individuals with foreign exchange earnings can take part in the foreign exchange swap. Also, individuals going abroad to study, emigrate, visit family members, or support foreign relatives can apply for foreign currencies at the State Administration of Foreign Exchange (SAFE). Approval is based


•

129

on the strength of exit certificates and relevant papers, and after approval, a limited amount of foreign currency can be purchased. Foreign exchange certificates have been issued for the convenience of non-residents beginning in 1980. To accommodate the needs of passengers and prevent foreign currency from circulation at home as well as the arbitrage of exchange and supplies, the BOC issued foreign exchange certificates in different denominations of RMB on April 1, 1980. Foreigners, overseas Chinese, residents from Hong Kong, Macao, and Taiwan, as well as personnel from foreign embassies, consulates, and delegations could exchange foreign currencies for foreign exchange certificates in line with the exchange rates of the bank and use them to pay for commodities, labor services, and other services at hotels, restaurants, designated shops, and airports. The unused foreign exchange certificates could be carried out of China or cashed. The entities receiving foreign exchange certificates were subject to the approval of SAFE and must deposit the foreign exchange certificates received in the bank and exercise separate management of revenue and expenditure. Where the entity receiving foreign exchange certificates exchanged them in the bank, it could retain part of foreign exchange earnings as stipulated.

The implementation of the foreign exchange retention system necessitated a foreign exchange swap. Therefore, the State Council approved the request of the BOC to launch the foreign exchange quota swap business in October 1980. At the end of 1985, Shenzhen took the lead in setting up a regional foreign exchange swap market, which was an intermediary specializing in foreign exchange swap business and confined to over-the-counter transaction. In 1988, Shanghai initiated the first open market of foreign exchange swap. The counter transaction of the original foreign exchange swap center was changed to a quote-driven transaction system based on the principle of openness and transparency. Afterwards, other regions followed suit and set up their respective foreign exchange swap centers. By the end of 1993, there were as many as 108 foreign exchange swap centers in provinces and municipalities across China.

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Under such circumstances, a foreign exchange swap price based on supply and demand was also generated in the foreign exchange swap market in addition to the listed price retained for non-trade receipts and payments as decided by the State Council in 1981, resulting in a dual rate system—the official rate and the market rate The establishment of the foreign exchange swap centers marked the formation of China’s foreign exchange swap market, and fueled the further development of the foreign exchange swap business. However, the coexistence of several foreign exchange swap centers gave rise to some problems. Foreign exchange swap markets located in different places were isolated from one another, and foreign exchange funds could not be floated rationally. This, in turn, had led to irregular rates in the foreign exchange swap market.

1.2 The Formation of a Unified National Interbank Foreign Exchange Market On November 14, 1993, The Decision of the CPC Central Committee on Some Issues Concerning Establishment of Socialist Market Economic Structure was adopted at the Third Plenary Session of the 14th CPC Central Committee. The Decision demanded that “the foreign exchange control system must be reformed and a managed floating rate system based on market supply and demand, and a unified standard foreign exchange market must be established to render RMB a convertible currency.” Based on this, China’s foreign exchange market entered a brand new stage of development as China’s foreign exchange system underwent major reforms in the following aspects: •

The system of bank exchange settlement and sales has been implemented, foreign exchange turnover and retention have been eliminated, and a mandatory plan for the use of foreign exchange, as well as the examination and approval system, have been phased out. As of January 1, 1994, the system of retention, turnover, and quota control over all types of foreign exchange had been eliminated and the system of bank exchange settlement and sales was implemented for foreign exchange revenue and the spending of domestic institutions


•

•

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under current accounts. Apart from goods under import quota control, goods to be managed as special imported products, and goods subject to an automatic registration system, foreign currencies had to be purchased at the authorized bank on the strength of import licenses, certificates or import registration forms, corresponding import contracts, and valid commercial invoices (invoices, freight bills, and collection vouchers) compatible with the method of payment. Other uses of foreign exchange for goods and incidental charges for trade, as well as the non-trade business use of foreign exchange for external payments that are in conformity with the state import regulations, had to be cashed at an authorized bank on the strength of the contracts, agreements, invoices, and the payment advice of foreign institutions. To concentrate foreign exchange for a guaranteed supply, the foreign exchange revenue of domestic institutions under current accounts must be transferred to the mainland promptly and sold to an authorized bank at a market price. However, for foreign exchange to be retained pursuant to the state regulations, a foreign exchange account may be opened with authorized banks. Meanwhile, the issue of foreign exchange certificates was suspended and those in circulation were to be used by December 31, 1994. Remaining certificates could be exchanged for U.S. dollars or converted into RMB before June 30, 1995, at the BOC. On January 1, 1994, the official rate and market price of RMB were combined and a single, managed, floating rate system based on market supply and demand was instituted. At the time, the rate was US$1 to RMB 8.70, which had been decided by the then market supply and demand. The PBOC publishes the rate every day, and the purchasing and selling prices of foreign currencies may be floated within a given margin. A unified, standardized, and highly efficient foreign exchange market has been established. As of January 1, 1994, with the withdrawal of Chinese enterprises from the foreign exchange swap center, the authorized bank of foreign exchange became the main player of foreign exchange transactions.

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On January 1, 1994, the unified national interbank foreign exchange market began to operate, and its operational platform—the China Foreign Exchange Trade System—was also set up in Shanghai, which was linked to all sub-centers across the country. On April 4, the trading system of the China Foreign Exchange Trade System was officially put into operation, adopting the membership system, and the system of matchmaking transaction and concentrated settlement. The PBOC can intervene, where necessary, in the foreign exchange market, according to its goals for macroeconomic policy, to adjust the market supply and demand and stabilize the RMB rate. The establishment of the China Foreign Exchange Trade System signifies that the development of China’s foreign exchange market has entered a new stage. Organizationally, the China Foreign Exchange Trade System differs from the former foreign exchange swap center as it is linked to the computers of 36 sub-centers through satellite and ground communication networks across the country. Members in each center can quote the price or rate of exchange, and close a deal by concentrated matchmaking on computers, giving priority to price and time. As an interbank foreign exchange market, it is also different from overseas foreign exchange markets because it serves China’s system of exchange settlement and sales, and provides services to cover positions for the exchange settlements and sales of each bank. In terms of the fixed exchange place, such as the stock exchange, the interbank foreign exchange market is tangible. But, as the interbank foreign exchange market is a system that handles transactions through a computer network, it is also similar to the international mature foreign exchange market with the features of an invisible market. The introduction of the above measures for the reform of the foreign exchange control system, plus the market-oriented services provided by the unified national foreign exchange market, helped China smoothly realize the conditional convertibility of RMB under current accounts in 1994. On this basis, other restrictions on foreign exchange under current accounts were further lifted in 1996. On December 1, 1996, China declared that convertibility of RMB under


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current accounts had been achieved, indicating a significant step forward in RMB convertibility. Improvements have also been made in the mechanism for setting the Renminbi exchange rate. After the unification of the exchange rate on January 1, 1994, China began to carry out a single, managed floating rate based on market supply and demand. The PBOC publishes the middle price of the market transaction of the Chinese currency against four major foreign currencies, such as USD, EUR, HKD, and JPY, according to the weighted middle price generated in the interbank foreign exchange market on the previous business day. The buying and selling price of RMB against the U.S. dollar in the interbank foreign exchange market can be buoyed within the margin of 0.3% or so of the middle price of the market transaction that is published by the PBOC. The buying and selling price of HKD and JPY can be floated within the margin of 1% or so of the middle price of the market transaction, and that of EUR within the margin of 10% or so. The authorized bank of foreign exchange sets the rate within the specified range of rate fluctuation and executes foreign exchange transactions with its clients. The buying and selling price of USD spot exchange listed by each bank is not to exceed the middle price of market transaction published by the PBOC by 0.17% or so, and those of EUR, HKD, and JPY should not exceed the middle price by 1% or so. For the rates of foreign currencies other than the above four, the difference in the buying and selling rate shall not exceed the middle price by 0.5% based on the middle price of the USD market transaction and middle cross rate on the international foreign exchange market. For transactions in excess of US$1 million, the bank can close a deal with clients through negotiation within the specified range. The buying price of USD and HKD in cash listed by each bank should not exceed the middle price of purchasing and selling spot exchange by 0.75%, and the buying price of EUR and JPY in cash should not exceed the middle price of the purchasing and selling spot exchange by 1%. The selling price of all the currencies in cash is the same as the price of selling spot exchange. The PBOC exercises macro-control over the Renminbi exchange rate and make necessary interventions in the market to maintain a reasonable and stable rate.

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1.3 The Role of the Interbank Foreign Exchange Market The establishment of the unified interbank foreign exchange market is of great significance to China’s economic development. First, it has helped set a unified national Renminbi exchange rate with relative stability. Second, it has promoted the steady growth of China’s state foreign exchange reserve. By the end of 1993, the state foreign exchange reserves only amounted to US$21.2 billion, while by the end of March 2006, the amount had surged to US$875.1 billion, up 41 times in 13 years. Third, it has created an operational platform and transmission channel for the implementation of the monetary and foreign exchange policies formulated by the central bank. Fourth, it has rendered great support to the implementation of a system of exchange settlement and sales. Fifth, it has created sound market conditions for the further reform of the foreign exchange system. The development of the interbank foreign exchange market has played a proactive role in supporting China’s economic reform and opening-up. The achievements scored in the development of China’s foreign exchange market are obvious. Over a short period of around a dozen years, China’s foreign exchange market has expanded from a small, isolated, single-variety, and irregular foreign exchange swap to a large, diversified, concentrated, and unified one.

2. The Steady Development of the Interbank Foreign Exchange Market 2.1 The Operating Mechanism The establishment of the interbank foreign exchange market in 1994 was a decisive step for China’s foreign exchange market to move toward becoming an international standard market. In selecting the market mode, full consideration has been given to the principles of gradual progress and controllability. Priority has first been given to meeting the bank’s needs for cover position in exchange settlement and sales. On the basis of the swap market, a transaction mode of concentrated, quote-driven, matchmaking deals and concentrated settlements has been developed. From then on, China’s foreign exchange market entered a new and steady stage of development.


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The concept of electronic transaction was introduced from the very beginning of the establishment of the interbank foreign exchange market. China’s foreign exchange transaction system was established only one year after Japan’s first electronic foreign exchange transaction system, MINEX, and the present leading global electronic brokerage system (EBS) for spot exchange transactions. China’s foreign exchange transaction system adopts a mode of independent quotation, matchmaking deals, and concentrated settlements. It also mainly implements a mechanism for setting the price driven by purchase orders, which is in conformity with the main characteristics of the leading electronic brokerage system worldwide. Currently, the main difference between China’s interbank foreign exchange transaction system and electronic brokerage systems of other countries lies in its integration with the function of concentrated settlements, which is compatible when the main market player relationship is not established on equal footing in the present Chinese foreign exchange market and the credit extension mechanism between financial institutions is incomplete. Additionally, concentrated settlement is becoming an orientation for the development of settlement modes in the international foreign exchange market. This mode has the following characteristics in its concrete operation: •

•

The implementation of a membership system. All the financial institutions and their branches, established with the approval of the PBOC and allowed to conduct foreign exchange business, can apply for membership in the China Foreign Exchange Trade System. Members are divided into two types: self-operating members and agency members. The agency members can only engage in agency business (trading of foreign exchange on behalf of traders), while self-operating members can engage in self-operating business (normal trading of foreign exchange for its own business) and agency business concurrently. By the end of 2005, the interbank foreign exchange market had 385 members in total, most of whom were self-operating members. A modernized electronic trading system. China’s interbank foreign exchange market executes concentrated transactions, by the use of modern computer and communication technologies, through the electronic trading system networked

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•

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across the country. In the initial period, the authorized foreign exchange bank had to assign qualified traders to conduct site transactions at the trading hall of sub-trade centers in central cities across the country. Later on, distance transaction was gradually popularized. At present, all the interbank foreign exchange transactions are handled at distance, where traders can make quotations in their own dealing rooms without going to an authorized trading place, and the foreign exchange market is completely invisible. The matchmaking transaction mode. The interbank foreign exchange transaction adopts a quote-driven mode of independent quotation and matchmaking deals, and the electronic trading system makes a match for quotations for the trade of foreign currency on the principle of prioritizing price and time. In the circumstance where the main market participants differ greatly from one another in actual strength, this transaction mode embodies fairness, impartiality, and optimized pricing of foreign currency transactions. Local and foreign currencies for foreign exchange are settled in a concentrated way. The Renminbi funds are settled through the settlement system of the PBOC and foreign exchange funds are transferred abroad through the bank of deposit. The settlement speed of both foreign exchange and Renminbi funds are T+1, meaning that the transaction concluded on the day is valued on the following working day simultaneously.

2.2 Operation of the Interbank Foreign Exchange Market over the Years Services have diversified In 1994, when the interbank foreign exchange market was just established, only USD and HKD could be transacted. In 1995, the exchange of JPY for RMB was added. In April 2002, the Euro was added for exchange with RMB. In June 2002, intermediary business for borrowing and lending in foreign currencies was introduced, providing market members with multi-channel transaction services. In 2002, the market and commerce system was implemented on


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a trial basis for the transaction of minor currencies to raise the rationality of quotation and market liquidity. In February 2003, the foreign exchange transaction time was extended from half a day in the morning to a whole day. In October 2003, two-way transaction in the foreign exchange market was implemented to facilitate members’ cover position and fund dispatches. In 2004, the BOC Hong Kong and the BOC Macao participated in the transaction of exchange settlement and sales, and the transaction platform was extended abroad for the first time. In May 2005, spot transaction for eight foreign currencies was introduced to enrich the foreign exchange variety at multiple levels. In August 2005, forward foreign exchange transactions were launched in the market and the first foreign exchange derivative came into being in the interbank market. In early January 2006, the market and commerce system, and the inquiry transaction mode were introduced concurrently in the spot foreign exchange market. The middle price of the RMB rate was set in a new mode and the mechanism for setting the exchange rate for the RMB on the basis of market forces was further improved. Market transactions have recovered after the Asian financial crisis Since the establishment of the interbank foreign exchange market, the transaction volume has risen continuously as a whole, but due to the Asian financial crisis, business volume declined for a time. As seen in Figure 6.1, after 2000, foreign exchange transaction volume enjoyed a rapid growth in momentum again. The exchange rate of RMB has risen stably After the establishment of the interbank foreign exchange market, the managed floating exchange rate mechanism of the Renminbi ran steadily and, as a whole, the exchange rate of the Renminbi is heading for a rise while keeping stable. Since the interbank foreign exchange market went into official operation on April 1, 1994, the market-weighted rate of the Renminbi against the U.S. dollar has dropped gradually from the initial 8.6988:1 to 8.2716:1 on May 15, 1995. This was followed by small margin devaluation in 1996 as the exchange rate once stood at 8.3338:1 on April 3. For the

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Turnover of the interbank foreign exchange market (1994–2004)

(US$100 mil.) 2,500 2,090 2,000 1,511

1,500 972

1,000 655 500

0

408

628

750

700 520 315

422

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

following seven years, the rate of the Renminbi to the U.S. dollar remained at about 8.2800:1. On July 21, 2005, the PBOC carried out a major reform of the mechanisms that set the exchange rate for the Renminbi. The main objective was to implement a managed floating rate system based on market supply and demand, and regulate by reference to a basket of currencies. Based on the estimated rational equilibrium of the exchange rate, the RMB rate against the U.S. dollar appreciated by 2% on the same day, reaching 8.1100:1. The transaction price of the U.S. dollar against the Renminbi in the interbank foreign exchange market can still fluctuate within the middle price issued by the central bank, but by a margin of not above 0.3%. The transaction price of non-USD currencies against the Renminbi can fluctuate at the middle price of the currency issued by the central bank within an increased margin of 1.5% or so. Also, it had been stipulated that beginning from July 22, 2005, the central bank would publish the closing price of the transaction currencies, including the U.S. dollar against RMB in the interbank foreign exchange market as the middle transaction price of the currency against the RMB on the following working day. On September 23, 2005, the central bank published the new exchange rate management system again, stipulating


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that the floating margin of the transaction price for non-USD currencies, including EUR, JPY, and HKD, against the Renminbi in the interbank spot foreign exchange market would rise from 1.5% to 3%. Restrictions on the price differential margin of non-USD currencies, as listed by the bank to traders, have been abolished, and the bank would set the rate of non-USD currencies against the Renminbi independently. On December 30, 2005, the exchange rate of the Renminbi against the U.S. dollar in the interbank foreign exchange market closed at 8.0702:1, with an appreciation margin of 7.23% compared to the rate at the initial period of the interbank foreign exchange market development (see Figure 6.2). Figure 6.2

The RMB exchange rate against the USD (1994–2005)

8.8000 8.7000 8.6000 8.5000 8.4000 8.3000 8.2000 8.1000

3-3 1 9-3 -199 4 0 3-3 -199 1-1 4 9-3 99 5 0 3-3 -199 1-1 5 9-3 99 6 0 3-3 -199 1-1 6 9-3 99 7 0 3-3 -199 7 1 9-3 -199 8 0 3-3 -199 8 1 9-3 -199 0-1 9 3-3 99 9 1 9-3 -200 0-2 0 3-3 00 0 1 9-3 -200 0-2 1 3-3 00 1 1 9-3 -200 0-2 2 3-3 00 2 1 9-3 -200 0-2 3 3-3 00 3 1 9-3 -200 4 0 3-3 -200 1-2 4 00 5

8.0000

Note: Before July 22, 2005, the central bank used to issue the weighted middle price for the RMB rate against the transaction currencies, including the USD in the interbank foreign exchange market as the middle price of the transaction currency against the RMB on the following working day. Beginning from July 22, 2005, the central bank has published the closing price of the transaction currencies, including the USD against the Renminbi in the interbank foreign exchange market as the middle transaction rate of the currency against the Renminbi on the following working day. Correspondingly, the price shown in the figure should be adjusted from the daily weighted middle price to the closing price.

