Embracing the New Era: A new chapter of Opening-up in China s Financial Sector (Updated in May 2018 based on new policies and data)

Transcription

1 Management consulting Embracing the New Era: A new chapter of Opening-up in China s Financial Sector (Updated in May 2018 based on new policies and data)

2 2018 marks the beginning of a new era that China further opens up its financial service sector This report has been updated based on China s new policies and data compares to the March 2018 edition. In his keynote speech at the opening ceremony of the Boao Forum for Asia 2018 (BFA) on April 10, President Xi Jinping described economic globalization as an irreversible trend, and noted that China would continue on its course of opening-up. On the following day, the People s Bank of China unveiled policy details as well as a timeline, that focus on expending market access and lifting ownership restrictions. they will create new opportunities for domestic and foreign players, adding market competition, and leading to new channels, products and services, with improved customer experience, and operations. The precise timing for the further opening-up of financial sector reflects that decision-makers have adequately grasped the risk of the domestic financial system. After experiencing strong supervision in 2017, the systematic risk in financial sector has been reduced to some extent and China s financial industry is maturing. This series of deeper financial measures to open-up are beneficial to both China and the global financial industry, as Expanding market access To allow foreign banks to set up branches and subsidiaries To further improve the stock market connectivity between the mainland and Hong Kong by increasing the daily quota threefold To allow eligible foreign investors to provide insurance agent and loss adjuster services To lift restrictions on business scope of foreign-invested insurance brokerage companies, treating foreign and domestic companies equally To substantially expand the business scope of foreign banks To remove restrictions on the business scope of jointly funded securities companies, treating domestic and foreign institutions equally To launch the Shanghai-London Stock Connect Expected timeline End of June 2018 Lifting ownership restrictions To remove the foreign ownership cap for banks and asset management companies, treating domestic and foreign players equally 1 May 2018 No longer require jointly funded securities companies to have at least one local securities company as a shareholder End of June 2018 End of June 2018 End of December 2018 End of December 2018 End of December 2018 To raise the foreign ownership cap to 51% for securities companies, fund managers, futures companies, and life insurers, and remove the cap in three years To encourage foreign ownership in trust, financial leasing, auto finance, currency brokerage and consumer finance Apply no cap on foreign ownership in financial asset investment companies and wealth management companies newly established by commercial banks Foreign insurance companies will no longer need to have a representative office in China for two consecutive years prior to establishing a subsidiary Expected timeline End of June 2018 End of June 2018 End of June 2018 End of December 2018 End of December 2018 End of December

3 It is another good time for foreign financial institutions to seize the country s growth opportunity By the end of 2017, total assets of China s financial services industry reached USD 32 Trillion and the AUM of china asset management service provider reached 20 Trillion. As China committed to further opening up, we expect foreign financial institutions (FIs) market share to expand in the future 2018 is the another good timing for foreign FIs to seize China s growth opportunity. Total asset of China s financial service sector, as of 2017 Total market value, as of 2017 Billion USD 35,000 29,295 30,000 25,000 20,000 15,000 10,000 5,000 0 Commercial Banks 2,577 Insurance Companies Securities Firms Trust Companies Billion USD 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, ,730 Equities 7,629 Bonds Total AUM of China s asset management service provider, as of 2017 Billion USD 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, ,545 Bank Wealth Management Products 4,038 Trust Asset Management 2,655 Sercuties Asset Management 2,114 Fund Asset Management 2,295 Insurance Asset Manamgement 1,785 1,708 Mutual Funds Private Funds The legendary Chinese strategist SunZi said, fully understand the competitive landscape and you will never be defeated. With the aim of bringing you the receipt of the winning formula, we prepared this overview of China s financial service sector. Key messages of the overview include: 1) The regulatory policy changes by the authorities are swift and firm, with full support of Chinese top leadership. 2) While Chinese FIs enjoyed significant growth over last decade, they are experiencing significant headwind in recent years. There are little differentiation in product & service offerings among Chinese FIs. Yet leading Chinese FIs have made good progress in developing nationwide channels and branch network. Regional banks have stronger customer loyalty. Most leading Chinese FIs have strong digital capabilities, especially in digital payment. 3) Most foreign FIs selected trusted and capable partner(s) to develop their business in China. We hope you find this overview insightful. Should you have any questions regarding China s financial service sector, please do feel free to contact us. 3

