Review and Outlook of Chinese Banks in Hong Kong

Review and Outlook of Chinese Banks in Hong Kong KPMG China December 2017 kpmg.com/cn

01 Review and Outlook of Chinese Banks in Hong Kong 2017 is the 20th anniversary since Hong Kong returned to mainland China. In these 20 years, Hong Kong has experienced rapid development and gained mutual benefits with mainland China. Chinese banks in the city have also experienced healthy growth in the past 20 years, benefitting from the closer economic and financial relations between Hong Kong and mainland China. As one of the major global international financial centres, the economic growth of Hong Kong s banking industry has been higher than its GDP growth since 1997. In KPMG's publication, Review and Outlook of Chinese Banks in Hong Kong, the performance of Chinese banks in Hong Kong over the past 20 years and their future are discussed in two parts. The first part of the publication analyses data disclosures of Chinese licensed banks, restricted licence banks and deposit-taking companies in Hong Kong ("Chinese Financial Institutions in Hong Kong") in the annual reports from 1997 to 2016 issued by the Hong Kong Monetary Authority ( HKMA ), as well as other areas of development of Chinese Financial Institutions in Hong Kong over the past 20 years. The second part of this report features summaries from interviews with 12 bankers, and their forecasted prospects of five key areas: RMB internationalisation, the Belt and Road and Greater Bay Area Initiatives, fintech development in Hong Kong, the opportunities and challenges of setting up corporate treasury centres in Hong Kong, and the development of Chinese banks wealth management business in Hong Kong. We sincerely thank the following bankers for their contributions to this publication (in alphabetical order by name): - Chen Linlong, Chief Executive Officer, China Everbright Bank Co., Ltd., Hong Kong Branch - Du Yunfei, President, China Minsheng Banking Corp., Ltd. Hong Kong Branch - Gao Ming, Chairman and Executive Director, Industrial and Commercial Bank of China (Asia) Limited - Jiang Xianzhou, Vice Chairman and Chief Executive Officer, China Construction Bank (Asia) Corporation Limited - Ma Zhiwen, President, Bank of Shanghai (Hong Kong) Limited - Sun Long, Chief Executive Officer, Agricultural Bank of China Limited Hong Kong Branch - Wang Feng, Chief Executive, Bank of Communications Co., Ltd Hong Kong Branch - Xia Weichun, Chief Executive, Industrial Bank Co., Ltd Hong Kong Branch - Yue Yi, Vice Chairman, Executive Director and Chief Executive, Bank of China (Hong Kong) Limited - Zhang Li, Chief Executive Officer, Shanghai Pudong Development Bank Co., Ltd Hong Kong Branch - Zhang Xiaowei, President and Chief Executive Officer, China CITIC Bank International Limited - Zhu Qi, Chief Executive Officer, Wing Lung Bank Limited

Review and Outlook of Chinese Banks in Hong Kong 02 Overview of Chinese Banks in Hong Kong over the past 20 years Hong Kong, as one of the most important channels for China s foreign commercial trade, has transformed gradually to an economy that is led by commercial and financial services. Hong Kong s GDP in 2016 reached HKD 2,500 billion, an increase of 81 percent compared to 1997. As a major international financial centre, the Hong Kong financial services sector s growth rate has been higher than the GDP rate, and has become the most important base for multinational financial institutions since its return to mainland China in 1997. According to data from the annual reports of the HKMA from 1997 to 2016, the development of the Chinese banking industry in Hong Kong over the past 20 years has the following features: Total assets have increased dramatically, and the number of organisations has expanded gradually. Since 1997, the size of the Chinese Financial Institutions in Hong Kong s total assets has expanded significantly. According to information from the HKMA, the total assets of Chinese Financial Institutions in Hong Kong was HKD 957 billion in 1997, while this figure reached HKD 7,260 billion in 2016. The size of total assets has expanded by 660% over the past 20 years, while the compound annual growth rate was 11%. As for the industry s average, the average total assets reached HKD 279.2 billion in 2016, an increase of 920% over the past 20 years, while the compound annual growth rate was 13% (1997: HKD 27.3 billion). In addition, over the past 10 years, the number and size of the Chinese Financial Institutions in Hong Kong doubled, mainly due to the promotion of multiple Hong Kong-China cooperation policies and the globalisation of the financial services sector in mainland China. In these 10 years, a number of Chinese banks, including Bank of Shanghai, Industrial Bank, China Minsheng Bank, China Everbright Bank, Shanghai Pudong Development Bank and China Development Bank, entered the Hong Kong market to set up local branches through acquisition or investment. As a result, the number of Chinese Financial Institutions in Hong Kong increased from 16 in 2007 to 26 in 2016 (an increase of 170%).