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Market membership has increased and diversified In 1994, when the interbank foreign exchange market was initiated, there were 303 market members and, up to December 2005, the number of members grew to 385. Members included the central bank, four state-owned commercial banks, 11 joint-stock commercial banks, three policy banks, 41 city commercial banks, 189 authorized branches of commercial banks, 189 foreign-funded banks, two trust investment companies, and 25 rural credit cooperatives (including rural commercial banks). Clients in the interbank foreign exchange market include various Chinese and foreign financial institutions, half of which are foreign-funded banks (see Figure 6.3). Figure 6.3

Membership structure of the interbank exchange settlement and sales market

1 central bank, accounting for 0.3%

109 commercial bank-authorized branches, accounting for 28.3%

4 state-owned commercial banks, accounting for 1.0%

189 foreign-funded banks, accounting for 49.1%

11 joint-stock commercial banks, accounting for 2.9%

2 trust investment companies, accounting for 0.5%

3 policy banks, accounting for 0.8%

25 rural credit associated cooperative, accounting for 6.5%

41 urban commercial banks, accounting for 10.6%


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3. Expansion and Innovation of the Interbank Foreign Exchange Market 3.1 Expansion While the RMB spot exchange settlement and sales market has developed rapidly, other foreign exchange sub-markets have also been established. At present, there are three sub-markets, namely, the interbank borrowing and lending market in foreign currency, the interbank foreign currency buying and selling market, and the interbank forward foreign exchange market. The foreign currency borrowing and lending market In order to raise the foreign currency operational efficiency of domestic financial institutions and expand their financing channels, the Trade System launched the foreign currency borrowing and lending business on June 3, 2002. Before this, the surplus shortterm foreign currency funds of domestic financial institutions were either idle or deposited abroad at lower interest rates, whereas financial institutions that were in need of foreign currency funds could only get them from the international market at a high cost. The establishment of the foreign currency borrowing and lending market has joined the supply and requisitioning parties of the foreign currency funds, increased the income of the supply party, and raised the efficiency of foreign currency fund applications. The interbank foreign currency borrowing and lending business has played a unique role in increasing the market transaction efficiency, enhancing market liquidity, and promoting market development with its unique currency broker business mode. First of all, in the foreign currency borrowing and lending broker business, a neutral third party of some influence in the market has been introduced into the transaction as a witness of the deal. This makes up for the imperfection of China’s interbank market credit system to some extent. Second, as the information medium of both trading parties, the currency broker eliminates the asymmetric command of information between market participants, offers members all-round and real market information, and raises the possibility of closing

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the deal. Third, the currency broker also eliminates the mismatch in the quantity of supply and demand by pooling supply and demand in every respect, and working as a bridge between big and small institutions to merge the transaction intentions of small and medium financial institutions into a whole. The broker also breaks up the transaction intentions of big financial institutions from the whole into parts to raise the success rate of market transactions. Fourth, the currency broker’s participation eliminates the negative effect of the inconsistency of the market position upon the transaction and creates favorable conditions for equal transactions. The foreign currency buying and selling market On May 18, 2005, the Trade System introduced the spot transaction of eight foreign currency pairs to develop and improve China’s interbank foreign exchange market, enrich the transaction variety, and overcome the limitations of China’s small and medium financial institutions in their direct participation with foreign exchange transactions in the international market due to their low risk ratings and size restrictions. This action added another type of foreign currency trading market to China’s foreign exchange market. The foreign currency buying and selling market was developed through cooperation with the world-famous financial information company, Reuters, on the basis of extensive market investigation and research. An electronic concentrated quote-driven transaction mode driven by multiple market makers’ quotations was adopted. The first advantage of this mode is that each financial institution regards the transaction center as a rival in form and does not have to extend credit to the rival one by one, thereby thoroughly solving the problem of credit obstacle in the foreign exchange market. The second advantage is that the mode features high efficiency, eliminates the process of mutual inquiry between rivals, and meets the transaction demand of the participants in the shortest possible amount of time, thereby preventing market risks. The third advantage is that the market makers participating in the quotation are well-known big banks that, with abundant resources, are active in the international foreign exchange market, and their quotations are very competitive. This has enabled the domestic, especially the small and medium financial


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institutions, to promptly enjoy preferential prices that are fully synchronous with the international foreign exchange markets. Forward foreign exchange market China’s forward foreign exchange business began in April 1, 1997. With the approval of the State Council, the BOC piloted the forward exchange settlement and sales business through the counter. Afterwards, the CBC, ICBC, and ABC, as well as three joint-stock banks, joined the pilot program, although these banks belonged to the forward foreign exchange retail sales market. China’s interbank foreign exchange forward business went into official operation on August 15, 2005, marking a significant step in the development of China’s forward foreign exchange market. With the further reform of China’s exchange rate regime and the continuous improvement in the mechanisms for setting the Renminbi exchange rate, the rate fluctuation becomes normal in the foreign exchange market. The broad market participants, especially commercial banks and other financial institutions, face greater exchange risks. The interbank forward foreign exchange business provides market participants with an effective means to hedge against exchange risks and plays a vital role in enhancing the risk management of market players, intensifying the market function in the process of setting the exchange rate for Renminbi, and guiding the market toward a reasonable rate.

3.2 A General Survey of the Transaction Variety in the Interbank Foreign Exchange Market The present interbank foreign exchange market offers the following business items to its members: Renminbi to foreign currency spot transactions Membership composition: The interbank foreign exchange market implements a membership system. All banks, non-bank financial institutions, and non-financial enterprises that are qualified for interbank foreign exchange spot transaction, as stipulated by the

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regulatory body, can file an application to the Trade System for membership to enter the interbank spot foreign exchange market for transaction. Transaction mode: The interbank foreign exchange market sets up an electronic quote-driven transaction system and an inquiry system for transaction. The former closes a deal through matchmaking on the basis of independent quotations by members on the principle of giving priority to price and time. The latter can facilitate technically members’ direct consultation about trading factors, including currency, exchange rates, and amounts on the principle of bilateral credit extension and settlement. Members can decide the inquiry or quote-driven transaction mode at their own discretion. Transaction time: Monday to Friday (Beijing time); quote-driven transaction (9:30 a.m. to 15:30 p.m.); inquiry transaction (9:30 a.m. to 17:30 p.m.) (closed on public holidays). Variety: Spot transaction of the Renminbi for USD, HKD, JPY, and EUR. Setting exchange rates: As of January 4, 2006, the middle price of the Renminbi exchange rate against the USD had been set in a different way from the previous practice of determination on the basis of the closing price generated by quotation matching in the interbank foreign exchange market. The Trade System makes an inquiry of all the market makers in the interbank foreign exchange market before the opening quotation each day and regards the quotations of all the market makers as the calculation specimen of the middle price of the Renminbi exchange rate against the USD. After excluding the maximum and minimum quotations, the remaining quotations of the market makers are mean-weighted to obtain the middle price of the Renminbi exchange rate against the USD on the same day, and the weight is determined by the Trade System in line with the composite index of the bidders, including the transaction volume and quotation in the interbank foreign exchange market. Settlement methods: The Renminbi/foreign currency spot quotedriven system adheres to the principle of “concentration, two-ways, and balance for settlement.” The Trade System handles the settlement of the Renminbi and foreign currency for its members on the settlement day. The settlement speed is T+2, with the settlement


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of Renminbi fund handled through the PBOC payment system and that of the foreign currency fund through the settlement system abroad. For the inquiry system, the fund is settled by both trading parties themselves in line with the contract notes generated by the system. The settlement speed can be T+2, T+1, or T+0, as agreed by both parties. Foreign currency to foreign currency spot transactions Transaction mode: The business of buying and selling foreign currencies adopts the mode driven by the market makers’ quotations. The market makers offer the buying and selling prices for each currency pair from which the trading system selects the optimum buying and selling price, publishes it in real time, matches the optimum market maker’s offer and the transaction request of the member banks on the principle of giving priority to price and time, and feeds back the transaction information to both parties in real time. The member banks close a deal by such means as a click of the offer, limit order, or RFQ inquiry. Transaction players: Financial institutions that are approved by the regulatory departments to conduct foreign currency business are divided into two categories: market makers and member banks. Transaction time: Monday to Friday (Beijing time); 7:00 a.m. to 19:00 p.m. (not open in official holidays). Transaction currencies: EUR/USD, AUD/USD, GBP/USD, USD/ JPY, USD/CAD, USD/CHF, USD/HKD, and EUR/YEN Settlement methods: The Trade System settles accounts for foreign currency deals on the principle of concentration and balance. Concentration means that the market makers and member banks regard the Trade System as the rival and settles accounts for the deal with it. Balance means that the market makers and member banks settle accounts with the Trade System in terms of the net balance of the transaction amount for the same currency on the same value date. The settlement speed is T+2. Foreign currency to foreign currency forward transactions Transaction mode: Both parties handle transactions through the inquiry transaction system of the Trade System. Both parties decide

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on the transaction currency, amount, maturity, exchange rate, and delivery arrangement through consultation. To make clear the rights and obligations of both parties, members of the forward foreign exchange market should sign a trader’s agreement on interbank forward foreign exchange. Settlement methods: Both parties of the deal can adhere to the principle of bilateral settlement, namely, the mode of full-amount delivery of the principal at maturity or the mode of differential delivery between the stipulated forward transaction price at maturity and the spot transaction price at maturity. To hedge against default risks and ensure the performance of a forward foreign exchange transaction contract, a member can set the margin in light of the credit standing of the rival through consultation, which shall be in the custody of the Trade System on his behalf. Transaction players: Members of the Trade System are those who hold qualification certificates for conducting the transaction business of financial derivatives issued by competent authorities. SAFE exercises legal-person-record control over the main participants in the interbank forward foreign exchange market. Transaction time: Monday to Friday (Beijing time); 9:30 a.m. to 17:30 p.m. (not open on official holidays). Local and foreign currency information intermediary service To meet the demand of different members, especially the small and medium financial institutions, and supplement the electronic transaction mode, the Trade System launched the foreign currency information intermediary service in June 2002. The Trade System can seek potential business rivals by telephone, fax, and the Internet and make market analysis to promote business conclusion on the commission of the financial institutions. The financial institutions with legal person status, and their authorized branches that are eligible for market financing and foreign currency borrowing and lending business, can immediately become the traders of the information intermediary service after signing an Intermediary Service Agreement with the Trade System Currently the intermediary currencies for foreign currency borrowing and lending are chiefly USD, EUR, JPY, and HKD, and the maturity is less than one year for the time being.


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3.3 Latest Changes in China’s Foreign Exchange Market Over recent years, the development of China’s foreign exchange market has accelerated remarkably. In 2005, the Chinese government initiated a major reform initiative on the Renminbi exchange rate in accordance with the principles of initiative, controllability, and progressiveness. This included an alteration of the Renminbi exchange rate and, more importantly, the constant improvements in the formation mechanism for the exchange rate for the Renminbi. After the reform, the exchange rate of Renminbi is no longer pegged solely to the USD. Instead, a basket of currencies are formed by selecting some main currencies and imparting them with corresponding weights in line with the actual situation of China’s foreign economic development. At the same time, in light of the domestic economic and financial situation, and with the market supply and demand as the base, fluctuations in the multi-lateral exchange rate index of the Renminbi are calculated with reference to a basket of currencies to exercise management and regulation of the Renminbi rate and keep it basically stable at a rational and balanced level. This reference to a basket of currencies shows that the fluctuations in the exchange rate between foreign currencies affects the Renminbi rate, but it does not mean that China pegs the Renminbi to a basket of currencies. The market supply and demand should be regarded as another major basis on which a managed flexible exchange rate is set. In selecting a basket of currencies and determining the weight China considers its major trading countries or regions, and their currencies for China’s international payments under current accounts1. Here, the weight of the commodity and service trade should be taken as the main basis. In general, the currency of the trade partners whose annual bilateral trade volume with China exceeds US$10 billion should not be neglected. At the same time, due consideration is given to such factors as the currency structure of foreign debt sources, foreign direct investment, and the currency structure of Based on the speech of Zhou Xiaochuan, governor of the PBOC, on August 10, 2005, at the unveiling ceremony of the board of Shanghai headquarters of the PBOC. 1

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some voluntary transfer projects under current accounts. Regulation by reference to a basket of currencies in setting the Renminbi rate conforms to the trend toward the diversification of China’s foreign economic and trade relations, and the diversified development of the international economic and financial systems. The implementation of the managed flexible rate system based on market supply and demand as well as regulated by reference to a basket of currencies can better mirror the change in Renminbi in relation to main currencies, respond to the unstable USD more favorably, reduce the fluctuation in multi-lateral rate of Renminbi, and maintain the overall stability of China’s foreign economic and trade environment. This further promotes a general balance of international payments and contribute to the sustained, coordinated, sound, and fast development of China’s national economy.

CHAPTER

7

The Shanghai Securities Market

1. History

T

he Shanghai securities market is the offspring of China's economic reform. Over the past 20 years, it has rapidly developed from being a small regional market into a large national market. The development of the Shanghai securities market since the reform and opening-up of China can be divided into three periods. Exploration and Startup (1981–1990) The issue of treasury bills was resumed in 1981, restarting China’s securities market. In 1984, a few enterprises in Shanghai, Beijing, and Shenzhen began to issue stocks and corporate bonds, and the variety of securities had gradually increased. In 1988, the treasury market was established along with a securities market consisting of a primary and secondary market. Comprehensive Development (1991–2003) By the end of 1990, the Shanghai and Shenzhen Stock Exchanges had been established with the consent of the State Council, and the securities market went into official operation. During this period, the Shanghai securities market experienced a rapid expansion, rising from original scattered regional stock markets to a centralized national stock market. Its trading varieties also expanded from

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the singular treasury bonds and stocks to include corporate bonds, financial bonds, funds, convertible bonds, warrants, and asset-backed securities. Many new technologies, such as centralized bidding transactions and paperless issue and trading, were successively put into use. A series of laws were promulgated successively, such as Company Law, Securities Law, and Law on Securities Investment Funds. A nationwide securities regulatory system was basically established, featuring the administrative regulation of the China Securities Regulator Commission (CSRC) and the industrial selfdiscipline and regulation of the Securities Association of China, and the Shanghai and Shenzhen Stock Exchanges. Further Development (2004–Present) Since 2004, the securities market has observed the principles of “being open, fair, and just,” followed the guidelines of “governance by law, supervision, self-discipline, and standardization,” and tried to implement a concerted development with the national economy. The securities market aims to establish an efficient and transparent capital market with a reasonable structure, complete mechanisms, proper functions, and safe operation Table 7.1 Major events in the development of the Shanghai securities market Year

Date

1990

Nov 26

Establishment of the Shanghai Stock Exchange (SSE).

Dec 19

SSE started official operation.

1991

Jul 8

Collective deposit of stocks and script-less trading of securities realized.

Jul 15

SSE Stock Index was released.

1992

Feb 21

The first B-share, the B share of Shanghai Vacuum Electron Devices Co., Ltd., was listed.

May 21

Stock prices liberalized across the board, and aggregate auction implemented.

