::PV Viswanath::

Dr. P.V. Viswanath

pviswanath@pace.edu

Home

Bio

Courses

Research

Economics/Finance on the Web

Student Interest


	Courses /FIN 396T - ECO 375

	Important Terms and Concepts
	Terms and Questions for Self-Study Jeffrey Wasserstrom, "China in the 21st Century: What Everyone Needs to Know Chapter 1 Chapter 2 Chapter 3 Chapter 4 Background information Terms and questions for self-study by chapter Financial Markets and Institutions Introduction to Banking The Chinese Banking System The Rural-Urban Divide The Chinese Fiscal System Equity Markets Private Equity and Venture Capital The Chinese Payments System Shadow Banking

	Terms and Questions for Self-Study Jeffrey Wasserstrom: Chapter 1: What were Confucius's core ideas? A: Confucius's core ideas are education, ritual, and relationships that are hierarchical, yet provide benefits to both superior and inferior. Why was Confucius out of favor after the Communist Revolution? Why is he back in favor? Are Confucian ideas a hindrance to Chinese economic development? Is there a connection between Confucian ideas and the development of informal financial networks? Is this good or bad? (Some researchers make this connection; look, for example, this paper by Franklin Allen, Jun Qian and Meijun Qian.) A: Some people have argued that Confucian ideas particularly the focus on relationships have fostered the notion of guanxi, which in turn has encouraged the development of informal financial networks. Although the primary relationships that Confucius spoke of were hierarchical, Confucian followers also spoke about more egalitarian relationships between friends. This would certainly tie into notions of guanxi. Informal financial networks have facilitated the financing of private enterprises, given the relative unwillingness of banks to lend to private enterprises. This is good, of course. However, some of these informal financial networks have also been ways for SOEs and government insiders to channel SOB funds to private parties for a share of the spoils (see, for example, the writings of Joe Zhang). This would simply increase the existing tendency for misallocation of resources. Chapter 2: Has Chinese society always been servile and accepting of authority or have there been peasant uprisings? What is the relevance of this for modern China? What was the Opium war and what was its economic relevance? Is the Chinese party a new dynasty? Why or why not? A: The Chinese party is, arguably, not a new dynasty because even though China is a one-party system and the people in power bestow power on the incoming group of power-wielders, the incoming group is, usually, not related to the outgoing group, which is a key element of a dynasty. As a result, there is scope for new ideas and new people coming into power. Chapter 3: Can you compare the warlord era with previous eras in Chinese histories? Why are Lu Xun and his ideas important for the development of Chinese political reform? What is the significance of mass campaigns in Chinese society? What was the Hundred Flowers campaign? What is the Great Leap Forward? What is Mao's reputation in China, today? Chapter 4: Who was Deng Xiaoping? Why is he important in modern Chinese economic history? What was the true story of the Tiananmen Uprising? Why has the Chinese Communist party survived, while other communist movements have not? Why was the Falun Gong movement repressed? Do you see any connection between this and the current suppression of the anti-corruption movement? (see this Economist article on the Communist Party's anti-graft campaign.) What is unique about China and what does it have in common with other countries? Introduction to Banking: What is a bank? What does it do? What makes a bank different from other financial intermediaries? Why does the banking sector need more regulation than other financial sectors? What is the role of the central bank? Why are banks and other financial institutions important elements in situations of systemic failure? What is the “too big to fail” problem? How can troubled banks be restored to health? What are asset management companies and what is their role in restoring troubled banks to health? The Chinese Banking System: How was the banking system in China organized prior to the reform of the system in 1979? Describe how the banking system changed in parallel with changes in the organization of the economic system. Ans: In the 1980s, China moved first towards rationalizing the state sector and then to embracing the market system. Concomitantly, in the early 1980s, the four specialized banks were established (the BOC to deal with foreign trade and investment, the ABC to deal with rural finance, the CCB to deal with fixed investment and manufacturing and the ICBC to deal with commerce.) In the 1990s (1992 onwards), economic reforms and markets were fully embraced and the private sector was given a role. Concomitantly, the four specialized banks were converted into commercial banks that would be appropriate for a market economy with a private sector (and special development banks were established to take care of policy considerations). Why were the original four commercial-cum-development banks converted into commercial banks alone in the mid 1990s, and four new development banks established? Why did the Chinese