Webinar: China 2016 Financial Industry Trends and Outlook

January 13th, 2016 - 17:00 – 17:45 Beijing Standard Time

The webinar will start in a few minutes.

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2016 China Financial Industry Trends and OutlookModerated by Paul RobinsonPresented by Zennon KapronJanuary 13th, 2016

China’s Economics are not great…

Manufacturing PMI decreased throughout 2015

0%

2%

4%

6%

8%

10%

12%

14%

16%

1990 2000 2006 2007 2008 2009 2010 2011 2012 2013 2014

China GDP Growth

GDP growth still slowing…

Systemic issues still exist…

Shadow lending has decreased slightly, but still a worryingly large % of GDP

Foreign reserves decreasing as China

works to support the Yuan

And a poorly performing market…

1,750

2,250

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5,250

Sep-

14

Oct

-14

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-14

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15

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15M

ar-1

5

Apr

-15

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-15

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15

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5

Aug

-15

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15

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-15

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-15

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Shanghai Composite Performance

Social problems & Social Media…

Social problems are getting more attention through social media• Social media is driving a new level of awareness on social issues• Government cannot ignore issues, because no one else is• Pollution still an issue => government working, but not “clean” until 2030

So where does that leave us?

Government opening the market…

Evolution of China’s Cross-border investment

programsSH-HK Stock

Connect

Mutual Recognition

RQFII

QFII

Shenzhen-HK Stock Connect

QFII

QDII QDII

RQFII

QFII

QDII

SH-HK Stock

Connect

RQFII

QFII

QDII

Mutual Recognition

SH-HK Stock

Connect

RQFII

QFII

QDII

Equities, bonds, funds

QFII

Equities, bonds

Funds

Equities

Equities, bonds, funds

Equities

2014 2015 20162006 20112003

China’s ‘One Belt, One Road’ strategy and Banks…China’s Policy banks push further into ‘One Belt, One Road’ initiative

The New Development Bank (NDB)

Launched in Shanghai to provide funding for BRICS infrastructure. Initial capital of USD 100 Billion, evenly backed by the BRICS countries. Start operation in early 2016 and is analogous to its counterpart – World Bank.

The Silk Road Fund

Established in 2014 and launched the first phase of funding of USD 10 billion. Positioned as open-ended, taking equity, debt, loans, funds and other diversified investment and financing methods

Asia Infrastructure Investment Bank

(AIIB)

Set up by 50 partner countries. China accounts for 30% of the subscribed shares and subsequently has 26% of the voting rights. Focusing on the development of infrastructure within the sectors of Asia.

Export-Import Bank of China

USD 45 billion injected into the Export-Import Bank of China. More than 300 new projects signed in 2014, an increase of 68% of the contract amount, and the cumulative amount of payments increased by 15%.

Future

14 offshore RMB-clearing banks have been set up over the past 2 years to fully realize the regional’s

potential of trade and investment with China and to promote RMB internationalization

• Bond issuance in both Renminbi and foreign currencies outside China for use in Belt and Road countries

• Strengthen regulatory cooperation: encourage MOUs for cooperation in bilateral financial regulation coordination

• Increase cross-border cooperation on credit rating and investigation

• Encourage commercial equity investment and private fund investment

Future financial integration

But at the same time intervening…

Nov. 21, 2014 PBOC cuts

rates by 0.4%

Dec. 28, 2014PBOC lowers loan

deposit requirements

Jan. 20, 2015GDP grows 7.3%

in 2015, better than expected

Feb 4. 2015PBOC cuts RRR

by 0.5%

Feb. 28, 2015PBOC cuts rates by 0.25%

March 5GDP growth target

cut to 7% from 7.5%

March 8Trillion yuan support to local government via debt swap

April 19PBOC cuts RRR by 1%

May 10PBOC cuts

rates by 0.25%

June 10Debt swap support to local government extended to 2 trillion yuan, A-shares not included by MSCI

June 24PBOC removes loan

deposit ratio limit

June 27 PBOC cuts rates by 0.25%, RRR by 0.5%

July 5IPOs halted, brokers start market stabilization fund, PBOC supports

margin finance

July 8CSRC forbids major investors to sell shares

July 157% YoY GDP growth

reported in 2Q

Aug. 11PBOC devalues yuan by 1.9%

Aug. 25PBOC cuts rates and RRR again

1,750

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Shanghai Composite Performance and government meddling

The overarching 2016 China Financial Industry theme…

The government desperately wants to

reform the market, but is faced with economic and systemic conditions that

won’t let it or even force it to backtrack.

Some trends / sub-themes for 2016…

Card processing and clearing opening up…

• Regulations have previously prevented any other players moving into the local credit / debit card market besides CUP

• Starting in 2015, culmination in 2016: new players will most certainly be allowed to launch in China for both clearing, processing and VAT.

• This, combined with a changing merchant fee, will make the market challenging for both CUP and new entrants…

The most interesting of these would be Alipay…

A move into setting up a card network would allow Alipay to:

1. Further consolidate its hold on domestic offline transactions

2. Very quickly push into overseas markets

Direct Banking slow start…

• Although all 3 of the BAT (Baidu, Alibaba, Tencent) have moved in or are moving into banking, they have yet to make an impact

• Why?– No big product differentiation?– Customers inertia?– Existing banks already do most of what retail customers need?

• We are still bullish that they will make progress, but may take longer than originally expected for them to make a dent.

WeBank was setup by Tencent in Q1 2015

Baidu has partnered with CITIC and will launch their bank in 2016

Alibaba has launched Mybankthrough its Ant Finance subsidiary

…but will really start to drive more opportunities in future.

And then selling….

