Banking and finance in China: The outlook for 2015

Transcription

A PwC survey of 43 banks and financial institutions
January 2015
Banking and
finance in China:
The outlook
for 2015
www.pwccn.com
Foreword
Welcome to PwC’s 2015 survey of
banking and finance in China.
In the past year China’s financial
environment has experienced
profound shifts, with the economy
maturing to a pattern of more
moderate growth and policy reforms
curtailing the conditions that
underpinned an era of record bank
profits. Amplifying the effects of
these changes, competitors to
traditional bank finance have
emerged, particularly in the form of
internet banking and web-based
financial products.
Over the long-term, these are positive
developments. Reform and
innovation in China’s financial system
will help lay the groundwork for
balanced and sustained economic
growth. Yet navigating the shifting
landscape of the interim period will
prove challenging even for the most
nimble of institutions.
Matthew
Phillips
China & Hong Kong
Financial Services
Leader
To help provide a nuanced roadmap
of current and future conditions in
banking and finance in China, we
interviewed 36 CEOs as well as other
managers at top financial institutions
in the final quarter of 2014.
Complementing this effort, PwC
partners have pooled their expertise
and decades of experience to provide
insights into where the sector is
headed, as well as prescriptive
strategies for preparing for change.
Readers who have followed our past
annual banking surveys will notice
that the scope of this year’s report has
expanded. Whereas previous editions
focused on foreign banks, our 2015
report also covers domestic banks and
a wide range of other financial
institutions, including trust, P2P,
internet finance and auto financing
companies. We believe this expanded
scope will help readers put their
individual industry experience into
the context of China’s increasingly
diverse and complex financial sector.
Our survey consisted of open-ended
questions tailored to each of the
financial subsectors we interviewed
focusing on the key trends they are
facing at the outset of 2015. We
encouraged respondents to provide
qualitative explanations of the
changes affecting their businesses
and to supply suggestions of what the
coming year may hold. In order to
ensure that participants could speak
candidly, all respondents were given
anonymity in the report.
PwC would like to extend its sincere
thanks to the CEOs and other
executives for their time and in-depth
responses to our survey.
We hope that you find the results of
this year’s survey to be enlightening
and informative.
Raymond Yung
Jimmy Leung
William Yung
Richard Zhu
China Financial
Services Leader
China Banking and
Capital Markets
Leader
China Financial
Services Partner
China Financial
Services Partner
Banking and Finance in China: The Outlook for 2015 | PwC
1
Table of Contents
Executive summary
.4
Overview 5
A new policy paradigm
5
Competition from innovation
6
Rising risk profiles
6
Chapter 1 – Interest rate liberalisation
7
Background
7
Survey findings
9
Forecast
Chapter 2 – Deteriorating credit quality
10
11
Background
11
Survey findings
19
Forecast
20
Chapter 3 – Internationalisation of the RMB
21
Background
21
Survey findings
25
Forecast 26
Chapter 4 – Wealth management products and trusts
27
Background
27
Trends in wealth management products
29
Trends in trusts
33
Key trends in securities 39
Survey findings
35
Forecast
36
Chapter 5 – New market entrants
Background
37
Internet banking
38
Web-based wealth management 38
P2P lending 39
Third-party digital payment systems
40
Auto finance companies
41
Survey findings
42
Forecast
43
Chapter 6 – Red flags in 2015
44
Survey findings
44
Analysis
45
Chapter 7 – Conclusion and recommendations 46
Summary of key survey findings
46
Interest rate liberalisation
46
Deteriorating credit conditions
47
Internationalisation of the RMB
47
WMPs and trusts
48
New market entrants
48
Summary of key policy themes for 2015
49
Continued support for A-share markets
49
RMB internationalisation to sustain momentum
49
Local government financing shake-up
50
Recommendations for regulators
51
Recommendations for banks
53
Appendices 37
59
3
Executive
summary
4
PwC | Banking and Finance in China: The Outlook for 2015
Overview
A new policy paradigm
2014 was a turbulent year for China’s
financial system, with the Xi Jinping
administration juggling the separate
and often contradictory goals of
advancing reforms and softening the
effects of a continued economic
slowdown. On the reform side of the
equation, the government’s policy
agenda included greater
internationalisation of the RMB, more
stringent regulation of banks’
exposure to non-standard assets,
gradual progress toward interest rate
liberalisation, an overhaul of local
government finance and pilot
programmes allowing greater private
sector participation in state-owned
enterprises. At the same time, a
continued trend of slowing economic
growth compelled the central bank to
introduce a series of targeted easing
measures, each of which were
carefully calculated to provide a
modicum of relief without reversing
the government’s overall commitment
to rebalancing the economy.
