Webinar: A look at the Top-10 China Financial Industry Trends for - PowerPoint PPT Presentation

Webinar: A look at the Top-10 China Financial Industry Trends for 2014 January 23rd, 2014 - 17:00 – 17:45 Beijing Standard Time The webinar will start in a few minutes. 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

A look at the Top-10 China Financial Industry Trends for 2014 • Top 10 Capital Markets Trends in Brief • Top 10 Banking Trends in brief Prepared by Victor Fan, Fiona Zhao Moderated by Paul Robinson Presented by Zennon Kapron January 23rd, 2014

Top-10 China Capital Market Trends for 2014 1. Asset management industry moving towards “common” retail wealth management industry 2. Chinese domestic a-share market faces more uncertainty in 2014 3. Money market products will take more share from bank deposits and put pressure on banks 4. ChiNext market will continue to grow strongly 5. Emergence of new financial derivatives including stock options 6. Expansion of the Over the Counter Bulletin Board (OTCBB) 7. Restart of IPOs, challenges and opportunities 8. Deepening Internet Finance influence on the Chinese capital market 9. Increasing number of hedge funds entering China; development of local hedge fund industry – Shanghai Hongkou Hedge Fund Park 10. Ambiguous future of algorithmic trading in china 3 ¡

Top-10 China Capital Market Trends for 2014 Trend Number 1: Asset Management Industry Trend Number 4: ChiNext Market Trend Number 7: Restart of IPOs

Top-10 Capital Markets Trends – Asset Management • Asset management industry moving towards “common” retail wealth management industry • The combination of Internet finance and finance industry has changed the landscape of asset management industry • 2014 => ‘generally available’ wealth management products will keep being a competitive focus for AM firms • Drivers: 1. Large population and large total wealth management demand 2. Undeveloped wealth management products and services 3. Less knowledgeable investors 4. Immature financial system in China • Favorable products: low threshold, low risk, stable and relatively high return 5 ¡

Top-10 Capital Markets Trends – Asset Management AUM growth of Yu’ebao product => largest fund product in the market currently => Tianhong Asset Management now second largest AM in China. AUM of Yu'ebao managed by Tianhong Fund (CNYbn) 185.3 200 180 160 140 100 120 100 80 55.65 60 40 6.6 20 0 June 30, 2013 Sep 9, 2013 Nov 14, 2013 Dec 31, 2013 Source: Tianhong Asset Management, 2014 6 ¡

Top-10 China Capital Market Trends for 2014 Trend Number 1: Asset Management Industry Trend Number 4: ChiNext Market Trend Number 7: Restart of IPOs

Top-10 Capital Markets Trends – ChiNext Market • ChiNext market or “growth enterprise board” in Shenzhen Stock Exchange preforming much better than SSE in 2014. Growth index ended 2014 at 1304.44, +82.73% • Reasons for ChiNext growth: 1. Listing firms like the typically higher P/E ratios which mean higher valuations than SSE 2. Threshold for getting listed in ChiNext lower than the SSE and compared to the OTC market, liquidity and financing is much better 3. More than 50% of the first batch pre-IPO firms have applied to list on ChiNext market 8 ¡

Top-10 Capital Markets Trends – ChiNext Market 2014 Stock Market Returns 100.00% 82.73% 80.00% 60.00% 40.00% 20.00% -6.79% -10.91% 0.00% -20.00% Shanghai A-share Shenzhen A-share ChiNext Source: Shanghai Stock Exchange, Shenzhen Stock Exchange, 2014 9 ¡

Top-10 Capital Markets Trends – Growth Enterprise Board • The first batch of 50 new IPO firms will be listed in January 2014. Among which 6 firms will be on the SSE, 20 on the the SME board, and the remaining 24 on ChiNext Number of the First Batch IPO Firms In A- share Market In January 2014 6 24 20 Main-board SME-board ChiNext Source: Shanghai Stock Exchange, Shenzhen Stock Exchange, 2014 10 ¡

Top-10 China Capital Market Trends for 2014 Trend Number 1: Asset Management Industry Trend Number 4: ChiNext Market Trend Number 7: Restart of IPOs

