The Chinese Equities Market and Fixed Income Market

China's stock market basically operates through three stock exchanges -- the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange (SEE) and the Hong Kong Stock Exchange (HKSE). The first two are exchanges where companies are domestically listed. Both the SSE and SEE include an A share market and a B share market. In the A share market, shares are denominated in RMB; in the B share market, shares are denominated in U.S. dollars. Shares in the Hong Kong stock market are called H shares and are denominated in Hong Kong dollars.

Of the three markets, the A share market is the largest market for Chinese listed companies. With more than 1300 companies listed on the SSE and SEE, the A share market is where most local equity offerings take place. The roles of SSE and SEE have differentiated somewhat after the CSRC decided in October of 2000 that the SEE would not be allowed to take new IPO business except for IPOs involving growth companies. Since then, the SSE has become the major domestic stock exchange for Chinese companies for IPOs and the SEE has become a stock exchange more like the NASDAQ in US.

As for B shares, this class of shares was created in 1992 with the intent of attracting foreign investors to invest in Chinese companies. Because of the inconvertibility of the RMB (Chinese RMB cannot be easily transferred into other currencies), the B share market was established as a separate market from the A share market. The shares of companies sold on the B market are issued and transacted in U.S. dollars (USD) on the SSE and in Hong Kong dollars (HKD) on the SEE. As of 2008, the B share market has only around 100 companies and it is widely assumed that this market will be merged into A share market in the near future.

Fixed Income Market

The fixed income market is an important part of a well functioning capital market. China's fixed income market has only recently begun to mature. Although the scale of the fixed income market and derivatives market is still small relative to the markets in developed countries, after more than 10 years of development, China's fixed income market now has most of the products that are prevalent in developed countries, including money market tools, Treasury bonds, corporate bonds, convertible bonds and some MBS/ABS securities.

There are two major mechanisms in China through which fixed income products are bought and sold. One is the so-called Inter-bank Bond Market, which is an over-the-counter market (a market where individual investors can buy and sell securities). The Inter-bank Market is the major place for the issuance and trade of fixed income products. Initially created as a market only for commercial banks to trade fixed income products, the Inter-bank Market now allows all institutional investors -- and even individual investors -- to buy and sell bonds through the branches of Big Four banks. (However, financial institutions such as commercial banks and insurance companies are still the largest players in this market.)

The other fixed income market in China is called the Stock Exchange Market. This refers to bonds and other fixed income tools listed on the SSE and SEE. Unlike the Inter-bank Market, the Stock Exchange Market includes convertible bonds -- bonds which can be converted to stocks upon meeting predetermined conditions. The participants in this fixed income market are mainly non-bank financial institutions such as insurance companies, securities firms and pension funds. Commercial banks are currently not allowed to participate in this market.