In 2014 the People’s Bank of China
(PBOC) announced a series of
targeted monetary policy adjustments
that mark a fundamental shift in how
the central bank intends to manage
liquidity. Rather than relying on the
formal banking model of the past,
policymakers are increasingly
opening capital and finance to market
forces. At the same time, the PBOC
has continued the accelerated pace of
RMB internationalisation seen since
2012, both by further encouraging
the development of RMB liquidity
offshore, and by creating transparent
channels to guide a portion of this
offshore capital back onshore.
The delicate tightrope act looks set to
continue into 2015, presenting a
complex situation for financial
institutions. While our survey
respondents are mostly optimistic
that the current direction of reform
will create long-term stability and
future opportunities, the near-term
effects may threaten profitability and
stifle innovation in the traditional
banking sector.
Meanwhile, the economic slowdown
is intensifying the effects of policy
reforms on lenders. In particular,
banks saw a trend of deteriorating
credit quality throughout 2014. With
overdue and non-performing loans
rising as economic growth moderates,
it remains to be seen if China can
restructure and reform its financial
system without creating a prolonged
drag on the economy. Nevertheless,
our survey findings show that smart
players are looking beyond the
near-term, focusing on emerging
opportunities that will endure beyond
current growing pains.
Viewed together, these moves suggest
an attempt to forge a new policy
paradigm by China’s central bank.
Money supply is no longer set in
response to export-led capital inflows,
and with the risks posed by the rapid
build-up of liquidity in opaque finance
asset classes now widely
acknowledged, Chinese policymakers
are searching for a sustainable model.
By creating liquidity in offshore
centres and enabling a portion to flow
back to the mainland through
transparent channels, policymakers
are looking to ensure sufficient
liquidity and a more efficient
allocation of credit to support the
domestic economy, while more tightly
regulating how the formal banking
sector reinvests deposits.
Though opinions diverged on the
timeline for the RMB’s emergence as a
fully convertible settlement currency,
a majority of the respondents in our
survey believe that an
internationalised currency aligns
with the government’s emerging
liquidity management model and its
push for China’s SOEs and large
private enterprises to expand globally.
5
Most respondents said that the RMB’s
role in cross-border settlement is
growing quickly, even if it remains a
small portion of the overall total. In
general, banks with strong overseas
bases—particularly those with strong
connections to Hong Kong markets—
appear best poised to take advantage
of near-term opportunities.
For most executives, the Shanghai
Pilot Free Trade Zone (SH PFTZ) and
similar future initiatives will be the
key bellwether of emerging
opportunities in RMB services. The
majority of respondents remain
optimistic about the future of the
zone, and many report that they have
either already opened branches there
or plan to do so soon. Even so, banks
told us that their entry into SH PFTZ
is an investment in the future, rather
than an acknowledgment of existing
opportunities. The timeline for a
fully-implemented SH PFTZ remains
unclear.
Accompanying the broad changes in
the approach to liquidity
management, policymakers made
gradual moves toward interest rate
liberalisation in the past year. In
March 2014, central bank governor
Zhou Xiaochuan implied an
accelerated timeline for this process,
saying that deposit rates would be
liberalised within two years. A rapid
rise in deposit rates would threaten
bank profits, especially amidst the
current economic slowdown.
Our survey respondents tend to see
interest rate liberalisation as
inevitable—or as the de facto reality
that has resulted from the need to
attract deposits with higher-yielding
asset classes, such as wealth
management products (WMPs).
While most CEOs and executives told
us that this trend will further crimp
net interest margins, many believe
that shifting focus to fee income and
increased lending to small- and
medium-sized enterprises will help
mitigate the side-effects of reform.
6
Competition from
innovation
China’s traditional banking
institutions are also facing new
challenges from innovations in
financial products and technology.
Private-sector internet giants such as
Alibaba and Tencent, have quickly
gained a sizeable foothold in the
market for digital payments and
online investment platforms. This
phenomenon is rapidly altering the
landscape within one of China’s most
closely guarded industries, with state
banks losing deposits and
transaction-fee income to internet
finance providers.