Top-10 Capital Markets Trends – Restart of IPOs IPO facts • A-share market struggling; worry that IPOs will further strain liquidity • The first batch of 50 firms will be listed on main-board, SME board and Growth Enterprise Board • Estimates are that IPO-based financing could reach RMB250B • New approval mechanism called IPO registration mechanism will replace the previously complicated authorization pre-IPO process Impact of new IPOs 1. A-share market will drop as new IPOs come on 2. Newly listed companies will have to contend with lower valuations 3. Examination of firm quality for registration => markets / investors One potential solution is the implementation of a delisting mechanism 12 ¡

Top-10 China Banking Industry Trends for 2014 1. Emergence of Private Banks 2. Deposit Insurance System 3. Bankruptcy Regulations 4. Expansion of Credit Asset Securitization 5. Issuance of Bank’s First Preferred Stock 6. Negotiable Certificate of Deposit (NCD) 7. New Business Model: The Emergence of Direct Banks 8. Near Field Communication (NFC) Mobile Payments 9. Micro-chat Banks 10. Banks’ Opportunities Arising from Free Trade Zone (FTZ): Cross -boarder RMB Business Development 11. Challenge from Money Funds such as Yue’bao 12. Banks shifting to business such as Financing Products

Top-10 China Banking Trends for 2014 Trend Number 1: Emergence of Private Banks Trend Number 2: Deposit Insurance System Trend Number 3: Bankruptcy Regulations

Emergence of Private Banks – Concept Concept • There is no agreed definition of “private bank” in China • Private bank definition from Hexun: – private banks are owned and run by non-governmental organisations. Modern financial enterprise with a singular owner. • Non-governmental owned • Direction from and risk on non-state investors

Emergence of Private Banks – Background • Commercial banks play a vital role in the economy to enable finance. Historically used to government to guide the economy • Although non-government ownership in banks has increased, it is still very low in most banks The Share of Non-governmental Captial (end-2013) 90% 90% 80% 54% 70% 60% 41% 50% 40% 30% 20% 5.30% 10% 0% Big Five Banks Nationwide 145 City Rural Joint-Equity Commercial Financial Commercial Banks Institutions Banks PBOC: China Bank Regulatory Commission

Emergence of Private Banks – Background • Non-government capital hasn’t changed governance -> capital typically flows into infrastructure projects or SOEs, rather than private enterprises (50% of China’s economy) • SMEs face a serious capital shortage => turn to shadow banking • Private banks will hopefully fill the gaps and bring some stability to shadow banking / SME lending • July 5 th , 2013 – General Office of the State Council published “Guiding Opinions” which set guidelines for private banks • Suning Bank pre-approved on September 12 th -> invested by Suning Commerce; first A share company to invest in a private bank • End 2013: roughly 67 private banks with approved names by State Administration for Industry and Commerce including 30+ listed firms • On January 6 th , 2014, Shang Fulin, China Banking Regulatory Commission (CBRC) chairman started pilot of private banks

Emergence of Private Banks – Establishment criteria “Non-confirmed” Details Criteria Excellent corporate finance, business performance; Parent company adequate capital; strong corporate governance and qualification risk control Limited licenses Encouraged to specialized in particular field Prudent regulatory Qualified indicators such as Capital Adequacy Ratio standards based on size; changing over time Clear risk management procedures including Risk handling system bankruptcy procedures

Top-10 China Banking Trends for 2014 Trend Number 1: The Emergence of Private Banks Trend Number 2: The Deposit Insurance System Trend Number 3: Bankruptcy Regulations

Deposit Insurance System – Overview • A key part of mature economies to to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay; key component of a financial system safety net that promotes financial stability • Accelerated interest rate marketization -> deposit Insurance system is the precondition to push the liberated interest rate • Accelerated liberated interest rate -> increasing competition among banks => banks need deposit insurance to guarantee savers’ benefits • Private banks will also need deposit insurance to help develop their business

The Deposit Insurance System–Timeline …the upcoming of deposit insurance system 2007 – deposit Nov 2013 – 3rd insurance system Plenum of the was on the 18th Communist agenda during Party of China the 3rd National (CPC) establishes Financial Work idea of deposit Conference insurance system Jan 2014—PBOC states that China is ready to start deposit insurance system March 2011 – The Twelfth Five-Year Plan for National Economic and Social Development of the People’s Republic of China indicates acceleration of establishment of deposit insurance system

Top-10 China Banking Trends for 2014 Trend Number 1: The Emergence of Private Banks Trend Number 2: The Deposit Insurance System Trend Number 3: Bankruptcy Regulations