government convert the major state-owned commercial banks into joint-stock corporations, whose stock was traded on exchanges? Why are the prices of chinese companies traded on Chinese stock exchanges (Shanghai and Shenzhen) usually different from the prices on the HongKong or the New York stock exchanges? Why is the Chinese government interested in having foreign investors buy equity in Chinese banks? Describe the asset structure of state-owned Chinese banks; what can you infer from this? Describe the liability structure of state-owned Chinese banks; what can you infer from this? By what mechanism does the Communist party control operating policies at state-owned Chinese banks? Ans: The Communist Party controls operating policies at the state-owned banks indirectly by controlling the appointment of the top-level bank managers. What are the antecedents of City Commercial banks? Compare and contrast them with the major State-owned Commercial banks. Why are foreign banks finding it difficult to make inroads into the Chinese banking industry? Briefly describe the rural financial system. What are the different institutions involved in the regulation of China's banking system? What are their different roles? How does the PBOC conduct monetary policy? How does it contrast with the conduct of monetary policy in the US? Why does the PBOC set bank borrowing and lending rates? Ans: The PBOC sets bank borrowing rates at low levels in order to have easy access to people's savings . Lending rates are set a few percentage points higher, but not too high. This is intended to allow SOEs to have access to cheap loans and to keep banks solvent. What is the difference between the approach of the PBOC and the CBRC to bank regulation? What are the functions of the Ministry of Finance? Give two examples of the rivalry between the Ministry of Finance and the PBOC and elaborate on what happened in each case. What are Asset Management Companies? How have they been used to manage China's NPLs? Ans: Asset Management Companies are asset recovery banks which have taken over the NPLs (bad debts) of the SOCBs, first at face value then at a discount, but still at prices above market value. This allows the balance sheet of the SOCBs to be cleaned up, in preparation for eventual IPOs. The NPLs have been eliminated (very slowly) by recovering loans from the debtor institutions through various mechanisms, either directly or indirectly by arranging the restructuring and sale of the debtor firms or by sale of the loans themselves to private parties. How have the AMCs been financed? Ans: The AMCs have been financed partly by the PBOC and the MoF and then later by bonds that ended up being held by the SOCBs themselves. How successful have the AMCs been in recovering money from defaulting debtors? What is the problem of moral hazard in Chinese banking? What is financial repression? How does is manifest itself in the Chinese financial system? Why is there no financial repression in the US? Explain. The Rural-Urban Divide What is the difference in the way rural production was organized and urban production was organized after the Communist takeover in 1949? How did this impinge upon relative level of privileges for urban and rural residents? Why did rural areas end up serving the needs of urban areas? What was the political basis for this differentiation? What is the system of urban property rights today? What is the system of rural property rights today? Describe the development of Town and Village Enterprises and explain the reasons for their eventual demise. What was the system of rural finance prior to the 1979 reform? What was the state of rural banking in the early post-reform period? What was the state of rural banking subsequent to the reorganization of the banking system in the mid 1990s? Why did rural areas languish relative to urban areas in terms of obtaining bank financing? What are some of the steps that have been taken to improve rural finance? Why is it important to solidify ownership rights of rural land users from an economic point of view? The Chinese Fiscal System How did the fiscal system work prior to reform? How did the fiscal system work post-reform, but before the 1994 tax sharing reform? What were the important elements of the 1994 tax reform plan? What happened to the ratio of central government revenue to total government (central, provinces and local) revenue after 1993? What happened to the ratio of all government revenues to GDP post 1993? What do you conclude from your answer to these two questions? What are the different components of government revenue? How have they changed from the 1979 reform to the present day? What has been the trend in local government spending versus central government spending? What are the implications of this for the provision of social services in rural areas? What has been the role of transfers from the central to the provincial governments as regards inter-provincial inequality? What are the implications of this for urbanization? Why do local governments borrow? How do local governments borrow, if local government borrowing is illegal? What is the connection between financial repression and fiscal policy in China? Equity Markets Why did the Chinese government institute a system of stock ownership of SOEs? Why did the Chinese