1993

Event

Dec 28

Bond future transaction and clearing systems were launched.

Apr 26

Satellite data broadcasting system was put into use.

May 10

The Registration Company was opened officially.

Dec 15

Launch of the treasury bond repurchase business.

Dec

Converted into a national market.


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Table 7.1 Major events in the development of the Shanghai securities market (continued) Year

Date

1994

Oct 24

Timely Implementation of the information disclosure system.

1995

Apr 19

The A-share automatic query system launched.

1996

Sep 24

The trading mode of combining seat physical and seat remote while giving priority to seat remote was adopted.

Dec 16

The 10% price limit for stocks and fund prices was implemented.

Mar 1

The information publication system of stock and fund transactions was implemented.

Aug 15

SSE was put under the direct management of the CSRC.

Dec 19

SSE moved to its new address—SSE Building.

Jan 1

Stock Listing Rules of Shanghai Stock Exchange officially came into force.

Apr 1

Interim Measures of Shanghai Stock Exchange concerning Overall Stock Brokers Designating System came into effect officially.

Jul 1

The Securities Law of the People’s Republic of China went into effect officially.

Nov 10

The first banking stock in Shanghai securities market—A share of Shanghai Pudong Development Bank—was listed.

Feb 23

Hongqiao Airport issued convertible bonds, the first follow-on convertible bonds ever issued by a Chinese listed company.

Jul 6

Companies listed in Shanghai and Shenzhen Stock Exchanges exceeded 1,000. The number of listed companies in China ranked among the world top ten.

Dec 12

The largest steel enterprise in China—Bao Steel Ltd.—was listed at SSE.

Feb 20

Upon approval by the State Council, the CSRC decided to allow domestic residents to purchase and sell B shares with their B-share accounts, which were opened with their legally held foreign exchanges.

Mar 31

China Securities Depository and Clearing Corporation Limited was established in Beijing with two branches, in Shanghai and Shenzhen respectively.

Apr 24

PT Shanghai Narcissus was delisted officially, resulting in the first decrease of listed companies since SSE opened, from 608 down to 607.

Jun 22

Sinopec published its Prospectus, issuing shares of 2.8 billion, which hit a new record in terms of issued and outstanding A shares.

1997

1998

1999

2000

2001

Event

152

SHANGHAI FINANCE Table 7.1 Major events in the development of the Shanghai securities market (continued)

Year

Date

2002

Jan 10

The CSRC and the National Economic & Trade Commission jointly promulgated the Rules for Corporate Governance of Listed Companies.

Oct 7

The 42nd annual meeting of FIBV determined to accept the Shanghai and Shenzhen Stock Exchanges as its official members.

Nov 8

The CSRC announced that the QFII system would come into force on December 1, indicating that China’s securities market was opened to qualified foreign institutional investors.

Jul 7

SSE completed the broadband broadcasting system.

Aug 20

The block trading system of SSE was put into use.

Jul 12

The backup center for disaster recovery of SSE was put into full use.

Dec 30

The first ETF product in mainland China—SSE 50ETF—was established successively, with an IPO of 5.435 billion shares.

Apr 8

The SHSE & SZSE 300 Index, compiled jointly by the Shanghai Stock Exchange and the Shenzhen Stock Exchange, was published officially.

Apr 29

The CSRC released the Circular concerning Relevant Issues in the Trail Split-share Reform, kick-starting the trial splitshare reform.

Jun 19

After over a year of preparation and promotion, The Interim Rules of SSE concerning the Acquisition, Subscription, and Redemption of Open-end Fund was approved by the CSRC. This business was called SSE LOF distribution system for short.

Aug 22

Warrant trading was restarted in the mainland market. The 387.7 million call warrants of Shanghai Baosteel Group Corporation were circulated at SSE.

Dec 19

The database project of SSE was completed, one of the top three stock exchange databases in the world.

2003 2004

2005

Event

2. The Variety of Securities The securities listed at SSE can be divided into four categories: stocks, bonds, funds, and warrants. When SSE opened in December 1990, there were only 30 securities listed, including eight A shares and 17 treasury bonds. By the end of 2005, there were 1,031 securities traded in the market, including 827 A shares, 54 B shares, 120 bonds, 26 funds, and four warrants.


153

2.1 The Stock Market The securities can be divided into Share A and Share B. Share A is only available for domestic investors and QFII to subscribe to and trade, while Share B is only for domestic and foreign investors to subscribe to and trade in U.S. dollars. In 1990, the first eight A shares were listed, then the first B share listed in 1992. With the listing of a large number of state-owned enterprises, high-quality private enterprises, and the three types of venture enterprises, the function of Shanghai securities market as the national economic barometer began to materialize. As of 2005, there were 827 A shares and 54 B shares listed in the market, and the total market value of shares in SSE reached RMB 2,309.61 billion, with a negotiable capitalization of RMB 675.461 billion. The proportion of negotiable capitalization to the total market value was 29.2%. Table 7.2 Summary of listed stocks

Year

Number of listed companies

Number of listed stocks

Funds raised (RMB 100 mil.)

Issued capital (100 mil. shares)

Total market value (RMB 100 mil.)

1990

8

30

10.11

2.61

12.34

1991

8

46

0.24

2.72

29.43

1992

29

87

41.39

46.94

558.40

1993

106

190

93.47

235.54

2,206.20

1994

171

259

150.82

418.88

2,600.13

1995

188

258

58.16

560.66

2,525.66

1996

293

368

202.22

749.86

5,477.81

1997

383

467

474.60

975.37

9,218.06

1998

438

526

377.15

1,280.35

10,625.90

1999

484

576

486.37

1,580.15

14,580.47

2000

572

657

914.32

2,032.42

26,930.86

2001

646

744

957.49

3,164.44

27,590.56

2002

715

826

614.30

3,727.84

25,363.72

2003

780

914

560.96

4,170.39

29,804.92

2004

837

996

456.90

4,700.55

26,014.34

2005

834

1,069

299.77

5,023.05

23,096.13

Source: Shanghai Stock Exchange

12,386.11

16,965.79

31,373.86

22,709.38

16,959.093

20,824.137

26,470.597

19,240.208

1998

1999

2000

2001

2002

2003

2004

2005

242

243

241

237

240

239

239

246

243

247

251

252

259

255

256

Trading days


9,114.82

3,102.36

1995

13,763.52

5,735.52

1994

1997

2,509.71

1993

1996

46.08

323.85

1992

Turnover (RMB 100 mil.)

1991

Year

79.505

108.932

86.407

71.557

94.622

131.27

70.99

50.35

56.64

36.90

12.36

22.76

9.69

1.27

0.18

Daily average turnover (RMB 100 mil.)

Table 7.3

16.47

14.85

11.17

7.52

7.58

10.20

6.53

4.59

5.01

4.46

2.05

2.61

0.60

0.07

0.0002

Daily average trading volume (100 mil. shares)

221.57

286.67

330.15

494.79

234.13

472.62

404.43

119.00

159.83

192.74

114.30

157.54

38.43

4.82

2.01


20050818

20040924

20030416

20020624

20011024

20000217

19990625

19980409

19970512

19961203

19950522

19940906

19931207

19921130

19911231

Date

Maximum trading day

Turnover of stocks (1991–2005)

36.75

31.66

27.23

26.59

27.26

42.92

11.62

16.48

11.51

1.53

1.14

1.60

0.001

0.08

0.008


20050707

20040907

20030103

20021008

20011115

20000927

19990104

19981221

19971014

19960209

19950208

19940712

19930227

19920207

19910517

Date

Minimum trading day



155

Table 7.4 Price/Earning ratio and turnover rate of A Shares at Shanghai Stock Exchange Price/Earning ratio

Turnover rate (%)

Year

Average issued and outstanding shares

Average tradable shares

Average turnover rate of tradable shares

1995

16.32

13.66

519.41

1996

32.65

31.13

760.05

1997

43.43

42.44

534.99

1998

34.36

33.66

355.30

1999

38.13

36.59

421.55

2000

59.14

58.63

504.07

2001

37.59

41.39

216.67

2002

34.50

37.44

208.74

2003

36.64

37.22

268.58

2004

24.29

26.20

308.31

2005

16.38

17.84

290.70


Table 7.5 Price/Earning ratio and turnover rate of B Shares at Shanghai Stock Exchange Price/Earning ratio Year

Average issued and outstanding shares

Turnover rate (%)

Average tradable shares

Average turnover rate of tradable shares

1995

8.00

8.00

56.26

1996

14.04

14.04

61.58

1997

11.99

11.99

74.60

1998

6.04

6.04

57.30

1999

10.05

10.05

92.59

2000

25.23

25.23

151.24

2001

43.39

43.39

452.26

2002

30.61

30.61

95.99

2003

30.32

30.32

64.26

2004

20.15

20.15

58.29

2005

12.40

12.40

58.49


156

SHANGHAI FINANCE

2.2 The Bonds Market Bonds include treasury bonds, corporate bonds, and convertible corporate bonds. The treasury bonds market of SSE is the most vibrant in China. The government securities repurchase that was put forward in 1993 brought the mortgage function of treasury bonds into play. By the end of 2005, SSE had 120 varieties of bonds in total, including 43 treasury bonds, with a deposited bond balance of RMB 344.8 billion. It also had 47 corporate bonds, with a deposited bond balance of RMB 30.0 billion, and 18 convertible bonds, with a deposited bond balance of RMB 16.7 billion, plus three repurchase bonds. The aggregate deposited bond balance was close to RMB 391.7 billion. SSE has actively supported the development of the asset securitization business, and provided the circulation platform for asset securitization varieties via the block trading system. On September 6, 2005, the first asset securitization product in the history of China, Unicom CDMA, began circulation in SSE, creating a new Table 7.6

Number of bonds in the bonds market over the years

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Number of listed bonds

24

22

20

23

25

31

39

65

90

120

Financial bonds

2

0

0

0

0

0

0

0

0

0

Corporate bonds

5

5

5

9

10

12

11

22

27

47

Spot

5

5

5

9

10

12

11

19

24

44

3

3

3

3

13

19

18

Repurchase Convertible bonds Treasury bonds

17

17

15

14

15

19

25

30

44

43

Spot

9

9

7

6

7

11

17

21

29

34

Repurchase

8

8

8

8

8

8

8

9

15

9



157

development space for SSE. The full name of the asset securitization plan of Unicom is China Unicom CDMA Network Rental Income Plan. The funds raised reached RMB 1.6 billion. Meanwhile, in order to increase the variety of fixed income securities, SSE prepared the Asian bond ETF. The Executives’ Meeting of East Asia and Pacific Central Banks (EMEAP) set up the Asian Bond Fund. This organization consists of the central banks and financial service authorities from 11 members, including the People's Bank of China. The Asian Bond Fund is made up of the Pan-Asia Bond Index Fund and eight single market index funds. The China Bond Index Fund is one of the eight, and it mainly invests in China's RMB bonds market. In May 2005, EMEAP injected US$2 billion into the Asian Bond Fund, US$0.12 billion of which was invested in the China bond index fund. The China bond index fund primarily adopted the ETF products to invest in treasury bonds. It will be listed in SSE for public investors to subscribe to.

2.3 Fund By the end of 2005, there were 25 close-end funds and one ETF traded on SSE. The ETF has all the features of an index fund, including index duplication, passive management, low cost, as well as the characteristics of open-end funds and close-end funds. Meanwhile, it also optimizes ordinary open-end funds and close-end funds. Compared with ordinary open-end funds, ETF fulfills the subscription and redemption via stocks instead of cash; and compared with ordinary close-end funds, ETF may eliminate the discount and premium problems in the secondary market. SSE launched the first ETF in mainland China, SSE 50ETF, in February 2005, to deepen the blue-chip investment and value concept, construct the stock pricing base market, and increase the number of institutional investors. SSE 50 ETF has been widely recognized by the industry since its launch, and it won the Best Product Innovation Awards by Asia Asset Management on March 1, 2005. Also, in April 2005, it won the Asia-Pacific Best Product Innovation Award in the 2005 Global ETF Awards.

158


Fund trading over the years Trading volume (100 mil. units)


12

56.73

117.34

12

107.21

305.67

1996

15

128.01

497.38

1997

15

55.57

219.53

1998

19

329.58

605.28

1999

26

827.95

1365.82

2000

18

995.32

1334.18

2001

23

1148.35

1348.92

2002

25

573.69

556.77

2003

25

441.62

362.16

2004

25

297.78

249.10

2005

26

778.73

1355.51

Year

Quantity of funds

1994 1995


2.4 Warrants Warrant is a special contract in which the issuer promises to sell (or purchase) a certain amount of specific assets at some agreed price, on or before a certain date in the future. The warrant holder pays a certain sum to the issuer, which constitutes the price of the warrant. There are two types of warrant. First, the warrant issued by issuers of underlying stocks (such as the listed company) is called corporate-issued warrant, Second, the warrant issued by a third party, such as the securities trader other than the issuer of underlying stocks, is called the derivative warrant. On August 22, 2005, SSE successfully put forward the first Baosteel Warrant. By the end of December 2005, there were four warrants trading in the market.

The Shanghai Securities Market Table 7.8

159

Overview of warrants in 2005

Warrant code

580000

580001

580998

580999

Warrant name

Bao Steel JTB1

Wu Steel JTB1

Airport JTP1

Wu Steel JTP1

Call warrant

Call warrant

Put warrant

Put warrant

European

European

American

European

Year-end strike price (RMB)

4.50

2.90

7.00

3.13

Year-end strike proportion

1.00

1.00

1.00

1.00

2005-8-22

2005-11-23

2005-12-23

2005-11-23

Warrant category Strike mode

Listing date Maturity date

2006-8-30

2006-11-22

2006-12-22

2006-11-22

387,700,000

1,520,896,679

286,000,000

1,066,426,580

Opening (RMB)

1.26

0.82

1.85

1.16

Maximum (RMB)

2.11

1.84

2.33

1.86

Minimum (RMB)

0.68

0.82

1.85

0.93

Closing (RMB)

1.48

1.00

1.90

1.01

10,292,669.84

4,176,478.60

345,954.54

2,815,585.17

Trading volume (10,000 shares)

6,598,424.66

3,496,755.01

169,042.67

2,483,712.38

Annual turnover rate (%)

17,019.4087

3,070.8482

688.5425

1,918.9648

Year-end balance (RMB)

Turnover (RMB 10,000)


3. Listed Companies 3.1 Overview of Listed Companies Over a long period of time, SSE has set the establishment of a blue-chip stock market as its developmental goal, aiming to become an investment arena where both domestic and overseas investors can share the fruits of China's economic growth. The sustained economic growth has already cultivated large amounts of excellent Chinese enterprises, many of which have already been listed in SSE. These companies include not only large state-owned enterprises with outstanding performance, such as Sinopec, Bao Steel, and China

160

SHANGHAI FINANCE Figure 7.1 Increasing number of listed companies in Shanghai securities market (1990–2005) 900 800 700 600 500 400 300 200

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

0

1990

100

Source: Statistics of Shanghai Stock Exchange

Unicom, but also fast-growing private enterprises and foreignfunded enterprises. Propelled by the further development of China’s economy, some outstanding listed companies will grow into world-class multinationals, which will, in turn, enable the Shanghai securities market to become a world-class blue-chip market. By the end of December 2005, 834 companies were listed in SSE, with total market value of RMB 2,309.6 billion, among which the negotiable market capitalization was RMB 675.5 billion.

3.2 Industrial Distribution of Listed Companies About 65% of all the listed companies in SSE are industrial enterprises, 16% comprehensive enterprises, 10% utilities enterprises, 7% commercial enterprises, and 2% real estate companies.

3.3 Regional Distribution of Listed Companies at SSE In terms of regional distribution, most listed companies in SSE are from developed coastal areas, 17.39% of which are local enterprises in Shanghai, while 7.55% and 7.31% come from the adjacent Jiangsu and Zhejiang Provinces respectively.