03 Review and Outlook of Chinese Banks in Hong Kong An increasing industry impact. Since 1997, the Chinese Financial Institutions in Hong Kong have become more significant in the local market, which mainly contributed to the increased segmentation in total assets and financing facilities in Hong Kong. For example, the total assets of the Chinese Financial Institutions in Hong Kong in the local market increased from 11% in 1997 to 35% in 2016, and the borrowing and savings facilities of the Chinese Financial Institutions in Hong Kong in the local market increased from 11% and 22%, respectively, in 1997 to 39% and 34%, respectively, in 2016. In addition, over the past 10 years, the impact of the China Financial Institutions in Hong Kong in the local market grew steadily. The total assets and loan balance of the Chinese Financial Institutions in Hong Kong increased from HKD 571 billion in 2006 to HKD 3,132 billion in 2016, representing a compound annual growth rate of 18%. By the end of 2016, the average assets and financial facilities of the Chinese Financial Institutions in Hong Kong exceeded the Hong Kong local market s average by a third, which indicates that the Chinese Financial Institutions in Hong Kong are becoming more significant in Hong Kong s local market. Changes to the asset structure of Chinese Financial Institutions in Hong Kong Asset proportion of Chinese Financial Institutions in Hong Kong Loan proportion of Chinese Financial Institutions in Hong Kong Deposit proportion of Chinese Financial Institutions in Hong Kong Total assets of Chinese banks Total loans of Chinese banks Total deposits of Chinese banks Total assets of other banks Total loans of other banks Total deposits of other banks Data source: 1997 to 2016 annual reports issued by HKMA, KPMG China research

Review and Outlook of Chinese Banks in Hong Kong 04 The globalisation of loan portfolios. Since 1997, Hong Kong s offshore RMB market has progressed steadily, and the size of the Chinese Financial Institutions in Hong Kong has continued to grow. The credit balance of the Chinese Financial Institutions in Hong Kong increased by more than six times, from HKD 436 billion in 1997 to HKD 3,132 billion in 2016. Meanwhile, we notice that the Chinese Financial Institutions in Hong Kong s loan portfolios are becoming more global. In 1997, the loan portfolios of the Chinese Financial Institutions in Hong Kong were mainly constrained within the Hong Kong market (91%). However, the loan investment decreased significantly to 66% in 2016. Together with the advancement of RMB internationalisation and the establishment of Hong Kong as an offshore RMB clearing centre, the correlation between the Chinese Financial Institutions in Hong Kong and the financial institutions in mainland China will be strengthened. The trend of globalisation of the loan portfolio will become more distinct. Changes in loan portfolios of Chinese Financial Institutions in Hong Kong In HKD million Loans to customers inside Hong Kong Loans to customers outside Hong Kong Proportion of loans to customers inside Hong Kong Proportion of loans to customers outside Hong Kong Data source: 1997 to 2016 annual reports issued by the HKMA; KPMG China research

