about one-third of China's families' real income has dropped.
Nevertheless, China's new financial markets are very popular with the public. American investors would be surprised to discover the near-obsessive attention their Shanghai counterparts pay to their securities markets. The major TV stations carry reviews of the market on a daily basis. The securities firms are host to hundreds of daily visitors who sit in pews to view the screens that pump real time prices from the floor of the Shanghai Securities Exchange to the securities firms. Several years ago, a shortage of certificates providing the public with the opportunity to participate in new issues caused riots in Shanghai and Shenzhen, encouraging market regulators to permit broader participation. 1
From the state's point of view, the financial markets help meet two significant objectives. One, the reduction of the state's share of the burden of support for China's elderly through provision of a publicly available alternate reward to savings, and two, increased foreign exchange reserves through the issue of "B" shares owned and traded by foreigners.
The financial markets in China opened in 1991 in Shanghai and Shenzhen with 14 companies listed at the end of the year. The number of companies listed went up to 323 at the end of 1995, market capitalization went up from 11,019 millions of Yuan in 1991 to 349,791 million Yuan at the end of 1995. In U.S. currency, China's market capitalization increased from $2,028 million to $42,055 million at the end of 1995. Trading volume in U.S. dollars increased from $820 million to $49,774 million over the same period. 2 There are separate stock markets for domestic shareholders, referred to as A shares and for foreign shareholders, B shares. Shares of Chinese companies traded in Hong Kong are referred to as H shares and those listed on the New York Stock Exchange are referred to as N shares.
An estimated 21 million Chinese nationals own stock in the Chinese equity markets. The number has been on the rise as bank deposit rates dropped in the wake of easier monetary policy.
Lively futures markets developed in China in commodities, currencies and government bonds. In response to the apparent chaos in 1994, the China Futures Regulatory Commission limited trading of futures contracts other than commodity and some government bond futures at China's exchanges, in order to create a more rational futures industry. Financial futures, in particular, were severely limited. Stock and index-linked futures, currency and currency-linked futures were prohibited. Futures trading of China securities firms was to be strictly controlled. 3