The Shanghai Securities Market Table 7.9 Region

161

Regional distribution of listed companies at Shanghai Stock Market (as of the end of 2005) Number of listed companies

Proportion (%)

145

17.39

Jiangsu

63

7.55

Zhejiang

61

7.31

Beijing

60

7.19

Shandong

49

5.88

Hubei

34

4.08

Sichuan

34

4.08

Guangdong

32

3.84

Fujian

28

3.36

Anhui

27

3.24

Liaoning

25

3.00

Heilongjiang

23

2.76

Xinjiang

21

2.52

Hunan

20

2.40

Jilin

19

2.28

Henan

19

2.28

Hebei

18

2.16

Inner Mongolia

17

2.04

Jiangxi

16

1.92

Tianjin

16

1.92

Shaanxi

14

1.68

Chongqing

14

1.68

Shanxi

13

1.56

Yunnan

13

1.56

Gansu

11

1.32

Guangxi

10

1.20

Guizhou

9

1.08

Hainan

7

0.84

Qinghai

6

0.72

Tibet

6

0.72

Ningxia

4

0.48

Shanghai

Source: Market Reference Data Compiled by Shanghai Stock Exchange, 2005

162


Ownership structure of listed companies at Shanghai Stock Exchange at the end of 2005

Total tradable shares (36%)

Total non-tradable shares (64%) Source: Statistics of Shanghai Stock Exchange

3.4 Ownership Structure and Split-Share Reform of Listed Companies Share split has been a historical problem since the establishment of the Shanghai securities market. Over a long period of time, when the companies were listed at SSE, some of their shares were negotiable while the other shares were not. This has resulted in a coexistence of tradable and non-tradable shares in such companies’ ownership structures. The differentiation between the tradable and non-tradable shares leads to the interest divarication among shareholders, and distorts the pricing mechanism of the capital market, as well as restricts the standardization of the listed companies and the capital market. With a view to changing this situation, under the guidance of the CSRC, SSE started the split-share reform in May 2005 to unify the tradable and non-tradable shares of listed companies through a reasonable plan. The split-share reform proceeded smoothly. As of February 27, 2006, a total of 365 SSE-listed companies have completed or are engaging in the split-share reform, accounting for 44.68% of all listed companies and 52.53% of total market value. The accomplishment of the reform has created a new situation for the long-term healthy development of SSE. The governance structure of listed companies will be significantly improved, the price discovery function of the


163

market and the function of market disciplining behaviors of the listed companies will recover soon, and the investor confidence will be further enhanced.

3.5 The Top 50 Listed Companies By the end of 2005, the total market value of the top 50 listed companies had reached RMB 1,203.13 billion, down 4.07% compared to the value of 2004, accounting for 52.09% of the total market value of all listed companies at SSE. Sinopec. listed in 2001, maintained its lead position. Table 7.10 Top 50 companies in terms of market value listed at SSE

Rank

Stock name

Stock code

Total market value (RMB 10,000)

Proportion in the total market value of all listed companies (%)

1

Sinopec

600028

32,583,629.17

14.11

2

G Bao Steel

600019

7,214,944.00

3.12

3

Merchants Bank

600036

6,781,274.19

2.94

4

China Unicom

600050

5,935,046.99

2.57

5

G Yangtze Power

600900

5,665,222.42

2.45

6

Huaneng Power International

600011

5,166,000.00

2.24

7

Pudong Development Bank

600000

3,817,125.00

1.65

8

G Minsheng

600016

2,946,988.52

1.28

9

Shanghai Airport

600009

2,778,674.08

1.20

10

Shanghai-Jiangsu Expressway

600377

2,434,446.91

1.05

11

Kweichow Moutai

600519

2,152,807.80

0.93

12

G Wuhan Steel

600005

2,124,098.00

0.92

13

G Shanghai Port

600018

2,040,776.40

0.88

14

Sinopec Shanghai

600688

2,035,660.00

0.88

15

Hua Xia Bank

600015

1,990,800.00

0.86

16

Yanzhou Coal Mining

600188

1,752,320.00

0.76

164

SHANGHAI FINANCE Table 7.10 Top 50 companies in terms of market value listed at SSE (continued)

Rank

Stock name

Stock code



17

Sinopec Qilu

600002

1,712,100.00

0.74

18

G Shenergy

600642

1,490,055.94

0.65

19

GD Power

600795

1,413,858.79

0.61

20

Shandong Infrastructure

600350

1,308,518.20

0.57

21

Maanshan Iron & Steel

600808

1,289,207.01

0.56

22

Huadian Power International

600027

1,280,625.68

0.55

23

G CITIC

600030

1,280,454.00

0.55

24

Beijing Capital

600008

1,229,800.00

0.53

25

Yantai Wanhua

600309

1,192,339.20

0.52

26

G Oriental Pearl

600832

1,188,638.40

0.51

27

G China Shipping

600026

1,116,500.00

0.48

28

G Shanghai Automotive

600104

1,084,355.70

0.47

29

Zhenhua Port Machinery

600320

1,026,860.16

0.44

30

Offshore Oil Engineering

600583

1,018,512.00

0.44

31

Raw Water

600649

1,000,613.75

0.43

32

Southern Airlines

600029

848,000.00

0.37

33

G Guangzhou Holdings

600098

846,331.20

0.37

34

Gehua CATV

600037

845,210.71

0.37

35

G Lujiazui

600663

839,295.91

0.36

36

Sichuan Changhong

600839

820,236.13

0.36

37

Eastern Airlines

600115

795,300.00

0.34

38

Conch Cement

600585

787,935.84

0.34

39

Jiangxi Copper

600362

765,838.55

0.33

40

Shandong Aluminum Industry

600205

739,200.00

0.32

41

Fujian Expressway

600033

722,044.80

0.31

42

G Heilongjiang Agriculture

600598

721,456.37

0.31


165

Table 7.10 Top 50 companies in terms of market value listed at SSE (continued)

Rank

Stock name

Stock code



43

G Tianjin Port

600717

720,073.70

0.31

44

Jiangxi-Guangdong Expressway

600269

700,600.49

0.30

45

Handan Iron & Steel

600001

700,577.59

0.30

46

Anhui Expressway

600012

699,360.00

0.30

47

Yizheng Chemical Fiber

600871

696,800.00

0.30

48

Sinotrans Development

600270

695,409.96

0.30

49

G Baiyun Airport

600004

676,000.00

0.29

50

Zhongyuan Expressway

600020

641,550.00

0.28

Source: Market Reference Data Compiled by Shanghai Stock Exchange, 2005

4. Investors The Shanghai securities market enjoys a unique investor base. The number of individual investors is huge. Institutional investors have developed rapidly, while foreign investors are the new powers with tremendous potential.

4.1 Active Individual Investors SSE has always worked hard to attract individual investors since its establishment. The rapid growth of China’s economy has greatly increased the income of Chinese residents, and paved the way for individual investors to invest in SSE. As of December 31, 2005, SSE had 37,479,173 accounts, among which, 212,826 were held by institutional investors and 37,266,347 by individual investors.

166


Increasing individual investors (1993–2005)

(Unit: 10,000) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0

1993

1995

1997

1999

2001

2003

2005

Source: Statistics of Shanghai Stock Exchange

4.2 Participation of Institutional Investors In recent years, the entrance of social security fund, insurance fund, and enterprise annuity, as well as other pension funds, into the market has initially balanced the structure of institutional investors in the Shanghai securities market. In 2005, the CSRC, together with the CIRC and the Ministry of Labor and Social Security, took active measures to encourage the entrance of social security fund and insurance fund into the market steadily, and speed up the process of enterprise annuity entering the market. The national social security fund has actively participated in investments in the stock market since its establishment, and its amount of investment has grown year after year, making it a major investor. The insurance funds have also become a main investor in the securities market. By the end of 2005, insurance funds entering the market indirectly reached RMB 106 billion, an increase of 57% compared to the previous year, while the funds directly investing in


167

the securities market went up to RMB 13.57 billion. In recent years, the scale of the insurance industry entering the market indirectly via securities investment fund has expanded rapidly. Compared to 2004, the total amount of insurance funds investing in funds and equity funds has increased greatly, accounting for 22.79% of the fund market. Insurance institutions have become the most important institutional investor in the securities investment fund market, playing an important role in developing the funds, stabilizing the capital market, and maintaining the market confidence.

4.3 The Increasingly Mature Securities Investment Fund In recent years, the sustained development of the securities investment fund has further expanded the investment scope and sales channel of the funds. Statistical data shows that, as of December 31, 2005, there were 218 securities investment funds active in the market, with a total net value of RMB 469.11 billion and total fund shares of 471.48 billion. On July 14, 2005, SSE launched the fund distribution platform named SSE LOF, which was a new network consisting of all members of SSE qualified for offering and specializing in the acquisition (subscription) and redemption of open-end funds. An investor can conduct the acquisition (subscription) and redemption of open-end fund at the business office of any SSE member with the qualification of fund offering, as long as he/she holds a SSE shareholder code card (SSE common stock account) or the Shanghai securities investment fund account with China Securities Depository and Clearing Corporation Limited. The subscription and redemption of open-end funds via the SSE LOF Distribution System is the same as the over-the-counter system, both of which are based on the net value.

4.4 Sustained Development of Qualified Foreign Institutional Investors (QFII) Along with China's entry into the WTO, the Shanghai securities market has accelerated its opening-up to foreign investors. By virtue of the QFII system, more and more investors from foreign mature

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markets are participating in SSE. By the end of 2005, QFII had approved 32 qualified foreign institutional investors, with approved investments denominated in foreign currencies worth US$5.495 billion. By the end of October 2005, QFII held securities assets worth RMB 28.5 billion, accounting for 90% of the total assets, which included stocks valued at 16.9 billion or 53% of the total assets as well as funds of 4.4 billion or 14% of the total assets. The sustained development of QFII has not only enhanced the international influence of SSE and boosted market confidence, but also promoted the development of China’s capital market.

5. The Trading and Clearing System 5.1 The Trading System The trading days of SSE is from Monday to Friday each week. In the morning session, 9:15 to 9:25 is the competitive bidding time, while 9:30 to 11:30 is the continuous bidding time. During the afternoon session, 13:00 to 15:00 is the continuous bidding time and 15:00 to 15:30 is declaration acceptance time for block trade. The market is closed on Saturday, Sunday, and days as proclaimed by SSE. SSE adopts the collective auction method. The trading of all listed securities goes through the aggregate auction via the mainframe, and is automatically matched according to the principle of price-time priority. The SSE implements the overall designated trading system for the securities transaction. The investor engaging in securities trading in SSE designates a member trading and clearing on his behalf, and signs the designated trading agreement. The investor can only conduct trading by opening his securities account at the seat owned by the member. SSE launched the block trade business in January 2003. Contrary to price bidding transactions, block trade is conducted through the block trading system platform specially developed by SSE. This helps change the current situation of merely matching transactions and diversify trading mechanisms. The trading price of securities listed in SSE generally fluctuates in line with the market conditions, allowing competitive bidding.


169

Currently, it implements a 10% price limit to all A shares, B shares, and funds on each trading day (exclusive of the first trading day), and 5% price limit to ST stocks. The declared price of block trade must be determined between the maximum and minimum strike prices concluded within the bidding time. In the event that no security is traded, the closing price is the strike price. SSE uses the net price to trade listed government bonds. The government bond repurchase adopts two trading modes, namely, pledge and buyout. Having been upgraded many times, the capacity of the SSE trading system is now leading the world. The mainframe is capable of accepting 29 million trusts, striking 60 million transactions, and completing 16,000 transactions per second.

5.2 Registration and Clearing The Shanghai branch of the China Securities Depository and Clearing Corporation Limited (DCC) registers and deposits the stocks of companies listed at SSE collectively. DCC implements a central depository system for all securities listed at SSE. Each securities company is the central depository trustor of listed negotiable securities and the non-tradable securities held by securities investors, while the issuer is the central depository trustor of state-owned shares and legal-person shares. According to the central depository system, DCC is responsible to the depository trustor and the depository trustor to the securities investors deposited. A securities investor must assign a securities enterprise as his/her security depository institution and designated trading organization. Currently, DCC, according to the principle of security, efficiency, and other criteria, has gradually established a legal person netting system that integrates centralized clearing and classified delivery, implementing a “T+1” delivery system for A Shares. On a trading day, SSE transfers the data of securities transactions to DCC, which summarizes and clears all transactions of the same member on the trading day according to the netting principle, calculates the net amounts of securities or amounts receivable or payable, and completes the clearing process.

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On the next trading day (“T+1” day) at 9:00 a.m., it begins the delivery to clear the transfer of funds and securities of each clearing member, so as to make the buyer get the securities and the seller get the funds. The delivery sequence starts first with the delivery of transactions in the secondary market, and then the delivery of the subscription of new shares in the primary market. The delivery is completed by means of recording. The members open securities and fund accounts at DCC for funds delivery. DCC’s computers automatically transfer the securities (funds) from the accounts of the payers to the accounts of the payees according to the clearing results. The members, after completing the delivery with DCC, then conduct the clearing and delivery with investors.

6. The SSE Index 6.1 The SSE Index Series The index is not only the barometer but also the lifeline of the securities market. Over the past 16 years, from the initial single composite index to the various indexes, SSE has gradually formed a relatively comprehensive index system. This system has become an authoritative statistical index widely used both at home and abroad to evaluate the performance of China’s securities market. The SSE index series includes the Shanghai SSE 180 Index, the Shanghai SSE 50 Index, the Shanghai Composite Index, the A-Share Index, the B-Share Index, the Classified Index, the Bond Index, and the Fund Index, among others. Among these, the Shanghai Composite Index is the earliest compiled index. The SSE 180 Index is a benchmark index established on the basis of the development situation of China’s securities market, using international experience and compiled using scientific methods. The index reflects the conditions and operations of Shanghai securities market, serving as a performance benchmark for investment and a basis for financial derivatives. The SSE 50 Index pools the 50 largest stocks of good liquidity and a broad representation from the Shanghai securities market to form a constituent index. It comprehensively reflects the complete picture of the most influential


171

leading enterprises in the market, and forms a Chinese blue-chip group. What is more exciting is the Shanghai-Shenzhen 300 Index, a unified index that has been cultivated for as long as seven years.

6.2 The Base Day, Base of Index, and Base Index Since the SSE 180 Index, released on July 1, 2002, is the extension of the SSE 30 Index released on July 1, 1996, the SSE 180 Index still takes the average negotiable market capitalization from January to March 1996 as the base, with a base index of 1,000 points. The SSE 50 Index takes December 31, 2003 as its base day, and the adjusted market value of all stocks on that day as the base, and its base index is 1,000 points. It was released on January 2, 2004. The SSE Composite Index takes December 19, 1990 as its base day, and the market value of all stocks on that day as the base, and its base index is 100 points. It was released on July 15, 1991. The SSE A Share Index takes December 19, 1990 as its base day, and the market value of all A shares on that day as the base, and its base index is 100 points. It was released on February 21, 1992. The SSE B Share Index takes February 21, 1992 as its base day, and the market value of all B shares on that day as the base, and its base index is 100 points. It was released on February 21, 1992. Figure 7.4

The SSE Composite Index over the years


2,500 2,000 1,500 1,000 500 12-21-1990 8-2-1991 2-28-1992 9-25-1992 4-23-1993 11-19-1993 6-24-1994 1-20-1995 8-25-1995 4-5-1996 11-1-1996 6-13-1997 1-9-1998 8-21-1998 4-2-1999 11-5-1999 6-30-2000 2-16-2001 9-14-2001 5-3-2002 12-6-2002 7-18-2003 2-20-2004 9-24-2004 4-29-2005 12-9-2005

1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

Closing index

Weekly turnover (RMB 100 mil.)

Closing index

0

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The SSE industrial index takes April 30, 1993 as its base day, and the market value of shares in corresponding sectors as the base; its base index is the unified 1,358.78 points (the closing point of the SSE Composite Index on April 30, 1993). It was released on June 1, 1993. The SSE Fund Index takes May 8, 2000 as its base day, and the market value of all securities investment funds on that day as the base; its base index is 100 points. It was released on June 9, 2000. The SSE Government Bond Index takes December 31 2002, as its base day, and the market value of all constituent government bonds as the base. Its base index is 100 points, and it was released on January 2, 2003. The corporate bond index takes December 31, 2002, as its base day, and the market value of all constituent corporate bonds on that day as the base, with a base index of 100 points. It was released on June 9, 2003.