05 Review and Outlook of Chinese Banks in Hong Kong Future prospects of Chinese banks in Hong Kong Prospect 1 The impact of RMB internationalisation on the development and future of Chinese banks in Hong Kong Gao Ming Chairman and Executive Director Industrial and Commercial Bank of China (Asia) Limited RMB internationalisation is an important strategic priority for the Central Government and the People's Bank of China. With the largest offshore RMB market, Hong Kong's financial industry is undoubtedly the first and biggest beneficiary of RMB internationalisation. In the future, the trend of RMB internationalisation will not change, and will continue to follow the idea of "trade first", which lays a good foundation for the increasing circulation of RMB in the capital market. Along with the development of RMB internationalisation, the RMB is getting stronger as a means of payment for international trade. Jiang Xianzhou Vice Chairman and Chief Executive Officer China Construction Bank (Asia) Corporation Limited Chinese banks in Hong Kong may have to consider how to deal with the higher requirements from customers on the diversity of banking products. Yue Yi Vice Chairman, Executive Director and Chief Executive Bank of China (Hong Kong) Limited For the next 12 months, the main direction of RMB business development expected by various Chinese banks in Hong Kong is in RMB cross-border financing that is, RMB business will not rigidly adhere to traditional loan, bond and exchange business. With the advancement of RMB internationalisation, the proportion of individuals and enterprises not from mainland China in the RMB fund pool in Hong Kong has gradually increased, and the proportion of foreign investors among offshore RMB bond buyers is also increasing. Chinese banks in Hong Kong should actively expand and participate in offshore RMB business between nonresidents to seize the opportunities emerging from the opening of the capital market in mainland China. They should also actively participate in major projects (such as the Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect and Bond Connect programmes) to capitalise on the business opportunities in this area. In addition, bankers also recommend that the HKMA should consider having more discussions with banking industry regulators in mainland China as well as the People's Bank of China on how to further open up and integrate RMB markets between Hong Kong and mainland China. If regulators in both jurisdictions allow Chinese banks in Hong Kong to enter the inter-bank market in China and borrow and lend RMB in certain amounts, it would be beneficial as it partially solves the problem of insufficient market depth due to a limited pool of offshore RMB funds. In response to the fluctuation of the RMB exchange rate, Chinese banks in Hong Kong may have to actively promote the diversification of RMB business.

Review and Outlook of Chinese Banks in Hong Kong 06 Prospect 2 The Belt and Road and Guangdong-Hong Kong-Macau Greater Bay Area initiatives Sun Long Chief Executive Officer Agricultural Bank of China Limited Hong Kong Branch The Belt and Road initiative brings enormous financing requirements. Funds need to be raised from international financial centres such as Hong Kong, which creates a large number of business opportunities for the banking industry in Hong Kong. As a key foreign economic strategy for mainland China, the Belt and Road initiative aims at linking the Silk Road Economic Belt to the Maritime Silk Road, and actively developing economic partnerships with countries along the routes. Hong Kong is an important node for the Belt and Road initiative, as well as one of the three pillars in the Greater Bay Area. Chinese banks in Hong Kong should seek to better serve the Belt and Road and Greater Bay Area initiatives. These banks have insight into mainland enterprises, and could take advantage of the well-established resources from their parent banks to achieve steady growth. In addition, Chinese banks in Hong Kong may have to actively expand to international markets and secure cross-regional financial cooperation projects. At the same time, they have to constantly innovate their products and services, and provide more financing services to meet customer needs. Wang Feng Chief Executive Bank of Communications Co., Ltd Hong Kong Branch To better serve the Belt and Road and Guangdong-Hong Kong- Macau Greater Bay Area initiatives, there are three key areas to focus on. The first is to take advantage of the entire group and deepen crossborder, cross-industry and crossmarket cooperation. The second is to align with clients' strategies and to support infrastructure construction along the Belt and Road. The third is to provide innovative products to meet diversified customer needs.

