Finance Paper

Topics: Stock market, Foreign exchange market, Stock Pages: 11 (3287 words) Published: March 5, 2014


Finance Writing Assignment

Name

FIN 302
Instructor
December 9, 2013

Table of Contents
I. CHINA STEPS TOWARD MARKET-BASED INTEREST RATES………………………..3 A. China and Certificates of Deposits……………………………………………………………..3 B. Recent Development……………………………………………………………………………..3 C. Implications……………………………………………………………………………………3-4 D. Comments………………………………………………………………………………………..4

II. FED CLOSES IN ON BOND EXIT…………………………………………………………….5 A. US Bonds…………………………………………………………………………………………..5 B. Recent Development………………………………………………………………………..….5-6 C. Implications……………………………………………………………………...……………….6 D. Comments………………………………………………………………………………………...6

III. WHY THE DOLLAR DOMINATES, AND WHY THAT’S NOT ALL GOOD………..….7

A. US Dollar……………………………………………………………………………………..…..7 B. Recent Development…………………………………………………………………………...7-8 C. Implications………………………………………………………………………………………8 D. Comments……………………………………………………………………………………...…8

IV. UPSTAIRS TRADING DRAWS MORE BIG INVESTORS…………………………..……9

A. Trade……………………………………………………………………………………………..9 B. Recent Development…………………………………………………………………………..…9 C. Implications……………………………………………………………………………………..10 D. Comments……………………………………………………………………………………….10

V. SKY-HIGH STOCKS: A SPLIT DECISION? ………………………………………………11 A. Stock Splits……………………………………………………………………………………...11 B. Recent Development…………………………………………………………………...……11-12 C. Implications………………………………………………………………………….………….12 D. Comments……………………………………………………………………………………….12

References…………………………………………………………………………………………..13

CHINA STEPS TOWARD MARKET-BASED INTEREST RATES

China and Certificates of Deposits
China has not allowed trading of certificates of deposits between banks due to tight controls. China used to fix deposit and lending rates, limiting competition between banks and in effect transferring cash from savers to borrowers because of the artificially low rates. In the past, banks could lend to each other in the interbank market, but there was no way to package those loans as products for trading between banks. Deposit-rate reform has been one of the most critical and risky elements of banking reforms for China. Forcing lenders to compete for funds would offer consumers more spending power, while undermining the model of state-directed, subsidized credit (Li 2013).

Recent Development
China took a step toward interest-rate liberalization by giving banks the freedom to issue large-denomination negotiable certificated of deposit. At first, the CD’s will be available to fund managers and people in the interbank market. The CD’s will not be issued directly to individuals or nonfinancial enterprises (Silk 2013). China’s move is a step toward a fully market-based system of interest rates. China has recently scrapped controls on interest rates for most loans in July 2013, but deposit rates are still subject to a ceiling. However, regulators have intentions to gradually phase out the interest-rate ceiling which acts as an implicit tax on savers and a subsidy to borrowers.

Implications
By forcing the banks to negotiate the cost of lending between themselves, CD’s will provide a clearer picture of the cost of capital in a market-driven environment. The PBOC should consider a cap on the rates for negotiable CD’s because there could be a price war. A deposit insurance system should be introduced as to ensure less risk. The new trading of CD’s will offer banks a way to manage their liquidity when financing conditions are tighter. CD’s would offer a source of funding that is locked in from 1 month to 3 years (Silk 2013). The interest rate will be determined by the market. The CD’s will be priced on the Shanghai interbank offered rate which is likely to make the Shibor the benchmark rate in the Chinese money market instead of the short-term bond repurchase rate. The Shibor rose the week of Dec 1, 2013 to 5.17% from 4.72% due to the announcement that the central bank in China will begin to offer negotiable CD’s. The...

References: (2013, December 1). In China Interest Rate. Retrieved December 1, 2013, from
http://www.tradingeconomics.com/china/interest-rate
Chappatta, B. (2013, March 25). Record Build America Bonds Rally Defies Subsidy Cut: Muni
Credit.Bloomberg
Hilsenrath, J. (2013, December 6). Fed Closes In on Bond Exit. The Wall Street Journal.
Retrieved December 8, 2013, from http://online.wsj.com/news/articles/SB10001424052702303722104579242614008515066?mod=WSJ_business_LeftSecondHighlights
Hope, B. (2013, December 8). Upstairs Trading Draws More Big Investors. In The Wall Street
Journal
Li, F., Lee, J., & Liu, L. (2013, September 26). China to Allow Interbank Trading of Certificates of
Deposit Bloomberg
(n.d.). Retrieved December 8, 2013, from http://en.wikipedia.org/wiki/Strong_dollar_policy
Silk, R., & Zhu, G
Street Journal.Retrieved December 8, 2013, from http://online.wsj.com/news/articles/SB10001424052702304744304579245692059412548?mod=WSJ_hp_LEFTWhatsNewsCollection
Wessel, D
That 's NotAll Good. Retrieved December 8, 2013, from http://online.wsj.com/news/articles/SB10001424052702303722104579237853762008142
Zweig, J
Retrieved December 8, 2013, from http://blogs.wsj.com/moneybeat/2013/12/06/sky-high-stocks-a-split-decision/?mod=WSJBlog&mod=MarketsMain
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