Webinar: China 2016 Financial Industry Trends and Outlook January 13th, :00 17:45 Beijing Standard Time

Transcription

1 Webinar: China 2016 Financial Industry Trends and Outlook January 13th, :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 or send us an research@kapronasia.com.

2 2016 China Financial Industry Trends and Outlook Moderated by Paul Robinson Presented by Zennon Kapron January 13 th, 2016

3 China s Economics are not great Manufacturing PMI decreased throughout 2015 GDP growth still slowing China GDP Growth 16% 14% 12% 10% 8% 6% 4% 2% 0%

4 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

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

6 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

7 So where does that leave us?

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9 Government opening the market Evolution of China s Cross-border investment programs Mutual Recognition Shenzhen- HK Stock Connect Mutual Recognition Equities Funds SH-HK Stock Connect SH-HK Stock Connect SH-HK Stock Connect Equities RQFII RQFII RQFII RQFII Equities, bonds, funds QDII QDII QDII QDII QDII Equities, bonds QFII QFII QFII QFII QFII QFII Equities, bonds, funds

10 China s One Belt, One Road strategy and Banks The New Development Bank (NDB) The Silk Road Fund Asia Infrastructure Investment Bank (AIIB) Export-Import Bank of China China s Policy banks push further into One Belt, One Road initiative 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. 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 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. 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 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 financial regulation coordination Increase cross-border cooperation on credit rating and investigation Encourage commercial equity investment and private fund investment 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

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

12 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.

13 Some trends / sub-themes for 2016

14 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

15 Direct Banking slow start Baidu has partnered with CITIC and will launch their bank in 2016 Alibaba has launched Mybank through its Ant Finance subsidiary WeBank was setup by Tencent in Q 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.

16 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 indirectly 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. Search, advertising Better search, financial product distribution Mutual funds based on search information Gaming, communication Banking, taxis, movie tickets Cross-product financial product distribution E-commerce Credit scoring Lending products based on shopping history

17 Digital Payments The place to be Digital payment consumption trend Digital: % of total consumption 2020e 27% total consumption Source: EuroMonitor, iresearch, Kapronasia

18 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 3.9% 5.1% 10.6% % Alipay Lakala UMP TenPay China Mobile SmartPay Qiandai China Telecom Others 5.8% 6.7% 11.2% 19.4% % Alipay TenPay Chinapay 99Bill Chinapnr Yeepay IPS Others 2015 Q Q1 0.6% 3.0% 11.3% 78.5% Alipay Lakala UMP TenPay Bestpay Lianlianpay Ping An Pay 99Bill Others Yeepay JD wallet 4.9% 6.8% 10.7% 19.9% 48.9% Alipay Tenpay chinapay 99bill chinapnr YeePay IPS Jdpay Other Source: iresearch

19 Digital Payments taking more of traditional payments Digital players increasingly moving to offline acceptance especially targeting longtail 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 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 iphone in use at a Shanghai restaurant for unsecured WeChat and Alipay acceptance

20 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?

21 China Fintech incredible growth

22 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?

23 P2P Platforms have reached scale 3,000 2,500 2,000 1,500 1, Number of P2P Online Platform and Growth Rate % % 196% 253% % 201% % 0% % 400% 350% 300% 250% 200% 150% 100% 50% 0% Number of P2P Online Platform Growth Rate 25% 20% 15% 10% 5% Average interest rate, % 19.3% 17.9% 21.3% 13.3% 0%

24 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

25 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

26 Some predictions for 2016

27 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

28 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?

29 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

30 Webinar: 2016 China Financial Industry Outlook and Trends Thank You For more information about the topics covered in this webinar or Kapronasia, please visit or send us an