Although the internet finance
industry remains in its infancy, it has
the potential to accelerate the
liberalisation of China’s financial
sector, while at the same time
providing consumers with higheryielding returns on relatively low-risk
investments. It also highlights the
scale of Chinese internet firms’
ambitions. Online giants are taking
advantage of the lagging nature of
many parts of China’s still statedominated economy by branching out
into new areas, potentially
transforming them into financial
powerhouses in the process.
Respondents to this year’s survey
believe that internet finance and
online banking will continue their
rapid growth in the coming year, but
many also said that closer regulatory
scrutiny of the industry is inevitable
and will lead to an erosion of the
advantages many of these firms
currently enjoy. The eventual effect
will be a streamlining of the market,
creating more competitive conditions
in the industry.
Rising risk profiles
Throughout 2014, the quality of
credit assets held by Chinese banks
showed signs of sharp deterioration.
The total balance of non-performing
loans (NPLs) across the entire
banking industry hit RMB 766.9bn
(USD 123.9bn) by the end of the third
quarter, up 36% YoY - the sharpest
rise recorded since 2011. Even if
policymakers are able to mitigate
rising NPLs through targeted liquidity
measures and accelerated efforts to
purge problem loans from bank
balance sheets, bad debts are likely to
remain a notable risk for China’s
banking sector throughout 2015.
Our respondents held widely
diverging views on the severity of the
NPL situation. Most foreign banks
gave a negative prognosis for the
overall effects of rising bad debts, but
believed a focus on top-tier borrowers
would insulate them. Though
domestic banks also acknowledged
the problem, many of their survey
answers showed confidence that the
government will again mop up excess
problem loans using China’s asset
management companies (AMCs). The
median view from our respondents is
that overall bad debt levels, while
rising, remain manageable, and the
effects of rising NPLs will not trigger
broader systemic crises.
On top of the effects of deteriorating
credit assets quality, recent events
suggest that the government is
working to repeal the implicit
guarantee that has guarded trusts
and WMPs from failure. Despite
rising default risks, policymakers
were clearly at pains to avoid
widespread defaults in 2014 for fear
of generating broader systemic panic.
Yet as the government has achieved
some success in breaking the linkage
between banks and non-standard
assets and deepening the monetary
management framework, real
defaults of bonds, as well as trusts
and other assets, look increasingly
likely in 2015.
Chapter 1
Background
China continued gradual moves
towards liberalised lending and
deposit rates in 2014, as part of the
government’s broader efforts to create
a financial system for balanced and
sustained growth. Recent policy
moves suggest that the pace of
liberalisation is accelerating,
signalling an end to the era of bumper
profits enjoyed by Chinese banks
since 2008.
The wave of liquidity unleashed by
the RMB 4tn (USD 650bn) stimulus
package in late 2008 and the
subsequent rise of China’s shadow
finance sector proved a boon for
Chinese banks. Banks, as the
dominant distributors of liquidity
within the economy, were initially
able to channel this liquidity freely to
whichever sectors of the economy
they deemed to have the strongest
demand. When formal credit
conditions were tightened, banks
increasingly channelled liquidity via
interbank markets into high-yielding
products such as trusts issued by local
government financing vehicles and
property developers, ensuring high
returns.
This resulted in stellar profit growth.
Net profits at China’s 16 listed banks
more than trebled between 2008 and
2013, rising from RMB 375.3bn in
2008 to RMB 1.17tn in 2013. The
disproportionate advantages enjoyed
by banks were underlined by the fact
that listed banks’ profits accounted
for almost 50% of the total profits of
A-share-listed companies in 2012 and
2013, compared with 33% in 2009
(see Figure 1).
7
Recently, however, the
central government has
made decisive moves to
curtail banks’ role as the
primary distributor of
credit. We expect further
measures to reduce bank
profits and ensure greater
lending to priority sectors,
while regulators will
continue to squeeze bank
exposure to profitable but
risky asset classes. This is
likely to narrow banks’ net
interest margins, which
have broadly stabilised since
mid-2013 (see Figure 2).
Figure 1: Net profit of listed banks as a % of total A-share net profits
60%
50%
40%
30%
20%
10%
0%
2008
2009
2010
2011
2012
2013
1H14
3Q14
Sources: WIND, PwC
Note: since Agricultural Bank of China and China
Everbright Bank were listed in 2010, figures for
the two banks in 2008, 2009 are excluded.