7. Market Outlook The fast growing Chinese economy, stimulated by China’s continuous reform and opening-up, will lay a solid foundation for the development of SSE. Looking ahead, SSE will march from an emerging market to a mature market in terms of market scale, market function, investment tools, quality of listed companies, and internationalization. From 1978 to 2004, China’s GDP increased from US$143.7 billion to US$1,649.4 billion, representing an annual average growth of 9.4%. Its GDP is expected to reach about US$4,000 billion in 15 years. Shanghai’s securities market will definitely benefit from China's soaring economy. Currently, China’s financial system, which gives priority to the indirect financing of banks, does not contribute toward eliminating the risks in the banking system and enhancing the risk resilience of Chinese enterprises. In its Eleventh Five-Year Plan, the Chinese government proposed to speed up direct financing, actively develop the capital market, such as stocks and bonds, and steadily develop the futures market. The experience of some

0

100

200

300

400

500

600

700

800

11-20-1998

4-24-1998

9-12-1997

1-31-1997


The SSE 180 Index over the years

7-5-1996

5-18-2001

9-29-2000 Closing index

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Closing index

8-5-2005

(RMB 100 mil)

Figure 7.5

The Shanghai Securities Market 173

12-24-2004 5-28-2004

10-17-2003 3-14-2003 8-2-2002

12-21-2001

2-25-2000

7-2-1999

174


The SSE 50 Index over the years


Closing index

600

1,200

500

1,000

400

800

300

600

200

400

100

200


10-28-2005

8-12-2005

6-3-2005

3-18-2005

12-31-2004

10-22-2004

8-13-2004

6-4-2004

3-19-2004

0 1-2-2004

0

Closing index

mature capital markets shows that the market value of a country’s primary market generally accounts for 100% of its GDP, whereas the value of SEE only makes up 16%. If this proportion can rise to 100%, SSE will be able to rank among the top six in the world’s securities markets. Over a long period of time, the existence of large amounts of non-tradable shares in the securities market has made it impossible for the resource allocation to be realized by M & A in the securities market. The functions of the capital market in selecting the superior and eliminating the inferior and allocating resources have not been brought into full play. The split-share reform initiated in 2005 has eliminated the difference between tradable shares and non-tradable shares, and realized the full circulation of shares, paving the way for the M & A development of the securities market. The reform of state-owned asset management system is also underway. The strategic restructure of the state-owned capital is being conducted. The state-owned capital has gradually exited from the competitive industries. It is foreseeable that after the full circulation in the securities market is realized, the securities market


175

will become an important arena for the restructure of state-owned listed companies and state-owned capital. Innovation has always been the major driver of SSE. Such innovation over the next five years will find expression mainly in the following aspects. First, financial derivatives will be put forward. Currently, there are no financial derivatives in the Shanghai securities market. In order to provide more diversified investment varieties and risk management tools to investors, the innovation based on stock, index, and derivatives of index products is essential. Second, the market of fixed-income products will be developed. It is an urgent task faced by the current Shanghai securities market to vigorously promote the development of the corporate bonds market, the treasury bonds market, and other fixed-income markets. In the coming five years, the size of the corporate bonds market in Shanghai will be further enlarged, and the securitized asset products will undergo rapid development. Third, the trading mechanism will be perfected. The Shanghai securities market will further perfect the block trade and carry trade; establish the pilot margin trading system, the securities lending system, and the system of market makers; and relax restrictions on the price limits With the acceleration of economic globalization, especially the further integration of China’s enterprises into the world economy, the pace of the Shanghai securities market bringing itself in line with international conventions will be quickened through international cooperation. In about five to ten years from now, the reform of the RMB exchange rate regime will be deepened, and the liberalization pace of the RMB capital account will speed up. The cross-border bidirectional flow of capital will increase, and the restrictions on QFII will be further relaxed. Offshore companies will be listed at SSE, enabling the latter to become one of the major investment destinations in the world.

CHAPTER

8

The Shanghai Futures Market

1. Historical Survey of China’s Futures Market

C

hina’s futures market came into being in the late 1980s and early 1990s. It was born when the new and old systems stood in opposition to each other and grew up gradually along with the exploration, establishment, and perfection of China's socialist market economy. On October 12, 1990, China’s first commodity futures market, the China Zhengzhou Grain Wholesale Market, was approved by the State Council. Based on physical trading, the market introduced the futures trading mechanism. China’s futures market is now in the stage of standardized development. Its size has shrunk from over 50 futures exchanges and about 1,000 futures brokerage companies to the current three futures exchanges and around 200 futures brokerage companies. Currently, there are three commodity futures exchanges in China, namely, the Zhengzhou Commodity Exchange (ZCE), the Dalian Commodity Exchange (DCE), and the Shanghai Commodity Exchange (SCE). ZCE initially engaged in forward trading, but on May 28, 1993, it launched forward standardized futures contract trading, covering wheat, cotton, green beans, and sugar. Established on February 28, 1993, DCE mainly engages in the futures of corn, No. 1 soybeans, No. 2 soybeans, and soybean meal. Among these futures, the No. 1 soybean is the most buoyant variety in the market. At the same time, the opening-up of the futures industry has achieved substantial breakthrough. Since 2005, any intermediary

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SHANGHAI FINANCE

agency holding the license of the Hong Kong Securities and Futures Commission or registered with the Monetary Authority of Macao, may establish joint-venture futures brokerage companies in the mainland of China in compliance with the provisions of the CSRC. In December 2005, the CSRC approved the ABN AMRO Financial Futures (Asia) Company, held by ABN AMRO to hold shares in Galaxy Futures Company. China's futures market has gone through decades of trials and tribulations and realized the transition from disorder to standardization and from slump to prosperity. The market has experienced three development stages: the trial stage, the stage of screening and rectification, and a stage of standardized development. After the two rounds of screening and rectifications in 1994 and 1998, the futures market has gradually stepped onto the right track. Its scale has expanded increasingly, the market subject is becoming mature, and the market function has gradually been brought into play.

2. Overview of the Shanghai Futures Exchange The Shanghai Futures Exchange (SHFE) is the major ground for industrial derivatives trading in China. It was established in 1999 after the merging and restructuring of the original six futures exchanges, namely, Shanghai Metals, Construction Materials, Cereals and Oils, Petroleum, Chemicals, Coal, and Agricultural Materials. SHFE established its rules and regulations on trading operation and market management in accordance with The Interim Provisions of the State Council concerning the Administration of Futures Trading and The Measures of CSRC and the Administration of Futures Exchanges. According to SHFE’s Articles of Association, the General Manager is the legal representative of the Exchange; SHFE consists of 17 functional departments. The Members Meeting is the authoritative organ of SHFE and the Council is the standing body of the Members Meeting, under which there are seven special committees, namely, the supervision, trading, delivery, membership qualification appraisal, mediation, finance, and technology committees. SHFE now has over 200 members, over 80% of which are futures brokerage companies. Also, it has more than 250 remote transaction terminals across the country.


179

2.1 Listed Variety Currently, the commodities listed at SHFE include copper, aluminum, rubber, and fuel oil futures. China is the largest copper and rubber consumer in the world, and the rapid development of the Shanghai futures market has attracted the close attention of the international market. In particular, the copper and rubber futures of SHFE have increasing influence on the international futures market. Shanghai is considered one of the three pricing centers for copper in the world, and the influence of Shanghai rubber futures on the international rubber price has become increasingly strong. SHFE mainly focuses on deploying the value of copper, aluminum, rubber, and fuel oil futures. The focus of copper futures is on the extension and perfection of the variety function and speeding up of the development of copper futures. For aluminum futures, the focus is on the thorough promotion of the product and the market development centering on key enterprises. In terms of fuel oil futures, the focus is on summarizing the experience accumulated since it was traded in the market, going to the enterprises for investigation, and promoting its maturity and perfection. For the rubber futures, the focus is on the recommendation of the rubber futures to enterprises with a physical trading background in view of the import quota policy, the changes in tariff policy, and the liberalization of import operation rights. New product development can be divided into two aspects, metal and energy. The metal futures series is mainly engaged in the R&D of steel and zinc futures products. The energy futures series has carried out R&D on gasoline, kerosene, diesel oil, and crude oil by drawing upon the successful experience in the development and listing of fuel oil futures.

2.2 Members of the Exchange Members of the Exchange must be enterprises registered as legal entities in China, which have gone through the review and approval by the Exchange, and have reported to the CSRC for filing. Members of the Exchange can be divided into members of futures brokerage companies (brokerage members) and members of non-futures brokerage

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companies (non-brokerage members). Any investor that entrusts the brokerage member to conduct futures trading must open an account and register at the brokerage member in advance. Investors can be classified into either institutional investors or individual investors. The Exchange implements the investor trade coding system, in which both brokerage members and investors must abide by the system of one account with one code, and shall not trade by mixing the code. Brokerage members may accept the investors' agency orders by means of writing, telephone, computer, online orders, and other ways stipulated by the CSRC. Brokerage members shall provide settlement reports to the investors after the market closing every day. Investors are entitled to know the content of the settlement reports at the agreed time and by means stipulated in the Client Contract. Non-brokerage members who want to conduct self-run futures trade must open special capital accounts at the clearing bank designated by the Exchange and credit sufficient funds into them.

2.3 Exchange Settlements The Exchange only settles with its members, whereas the brokerage member settles with investors. The clearing of the Exchange implements the margin system, the daily debt-free clearing system, the risk reserve system, etc. The margin can be divided into settlement reserve and trading margin. The settlement reserve refers to the capital in the special Exchange settlement account for the settlement, and it is the margin that has not been tied up by the contract. The minimum balance of the settlement reserve of a futures brokerage member is RMB 2 million, which shall be paid in full with the self-own capital of the futures brokerage member. The minimum balance of the settlement reserve of a non-futures brokerage member is RMB 0.5 million. The Exchange calculates the interest according to the capital in the balance of the settlement reserve and the interest rate of the current deposit as released by the People's Bank of China in the same period, and transfers the interest to the special capital account or the settlement reserve of the member on March 21, June 31, September 21, and December 21 (it will be prolonged during a statutory holiday). The trading margin


181

refers to the capital deposited in the special Exchange settlement account to ensure the performance of the contract. It is the margin that has been tied up by the contract. When the purchaser and the seller strike a deal, the Exchange collects the trading margin at a certain proportion of the contract value from both parties. The daily debt-free clearing system (also called Mark-to-Market) means that the Exchange settles the profit and loss, trading margin, commission charge, and tax of all contracts after the end of each trading day, and transfers the net amounts of accounts receivable or payable at one time. The Exchange also correspondingly increases or decreases the member’s settlement reserve, transfers the profit of the day to the member’s settlement reserve, and debits the loss of the day from the member’s settlement reserve. Risk reserve refers to funds set aside by the futures exchange to provide financial guarantee and compensate losses brought about by unforeseeable risks, so as to maintain the normal running of the futures market. The Futures Exchange collects a risk reserve equal to 20% of the commission (including the discounted parts to members) from its members by drawing from the management fee.

2.4 Risk Control in the Exchange The Exchange implements the price limit system. When a certain futures contract has only a call (or put) declaration at the price limit yet without a put (or call) declaration at the price limit within five minutes before the closing, or the deal is concluded as soon as the put (or call) declaration is made although the price has not reached the price limit, the Exchange deems that the daily price limit occurs when the trading day closes, and handles it according to relevant provisions. When the price limit of the same direction appears continuously or the market risk has increased obviously, the Exchange may avoid the transaction risk by adjusting the price limit, increasing the trading reserve, and unloading according to certain principles. In the case where the risk cannot be avoided despite the above measures, the Exchange announces its entrance into the abnormal situation, and then it is up to the Council of the Exchange to decide if further risk control measures need to be taken.

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The Exchange practices a position limit system, but does not set limits on the hedging position. It sets a position limit on general month contract and month contract a month before the delivery month by the code of its member and the investor. It sets the position limit of a brokerage member according to its registered capital, credit, risk resistance capacity, previous trading, and the number of investors. The delivery contract sets limits on the absolute quantity of the positions of the member and the investor. For an investor who opens accounts at different brokerage members, his position is the sum of his positions in different accounts. The detailed rules for the implementation are formulated separately. The Exchange implements the forced sale system. The Exchange adopts forced sale measures if members violate the regulations. This is done when a member or an investor has violated the regulations, exceeded the position limit, not superadded the margin in time, or committed other irregular activities. The Exchange adopts a large position-reporting system. When the position of a certain contract held by a member or an investor exceeds 80% of the maximum position limit set by the Exchange, the member or the investor reports his funds and position to the Exchange through the brokerage member. The Exchange may adjust the position-reporting standard according to the market risk status.

3. Trading in the Shanghai Futures Market 3.1 Trading across the Country After years of rapid growth, China's futures market underwent adjustment and consolidation in 2005. Generally speaking, the futures market had run smoothly and the turnover was heavy. In 2005, the total futures trading volume was 323 million contracts, a 5.61% increase over the previous year, with a turnover of RMB 13.44 trillion, a decrease of 8.50%. The turnover of SHFE reached RMB 6.54 trillion, accounting for 48.64% of the total, down 22.44% from the previous year. The turnover of the Dalian Commodity

The Shanghai Futures Market Figure 8.1

183

Comparison of turnovers of China’s futures exchanges

Turnover (RMB 100 mil.) 100,000 84,326 80,000 65,402 60,000

50,969

47,417

40,000 21,645 20,000 0

11,640

Shanghai

Dalian 2004

Zhengzhou 2005

Source: Shanghai Futures Exchange

Table 8.1 Exchange

Trading of futures exchanges across China in 2005 Variety


Trading volume (10,000 contracts)

Shanghai Commodity Exchange

Copper Aluminum Natural rubber Fuel oil Sub-total

40,463.23 3,714.46 15,601.79 5,622.55 65,402.03

2,470.41 425.00 1,900.63 1,961.91 6,757.95

Zhengzhou Commodity Exchange

Cotton No. 1 Strong gluten wheat Hard winter white wheat Sub-total

15,671.05 5,653.62 304.93 21,629.60

2,172.07 3,323.61 196.18 5,691.86

Dalian Commodity Exchange

Soybean meal Soybean No. 1 Soybean No. 2 Corn Sub-total

18,488.05 23,130.63 291.61 5,506.46 47,416.75

7,347.64 8,007.14 108.22 4,371.95 19,834.94

134,448.38

32,284.75

Total Source: Shanghai Securities Regulatory Bureau

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Exchange reached RMB 4.74 trillion, accounting for 35.27% of the total, a 6.97% decrease from the previous year. The turnover of the Zhengzhou Commodity Exchange was RMB 2.16 trillion, accounting for 16.09% of the total, up 85.82% from the previous year. An overall analysis of the futures markets in 2005 shows that the old varieties like copper, soybean, and soybean meal remained the main forces in the market. Their turnovers were heavy. The three varieties—fuel oil, cotton, and corn put forward in 2004—were traded steadily and vibrantly, becoming the three fastest growing commodities in the 2005 market. Figure 8.2

Distribution of turnover of various varieties in the futures exchanges across China in 2005

Soybean No. 1 17.20%

Soybean No. 2 0.22%

Corn 4.10%

Soybean meal 13.75%

Copper 30.09%

Aluminum 2.76%

Cotton 11.67%

Natural rubber 11.60%

Green bean 0.00% Strong gluten wheat 4.21% Source: Shanghai Futures Exchange

Hard wheat 0.23%

Fuel oil 4.18%


185

3.2 Trading at SHFE SHFE has achieved positive outcomes through strengthened infrastructure development and constant innovation. The aggregate trading volume of 2005 was 67.58 million contracts, down 16.73% compared to 2004, but accounting for 20.93% of the national total. Also, the aggregate turnover throughout the year hit RMB 6,540.2 billion, down 22.44% over the previous year, but still accounting for 48.64% of the national total. Table 8.2

Trading at Shanghai Futures Exchange (2003–2005) 2003

2004

Trading volume Turnover (10,000 (RMB contracts) 100 mil.) Copper Aluminum Natural rubber Fuel oil Total


2005




2,233

21,622

4,250

56,785

2,470

40,463

431

3,213

1,366

11,724

425

3,714

5,352

35,705

1,936

14,580

1,901

15,602

—

—

564

1,237

1,962

5,623

8,016

60,540

8,115

84,326

6,758

65,402

23,000

28,000

33,000

38,000

43,000

48,000

1-04-2005

4-14-2005

4-1-2005

3-21-2005

Cu SHFE 3M

9-1-2005 8-19-2005

8-8-2005 7-26-2005

7-13-2005

6-30-2005

6-17-2005

6-6-2005

Shanghai spot price in physical

11-3-2005

10-21-2005 10-1-2005

LME 3M

23,000

28,000

33,000

38,000

43,000

48,000

US$/ton

12-23-2005

RMB/ton

12-12-2005

11-29-2005

11-16-2005 9-27-2005

9-14-2005

5-24-2005

5-11-2005

4-27-2005

3-8-2005

2-23-2005

2-10-2005

1-28-2005

1-17-2005

Figure 8.3 Comparison of the three-month copper futures at SHFE and LME vs. the spot price trend in Shanghai (January to December 2005)


