The Chinese payments system The Chinese financial

Transcript:The Chinese payments system The Chinese financial:
The Chinese payments system The Chinese financial system, spring 2014 PV Viswanath Lubin school of business P.V. Viswanath Learning objectives An important part of the financial system is to provide an efficient way for people and businesses to make payments to each other when they wish to buy goods and services. Can you pay with cash? Must you pay with cash? Can you pay with a check? If so, how will your payment reach your seller ultimately? Can you pay with a credit card? Do vendors accept credit cards? Do buyers wish to use credit cards? And, once again, how will the payment reach the seller ultimately if the buyer uses a credit card? What happens if there is a transaction on an exchange? How is payment made? Do businessmen require payment in cash? Do they provide trade credit? What about international transactions? Is it possible for somebody in China to pay for international purchases in RMB? Can foreigners use foreign currency in China? How does that work? Are there political, legal and social issues involved in the answers to these questions? If so, what are they? We will discuss some of these issues in these slides. P.V. Viswanath 2 Clearing A clearing house is a financial institution that provides clearing and settlement services for financial and commodities derivatives and securities transactions. Settlement in the context of securities trading refers to the delivery of the security to the purchasing party and payment of the agreed upon price to the selling party. Clearing refers to the facilitation of such settlement. The two parties to the transaction or their responsible representatives are usually members of the clearing house that clears their trade. A clearing house stands between the two member firms and its purpose is to reduce the risk of one (or more) of the member firms failing to honor its trade settlement obligations. A clearing house reduces the settlement risks by netting offsetting transactions between multiple counterparties, by requiring collateral deposits (also called “margin deposits"), by providing independent valuation of trades and collateral, by monitoring the credit worthiness of the clearing firms, and in many cases, by providing a guarantee fund that can be used to cover losses that exceed a defaulting clearing firm's collateral on deposit. Sometimes (but not always) a clearing house will also take the opposite position of each trade, so that the legal counterparty to each trade