Declining
Rising
Figure 2 : Listed banks’ net interest margins (%)
2008
2009
2010
2011
2012
2013
3Q14
China Everbright Bank
2.8
1.95
2.18
2.49
2.54
2.16
2.74
Shanghai Pudong
Development Bank
3.05
2.19
2.49
2.6
2.58
2.46
3.04
Industrial Bank
2.92
2.42
2.52
2.52
2.64
2.44
2.77
Bank of Nanjing
3.29
2.8
2.55
2.66
2.49
2.3
2.56
Agricultural Bank of China
3.03
2.28
2.57
2.85
2.81
2.79
2.91
China Minsheng Bank
3.29
2.59
2.94
3.14
2.94
2.49
2.61
China Construction Bank
3.24
2.41
2.4
2.7
2.75
2.74
2.8
Hua Xia Bank
2.07
2.03
2.46
2.81
2.71
2.67
2.71
ICBC
2.95
2.26
2.44
2.61
2.66
2.57
2.6
Bank of China
2.63
2.04
2.07
2.12
2.15
2.24
2.26
PingAn Bank
3.02
2.47
2.49
2.53
2.37
2.31
2.53
Bank of Ningbo
3.47
3.12
2.76
3.23
3.48
3.05
2.69
China Merchants Bank
3.42
2.23
2.65
3.06
3.03
2.82
2.5
CITIC
3.33
2.51
2.63
3
2.81
2.6
2.37
Bank of Communications
3.01
2.29
2.46
2.59
2.59
2.52
2.4
Sources: Company reports, PwC
8
A surprise asymmetrical interest
rate cut in November 2014 will also
likely act as a further brake on bank
profit growth (in the short term at
least). The central bank reduced its
benchmark one-year lending rate
by 0.4pp, but its benchmark
one-year deposit rate by just
0.25pp, narrowing banks’ loan-todeposit spread to around 2.3%,
from over 3% prior to previous rate
cuts in 2012.
The rate cut—along with the
subsequent publication of draft
regulations governing a bank
deposit insurance scheme—is likely
a precursor to a broader
liberalisation of interest rates in
China. In the long run, this may
benefit banks by enabling them to
more freely adjust lending and
borrowing rates. However, the
overall impact on profits and
margins is expected to be negative,
as banks will have to offer more
attractive rates to depositors in an
increasingly competitive market.
Survey findings
Most banks agreed that interest rate
liberalisation is inevitable, though
there was some divergence in opinion
over when this will happen. Some
respondents told us that they expect
the process of liberalisation to
continue according to the timeline
laid out by central bank governor
Zhou Xiaochuan, who said in March
2014 that deposit rates would be
liberalised within two years.
However, amid an environment
where depositors are increasingly
dictating market rates by shifting
their liquidity to higher rate WMPs,
most respondents said that they
would be extremely surprised if the
government proceeds with drastic
changes to interest rate policy during
an economic slowdown, at a time
when NPLs are piling up. Those in
this camp said that a far better time
for liberalisation would be in a future
period in which the economy is
overheating.
Banks told us that interbank liquidity
was ample in 2014, but that deposits
tightened due to emerging
alternatives to savings accounts.
Several respondents said that they
expect further compression of net
interest margins, gradually falling to
around 2%, which is common in
other mature markets. Lending
margins will also be trimmed as SOEs
and large private firms begin to shift
their financing to capital markets, a
transition that the government is
encouraging in order to spread risk
away from the banking sector. A
common feeling expressed by
respondents was that banks will have
to adjust their business to be less
reliant on deposits and lending,
instead shifting focus to fee income
and lending to small- and mediumsized enterprises (SMEs).
The majority of banks we interviewed
indicated that they were surprised by
the central bank’s recent cut to
benchmark interest rate. Those who
had expected a rate cut said that the
move came earlier than anticipated.
9
Several respondents
said that they expect
further compression of
net interest margins.
Forecast
There are several key structural
reforms that must precede a formal
liberalisation of interest rates. The
most notable upcoming milestone will
be the establishment of a deposit
insurance scheme, which will be
introduced in 2015, according to a
draft proposal released by the
People’s Bank of China (PBOC) and
the State Council on 30 November
2014. The proposal states that
domestic commercial banks will be
required to pay premiums on a
semi-annual basis, insuring against
insolvency or bankruptcy risks, to
provide coverage of up to RMB
500,000 (USD 80,600) for each
depositor. No details were given in
terms of the size of premiums, the
total scale of the programme or the
precise timeline for implementation.
The bold nature of recent reforms
suggests a determination among
policymakers to disrupt the
conditions that had proved so
profitable for banks in recent years.
