Background to the Chinese Economy, Banking System and Capital Market

Hai Xin

1.1 INTRODUCTION

This chapter starts, after a brief overture on the name(s) of the Chinese currency, with concise overviews of the Chinese economy, its banking system, which has towered over the domestic financial system, and its unbalanced and generally underdeveloped capital markets: bonds, equities and derivatives. The main objective is to let those readers without prior knowledge of these subjects gain a basic understanding so the subsequent topics relating to the renminbi can be placed in the appropriate context. As the Chinese property market is billed by some economists as the most important sector in the world, and its health is so intimately linked to that of its banking system and beyond, we include a short excursion on the domestic real-estate market.

As the renminbi has already been more or less fully convertible in all current-account transactions since 1996, and reforms on the renminbi exchange-rate system are generally, if not always, related to capital-account transactions, we look at the historical development of cross-border capital flows – both onshore investors going out and offshore investors going in, going through the alphabetic soup of QFII, QDII, FDI