Webinar: China 2016 Financial Industry Trends and Outlook January - PowerPoint PPT Presentation

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. For more information and to sign-up to our monthly newsletter, please visit www.kapronasia.com or send us an email: research@kapronasia.com. Twitter: @chinafintech

2016 China Financial Industry Trends and Outlook Moderated by Paul Robinson Presented by Zennon Kapron January 13 th , 2016

China’s Economics are not great … Manufacturing PMI decreased GDP growth still slowing … throughout 2015 China GDP Growth 16% 14% 12% 10% 8% 6% 4% 2% 0% 1990 2000 2006 2007 2008 2009 2010 2011 2012 2013 2014

Systemic issues still exist … Shadow lending has Foreign reserves decreased slightly, but still a decreasing as China worryingly large % of GDP works to support the Yuan

And a poorly performing market … Shanghai Composite Performance 5,250 4,750 4,250 3,750 3,250 2,750 2,250 1,750 Oct-14 Nov-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Oct-15 Nov-15 Sep-14 Dec-14 Sep-15 Dec-15

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 … Shenzhen- HK Stock Equities Evolution of China’s Connect Cross-border investment Mutual Mutual Funds programs Recognition Recognition SH-HK SH-HK SH-HK Stock Stock Stock Equities Connect Connect Connect Equities, RQFII RQFII RQFII RQFII bonds, funds Equities, QDII QDII QDII QDII QDII bonds Equities, QFII QFII QFII QFII QFII QFII bonds, funds 2003 2014 2015 2016 2006 2011

China’s ‘One Belt, One Road’ strategy and Banks … China’s Policy banks push further into ‘One Belt, One Road’ initiative The New Launched in Shanghai to provide funding for BRICS infrastructure. Initial capital of Development USD 100 Billion, evenly backed by the BRICS countries. Start operation in early Bank (NDB) 2016 and is analogous to its counterpart – World Bank. Established in 2014 and launched the first phase of funding of USD 10 billion. The Silk Road Positioned as open-ended, taking equity, debt, loans, funds and other diversified Fund investment and financing methods Asia Infrastructure Set up by 50 partner countries. China accounts for 30% of the subscribed shares Investment Bank and subsequently has 26% of the voting rights. Focusing on the development of (AIIB) infrastructure within the sectors of Asia. USD 45 billion injected into the Export-Import Bank of China. More than 300 new Export-Import projects signed in 2014, an increase of 68% of the contract amount, and the Bank of China cumulative amount of payments increased by 15%. Future financial integration Future • 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 14 offshore RMB-clearing banks have been set up financial regulation coordination over the past 2 years to fully realize the regional’s • Increase cross-border cooperation on credit potential of trade and investment with China and to rating and investigation promote RMB internationalization • Encourage commercial equity investment and private fund investment

But at the same time intervening … Shanghai Composite Performance and government meddling 5,250 April 19 June 10 PBOC cuts Debt swap support to local government extended RRR by 1% to 2 trillion yuan, A-shares not included by MSCI 4,750 June 24 PBOC removes loan deposit ratio limit 4,250 June 27 PBOC cuts rates by 0.25%, RRR by 0.5% May 10 PBOC cuts Feb 4. 2015 rates by 0.25% Aug. 11 PBOC cuts RRR 3,750 PBOC devalues by 0.5% yuan by 1.9% Dec. 28, 2014 PBOC lowers loan July 15 March 8 deposit 7% YoY GDP growth Trillion yuan support to local 3,250 requirements reported in 2Q government via debt swap March 5 GDP growth target July 8 cut to 7% from 7.5% CSRC forbids Aug. 25 2,750 major investors Feb. 28, 2015 PBOC cuts rates to sell shares PBOC cuts rates by 0.25% and RRR again Jan. 20, 2015 July 5 GDP grows 7.3% IPOs halted, brokers start market 2,250 in 2015, better stabilization fund, PBOC supports than expected Nov. 21, 2014 margin finance PBOC cuts rates by 0.4% 1,750

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 … Baidu has partnered with CITIC WeBank was setup Alibaba has launched Mybank and will launch their bank in 2016 by Tencentin Q1 2015 through its Ant Finance subsidiary • 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.

… but will really start to drive more opportunities in future. The push from the 3 rd 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 ...especially acute as the 3 rd party players all have extensive big data platforms to be able to leverage the data for cross-channel / product sales: Core Business Using big data for … And then selling … . Better search, financial Mutual funds based on Search, advertising product distribution search information Gaming, Banking, taxis, movie Cross-product financial communication tickets product distribution Lending products based E-commerce Credit scoring on shopping history

Digital Payments – The place to be … Digital payment consumption trend Digital: 2010 - 3% of total consumption 2020e– 27% total consumption Source: EuroMonitor, iResearch, Kapronasia

Digital Payments – The place to be … but for whom? Alipay & Tenpay still account for 70%+ of digital payment transactions Market Share: Mobile Payment Market Share: Internet Payment 2013 2013 3.9% 5.8% Alipay Alipay 5.1% Lakala TenPay UMP 6.7% Chinapay TenPay 99Bill China Mobile 48.7% Chinapnr 10.6% SmartPay 11.2% Yeepay Qiandai China Telecom IPS 72.6% Others Others 19.4% 2015 Q1 2015-Q1 Alipay 4.9% Lakala Alipay UMP 6.8% Tenpay 0.6% TenPay 11.3% chinapay Bestpay 3.0% 99bill Lianlianpay 48.9% Ping An Pay chinapnr 10.7% 99Bill YeePay Others IPS 78.5% Yeepay Jdpay 19.9% JD wallet Other Source: iResearch

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 After an easy registration, acceptance for person acquiring sales team => anyone with the Alipay merchants is easy as they do not need a wallet can receive a 300 RMB referral fee for every specialized POS – many just use an merchant signed up to the platform iPhone, tablet or other device to accept payments iPhone in use at a Shanghai restaurant for ‘unsecured’ WeChat and Alipay acceptance

Digital Payments also about to get more crowded • All NFC solutions • Reliant on NFC-POS terminals • Now about 100% of all terminals • 40% of existing But is it too little too late? And what about regulation?

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?