Introduction:
During SARS period, Hong Kong is in the trough, the unemployment rate is
around 8%. Due to the individual visit scheme, the increase in the number of tourists
from the mainland China helps stimulate the local economy which is turning into
recovery. Greater transactions in the stock market in Hong Kong can act as a indictor.
The above news article is a good evidence.
China Life Insurance Company Limited is going to issue shares in this week. As
the interest rate of Hong Kong dollars is very low, so people prefer other ways of
investment instead of keeping money in the saving account. Some residents went to
the bank to line up over night to get the application form and hope to buy the shares to
earn money. Unfortunately, there are lots of people and the application forms are not
enough, so a long queue appears outside some banks.
Explanation:
China Life Insurance Limited Company is a Public Limited Company. Now it
issues shares through the banks. Other features:
There is no maximum number of shareholders, but it should have at least 2
shareholders. Now it issues the application forms through the banks to the public, then
later shares are freely transferable and traded in stock exchange. China Life Insurance
Limited Company can have a wider source of capital through issuing shares, but it is
required to publish its financial accounts to the public.
Also, bank run may occur easily as people withdraw money to buy shares. So
banks need to keep reserves for meeting clients’ withdrawals. If they fail to do so,
their clients may lose confidence in them and take their money back, resulting in bank
runs. Banks often keep excess reserves for safety reasons.
Except providing investment service, banks also have other services like coin
exchange, safety boxes. Most commonly use are deposits, it includes demand deposit,
saving deposits and time deposits. Some banks also sell negotiable certificates of
deposits to attract deposits.
There is also lending service. If refers to as a bank loan or bank credit. The 2
major forms are:
Fixing amount loan. A fixed sum is lent to the client. He is required to pay back the
principal and interest in installments. The interest rate is usually floating.
Another one is overdraft. The clients are allowed to withdraw more money than what
he has in his deposit account. The interest rate on the over-drawn amount is usually
floating and interest is calculates on a daily basis.
Banks also have a function of financing international trade. Banks finance export or
import trade by issuing letter of credit and bills of exchange.
P
Excess Demand
O
Q
Shares of China life
Quantity demanded is larger than quantity supplied(Qs). There is excess demand. The
market price decrease(Pe→Pc). The quantity transacted decrease(Qe→Qs). Total