China’s financial system is based on banks: 80% provided by banks or bank-like lenders; 20% from stocks and bonds. 90% of banks are owned or controlled by central or regional government. Key: this system is build for stability / control. unusually high bank dominance AMC became permanent and control much of the economy stock markets dominated by state entities, unusually limited foreign participation IPO funding shared among different stock type lockup of state shares which devalues companies Definitions Capital flows through stocks and bonds. Within China, although the government exert a certain degree of control; a bank based system gives banks a directive, they can control capital flow much easier. Can control: where, how, whether the loans are repaid. Stock Markets ownership on companies traceable as stock Bond Markets loans to companies packaged as tradeable financial instruments yield is a function of price Why China is a Bank-Based system Bank based system places decisions about capital flows to banks Capital-based market system takes direct control out of government or banks, places them in independent actors Banks-based system maybe completely owned the state Financial Repression China, Taiwan, SK, etc., did it very few money market funds / bonds to save. only bank savings or buying apartments were the primary investments household income put into banking system Loan Practices focus on grow and scaling operations soft terms of loans, delayed / forgiven payment bad assets taken off the books—recapitalized twice loan-making ask for holistic evaluation social welfare tax contribution mission alignment How to create bad-loans high rates of non-performing loans make “bad banks” / AMCs — “asset management companies” => take bad loans off balance sheet AMC Plan clean up bad lones + dissolve after 10 years 2008 spurred government stimulants: even more bad debts …so companies stayed around Growth of AMCs 2 AMCs per province were permitted 59 local AMCs AMC Structure AMC buys the remaining lone from the bank, resolve the problem from bank AMC negotiation with the company to resolve the loan AMC can also turn the debt into ownership in the company — turning the indebted company into an asset use the business license to do brokerage, financial, foreign trade, selling the license sell ownership to another institution AMCs failing bad lones became packages of 10 or more most of these are not held by AMCs, but instead sold at a profit to third parties — essentially hiding the bad lones So why stocks at all generate more capital — at least 50% of stock is non-tradeable, so doesn’t loose control generate capital without limitating state control Stock Structure State share: not tradeable, not transferable, assets management comissions LP shares: held by other companies / legal persons A shares: traded in Shanghai H shares: foreign / HK shares We can’t value state shares, so market cap of state companies maybe a bit lower.