12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

1-4-2005

RMB/ton

3-29-2005

3-15-2005

SHFE 3M

8-31-2005

8-17-2005 8-3-2005

7-20-2005 7-6-2005

6-22-2005

6-8-2005

Shanghai spot price in physical

11-9-2005 10-26-2005

LME 3M

12-7-2005 11-23-2005

10-12-2005

9-28-2005

9-14-2005

5-25-2005

5-11-2005

4-26-2005

4-12-2005

3-1-2005

2-15-2005

2-1-2005

1-18-2005

$1,200

$1,400

$1,600

$1,800

$2,000

$2,200

$2,400

$2,600

US$/ton

Comparison of the three-month aluminum futures at SHFE and LME vs. the spot price trend in Shanghai (January to December 2005)

12-21-2005

Figure 8.4

The Shanghai Futures Market 187

188


Comparison of the three-month fuel oil futures at SHFE vs. the spot price of 180 fuel oil in Singapore (January to December 2005)

RMB/ton 4,000

US$/ton 400

1,000

100

SHFE 3M

Figure 8.6

12-13-2005

150

11-8-2005

1,500

10-4-2005

200

8-30-2005

2,000

7-26-2005

250

6-21-2005

2,500

5-17-2005

300

4-12-2005

3,000

3-8-2005

350

1-4-2005

3,500

180—SIN Physical

Comparison of the three-month rubber futures at SHFE and Tokyo vs. the spot price of Yunnan natural rubber (January to December 2005)

RMB/ton

Japanese yen/kg

24,000

240

22,000

220

20,000

200

18,000

180

16,000

160

14,000

140

12,000

120

10,000

100 80 1-3-2005 1-12-2005 1-21-2005 2-1-2005 2-10-2005 2-21-2005 3-2-2005 3-11-2005 3-22-2005 3-31-2005 4-11-2005 4-20-2005 4-29-2005 5-10-2005 5-19-2005 5-30-2005 6-8-2005 6-17-2005 6-28-2005 7-7-2005 7-18-2005 7-27-2005 8-5-2005 8-16-2005 8-25-2005 9-5-2005 9-14-2005 9-23-2005 10-11-2005 10-20-2005 10-31-2005 11-9-2005 11-18-2005 11-29-2005 12-8-2005 12-19-2005 12-28-2005

8,000

Spot price of Yunnan Natural rubber

SHFE 3M

Tokyo 3M

CHAPTER

9

The Gold Market

T

he Shanghai Gold Exchange (SGE) opened officially on October 30, 2002, marking the beginning of China’s gold market. As a result, the financial factor market, consisting of the currency market, security market, insurance market, the foreign exchange market, and the gold market, has now been completely established.

1. Overview of China’s Gold Management System Shortly before the founding of the People’s Republic of China in 1949, the Kuomintang government fled to Taiwan with all the gold reserve of the central bank, making gold a strategic resource of vital importance to New China and a scarce national reserve. In order to establish the legal tender status of the Renminbi and set up the authority of the Renminbi, as well as stabilize the prices in the market, the People’s Bank of China (PBOC) stipulated in April 1950 that the purchase and sale of gold and silver in China were subject to its unified management. Thereafter, the PBOC took measures to freeze all civilian trading of gold and silver and strictly crack down on silver speculation and gold smuggling, which consolidated the status of the Renminbi. To encourage gold production and satisfy the huge demand for gold due to China’s tremendous economic growth, the PBOC and the Ministry of Finance adopted measures such as increasing

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the bank’s buying rate and canceling taxes on gold production. In October 1977, the People’s Bank of China formulated the Interim Administrative Measures of the People’s Republic of China on Gold and Silver, providing a guideline for gold management in China. In 1979, the State Council authorized the PBOC to release commemorative gold coins publicly. In August 1982, Circular of the People’s Bank of China concerning Resuming the Sale of Gold Jewelry was issued, allowing gold jewelries to enter the retail market. The gold management system in the 1980s was the continuation of the policy of unified control, monopoly purchase, and distribution of gold and silver. With the continued development of the socialist market economy, the old management system could no longer adapt to the new situation. Therefore, the State Council proposed in 1993 to reform the gold management system. The goal was to discontinue unified control, monopoly purchase and distribution of gold, liberalize the gold market, and allow the market to play a fundamental role of gold resource allocation. In June 2001, the PBOC submitted a proposal for building a gold exchange in Shanghai to the State Council, which approved it in October. The Shanghai Gold Exchange (SGE) was put into trial operation on November 28 of the same year, and then was put into official operation on October 30, 2002. The primary objective for establishing the Shanghai Gold Exchange was to promote the healthy development of the gold market, guarantee the normal operation of the gold trade, maintain the legal rights and interests of traders and the public, and provide a standardized trading platform and channel for gold trading. Since China’s entry into the WTO, the gold trading in China has gradually brought itself in line with international gold trading practices.

2. Market Operation Over the past three years, SGE has run smoothly with its trading volume rising gradually. In 2005, the trading volume of gold and platinum hit a record high since they were first traded in the market. The trading volume of the gold throughout the year was 906.42 tons, up 241.11 tons or 36.24% from the previous year. The turnover was RMB 106.976 billion, up 46.35%. The average daily trading volume

The Gold Market Figure 9.1

191

SGE’s gold trading volume and turnover from 2003 to 2005

RMB 100 mil. 1,200 1,000 800 600 400 200 0

2003 Annual trading volume

2004

2005

Ton 1,000 900 800 700 600 500 400 300 200 100 0

Annual turnover

was 3,745.52 kg, up 40.74% compared with the previous year. The trading volume of platinum for the year was 40.81 tons, up 13.03 tons or 46.89%, with a turnover of RMB 9,867 million, up 53.57%. The average daily trading volume increased by 51.74%. Thus, SGE has become a relatively important physical market of gold in the Asia-Pacific region. In 2005, the capital clearing and physical delivery of the exchange went smoothly. The capital cleared amounted to RMB 94 billion, up 30% from the previous year, among which the self-run business was RMB 58.3 billion, accounting for 62.02%; the agency business came to RMB 35.7 billion, accounting for 37.98%; the number of clearing invoice issued totaled 3,898 valued at RMB 97.6 billion, up 43.02% and 95.20 % respectively from the previous year. The physical appearance of gold and platinum was 312.10 tons, up 41.87% from the previous year; the disappearance of gold and platinum totaled 295.59 tons, up 36.65% from the previous year. The delivery rate of gold was 60.72% in 2005, almost the same as the previous year.

2.1 Tightened Links between Domestic and Foreign Markets In 2005, the international price of noble metals continued to rise, maintaining the bull market for the fourth year. In the first half of the

192


Gold price fluctuations in 2004 and 2005

RMB/g 140 135 130 125 120 115 110 105 100 95 0102 0121 0218 0310 0331 0421 0517 0607 0628 0719 0809 0830 0920 1018 1108 1129 1220

Gold price in 2004

Gold price in 2005

year, the gold price swung between US$410 and US$448 per ounce; in the second half of the year, the price picked up rapidly and broke through the integral mark of US$500 per ounce and hit the 24-year record of US$541 at the end of the year, up 17.44% throughout the year. The international platinum price was also extremely strong, rising from US$858 per ounce at the beginning of the year to the year-end US$969 per ounce, up 12.94% across the year. The domestic gold price soared continuously, rising from RMB 114.76/g at the beginning of the year to the year-end price of RMB 133.39/g, up 16.23%, though it was 19.93% lower than the increase rate of the international market. The top price reached RMB 139.15/g, the highest since the opening of the market. The bottom price was RMB 110.40/g, and the weighted average price RMB 117.26/g, being RMB 7.51/g higher than that of 2004 (see Figure 9.2). Throughout the 242 trading days, there were 139 trading days when the domestic gold price was higher than the international gold price, and the average gain was RMB 0.52/g. The domestic gold price was lower than the international gold price in the other 103 trading days, and the average gap was RMB 0.58/g (see Figure 9.3). The overall trend was basically the same. The price of platinum hit the record again, up 10.96% from RMB 232.39/g at the beginning of the year to the year-end


193

Domestic and international gold price movements in 2005

RMB/g

International gold price

12-29

12-13

11-25

11-9

10-24

9-13

9-29

8-26

8-10

7-7

7-25

6-3

6-21

5-18

4-7

4-25

3-4

3-22

2-16

1-4

1-20

144.00 140.00 136.00 132.00 128.00 124.00 120.00 116.00 112.00 108.00 104.00 100.00

Shanghai gold price

RMB 257.86/g. This was lower than the increase of the international market price, which was 13.68%. The top price was RMB 270.96/g and the lowest, RMB 230.79/g. The weighted average price was RMB 241.77/g, up by RMB 10.51/g from 2004.

2.2 The Market Function has Improved Constantly In 2005, the domestic gold market was still dominated by the spot trade, although the service functions of investment, risk aversion, and hedging began to appear. Thus, gold became a hot investment in the market. The turnover of Au (T+D) became increasingly heavy. The number of members and clients participating in the margin trade increased remarkably. The hedging, investment, and financing functions of the gold market were brought into full play. The proportion of the trading volume of margin in the total trading volume increased obviously. The Au (T+D), especially, was widely acknowledged by the market. Its trading volume rose rapidly, up 140.29 tons from the previous year, or 649.54%, achieving the fastest growth at SGE. Its proportion in the market increased from 3.25% in the previous year to 17.86% (see Figure 9.4). In the second half of the year, SGE began to attract individual investors to trade in the market, added the evening session,

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Figure 9.4

Proportions of the trading volumes of various gold varieties in 2004 and 2005 2004

Others 1.46%

2005

Au (T+D) 3.25%

Au (T+D) 17.86% Others 0.06%

Au 99.99 11.89%

Au 99.99 15.18% Au 99.95 83.40%

Au 99.95 66.90%

continuously improved the service measures, and further met the increasing investment demands for gold. On July 18, the Industrial and Commercial Bank of China (ICBC) launched the Gold Expert, an individual gold business through the trading platform of SGE. Its unique price-matching method attracted the extensive attention and active response of the market. By the end of 2005, the number of accounts opened with ICBC reached 1,534, realizing a trading volume of 1,749.05 kg. On November 8, SGE began to prolong the trading time and launched the evening session, which promoted the link between the domestic and foreign markets, improved the liquidity of the market, and increased the investment trading, which accounted for relatively big portions in the evening session. The trading volume of the evening session was 11,532 kg, with average daily trading volume of 372.01 kg.

2.3 Members’ Participation in the Market has been Enhanced The market players consist mainly of gold producers and smelters, gold-using enterprises and other enterprises, commercial banks, and agency clients. The diversified structure of market players has come into shape. By the end of 2005, SGE had 128 members, including


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Trading volumes by members in 2004 and 2005 (Unit: ton)

400

300

200

100

0

2004 Financial members

2005 Gold producers and smelters

Gold users & other enterprises

16 commercial banks, 31 gold producers and smelters, 81 gold users, and other enterprises. Gold producers and smelters are large gold mines and smelting companies in China, whose gold output accounts for over 90% of that of the country. The successful operation of the gold market has provided favorable opportunities and broader space for these enterprises to develop their business and speed up their expansion and M&A pace. These producers and smelters have also actively refined and distributed gold on behalf of many small domestic gold production enterprises. They are the most active players in the market. In 2005, the performance of the Shandong Zhaojin Group Company, Zhongjin Gold Corporation Ltd., Lingbao Jinyuan Tonghui Refinery Company, and Shandong Gold Group Company stood out. The trading volume of members of the gold production and refinery category was the highest, reaching about 349.69 tons, accounting for 38.58% of the total, up 33.83% or 88.39 tons from the previous year (see Figure 9.5). The commercial banks, such as BOC, ABC, and ICBC, took full advantage of their mature network, good credit, strong fund strength, and abundant professionals in actively participating in the

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gold self operation and best efforts offering business, the import and export of physical gold, and the square business in the international market. They have played an important role in activating the market, alleviating the seasonal imbalance between supply and demand in the domestic market, and improving the market liquidity. The trading volume in 2005 hit 279.55 tons, accounting for 30.84% of the market, up 41.91 tons or 17.64% from the previous year. Gold-using enterprises and other enterprises are the end customers of the market and an indispensable part of the gold market. Against the background of a sustained rise in the domestic price, the physical gold consumption and investment demand have increased simultaneously, becoming the market player with the biggest growth potential. In 2005, the trading volume reached 277.18 tons, accounting for 30.59% of the total, up 110.80 tons or 66.60% from the previous year. Commercial banks, large-scale gold mines, smelting enterprises and jewelry enterprises, as new intermediary agencies in the market, have actively promoted the agency business, and their trading volume has increased remarkably. By the end of 2005, they had 1,139 agency enterprise clients and 1,534 agency individual clients, with an agency trading volume of 340.32 tons, accounting for 37.55% of the total, and the business volume of the agency business had increased by 53.57% (see Figure 9.6) from the previous year, which was much faster than the growth of the self-run business.

3. Building the Market System SGE has formulated and improved about 40 business rules and regulations on trading, delivery, clearing, quality certification, and risk management, and has initially built a system of business rules covering every aspect of the trading process.

3.1 The Trading System The trading system is the basic system of the exchange, which includes provisions for such aspects as trading, clearing, delivery, agency, risk management, abnormal situation management, information


197

Trading volumes of self-run and agency businesses in 2004 and 2005 (Unit: ton)

600 500 400 300 200 100 0

Self-run business

Enterprise client 2004

Individual client 2005

management, supervision management, resolution, arbitration, and punishment. The exchange organizes the trading of products in accordance with the principle of “being open, fair, just, and honest,” concludes business mainly by means of order matching, and forms the equilibrium price according to the principle of prioritizing price and time. Each market player performs the trading, delivery and clearing responsibility according to the provisions. The exchange investigates and handles behaviors violating the contracts by means of real-time and dynamic monitoring.

3.2 The Clearing System The capital clearing at the exchange follows the principle of “centralization, netting, and secondary (clearing).” The exchange is responsible for clearing the capital in a unified manner. It settles the netting for the transactions of its members, and implements the secondary clearing system, namely, the exchange settles with its members, while its members settle with the clients. It implements the clearing velocity of T+0 for the capital and it also requires its members to open accounts separately for the self-run business and the agency business, as well as prohibits its members from misappropriating clients’ funds.

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The exchange also implements the capital clearing bank system. The clearing bank is a nationwide commercial bank or shareholding bank with certain assets and credit approved by the exchange. The clearing bank is responsible for transferring capital for the exchange and its members so as to ensure that funds between the exchange and members can be credited into an account timely and safely. The exchange has formulated strict measures on the routine business operation of fund transfer between the capital clearing bank and the gold transaction accounts as well as emergency handling measures. In addition, the exchange has developed a client margin safe operation system, which has helped technically reduce the incidence of its members misappropriating their clients’ funds. The exchange has also sped up the accounting of the capital and brought market risk under control.

3.3 The Delivery System The delivery system consists mainly of basic provisions on the physical delivery principle and process, inventory management, in/ out warehouse management, management of ordered warehouse, allocation management, fees collection, secondary clearing, and quality dispute resolution. To simplify and standardize the delivery process, the exchange implements the system of one account with one code to the physical management. The physical delivery management covers both members and clients. With 50 designated warehouses in 34 regions across the country, the physical delivery speed has achieved T+0. It has established a gold logistics network management system to meet the needs of enterprises to store and pick up goods. The delivery authority checks on the quality and safety, prevents risks, standardizes the designated warehouse operation, and manages the in/out warehouse handover process such as the identity authentication process of the consignee, and voucher management. The authority also conducts periodical or non-periodical checks of the warehouses to ensure consistency between account and goods, account and account, eliminate potential safety problems, and wall up the oversight in time.

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199

3.4 Quality Certification Systems SGE has put in place a strict access system for the products of enterprises engaging in gold production. The system has specified the basic conditions and requirements for listed products, the onthe-spot accreditation process, supervisory management, and penal punishment on contractual breach. The exchange also conducts strict inspection of the enterprises’ gold refinery, their testing and analyzing capacity, their process of casting gold ingot and gold bullion, etc. Qualified enterprises are accredited with the ability to provide standard gold ingot and gold bullion and allowed to trade their products in the market. By the end of 2005, there were 25 gold ingot enterprises and 17 gold bullion enterprises that had passed the quality certification.