4 Table of Contents 01 The Financial Regulatory Landscape Competitive Landscape: Banking Competitive Landscape: Insurance Competitive Landscape: Fund Management Competitive Landscape: Securities Global FIs Anticipated Challenges in Developing China Market 27 4

5 The Financial 1 Regulatory Landscape

6 The Financial Regulatory Landscape China s segmented supervision model of financial service industry is moving towards an coordinated and collaborative approach, enabled by several policy changes in 2017 Financial Stability and Development Commission of the State Council The separation of supervision of China s financial services industry has created significant risks in certain subsectors, including insurance asset management, banking wealth management, shadow banking, etc. With the People s Banks of China introducing macro-prudential supervision and the recent establishment of the cross-sector Financial Stability and Development Commission proposed in National Financial Work Conference (NFWC), as well as other policy making meetings, such as the 19 th CPC Party Congress, Central Economic Work Conference, China s regulatory framework is moving to an coordinated and collaborative approach. Some recent policies with significant implications include: The merge of banking and insurance regulatory committee, and restriction on the shadow banking business of asset management institutions; Crack down on Internet micro loans; Restriction on Unit-Linked products by insurance company; Restriction on program trading; The People s Bank of China (PBoC, China s Central Bank) China Banking & Insurance Regulatory Commission China Securities Regulatory Commission Banking Insurance Securities Trust Consumer Finance Auto Finance Re-insurance Insurance broker/agent Mutual funds and subsidiaries Futures PE Funds Financial Leasing Insurance asset management QD(F)IE/II/LP Interbank bond market Interbank Loan Asset Exchange Shanghai Insurance Exchange Main Board/ GEM / NEEQ 6

7 Competitive 2 Landscape: Banking

8 Competitive Landscape: Banking China s banking sector, the main pillar of the country s financial services industry, is facing tremendous profit growth pressure in recent years RMB deposit and loan balance of banking financial institutions Billion USD 30,000 Loan Balance Deposit Balance 25,000 20,000 15,000 10,000 5,000 As one of the world s largest credit market, China s banking financial institutions RMB loan balance exceeded USD 18.5 Trillion, and RMB deposit balance reached USD 25.2 Trillion by the end of The Compounded Annual Growth Rates (CAGR) from 2012 to 2017 are 13.8% and 12.3% respectively Net profit of commercial banks and its year-on-year growth Billion USD 300 Net Profit Year-on-Year Growth ROE % 20% 15% 10% 5% The slow down in net profit growth stabilized since 2016, mainly due to improved risk management, increased fee-based income, and more diversified business models % Net interest margin and non-interest income as % 2.9% 23.73% 23.80% 22.65% 21.15% 21.47% 19.83% 2.7% 2.5% 2.75% 2.68% 2.70% 2.54% 2.3% 2.1% 2.22% 1.9% Net Interest Margin 2.10% 1.7% Non-Interest Income as % 1.5% % 20% 15% 10% 5% 0% The growth of fee-based income could not offset shrinking net interest margin (NIM) following the liberation of interest rates. Interest income still consists of 77.3% of banking sector s total income. Source: CBRC, Wind 8