government initially create a system of three classes of shares -- state shares, A shares and B shares? Why doesn't the Chinese government allow Chinese citizens in China to invest in the US equity markets? What is the status of shareholder rights in China? What steps has the Chinese government taken to ensure that the introduction of equity markets does not undercut the financial repression system in China? What was the social role of the SOEs in the early years of reform, which led the Chinese government to closely control ownership of SOE shares? What was the reason that shareholder rights have slowly improved in China? What are some of the actions taken by majority shareholders in Chinese firms to the detriment of minority shareholders? Under what circumstances are firms delisted from the stock exchange in China? What are the characteristics of shareholders in Chinese corporations? How large is the market capitalization of listed Chinese companies compared to the same number for India and for the US? Private Equity and Venture Capital What is private equity? Distinguish between private equity, venture capital and angel investing. Why is an exit strategy so important in the world of private equity? What are the different alternatives for a private equity investor to exit from his/her investment? How did venture capital begin in China? Why did the government take such an important part in venture capital in the beginning? Why did early foreign PE funds choose to engage in joint ventures with SOEs rather than invest in private start-ups? What were the problems with exit strategies for foreign private equity money in the 1990s and early 2000s? Why did foreign private equity money start to come into China in the 1990s? Why is the establishment of the ChiNext stock market important for private equity? What are the problems today in the Chinese VC ecosystem? The Chinese Payments System Who are payments service providers? What is a clearing house? What does clearing entail? Who clears bankcard transactions in China? What are the two main interbank payments system? What is the main difference between them? Why is the Internet Banking Payment System important? How does it compare to HVPS and BEPS? What is the role of the PBOC in interbank settlement? What are the different institutions that have a role in the settlement of a securities trade? Start with the initial agreement between two investors to buy/sell at an agreed price. Why does the the China Securities Depository and Clearing Co. (SD&C) act as a counterparty in all stock market trades? What are the different functions performed by the SD&C? What sorts of Chinese are more likely to use credit cards? What is the implication of these propensities in the development of credit cards in China? What is UnionPay? How important are debit cards in China relative to credit cards? Can you explain their relative importance? How does Taobao ensure customer security in a trade? What is the difference between an online mall and an e-tailer? What is the purpose of an online mall? What advantages might it have over an e-tailer? Do you think mobile payment systems in China have a bright future? Why or why not? What is the role of mobile payment systems in financial repression? Shadow Banking What is intermediation? What is credit transformation? What is maturity transformation? What is liquidity transformation? How is related to securitization? What is the role of the PBOC in preventing financial crises? What are shadow banks? How do they differ from banks? What are the three shadow banking subsystems in the US? Which institutions comprise the government-sponsored shadow banking sub-system? Which institutions comprise the internal shadow-banking subsystem? Which institutions comprise the external shadow-banking subsystem? What is the size of the Chinese shadow banking system? How large is it relative to the size of the US shadow banking system? To that of the euro area? What sorts of assets provide backing for Wealth-Management products in China? Why do investors in WMPs underestimate their risk? Why is shadow banking popular in China? How and why do local governments use TICs (Trust Investment Companies)? Why was shadow banking important in the 2008 mortgage crisis in the US? Why do some economists believe that shadow banking is not necessarily toxic in China and can even be a force for good? Why may shadow banking in China be dangerous, according to some researchers? Background Information from Wasserstrom Terms The Great Leap Forward The Opium War The Boxer Rebellion The Cultural Revolution The Rape of Nanjing The Republic of China The People's Republic of China The Gang of Four Short Questions What was the name of the last imperial dynasty in China? When did it end? What was the Great Leap Forward? When did it occur? When did Confucius live? What were Confucius's core ideas? What was the Opium War? With whom did China fight the War of 1894-95? Which were the two great parties struggling for power in mainland China between 1926 and 1949? What were the names of the leaders of these two parties? What was the Rape of Nanjing? What is the difference between the Republic of China and the People's Republic of China? What was the Cultural Revolution? Who was Deng Xiao Ping? When did the Tianmen Square Uprising take place?