How Does the Chinese Stock Market Work?
- The People's Republic of China has two stock exchanges. The larger, primary stock market is the Shanghai Stock Exchange. Its trading volume and market capitalization overshadows that of Shenzhen Stock Exchange, the second stock market in mainland China. Both stock exchanges operate as nonprofit organizations. The China Securities Regulatory Commission (CSRC) sets policies and oversees their activities.
The first stock exchange in China started operating during the nineteenth century. By the 1920's the Shanghai Stock Exchange had become the primary stock market, after a series of mergers with other Chinese stock exchanges. The Communist revolution in China forced the Shanghai Stock Exchange to cease all operations in 1949. It reestablished operations at the end of 1990.
- The State Council Securities Management Department must approve applications for listing company shares. Additional requirements include a minimum of 50 million renminbi (RMB) in capital. The company must have been in business for more than three years and have had a profit for the three preceding years. At least 1,000 individuals must hold over 1,000 RMB of shares in the company. Publicly held shares must total a minimum of 25% of all shares. This requirement is only 15% for companies that have at least 400 million RMB in capitalization. The highest exchange rate for the renmimbi or yuan was seven RMB to one U.S. dollar in 2008.
Established in 1990, the Shenzhen exchange has a main board and a Small and Medium Enterprise Board (SME). It issues shares for Initial Public Offerings for companies that meet the listing requirements of the China Securities Regulatory Commission. These requirements include a minimum of 25% of publicly held shares, a capitalization minimum of 30 million RMB, along with an unblemished three-year credit history. In 2008, it had over 500 listed companies, with a market capitalization of over $100 billion U.S. dollars. It has over 35 million registered investors.
The Shanghai Stock Exchange trades treasury and corporate bonds, stocks, and funds. Investors can purchase two types of stock shares. The prices for A Shares are quoted in local currency, while B Share prices are quoted in U.S. dollars. The Shanghai Stock Exchange B Shares are sold in lots of 100. Odd lots can be sold during trading hours, but they cannot be purchased.
Until 2002, only domestic investors could purchase A Shares. However, Qualified Foreign Institutional Investors can purchase both now. The exchange currently lists almost 1,000 companies. It had over 40 million investor accounts in 2006. Of those, a majority were A Share investors at approximately 37 million. B Share investors held 1 million accounts and institutional funds held 1.9 million accounts.
- The trading floor is for both exchanges is open Monday through Friday, except holidays. A competitive pricing session runs from 9:15 a.m. to 9:25 a.m. local time. It is followed by a morning bidding session that starts at 9:30 a.m. and ends at 11:30 a.m. A second bidding session runs from 1:00 p.m. to 3:00 p.m. daily. Both exchanges are members of the World Federation of Stock Exchanges. The China Securities Central Clearing and Registration Corporation manages the deposit, registration and clearing for all securities trades.
The Shanghai and Shenzhen stock exchanges use an automated paperless trading system. Buyers can enter orders online through floor terminals or by sending them to brokers that are members. The Shanghai Stock Exchange has over 150 member brokers. Investors incur fees for their trades in addition to applicable broker commissions. Clearing fees and stamp duty are commonly applied to all trades. The Shanghai Stock Exchange settles all trades within one day. The Shenzhen exchange allows three days to settle B Share trades and one day for A Shares.