07 Review and Outlook of Chinese Banks in Hong Kong Prospect 3 Hong Kong fintech developments and opportunities Zhang Xiaowei President and Chief Executive Officer China CITIC Bank International Limited The Hong Kong government needs to carefully consider how to balance the relationship between the benefits and the overall risks of fintech to the banking industry. Du Yunfei President China Minsheng Banking Corp., Ltd. Hong Kong Branch The popularisation of fintech should not come from regulatory provisions or requirements, but from the increasing daily needs of people as we progress into a new era. Due to the great spillover of investment in fintech, Hong Kong financial institutions which have always been well-known in the traditional financial field have been more cautious. The development and construction of fintech in Hong Kong has been encouraging, but there is still room for development. Firstly, effective system upgrades and process optimisation are needed, as well as the improvement of infrastructure and the regulatory environment. In terms of user experience, real-time electronic payment platforms and the new concept of smart banks are undoubtedly the most critical needs of fintech at this stage. Secondly, the training of fintech talent in Hong Kong needs to continue to develop. At present, fintech talent in Hong Kong, especially those who know both finance and technology, is scarce, and the number of professionals who have practical development experience in the application of fintech is scarcer. The issue of training and retaining fintech talent needs to be considered by the Hong Kong government from a policy level, as well as by the banks. The development of fintech in Hong Kong also needs the support of government policies. For example, the government can refer to the mainland and overseas market experience and provide support for fintech applications such as electronic Know Your Customer and Application Programming Interface. In addition, Chinese bankers in Hong Kong suggest that the regulators should further liberalise constraints of cross-border banking groups insourcing and outsourcing management. This will enable Hong Kong banks to use more convenient and unified management information systems and fintech used by their parent banks in the mainland. Zhu Qi Chief Executive Officer Wing Lung Bank Limited In the future, Chinese banks in Hong Kong may have to strengthen their communication with the mainland Chinese technology enterprises. They can leverage the advantage of those technology enterprises and talent to support the growth of Chinese banks in Hong Kong.

Review and Outlook of Chinese Banks in Hong Kong 08 Prospect 4 Opportunities for Hong Kong companies setting up corporate treasury centres Xia Weichun Chief Executive Industrial Bank Co., Ltd Hong Kong Branch The experience of Chinese banks in Hong Kong in providing services to mainland customers is a great advantage for them in the market. Only by truly understanding customers, and their needs and pains, can we put ourselves in our clients' shoes to work out feasible solutions to meet their demands. Chen Linlong Chief Executive Officer China Everbright Bank Co., Ltd., Hong Kong Branch In the future, Hong Kong will not only be an important location for mainland enterprises to manage their global investment, but also a core hub for them to manage and operate overseas business, especially in the Asia Pacific region. The well-developed capital market in Hong Kong gives a secure channel for mainland companies to invest and allocate assets globally. Over the last several years, the HKMA has actively communicated with local governments and authorities in mainland China to encourage companies to set up more corporate treasury centres in Hong Kong, and assist the mainland companies with understanding the relevant policies. Corporate treasury centres need to arrange cross-border financial activities, including cash management, interest risk management, fundraising and investment management. Firstly, corporate treasury centres control all bank transactions, collections and payments businesses within the group under its jurisdiction. It would be a great advantage if corporate treasury centres could provide tailored cross-border cash pooling solutions for mainland companies. Secondly, corporate treasury centres need to focus on interest rate risks and exchange risks within their jurisdiction, and would therefore have greater demands for certain derivatives. Chinese bankers in Hong Kong note the strict local regulatory requirements in terms of account opening, client risk assessments, antimoney laundering, etc. Although such supervision does not constitute a substantial barrier for the corporate treasury centres in Hong Kong set up by large-scale Central Government or state-owned enterprises, this has caused some difficulties for some small and medium-sized mainland companies or privately-owned enterprises looking to extend their footprint in Hong Kong. There is appetite from mainland companies to set up corporate treasury centres in Hong Kong. Together with ongoing cross-border regulatory cooperation, this will help provide a robust environment for the steady development of Hong Kong's financial industry.