Lending products based on shopping history

Cross-product financial product distribution

Mutual funds based on search information

The push from the 3rd party players is not only hurting banks direct revenue, but in-directly is making them lose touch with their customers

• Many banks see big-data / customer analytics as a way to differentiate through better customer understand, but...

• ...as the 3rd partly payment and financial products run on 3rd party rails, banks do not see or touch the transactions

• Loss of immediate revenue obvious; longer-term, customer transaction information is even more important for differentiation

Core Business Using big data for…

Credit scoring

Banking, taxis, movie tickets

Better search, financial product distributionSearch, advertising

E-commerce

Gaming, communication

...especially acute as the 3rd party players all have extensive big data platforms to be able to leverage the data for cross-channel / product sales:

Digital Payments – The place to be…

Digital:2010 - 3% of total consumption2020e– 27% total consumption

Source: EuroMonitor, iResearch, Kapronasia

Digital payment consumption trend

Digital Payments – The place to be…but for whom?

48.9%

19.9%

10.7%

6.8%

4.9%

2015-Q1

AlipayTenpaychinapay99billchinapnrYeePayIPSJdpayOther

72.6%

10.6%

5.1%

3.9%2013

AlipayLakalaUMPTenPayChina MobileSmartPayQiandaiChina TelecomOthers

Market Share: Mobile Payment Market Share: Internet Payment

48.7%

19.4%

11.2%

6.7%

5.8%

2013AlipayTenPayChinapay99BillChinapnrYeepayIPSOthers

78.5%

3.0%

0.6% 11.3%

2015 Q1AlipayLakalaUMPTenPayBestpayLianlianpayPing An Pay99BillOthersYeepayJD wallet

Source: iResearch

Alipay & Tenpay still account for 70%+ of digital payment transactions

Digital Payments – taking more of traditional payments Digital players increasingly moving to offline acceptance especially targeting ‘long-tail’ SMEs who may struggle with costs…

Alibaba has converted its entire userbase into a 300M person acquiring sales team => anyone with the Alipay

wallet can receive a 300 RMB referral fee for every merchant signed up to the platform

iPhone in use at a Shanghai restaurant for ‘unsecured’

WeChat and Alipay acceptance

After an easy registration, acceptance for merchants is easy as they do not need a

specialized POS – many just use an iPhone, tablet or other device to accept

payments

Digital Payments also about to get more crowded

But is it too little too late?

And what about regulation?

• All NFC solutions• Reliant on NFC-POS terminals

• Now about 100% of all terminals• 40% of existing

China Fintech – incredible growth…

…but huge challenges

• Regulators in early January stopped registration of any new internet finance related companies.

• BAT (Baidu, Alibaba, Tencent) are still the fintech leaders– Would rather copy than buy small fintech– But what about an investment in a large fintech? Dianrong anyone?

P2P Platforms have reached scale…

1 1 5 15 50 148523

1575

2595

0%

400%

200%

233% 196% 253%

201%

65%0

5001,0001,5002,0002,5003,000

2007 2008 2009 2010 2011 2012 2013 2014 20150%50%100%150%200%250%300%350%400%450%

Number of P2P Online Platform and Growth Rate2007-2015

Number of P2POnline Platform

Growth Rate

18.9% 19.3%21.3%

17.9%

13.3%

0%

5%

10%

15%

20%

25%

2011 2012 2013 2014 2015

Average interest rate, 2011-2015

P2P

…which is helping platforms to move beyond just P2P lending...

…and helping them list.

Diversified products:• Investment in equity funds• Crowdfounding for real estate• «Finance supermarket»• Possible future ventures with

international agents (UBS, Morgan Stanley)

Different approach:• Creation of completely separate

branches• Creation of new digital platforms

But regulation is coming….

CBRC new P2P Lending regulation draft (2016) key points• No more funding for platforms’ own products• No more guaranteed returns• No more accounts in the platforms’ balance sheets• Limits on lenders and borrowers• Platforms have to release more data

Goals• Reduce risk of frauds at the expenses of lenders• Reduce systemic risk for the credit market due to bad loans• Increase transparency to avoid infiltration of criminal activities

Some predictions for 2016…

Key predictions for 2016

Mobile Payments will continue to grow for existing players, foreign players will struggle• BAT will consolidate online further, and continue international / offline push• Apple Pay, Samsung Pay and Cloud Quickpass will launch, but will account

for than less than a combined 5% of payments unless regulators intervene

P2P Lending will consolidate heavily• Smaller players will be forced out by yet to be announced regulation • Listed players may have to adapt their business model• Upcoming listings may need to revisit structure (e.g. Lufax)

Mainland stock markets will continue to suffer• Economics of China are not great• Investors have short-term memories, but not that short• No near-term signs of anything that could jump-start the market

– Shenzhen – HK connect? Maybe…

Key predictions for 2016

BAT will continue to ’win’ in the financial industry, but mainly in payments• Regulators approved remote bank account opening in early January, doesn’t

change much, as although peformance numbers haven’t been disclosed, does not look great.

• Continue to expand beyond their remit in payments – international & O2O

Card regulations will open up, but progress of foreign players unclear• What is real value–add?• Work with or against UnionPay?

Key predictions for 2016

Regulations will stifle innovation in 2016• Regulators will still struggle with how to respond to a changing market

– Leadership may change at CSRC– May lead to a bigger push for a combined uber-regulator

• The fintech regulation is a challenge. We expect this to continue throughout 2016

• The mobile payment regulation is also unexpected and unclear future

….but, regulators will still attempt to revive markets through opening• HK-Shenzhen connect…• Mutual recognition• Bonds

Webinar: 2016 China Financial IndustryOutlook and Trends

For more information about the topics covered in this webinar or Kapronasia, please visit www.kapronasia.com or send us an email: research@kapronasia.com. Twitter: @chinafintech

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