3.5 The Risk Management System The risk control system is the core management system of the Exchange. A scientific and effective risk management system identifies, quantifies, monitors, and controls market risks. It also requires a corresponding internal control system and internal incentive and restrictive mechanisms to be established. At the same time, there should be means and measures for preventing and eliminating risks. Of course, market discipline should be strengthened and the disclosure of information and risks should be sufficient. SGE has implemented a series of control measures, such as the maintenance margin system, price limit system, position limit and large position reporting system, forced sale system, and risk warning system, to effectively enhance risk control. Additionally, it has stepped up its efforts to raise market players’ awareness of risk prevention through communication, coordination, risk warning, pertinent guidance, strengthened inspection, real-time settlement, and restricted sale of gold. It also conducts dynamic tracking and monitoring of the trade, and establishes the risk prevention joint meeting involving relevant business departments. SGE has also formulated The Methods of the Shanghai Gold Exchange for Handling the Violations of the Rules and Contracts. All these efforts have not only guaranteed the orderly operation of gold trading but also improved the credibility of the gold market.

CHAPTER

10

Management of the Financial Industry in Shanghai

1. The People’s Bank of China Shanghai Head Office

O

n August 10, 2005, the People’s Bank of China Shanghai Head Office (PBOC Shanghai Head Office) was officially established, representing a major decision of the central government in perfecting China’s central bank system under the new circumstance. It would bring the macro-control function of the central bank into better play and speed up the development of Shanghai into an international financial center.

1.1 Responsibilities and Organizational Structure The goals of setting up the PBOC Shanghai Head Office are to establish the head office as a platform for open market operation, a platform for monitoring the operation of the financial market, an important window of foreign communications, and an R&D center for financial services. The PBOC Shanghai Head Office operates under the head office of PBOC, performs the specific operational functions of some businesses of the central bank as well as some administrative functions. Its main duties include: • •

Organizing and implementing the open market operation of the central bank according to the operation targets set by the head office. Undertaking the rediscount business of commercial banks and exclusive instrument operators in Shanghai.

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• • • • • • •

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Managing the interbank market, tracking the development of the financial market, researching and guiding the financial product innovation. Taking charge of the assessment of regional financial stability and foreign financial safety. Taking care of data collection, aggregation, and analysis in the relevant financial market. Conducting special research in terms of the operation of monetary policy, development of the financial market, and establishment of financial centers. Taking charge of the financial exchanges and cooperation in relevant fields, and undertaking relevant international financial business. Managing part of state foreign exchange reserve and gold reserve. Undertaking relevant businesses of the PBOC in Shanghai.

The management functions assumed by the PBOC Shanghai Head Office include managing branches of the PBOC within the jurisdiction of the Shanghai branch, as well as managing and coordinating enterprises and institutional units under PBOC in Shanghai. The units under its direct management include the China Foreign Exchange Center, the China Anti-Money Laundering Monitoring and Analysis Center, the Data Processing Center of the PBOC, the Credit Information Service Center of the PBOC, etc. It also coordinates the management of the China UnionPay and Shanghai Gold Exchange. Also, in order to maintain the business continuity of the current Shanghai branch, the official titles of the Shanghai branch of the PBOC and the Shanghai Bureau of the State Administration of Foreign Exchange are retained.

1.2 The Significance of Establishing the PBOC Shanghai Head Office The establishment has improved the macro control level of the central bank Since the monetary policy operation of the central bank is market-based, it relies heavily on the correct judgment of the market.


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Currently, various financial markets gather in Shanghai. The central bank has authorized its Shanghai head office to conduct monetary policy operation, such as an open market operation, with the following three considerations. First, the operator can observe the changes of the financial market and assess the market trend in time and on the spot before coming up with the best operating strategy. Second, the operator can communicate with the market organizers and players in time to understand the market. Third, carrying out the monetary policy operation in Shanghai makes it possible for the central bank to make rapid responses to fluctuations of the market, which is conducive to the smooth market operation. The establishment has improved the efficiency of the central bank in serving the financial market An important duty of the PBOC is to manage the interbank currency and foreign exchange market. Relegating the function of the central bank in monitoring the financial market to its Shanghai head office is a result of the effort to better adapt to market demands. This facilitates real-time and spot observation of trading behaviors in the market, timely identification of trading activities in the market, and necessary intervention, making it possible to provide better support for the head office to analyze and decide on monetary policies. The establishment of the PBOC Shanghai Head Office also promotes the development of the market and product innovation. First, it gradually broadens the access of various participants to the interbank market. Second, it encourages the market to continuously come up with new trading methods. Third, it encourages the market to put forward new products continuously, including various trading tools such as futures, options, forward, and swap so as to help market players avert market risk. Fourth, it continually perfects relevant rules for guiding market development. The Establishment has boosted the development of Shanghai into an international financial center To develop Shanghai into an international financial center is an important strategic decision made by the central government in

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view of the overall situation of China’s socioeconomic development. The experience of other countries indicates that the establishment of the head office of the central bank has promoted the development of an international financial center. A case in point is Frankfurt. The city replaced Berlin as the financial center of Germany after World War II. One of the reasons is that the central bank of Germany—Deutsche Bank AG—is located there. The headquarters of the European central bank was set up in Frankfurt, and the city became the center for the European single currency member countries to implement the monetary policy and conduct interbank settlement, which has further consolidated the status of Frankfurt as the international financial center in the European continent. The establishment of the PBOC Shanghai Head Office will definitely have a similar effect on Shanghai. First, it will attract more domestic and foreign financial institutions to move their relevant business or departments to Shanghai, and allure more talents. Second, it can increase the overall influence of Shanghai’s financial market on the Asia-Pacific region, speeding up the development of Shanghai into an international financial center by means of expanded foreign financial exchanges and cooperation.

2. Supervision over the Shanghai Banking Industry 2.1 CBRC Shanghai Bureau Established on October 15, 2003, the CBRC Shanghai Bureau (CBRCSB) is the local office of China Banking Regulatory Commission (CBRC) in Shanghai. SBRB implements state laws and regulations concerning finance; formulates detailed rules for the implementation of supervisory laws and regulations as per the authorization of CBRC; supervises the establishment, changes, termination, and business of banking institutions and their branches within its jurisdiction; investigates and punishes financial activities violating laws and regulations; conducts the fit-and-proper test to the directors and senior management of banking institutions within its jurisdiction; and collects relevant data and information.


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CBRCSB focuses on the understanding, prevention, and resolution of overall risks of various banking institutions; pays attention to the early identification, warning, and control of systematic risk; improves the effectiveness of the internal control of the banks; increases the transparency of information disclosed by various banking institutions and the performance by CBRC of its duties according to the laws. CBRCSB seeks to protect the interests of its vast depositors and financial consumers via prudent and effective supervision; enhance market confidence through prudent and effective supervision; improve the public’s awareness of modern finance through dissemination, education, and disclosure of relevant information; crack down on financial crimes. CBRCSB adheres to the following standards in regulation: promoting both financial stability and innovation; improving the competitiveness of China’s banking industry in international financial services; eliminating all unnecessary restrictions; encouraging fair competition while curbing disorderly competition; implementing a strict and explicit accountability system for both the supervisors and the supervisees; and utilizing all regulatory resources efficiently.

2.2 Risk-based Supervisory Approach Risk-based supervision is a new supervisory concept based on risk identification. It was put forward in the late 1990s, along with the upsurge of worldwide M&A in the banking industry. Following the risk-based supervision framework defined in the 1104 Project of CBRC (regulatory information system of CBRC), six steps have been designed to achieve continuous supervision: knowing the supervisee, evaluating risks, planning regulatory schemes, implementing regulatory measures, conducting supervisory ratings, and implementing continuous supervision. The major methods of risk-based supervision include supervision through market entry and exit, off-site surveillance, on-site examination, tripartite meeting, prudential meeting, meeting with board of directors, external auditors, and other regulatory institutions. The regulatory departments vary their supervisory rating systems with different types of supervisees. For instance, the CAMELs (namely,

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capital adequacy, asset quality, management ability, earning performance, liquidity, and market risk) rating is adopted; for banking branches, the ROCA (namely, risk management, operational controls, compliance, and asset quality) rating applies; and the SOSA (namely, strength of support assessment) rating is applied to the branches of foreign banks.

2.3 Regulation of the Shanghai Banking Industry over Recent Years Since its establishment, CBRCSB has continually enhanced its regulating role according to the laws and regulations such as The Law of the People’s Republic of China on Banking Regulation and the Administrative License Law of the People’s Republic of China, and developed a self-disciplined and high quality supervisory team. It has also promoted supervisory innovation, implemented separate regulation and risk rating, focused on the internal control system and corporate governance in banking institutions, and further improved these institutions’ risk resilience and market competitiveness. It has also earnestly implemented the state’s macro control policy, promoted the establishment of a long-term risk management mechanism in banking institutions, realized the effective integration of credit policy and industrial policy, and guided commercial banks to handle the relationship between risk prevention and development of local economy properly. Furthermore, it has encouraged the growth of some sectors while discouraging the expansion of others, effectively dealt with complaints of consumers about banking services, and safeguarded the legitimate interests and rights of consumers. In the future, it will actively promote the reform and opening-up of Shanghai’s banking industry, attract more domestic and foreign banking institutions to gather in Shanghai, continuously promote the construction of Shanghai as an international financial center, as well as create a favorable environment for the development of Shanghai’s banking industry. CBRCSB has continued its exploration of supervisory innovations. Since 2004, it has implemented risk rating and separate regulation of Shanghai branches of the shareholding commercial banks, and carried on the separate regulation of foreign banks. It


207

has continued to adopt the ROCA and CAMELs rating systems, promoted consolidated supervision, and energetically monitored and analyzed the risks of principal reporting banks. It has explored the separate regulation of the branches of state-owned commercial banks, strengthened the monitoring of asset quality, introduced external audit into policy banks, implemented dynamic evaluation of senior management in the Shanghai office of the Financial Asset Management Corporation, preliminarily realized the filing management of postal saving institutions, and provided effective guidance to its institutions and business development. CBRCSB has also encouraged banks to provide loans to small enterprises. For this, it has guided the banks toward adjusting their credit structure, and changing their growth pattern. It has also formulated the work plan designed to promote bank loans to small enterprises and has gradually established the system and mechanism for commercial banks to address financing problems facing small enterprises. At the same time, it has tightened the continuous supervision over the credit risk of the real estate industry, group (affiliated) enterprises, and large exposure in light of the new requirements and tasks of macro control.

3. Supervision over the Shanghai Securities and Futures Industry 3.1 China Securities Regulatory Commission In China, the securities and futures market is subject to the supervision of a centralized and unified regulatory body—the China Securities Regulatory Commission (CSRC). Founded in October, 1992, the CSRC is responsible for supervising China’s securities and futures market uniformly, maintaining the order of the securities and futures market, and making sure that it runs legally. It has set up 36 local regulatory bureaus across the country to perform the regulatory duties as authorized by the CSRC. In accordance with the provisions of The Securities Law of the People’s Republic of China and the Interim Provisions on the Administration of Futures Trade, the CSRC exercises its regulatory right over

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China’s securities and futures market and performs the following duties according to the law: formulating rules and regulations concerning the securities market regulation and executing the approval rights according to the law; supervising the offering, listing, trade, registration, custody, and settlement of securities; regulating the securities business of securities issuers, listed companies, securities companies, securities investment fund management companies, securities service institutions, stock exchanges, and securities registration and clearing institutions; formulating the qualification standards and code of conduct of securities practitioners according to the law, and supervising their implementation; supervising the information disclosure of securities issuing, listing, and trading according to the law; instructing and supervising the activities of securities associations; investigating and punishing activities violating the regulatory laws and administrative regulations of the security market; and other responsibilities provided by laws and administrative regulations. The CSRC may establish a regulatory cooperative mechanism with the securities regulatory institutions of other countries and regions for conducting cross-border supervision. According to the provisions of The Securities Law of the People’s Republic of China, the CSRC performs its duties according to the law and is entitled to adopt the following measures: conducting on-site examination of securities issuers, listed companies, securities companies, securities investment fund management companies, securities service institutions, stock exchanges, and securities registration and clearing institutions; investigating suspected illegal sites; inquiring the party and enterprises and individuals involved in the case being investigated and requiring them to explain affairs related to the case being investigated; consulting and duplicating the documents concerning the case being investigated, such as the registration of property rights and communication records; consulting and duplicating the securities trading records, registration and transfer records, financial accounting documents, and other relevant documents and materials of the parties, enterprises, and individuals related to the investigated cases, as well as sealing up documents and materials that may be transferred, hidden, or destroyed; querying the capital accounts, securities accounts, and bank accounts of the parties, enterprises, and individuals related to the investigated


209

cases. If the evidence proves that they have transferred or may have transferred or hidden the assets involved in the cases, such as illegal funds or securities, or have hidden, forged, or destroyed important proofs, it may freeze or seal it up upon the approval of the principal of the securities regulatory organization of the State Council; when investigating major illegal securities-related activities, such as manipulating the securities market or insider trading, upon the approval of the principal of the securities regulatory organization of the State Council, it may impose restriction on the parties’ securities trade, but the time limit shall be no more than 15 trading days; in the event that the case is complicated, it may be prolonged by another 15 trading days.

3.2 Overview of the CSRC Shanghai Bureau Established in March 1993, the CSRC Shanghai Bureau (CSRCSB) is the local office of the CSRC in Shanghai. At the end of 2005, CSRCSB supervised 837 supervisees in Shanghai, including 148 listed companies, 19 securities companies, one branch of a non-homegrown securities company in Shanghai, 454 securities sales departments, ten securities service departments, 27 fund management companies, 17 branches of non-homegrown fund companies in Shanghai, 31 securities investment consulting institutions, six branches of nonhomegrown securities investment consulting companies in Shanghai, 53 representative offices of foreign-funded securities institutions, 25 futures companies, and 46 sales departments of non-homegrown futures companies in Shanghai. According to The Securities Law of the People’s Republic of China, the major duties of CSRCSB include: performing its regulatory duties concerning the securities and futures market within the jurisdiction of Shanghai in strict accordance with the authorization of the CSRC; conducting frontline regulation within its jurisdiction and completing the cooperative regulatory tasks within the CSRC system; obtaining thorough knowledge about the market within the Shanghai jurisdiction, actively disclosing risks, and taking powerful measures to deal with them; regulating the securities and futures business activities of listed companies, securities and futures enterprises, securities investment fund management companies, securities and

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futures service institutions within its jurisdiction; guiding and supervising the activities of the Shanghai Securities Association and the Shanghai Futures Association, investigating securities and futures cases violating the laws and regulations within its jurisdiction and performing other duties authorized by the CSRC. In order to adapt to the development of the securities and futures regulatory work and further improve the regulatory efficiency and results, in 2004, the CSRC launched a responsibility system of jurisdiction supervision, that is, while the centralized and unified securities regulatory system still remains valid, the supervisory duties are to be linked to each post, employee, and supervisory department within the CSRC and its local branches. To implement this responsibility system, CSRCSB has taken the following measures to strengthen its routine regulatory work. Promoting separate regulation CSRCSB has classified listed companies, securities companies, and futures companies according to their different features and adopted different regulatory methods accordingly to strengthen their supervision. As to the listed companies, the Department of Listed Company Supervision of CSRCSB has followed the requirements and risk classification standards of the CSRC Department of Public Offering Supervision in determining and reviewing the risk rating of listed companies. For enterprises with risks and poor performance, the supervision is strengthened and a risk precaution and exit system is implemented. Also, for companies with high-quality assets and outstanding principal businesses, they are vigorously supported so that they can become big and strong through mergers and restructuring. The Department of Institutional Supervision of CSRCSB has classified the securities companies within its jurisdiction according to their net capital, effectiveness of corporate governance and internal control, and compliance of operations so as to implement different regulatory methods. Strengthening on-site and off-site surveillance The Department of Institutional Supervision and the Department of Futures Supervision of CSRCSB conduct frequent on-site examination


211

of supervisees within its jurisdiction annually. In 2005, based on the selfchecking of securities institutions, they obtained a true picture of the securities companies in Shanghai through a centralized examination. This has effectively facilitated the comprehensive improvement of securities companies. While strengthening on-site examination, SSRB has also gradually established an off-site monitoring system. A combination of on-site and off-site examination has played an active role in regulating the behavior of securities and futures companies, maintaining the fair, open, and just securities and futures market environment, and protecting the interests of investors. Cracking down on illegal activities In the face of numerous, complicated illegal activities in the securities market, CSRCSB has continuously adjusted its mindset, tried different channels to acquire clues, and put cases on record immediately, which has significantly improved its efficiency and effects. Also, it has actively helped the investigation bureaus of the CSRC and local offices of the CSRC with case investigation and evidence collection.