9 Competitive Landscape: Banking Larger banks are focusing on optimization of credit portfolio, while regional banks are still actively looking for ways to expand their balance sheets Total assets by bank types Billion USD 35,000 30,000 25,000 20,000 15,000 Rural Banking Institutions City Commercial Bank Joint-stock Commercial Bank State-owned Commercial Bank City commercial banks and rural banking institutions (collectively referred to as regional banks in this context) enjoyed CAGR of 20.6% and 14.1% respectively in total assets between 2014 and ,000 5, Non-performing loan (NPL) ratio by bank types Commercial Bank 3.50% State-owned Commercial Bank 3.00% Joint-stock Commercial Bank City Commercial Bank 2.50% Rural Comercial Bank 2.00% 1.67% 1.74% 1.74% These is a continuous rise in nonperforming loan (NPL) ratios among regional banks while larger banks stabilized. 1.50% 1.00% 0.50% 0.95% 1.00% 1.25% 0.00% Loan Structure of Listed Banks Corporate Loan Retail Loan Discounted Bill 36.10% 38.14% 25.47% 28.09% Regional banks are still heavily relying on corporate customers. They have to bear higher costs, and are more effected by the supply side structural reform % 59.34% 70.44% 66.92% State-owned Bank Joint-stock Bank City Commercial Bank Rural Commercial Bank Source: CBRC, Wind 9

10 Competitive Landscape: Banking Wealth management products (WMPs) have been playing important roles in Chinese banks transformation. With tighter supervision, banks are under pressure to right size such business Bank s WMPs balance and expected return rates Unit: Billion USD Bank Wealth Management Product Balance 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, % 2, , Expected Annual Return Rate 6.00% 4, , , % 4.00% 3.95% % 4.00% 3.00% 2.00% 1.00% 0.00% Bank s wealth management products (WMPs) balance reached USD 4.54 Trillion in 2017, representing an CAGR of over 30% from 2013 to The balance in 2017 almost stabilized due to tighter regulation. The new regulations prohibited banks from providing implicit guarantee in principal and returns for most WMPs. Underlying assets of bank s WMPs Bonds, Money Market Instruments and Bank Deposits Non-standard debt Instruments Others 100% 8.25% 8.78% 90% 10.90% 8.99% 14.67% 80% 25.62% 20.91% 15.73% 17.49% 16.22% 70% 60% 50% 40% 30% 66.13% 70.31% 73.37% 73.52% 69.19% 20% 10% 0% Since the CBRC announced tightened up the nonstandardized investment policy in 2014, bank WMPs investing in non-standard debt instruments have decreased. We expect the increased needs for investment grade products to be fulfilled by all FS sectors. Data Source: CBRC, Wind 10

11 3 Competitive Landscape: Insurance

12 Competitive Landscape: Insurance The insurance sector in China is huge yet the market is far from developed, with the growth momentum expecting to continue Insurance density and penetration in China (Unit: USD) 400 Insurance Density Insurance Penetration % 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% Till the end of 2016, by insurance premium, China has become one of the largest insurance market in the world. That said, the insurance density and penetration in China were just USD 345 and 4.2% in 2016, much lower than its counterparts (4,000 USD and 8%) in developed markets. There is still huge opportunity in China for domestic and foreign insurer, especially when the country is ageing now. Insurance premium by product types Unit: Billion USD CAGR % % % % Life Insurance Health Insurance Personal Accident Insurance Property Insurance Source: CIRC, Wind Life Insurance: largest volume high growth rate (21.65% from 2013 to 2017) Health Insurance: market with high potential highest growth rate, but greatly slowed down in 2017 Property Insurance: 2 nd largest volume lowest growth rate 12

13 Competitive Landscape: Insurance Current business models of both life insurance and property insurance companies are not sustainable, there s urgent business transformational pressure Non-premium investments in separate account and premiums Unit: Billion USD 350 Non-premium investment Premium 300 The universal life insurance and unit-linked insurance plan products still focus on providing insurance coverage to policy holders in overseas market. But in China, these products mainly serve investment purpose Many life insurance companies have expanded business scale by selling universal life insurance and unit-linked products before The compound growth rate of non-premium investment funds from 2013 to 2016 is 57.2% The business model was considered to bring very high risk, and was strictly regulated by CIRC since As a result, the nonpremium investment funds were substantially reduced. Premium mix of property insurance companies Unit: Billion USD Others Health Insurance 160 Liability Insurance Enterprise Property Insurance 140 Agricultural Insurance Vehicle Insurance The premium mix of property insurance companies are stable in recent years. The proportion of vehicle insurance premium remains the largest, around 70%. As vehicle sales growth began to slow down, there is a downward trend of premium growth for vehicle insurance Source: CIRC, Wind 13

