Money Markets in China (vis-à-vis

India)Pavitra Venkateswaran

Roll Number: 870Semester VI

B.B.A; LL.B (Hons.)

Money Market in

India The Money market in India is the money market

for short-term and long-term funds with maturity ranging from overnight to one year in India including financial instruments that are deemed to be close substitutes of money.

Similar to developed economies the Indian money market is diversified and has evolved through many stages, from the conventional platform of treasury bills and call money to commercial paper, certificates of deposit, repos, forward rate agreements and most recently interest rate swaps

Money market in

India The Indian money market consists of diverse

sub-markets, each dealing in a particular type of short-term credit. The money market fulfills the borrowing and investment requirements of providers and users of short-term funds, and balances the demand for and supply of short-term funds by providing an equilibrium mechanism. It also serves as a focal point for the central bank's intervention in the market.

Money market in China

An Overview

China’s money market lagged in its development

prior to the mid-1990s compared with the other segments of the financial system, especially the stock market.

Drastic Changes towards the ends of the last century

The major money markets such as interbank lending and borrowing, spot and bond repo, commercial paper, and discount and rediscount, have developed by leaps and bounds since the beginning of 1997.

Overview

The total combined volume of transactions of these markets reached 5,864 billion Yuan by the end of 2000, growing by 73

percent in theshort span of four years

First, the interbank spot and repo trading

leapfrogged every year for those four years. The circulation of commercial paper and the

scale of bill discount and rediscount were also expanded drastically in 2000

Against this background of growth, it is natural that the ratio of trading on the money market to GDP, an index for measuring the development of money market in an economy, rises rapidly

Overview

There was a sharp drop in the proportion of

interbank lending and borrowing and the big rise in the trading of the bond market (especially repo) and trading of paper and discount.

In China’s money market, the interbank market was the earliest to appear as a result of mainly non-governmental forces.

As early as 1981, “underground” lending and borrowing for overcoming a lack of funds appeared in Jiangsu and Zhejiang, both of which boasted the most developed township and village enterprises

Structure of the Money Market

In 1985, the People’s Bank of China officially

allowed lending and borrowing among specialized banks as a major part of financial reform.

Lending and borrowing activities reached its peak in 1995, when the volume of trading reached 1,000 billion Yuan, doubling the amount of the previous year.

Such a situation on the interbank market, of course, aroused discontent from the monetary authorities and consequently led to three major overhauls of the market from the end of the 1980s

Structure of the Money Market

A nationally unified interbank market was not

officially established until January 3, 1996, which was officially subject to tight regulation by the monetary authorities

it was from that time on, that the interbank market began to scale down and the size has not exceeded that of 1995 until today

On the other hand, the interbank bond market, especially the interbank treasury bond repo market, has developed rapidly, presenting a sharp contrast to the flagging interbank lending and borrowing market

Structure of the Money Market

China’s bond market has been dominated by

repo. The trading volume of repo has been

maintained at around 80 percent. At the same time, China’s bond market is

relatively segmented. Up to the present, the national interbank bond market and the bond market of the Shenzhen and Shanghai stock exchanges are still operating side by side

Structure of the Money Market

The commercial paper market in China dates back to

the beginning of the 1980s, when some economically developed areas began to explore the possibility of discount of commercial paper.

In 2000, the total trading volume of commercial paper, discount and rediscount topped 1,000 billion Yuan, accounting for 25 percent of the entire trading volume of the money market

while the total trading volume has been increasing, the proportion of discount and rediscount has gradually increased.

The commercial paper market has added such functions as providing loans (discount) as working capital and the basis for the open market operations rediscount by the central bank.

Structure of the Money Market

The China Securities Regulatory Commission

(CSRC), and the People’s Bank of China (PBOC) jointly released the long awaited “Tentative Provisions” in 2004

It’s the first legal recognition of the seven quasi-money market funds that currently operate in China’s Capital markets

It also presents an outline for future legal framework for the Money Market Funds (MMFs)

Tentative Provisions

As per the ‘TP’, an MMF is a fund that only invests

in money market instruments. It is included in the category of securities investment funds and its legal framework falls within the framework of securities investment funds.

MMFs can invest in money market instruments including cash, bank term deposits or large-amount certificates of deposit, bonds, bond repurchases, central bank notes and other money market instruments with good liquidity that are permitted by the CSRC and the PBOC

Tentative Provisions

There is an emphasis on Safe and Standard

Operation. There are strict limitations on the percentage of

various money market instruments invested by MMFs Given the low risk in money market instruments, the

interest rate fluctuations may be the only big threat. MMF’s transactions and settlement in the national

interbank market shall comply with the PBOC’s rules for interbank transactions and be supervised and examined periodically by the PBOC.

Tentative Provisions

the Shanghai Interbank Offered Rate or Shibor

increased to 13.44 percent, exceeding even the highs posted during the financial crisis in 2008 and setting a new record high for the decade.

Since late May, China's interbank lending market began to show signs of tightness and the pressure has gradually been rising since then

By June 20, the tightening in the market reached a tipping point which traders have started referring to as the "June 20 massacre"

In 2013

Over the recent period, some banks have

been over optimistic about their cash flows, and they didn't consider a series of facts that would affect the liquidity of the market in June. Therefore, without effective responses, and lack of the help from primary dealers like large banks, the price of funds in the money market fluctuated widely.

Overnight and 7-day lending rates reached 10-year highs, surpassing the levels registered during the height of the financial crisis in 2008.

In 2013

The financial markets have become more

complex and for a long time now the financial institutions involved are not restricted to a few state-owned banks. The Central Bank also doesn't have any experience in stabilizing the inter-bank market or in ensuring that banks meet their repayment obligations. It's never had to face this kind of challenge before.

In 2013

Most of the newly issued loans have indeed just been

churned around. The increase in funds has all gone to interbank lending, the banks are playing amongst themselves with money. This bout of tightness in the money markets and the Central Bank's decision not to release more funds is a warning to banks, that banks should direct funds into the real economy.

This echoes recent statements from China\'s State Council and the head of the CBRC on the need to ensure that funds are directed towards the real economy.

In 2013