4. Supervision over the Shanghai Insurance Industry 4.1 The CIRC Shanghai Bureau Founded on April 25, 2000, the CIRC Shanghai Bureau (CIRCSB) is subject to the direct leadership and unified management of the China Insurance Regulatory Commission (CIRC). It executes its power and performs its duties in the administrative area of Shanghai as authorized by the CIRC. The basic functions of the CIRCSB are as follows: implementing relevant state laws, regulations, and policies, and regulating the operation of insurance institutions in its jurisdiction as authorized by the CIRC; investigating and punishing illegal insurance activities within its jurisdiction according to law, maintaining the order of the insurance market, and safeguarding the interests of insurants according to law; monitoring and preventing insurance risks within its jurisdiction and reporting major cases to the CIRC immediately; and engaging in other affairs as assigned by the CIRC.

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The regulatory duties of CIRCSB are as follows: •

• • • •

•

• • •

•

To initially examine or examine and approve the establishment, cancellation, and changes of the branches of Chinese or foreign-funded insurance companies, insurance agencies, insurance loss adjusters companies, and other insurance intermediaries. To initially examine the establishment, merger, extension, cancellation, and changes of representative offices of foreign insurance institutions in Shanghai. To take charge of the issuance and replacement of licenses for insurance branches and agencies and release bulletins to the public. To take charge of the qualification censorship and license management of the sideline agents within its jurisdiction. To supervise the examination affairs concerning the qualification test of intermediate practitioners within its jurisdiction and authorize the Shanghai Insurance Association to issue and manage the qualification certificate of insurance intermediate practitioners within its jurisdiction. To take charge of the fit-and-proper test of the senior management of the branches of insurance companies within its jurisdiction and the principals of the representative offices of foreign insurance institutions. To preliminarily examine the qualifications of senior management of the insurance agencies within its jurisdiction. To manage the insurance product filing and registration. To conduct on-site examination of the branches of Chinese or foreign funded insurance companies, insurance agencies, representative offices of foreign insurance institutions in Shanghai, and sideline insurance agencies. To carry out on-site investigation into material complaints and prosecution cases concerning the interests of the insurance market, insurance companies, insurance practitioners, or policy holders, and mete out administrative punishment of illegal activities, as well as hand over the cases that have constituted crimes to the judicial system for criminal investigation.


• • •

•

• • • • • • •

213

To investigate and prosecute insurance institutions established illegally as well as illegal insurance business and insurance intermediate business activities. To conduct routine inspection and annual inspection of the representative offices of foreign insurance institutions in Shanghai. To conduct off-site surveillance of the branches of Chinese or foreign-funded insurance companies, insurance brokerage companies, insurance agencies, insurance loss adjustors institutions, and representative offices of foreign insurance institutions in Shanghai, analyze statistically the insurance compliance forms and reports submitted by each insurance institution periodically, and compile off-site surveillance reports which are to be submitted to the CIRC. To conduct annual inspection and registration of the branches of approved insurance companies, insurance brokerage companies, insurance loss adjusters companies, as well as insurance agencies and their branches. To supervise the market behavior of insurance institutions and insurance practitioners in Shanghai. To address complaints concerning insurance institutions and practitioners within its jurisdiction and those forwarded by the CIRC. To periodically analyze problems or issues of overall or potential importance as revealed in complaints received. To guide and manage the insurance industry societies or associations in Shanghai. To punish administratively the illegal activities of the branches of Chinese or foreign-funded insurance companies, insurance agencies, and insurance sideline agencies. To mete out administrative punishment to insurance practitioners in violation of laws or regulations in Shanghai. To undertake other affairs assigned by the CIRC.

4.2 The Shanghai Insurance Regulation in Recent Years In recent years, especially in 2005, focused efforts have been made in Shanghai to strengthen proactive supervision, cooperative

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supervision, information supervision, and long-term supervision. This has played an important role in creating a favorable development environment and guiding the standardization of the insurance industry. A motor vehicle joint information platform was launched on April 1, 2004. This platform implements a floating system for automobile third-party compulsory liability insurance rate that is linked with the safety record of drivers with a view to improving urban traffic management. With effect from April 1, 2003, all insurance companies and insurance intermediaries in Shanghai are required to implement the unified invoice system for insurance intermediate service, and the previous self-made vouchers were abolished. The implementation of this system has effectively standardized the internal management and market behavior of insurance institutions, vigorously promoted the taxation bodies to perfect the taxation management mechanism, and walled up the hole of tax evasion. In order to adapt to the trend of adopting information technology in the insurance industry, CIRCSB has developed the off-site surveillance information system for the insurance industry. The system is able to report on all subjects and automatically generate various regulatory forms. It was put into use between 2003 and 2004 and had greatly improved the regulatory efficiency and the authenticity of the statistical data. In 2004, the Shanghai insurance agent credit information was incorporated into the Shanghai Social Joint Credit Information System. So far, this system has collected the credit information of 95% of all insurance agents in Shanghai. It is the first industrial credit information system open to the public. The People’s Mediation Committee of the Shanghai Insurance Association has been established. This committee consists of experts in law, medicine, and insurance. Its establishment has contributed to industrial self-discipline, widened the channel for handling disputes over insurance contracts, strengthened the client services of insurance companies, and galvanized the companies to improve their internal management and client services. According to the unified arrangement of the CIRC, in 2004, starting with the manual policy issuance of aviation personal accident


215

insurance, CIRCSB has gradually strengthened the management of the manual issuance of insurance policies. Currently, all businesses with insurance period of over 30 days are handled by computer and controlled in real time. Also, in terms of the manual issuance of policies within 30 days, some companies are taking measures to develop a new policy issuance management system by connecting to the ticketing system for Shanghai long-distance passenger transportation or use e-commerce and SMS in developing new underwriting methods. In 2005, CIRCSB investigated and punished Shanghai Fanyi Consulting Co. Ltd. and Hyde Financial Group, which engaged in selling offshore policies. Also, it also actively encouraged domestic insurance companies to develop substitutes to fill in the market vacuum.

5. Coordinated Government Services On August 5, 2002, the Shanghai financial work conference was convened at the Shanghai Exhibition Center. The conference defined the objective of building Shanghai into an international financial center and put forward ten tasks for the near future. It was the first municipal financial work conference held since China initiated reform and opening-up in the late 1970s. On September 10 of the same year, the Shanghai Financial Services Office was established. As a special functional department of the municipal government, the office has enhanced cooperation among the various governmental departments and improved the quality of public services. Besides, the Huangpu District established the Office of Modern Service Industry Development, and the Pudong New Area set up the Financial Services Office. All these measures have played an important role in accelerating the introduction and cultivation of financial institutions, strengthening the public services of the government, promoting the CBD construction, and further optimizing the financial environment of Shanghai. The Shanghai Financial Services Office takes charge of financial management and services. Its major responsibilities include: •

Working closely with the central regulatory institution to thoroughly implement state guidelines, policies, laws, and

216

•

•

•

• • • •

•

SHANGHAI FINANCE

regulations concerning finance, as well as proposing and organizing the implementation of work opinions based on the real situation of Shanghai. Preparing and revising mid- and long-term plans and work guidelines for the development of the financial industry according the overall plan of national economic and social development of Shanghai. Studying and analyzing the macro financial situation, state financial policy, and the financial operation of Shanghai, and putting forward proposals and policy suggestions on improving the financial development environment and enhancing services. Assisting the central regulatory institution and relevant municipal departments in straightening out the financial order, coordinating and handling financial risk prevention and resolution, enhancing the building of Shanghai’s social credit system, maintaining social stability, and promoting the building of the financial security region. Exercising the macro management of local financial institutions, and coordinating the optimized allocation of local financial resources. Handling communication and information sharing between local governments and central financial institutions and their offices Shanghai. Promoting the reform, innovation, and opening-up of the Shanghai financial industry. Cooperating with regulatory institutions and relevant departments to promote the establishment of a modern corporate governance system within listed companies and improve their asset quality. Undertaking other affairs as assigned by the municipal government.

The Shanghai Financial Services Office has worked hard to bring the active role of local governments into full play in support of the national financial regulatory in its effort to strengthen financial supervision, rectify the financial market, and improve financial risk prevention, resolution, and disposal. It has established the “3+2”


217

joint meeting system involving the Financial Services Office, the PBOC Shanghai Head Office, as well as three financial regulatory departments. An instant coordination and disposal mechanism for dealing with major events has been put in place. All these are effective concrete actions taken to enable the participation of local governments in financial supervision and management. To encourage financial innovation, the Shanghai Municipal Government has rewarded the fuel oil futures of Shanghai Futures Exchange, the buyout repurchase of national debt of the Shanghai Stock Exchange, the Au T+D of the Shanghai Gold Exchange, the PayEasy of China UnionPay, and the interbank foreign exchange market of the China Foreign Exchange Trade Center in 2004. Also, the municipal government is studying detailed methods and rules for rewarding major financial innovations. For instance, the Financial Development Fund of Pudong New Area is under consideration Aiming to build an international financial center, the municipal government has always attached great importance to the effort toward creating a sound environment for the development of financial institutions through improving its policies, laws, credit, and measures to prevent loss and crime. In view of the prominent problems existing in the operation of new financial institutions in Shanghai, the financial services office has strengthened its coordination with relevant municipal functional departments, defined the procedures of policy and opinion implementation, unified work standards, and provided convenient services for financial institutions in terms of business registration, employee household registration, vehicle purchase, and reduction or exemption of real estate transaction fees. Additionally, it has enhanced the follow-up services to financial institutions located in Shanghai. It has communicated with regulatory departments periodically to keep itself updated in time on the establishment and changes of financial institutions. At the same time, by keeping in touch with the offices of Shanghai in other provinces and cities and the branches of Shanghai’s financial institutions in other provinces and cities, it has kept abreast of the relevant financial policies of the CPC Central Committee and other provinces and cities in time, which in turn has contributed to the development of the local financial industry.

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Lastly, the municipal and district governments have joined hands in promoting the building of Lujiazui Finance & Trade Zone. As a result, the software and hardware conditions of the zone have been gradually perfected. The municipal government has set up a leading team for bankcard development, formulated the Shanghai Bankcard Development Plan, and vigorously promoted the rapid development of the bankcard industry and the building of the Bankcard Industrial Park. Shanghai has taken the lead in establishing an enterprise credit system and an individual credit system across the country. Efforts have also been made to set up the financial industrial association, develop the financial supporting industry, strengthen coordinated government services so as to create a favorable development environment for building Shanghai into an international financial center.

Index A

A shares 151, 170 Agricultural Development Bank 38, 40–1 American International Assurance Company (AIA) 86, 94, 97–9 Asian Bond Fund 157 Asian financial crisis 42, 137 asset profit ratio 25–6 asset quality 12, 24, 27, 29, 34, 206–7, 216 asset securitization 156 asset-liability ratio 28, 29 auto financing 10, 22–3, 34, 42, 47, 49

B

B shares 150–3, 155, 168, 170 Bank of Communications 4, 8, 10, 15, 32, 33, 73, 76, 86 Bank of France 3 Bank of Shanghai 4, 10, 15, 32, 33, 35 bankcard industry 13, 46, 218 basket of currencies 138, 147–8 Big Four (state-owned banks) 9 block trade 167–8, 174 British Oriental Bank Corporation 3

C

CAMELs 206, 207 capital adequacy 32, 34, 49, 206 Carlyle Group 15 CBRC Shanghai Bureau (CBRCSB) 204–7 Central Business Districts (CBD) 13, 215 Central Huijin Investment Company 32, 55, 62 Central Treasury Bonds Registration & Settlement Company 108, 112, 115 China Banking Regulatory Commission (CBRC) 37, 41, 44, 49–50, 204–5 China bond index fund 157 China Development Bank 38, 58, 69 China Foreign Exchange Trade System (CFETS) 104, 126, 132, 135 China Insurance Regulatory Commission (CIRC) 166, 211, 213–4 China Merchants Bank 33, 163 China Securities Depository and Clearing Corporation 151, 167, 169–70 China Securities Industry Association 61–3

220

SHANGHAI FINANCE

China UnionPay 202, 217 Chinese Foreign Exchange Transaction Center 8, 146 CIRC Shanghai Bureau (CIRCSB) 211–4, 215 Citibank 4, 15, 68, 76, 77 CITIC 33 clearing systems 150, 168, 180–1, 197 commodity futures market 177 CSRC Shanghai Bureau (CSRCSB) 209–11 current accounts 125, 131–3, 147

D

data processing centers 23, 94, 202 Deng, Xiaoping 2, 6, 7 tour of South China 2 dual rate system 130

E

East Asia Bank 23 e-commerce 94, 215 emergency response system 13 Eleventh Five-Year Plan 16–9, 172 Everbright Bank 33 Executives’ Meeting of East Asia and Pacific Central Banks 157

F

financial companies under enterprise groups 48–9 financial services sector 17 five grades of loan classification 24, 50 foreign exchange settlement and sales 125–6, 134 foreign exchange wholesale market 125, 126

foreign-funded financial institutions 14–5, 42, 110, 128

H

Hong Kong Stock Exchange 10, 32 HSBC 15, 23 Hua Xia Bank 33

I

Import and Export Bank of China 38, 39, 40 Industrial and Commercial Bank of China (ICBC) 9, 27, 32, 104, 143, 194, 195 insurance fund 166 insurance penetration 88 Interbank Bond Index 109, 110

J

joint meeting system 12, 217

L

Law of the People’s Republic of China on Banking Regulation 206 lead reporting foreign banks 15, 45 legal-person shares 169 Lujiazui Finance and Trade Zone 13, 67, 218

M

main-board market 11 managed floating foreign exchange rate 17, 126, 130–1, 133, 137, 138 Mao, Zedong 6 Mercantile Bank 3 Minsheng Bank 33 money houses 3–4

Index

N

National Congress of Communist Party of China 2, 6, 8, 21 National Interbank Funding Center 104, 108, 112, 114 non-bank financial institutions 22, 43, 48–9, 104, 127, 143 non-performing loans (NPL) 12, 22, 24, 25, 27, 34, 50, 51, 93 non-tradable shares 160, 162, 168, 174

O

offshore banking 15 online banking 45, 47 Opium War 3 Overseas Chinese Bank Corporation 23

P

Pacific Insurance 86–7, 90, 94, 96 PBOC Shanghai Head Office 201–4, 217 People’s Insurance Company of China (PICC) 86–7 Ping An Insurance 86, 96 policy banks 24, 28, 38, 140, 207 position limit system 182 price limit system 181, 199 profit-earning capability 34, 54 Pudong Development Bank 10, 15, 33, 35, 72, 151, 163

Q

Qualified Foreign Institutional Investors (QFII) 15, 44, 56, 75–7, 153, 167–8, 175

221

quote-driven mode/system 126, 129, 134, 136, 142, 144

R

repurchase collateral 103, 108–9, 111, 113, 116, 118–9 buyout 103, 108–9, 111, 113, 116, 120–1, 217 risk control 24, 30, 33, 62, 64–5, 96–7, 181, 199 risk reserve 180–1 ROCA 206, 207 Rural Commercial Bank 24, 36, 37, 140

S

Securities Law 56, 58, 60–1, 63–5, 150–1, 207–9 Shanghai Financial Services Office 13, 215–7 Shanghai financial work conference 215 Shanghai Futures Exchange (SHFE) 178, 185, 217 Shanghai Gold Exchange (SGE) 8, 10, 189–91, 193–4, 196, 199, 202, 217 Shanghai Head Office of the People’s Bank of China 9, 18, 201. See also PBOC Shanghai Head Office Shanghai Metal Exchange 8 Shanghai Rural Credit Cooperative 10 shareholding banks 32–36 social security fund 56, 166 SOSA 206

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SHANGHAI FINANCE

specialized banks 1, 21, 27–8, 104 split-share structure 53–4 reform 162, 174 spot exchange 133, 135, 141 SSE composite index 170–1 Standard Chartered Bank 4, 23, 76–7 State Administration of Foreign Exchange (SAFE) 75, 128, 129, 146, 202 State Development Bank 28 state-owned commercial banks 24, 26, 28–32, 50, 140, 207 state-owned enterprises (SOEs) 29, 50, 53, 153, 159 state-owned shares 169

T

tradable shares 174 Trust Law 48

W

warrants 150, 152, 157–9 World Expo 11, 16, 17 World War II 1, 2, 3, 20, 204 WTO (World Trade Organization) China’s accession (entry) 22, 29, 41, 42, 46, 98, 167, 190 commitments 14, 17, 42

Y

Yangtze River Delta 2, 3, 17, 22

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