14 Competitive Landscape: Insurance Insurance market is highly concentrated in China, with top 10 life insurance and top 10 property insurance players premium accounting for over 70% and 85% of market share respectively Market share of life insurance premium by companies 28% Others 20% ChinaLife For life insurance premium, the top 10 companies accounted for 71.7% market share; the top 20 companies accounted for 86.6% market share; 3% Funde Sino Life 13% Pingan Ins. foreign companies only account for 6.9% market share 3% Hua Ins. 4% NCI 4% China Taiping 4% PICC 5% TaiKang Life 7% CPIC 9% Anbang Market share of property insurance premium by companies 33% 20% PICC Pingan Ins. For property insurance premium, the top 10 companies accounted for 85.1% market share; 1% Tian Ins. 2% Sinosure 15% Others the top 20 accounted for 92.3% market share; foreign companies only accounted for 1.96% market share 2% China Taiping 3% Sunshine Ins. 4% China Continent Ins. 4% China Ins. Source: CIRC, Wind 6% China Life 10% CPIC 14

15 Competitive Landscape: Insurance While insurance companies have invested more and more in high-yield assets such as unlisted equity and debt instruments, the return is trending downward in recent two years Asset allocation of insurance companies investment portfolio Unit: Billion USD 2,500 Bank Deposit Bond Stock and Funds Alternative , % 36.02% , % % 13.28% 12.80% 16.90% 15.18% 1, % 10.23% 43.42% 38.15% 34.39% 32.15% 35.11% % 20.12% 21.78% 18.55% 13.11% With the rapid growth of insurance premium, funds investable by insurance companies increased at a compound growth rate of 20%, reaching over USD 2.3 Trillion in In terms of the asset allocation of investment portfolio, it used to be mainly in bonds and bank deposits. In recent years, high-yield assets such as unlisted equity and debt instruments are growing in demand. ROI of insurance companies investment portfolio 8.00% 7.56% 7.50% 7.00% 6.30% 6.50% As insurance companies investment scope were expanded, as well as a buyout capital market, the return on investment (ROI) continued to grow in 2014 and % 5.50% 5.00% 5.04% 5.66% 5.77% But as macro economic slowdown and a lack of quality assets, ROI of insurance funds felt since % 4.00% 3.50% If the market remains sluggish, the ROI of insurance funds will continue to face pressure. 3.00% Source: CIRC, Wind 15

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17 Competitive 4 Landscape: Fund Management

18 Competitive Landscape: Fund Management Total asset under management (AuM) by mutual funds reached USD 1.7 Trillion in 2017, with most noticeable growth in money market funds Total AuM by mutual Funds Unit: Billion USD 2000 Open-end QDII Fund Money Market Fund 1800 Open-end Stock Fund Open-end Bond Fund Open-end Allocation Fund Close-end Fund AuM of mutual funds reached USD 1.7 Trillion, representing a CAGR of 36.9% from 2014 to The CAGR of AuM by stock fund is % from 2014 to The significant growth in MMF is driven by proliferation of FinTech and restriction of Banks wealth management products. Investors are increasingly drawn to lower risk allocation funds Market share (by AuM as of 2017) of Top 10 fund managers, and the rest There are 113 fund management companies, 45 of which are Sinoforeign joint ventures, 68 of which are domestic companies. Of these 113 companies, 12 are owned by securities companies & 2 by insurance companies. Others 50.10% Top 10 players are managing nearly 50% of the total assets. Top 20 players are managing 68% of the total assets. Source: Asset Management Association of China, Wind 18