09 Review and Outlook of Chinese Banks in Hong Kong Prospect 5 Greater wealth management opportunities for Chinese banks in Hong Kong Zhang Li Chief Executive Officer Shanghai Pudong Development Bank Co., Ltd Hong Kong Branch The reason Hong Kong is a leading wealth management centre lies in its unique external environment, which is mainly manifested in three aspects: the legal, social and economic environments. Hong Kong, with its unique legal, social and economic environment, provides high-net-worth individuals especially those in mainland China with a stable platform. The Chinese banks in Hong Kong should seek to develop their wealth management practices in the Asia Pacific region. This requires attention in three areas: Firstly, the banks may need to focus on customer resources in mainland China to achieve precision marketing. Secondly, promotion of the application of artificial intelligence (AI) and technology in financial services is needed. AI can contribute to the assessment of customer risk tolerance, optimisation of investment procedures, and the automation of investment advisory to improve the efficiency of wealth management services. Using technology and big data in financial services can help identify and target more accurate customer segments and channels for popular wealth management products. Thirdly, the banks may also need to increase their investment in professional talent. Ma Zhiwen President Bank of Shanghai (Hong Kong) Limited Investing in talent in wealth management is key for the Chinese banks in Hong Kong to meet the growing wealth management needs from both Hong Kong and mainland China. With Singapore priding itself as a mature wealth management centre in the Asia Pacific region, Hong Kong should define its current position and future directions to explore further improvements and improve its competitiveness: 1. For compliance, Hong Kong could promote simplified procedures for account opening and product sales to more mature, experienced and wealthy customers, in order to attract more investments and customers from the neighbouring jurisdictions. 2. For tax, the Hong Kong government could explore the possibility of reaching double tax agreements and treaties with more countries and/ or regions. Hong Kong should proactively expand its services to the Southeast Asian market and develop with Singapore jointly to solidify itself as a leading wealth management centre.

Review and Outlook of Chinese Banks in Hong Kong 10 Contact us Simon Gleave, Regional Head : +86 (10) 8508 7007 : simon.gleave@kpmg.com Edwina Li, Head of Assurance : +86 (21) 2212 3806 : edwina.li@kpmg.com Simon Topping Regulatory Advisory : +852 2826 7283 : simon.topping@kpmg.com Arthur Wang China Head of Banking : +86 (10) 8508 7104 : arthur.wang@kpmg.com Lewis Lu China Head of Tax : +86 (21) 2212 3421 : lewis.lu@kpmg.com Paul McSheaffrey, Head of Banking & Capital Markets, Hong Kong : +852 2978 8236 : paul.mcsheaffrey@kpmg.com Thomas Chan : +86 (10) 8508 7014 : thomas.chan@kpmg.com Kevin Liu IT Advisory : +86 (21) 2212 3980 : kevin.liu@kpmg.com Rita Wong : +852 2978 8172 : rita.wong@kpmg.com Sam Shi : +86 (10) 8508 7112 : sam.shi@kpmg.com James Chen : +86 (21) 2212 2424 : james.chen@kpmg.com Terence Fong : +852 2978 8953 : terence.fong@kpmg.com Walkman Lee : +86 (10) 8508 7043 : walkman.lee@kpmg.com Kenny Shi : +86 (21) 2212 2261 : kenny.shi@kpmg.com Joan Wong Transaction Services : +852 2140 2862 : joan.wong@kpmg.com Ellen Jin : +86 (10) 8508 7012 : ellen.jin@kpmg.com Penny Li : +86 (21) 2212 2285 : penny.li@kpmg.com Tiffany Wong Restructuring Services : +852 2140 2367 : tiffany.wong@kpmg.com Louis Ng Transaction Services : +86 (10) 8508 7096 : louis.ng@kpmg.com Stan He Restructuring Services : +86 (21) 2212 3540 : stan.he@kpmg.com Rani Kamaruddin, AML and Sanctions Regulatory Compliance : +852 2140 2815 : rani.kamaruddin@kpmg.com Tracy Zhang Tax : +86 (10) 8508 7509 : tracy.h.zhang@kpmg.com Cathy Zhou, AML and Sanctions Regulatory Compliance : +86 (21) 2212 3289 : c.y.zhou@kpmg.com Stanley Ho Tax : +852 2826 7296 : stanley.ho@kpmg.com Jin Cao Financial Risk Management : +86 (755) 2547 3428 : jin.cao@kpmg.com Ivan Li : +86 (755) 2547 1218 : ivan.li@kpmg.com Michael Monteforte Financial Risk Management : +852 2847 5012 : michael.monteforte@kpmg.com

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