19 Competitive Landscape: Fund Management Although private fund sector is relatively small, with 95% of funds managing RMB 2 billion or less, it is the fastest growing FS subsector Private funds AuM Unit: Billion USD 1800 Private securities funds Private equity funds Others AuM of private funds remained high growth since The CAGR from 2014 to 2017 is 95.1%, with total size reaching USD 1.7 Trillion. AuM of private securities funds declined significantly after regulatory restriction in 2016, and is around USD 265 billion by the end of AuM of private equity (PE) funds continued to increase rapidly and reached USD 910 billion The PE fund is a popular investment vehicle in China s financial market. Many institutions are developing related business to gain higher returns. Private securities Funds: private funds invested in public traded investment instruments Private equity funds: private funds invested in nonpublic traded investment instruments Number of Private Funds by AUM in China (2017) AuM of Hedge Funds in the US 5% Bridgewater 2.3% AQR Capital 1.5% Two Sigma 84% Others 1.3% Renaissance Technologies 1.3% DE Shaw & CO. 1% Millennium 1%Elliot 95% Below CNY 2B 1% Och-Ziff Capital 0.9% The Baupost 0.8% Winton Source: Asset Management Association of China, Wind Private fund sector is dominated by funds with asset size under RMB 2 billion in China, with the majority relying on banks, trusts & securities companies to market the products. As oppose to developed markets such as the US, there are no clear dominated players in China. 19

20 Competitive Landscape: Fund Management Private equity (PE) and venture capital (VC) funds are fueling the rapid growth of China s emerging industries Private equity (PE) and venture capital (VC) funds are fueling the rapid growth of China s emerging sectors such as internet, other IT, automobile, etc., while investment in financial services, such as crowdfunding has cooled down. Top 10 Industries Invested by PE and VC in 2017 Million USD 100,000 90,000 80,000 70,000 60,000 50,000 40,000 Chemical Electronic & Photoelectric Equipment Entertainment & Media Biotechnology/Health Care Manufactory Financial services Telecom & Value-added Service Automobile Other IT Internet 30,000 20,000 10, Source: Asset Management Association of China, Wind 20

21 Competitive Landscape: Fund Management Private funds are growing rapidly in recent years, but with tightened supervision and fierce competition, the sector is under the limelight Asset Management Association of China (AMAC) has adopted stricter requirements on information disclosure of private fund managers and their products, and began to impose penalty on inappropriate practice. With new investor suitability standards issued, many existing business models are deemed as unacceptable. Institutional investors such as insurance companies, are becoming more and more important LPs of PE funds. They will expect PE funds to provide more professional and comprehensive services to meet internal management responsibilities or regulatory requirements. Tightening regulatory supervision Changing investors behavior Improving investment capability Intensive market competition Despite a lack of derivatives in China, fund managers still need to develop quantitative investment capability. Fund managers need to actively explore and apply innovative investment approach to gain alpha returns. Fund managers need to provide customized investment management services to accommodate the diversified risk appetite of high net worth individual and institutional clients. The number of private fund managers has increased substantially. Many traditional FIs such as securities firms, trust companies are entering this market as fund managers. Institutions with strong investment management capability will dominate the market in coming years, which may lead to market concentration. 21

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23 5 Competitive Landscape: Securities

24 Competitive Landscape: Securities Chinese securities firms still heavily rely on brokerage & investment incomes, accordingly their financial results are highly correlated and fluctuated with the performance of stock market Income Mix of Securities Firms Unit: Billion USD Investment Advisory Income Financial Advisory Income Asset Management Income Income from Underwriting of Securities Interest Income Income from IPO service Investment Returns Commission Income , Source: CSRC, Wind Due to the fluctuation of stock markets, securities firms income experienced significant ups and downs in recent years. From the perspective of income mix, the income heavily relies on brokerage, investment and securities underwriting activities. Although all leading securities firms have been actively building their asset management business, income contribution from such business is still not significant. The income proportion of investment banking businesses, such as financial advisory and investment advisory business are still small. 24

25 Competitive Landscape: Securities While leading players dominate certain business segments, differentiation in product & service offerings is limited Asset Management Income of Leading Broker Dealers 3.79% 3.98% 4.08% 6.69% 3.77% GUOTAI JUAN GF Securities CITIC Securities Shenwan Hongyuan Huatai Securities Zhongtai Securities Orient Securities CMS Everbright Securities Huarong Securities Others 44.39% 7.76% 8.42% Many leading Chinese securities firms income mix looks very similar, with around 50% from brokerage business and the rest attributed to asset management, investment banking and advisory services; On the contrary, their global counterparts are often known for specialty in specific service line(s) such as investment banks, asset management, financial advisory or even securities services Income Mix of Guangfa Securities Income Mix of GUOTAI JUAN 47% 25% 50% 23% 2% Asset Management Brokerage Asset Management Investment Banking Brokerage Financial Advisory Investment Banking Others Financial Advisory 9% 13% 5% 8% 17% Others Source: CSRC, Wind 25

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27 Global FIs Anticipated 6 Challenges in Developing China Market

28 Global FIs Anticipated Challenges in Developing China Market Top challenges for foreign financial institutions to succeed in China market Obtaining license Financial licenses are still relatively scarce resources in China because of the long permission process and large number of candidate institutions in waiting list. Foreign FIs shall first evaluate whether to apply for a license or to acquire a local licensed FI. During the license application process, Foreign FIs will need to maintain an effective communication with regulators. Compliance to local regulations The regulations have been evolving rapidly as China market develops. When entering China market, foreign FIs need to consider how to quickly adapt to the local regulatory environment. Foreign FIs may consider bringing in innovative financial services from global market, which requires additional communications with regulatory authorities to review and approve. Business operation optimization Once established China business, Foreign FIs need to build up local operation team or outsource to such function to local service providers. The real challenge is how to integrate local operation with global management framework and process in order to better leverage global leading practices. For some specific operational areas, such as human resource, risk management, product management, customer and channel management, financial budgeting, IT system etc, it takes efforts to tailor global methodologies into the unique settings of China market. Products & services differentiation After rapid development in the recent decade, some major local FIs have established certain competitive advantages, accumulated a large number of customers, and extended branch network to wide geographic areas. It is essential for Foreign FIs to make strategic plans and road maps to leverage global capabilities to develop differentiated products and services so as to boost make share and revenue growth. 28

29 Global FIs Anticipated Challenges in Developing China Market PwC has wide range of capabilities which can be leveraged to provide various end-to-end support to foreign FIs covering everything from license application to business development Most leading FIs in China are PwC clients. This enables us with deep insights on market trends and dynamics. By providing end-to-end professional services from strategy to operation, PwC can help foreign FIs address challenges in China. Compliance to regulatory requirement and communication with regulators Strategy Target market analysis and strategic planning Operation Reorganization Design and optimization of operation processes Design and implementation of risk management mechanism and system Finance, accounting and assurance Financial advisory service and transaction support during M&A activities Financial Management Talent Management IT IT application Innovation & Development Use of Talent Organization setup Clients Demands Risk Monitoring Reshaping Cost Control Execution of Transaction Financing M&A Promoting Transaction Value Tax planning Risk Management Business Valuation Long term incentive mechanism design Forensic PwC has been providing professional support to various regulatory authorities in China for decades, including advising on the development of regulations. We can help foreign FIs to evaluate latest regulations, and facilitate your communications with regulators. 29

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31 Contact us James Chang China Financial Services Consulting Leader +86 (10) Harry Qin China Asset & Wealth Management Consulting Lead Partner +86 (10) Jason B Li China Financial Service Consulting Director +86 (10) jason.b.li@cn.pwc.com

32 This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors PricewaterhouseCoopers Management Consulting (Shanghai) Limited. All rights reserved. PwC refers to the China member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. CN C1