This has been triggered by the need to
increase lending to priority sectors of
the economy, most notably privately
owned SMEs and rural enterprises,
growth of which will be key to
broader reform efforts aimed at
rebalancing the economy and eroding
the dominance of monopolistic
state-owned enterprises.
We expect further reforms to follow
in the coming year, with the goal of
allowing market forces to better
dictate the allocation of capital while
disintermediating banks in the
10
process of liquidity distribution.
Concurrently, policymakers will
continue to encourage the growth of
alternative financing channels,
including offshore liquidity, equity
and bond markets, and privately
owned banks.
Under these conditions, the
performance of banks will diverge
significantly in the coming years, with
those that have strong deposit bases
and more specialised lending and risk
management strategies likely to
outperform competitors. On-going
reform of the banking system and the
continued squeeze on shadow finance
may also result in a flow of liquidity
into other asset classes, most notably
A-share markets.
Although interest rate liberalisation
will inevitably weigh on bank profits,
the impact may not be as severe as
some analysts have predicted. Under
the current system, SMEs are forced
to turn to expensive and shadowy
sources for credit. Interest rate reform
will help bring better-performing
SMEs into the formal lending system,
and will thereby provide banks with a
base of higher-margin business.
Chapter 2
Deteriorating credit quality
Background
In line with China’s broader
slowdown of economic growth, the
quality of assets held by Chinese
banks steadily deteriorated
throughout 2014. The total balance of
non-performing loans (NPLs) across
the entire banking industry hit RMB
766.9bn by the end of the third
quarter, up 36% YoY, the sharpest rise
in four years and extending the steady
rise in NPLs seen since late 2011 (see
Figure 3). Average NPL ratios hit a
three-year high of 1.16% at the end of
September 2014, above the 1% “red
line” specified by China’s banking
regulators, according to China
Banking Regulatory Commission
(CBRC) statistics.
11
Figure 3: Growth in NPLs
900
40%
800
35%
RMB (billion)
700
30%
600
25%
500
20%
400
15%
300
10%
200
5%
100
0%
0
3Q
4Q
1Q
2Q
2012
3Q
4Q
1Q
2013
2Q
3Q
2014
Total amount of NPLs for banking industry
Growth YoY
Sources: CBRC, PwC
Figure 4: Listed banks’ non-performing loans
Ping An Bank
Shanghai Pudong Development Bank
CITIC
Industrial Bank
Hua Xia Bank
Bank of Nanjing
Bank of Beijing
China MinSheng Banking
Bank of Ningbo
The big four
Bank of China
ICBC
0
20
3Q13
40
4Q14
12
60
1Q14
80
2Q14
100
3Q14
120
140
RMB (billion)
The total value of NPLs among the 16
listed banks reached RMB 604.6bn in
3Q14, up 31.7% YoY, while the NPL
ratio reached 1.12%, up 0.16pp YoY.
Our analysis shows that all 16 listed
banks saw double-digit growth in the
value of NPLs between 3Q13 and
3Q14. Although the value of NPLs at
smaller banks remains far lower than
at the Big Four lenders, NPL value has
grown faster at these smaller lenders
(see Figure 4). NPL write-offs by
Chinese banks have also spiked. The
value of NPLs written off more than
doubled from RMB 33.3bn in 1H13 to
RMB 71bn in 1H14 (see Figure 5).
Figure 5: Total NPL write-offs among listed Chinese banks
Ping An Bank
CITIC
Industrial Bank
Hua Xia Bank
Bank of Nanjing
Bank of Beijing
The big four
Bank of Ningbo
Bank of China
ICBC
0
5
1H13
2H13*
10
1H14
15
RMB (billion)
* 2H13 data is an estimate based on analysis of 1H13 and
2013 year end financial statements
13
Figure 6: Provision charges of A-share listed banks (YTD)
Ping An Bank
Changes in banks’ provision
levels also confirm a notable
rise in NPLs over the past year,
with provision charges
increasing significantly in the
first nine months of 2014 (see
Figure 6), while provision
coverage ratios generally
declined (see Figure 7). Yet
these figures also show that
banks are, by international
standards, holding relatively
large reserves against identified
problem loans, which could
cover many years of write-offs
at current run rates.
CITIC
Industrial Bank
Hua Xia Bank
Bank of Nanjing
Bank of Beijing
The big four
Bank of Ningbo
Bank of China
ICBC
0
20
3Q2012
40
3Q2013
3Q2014
60
80
100
RMB (billion)
Figure 7: Provision coverage ratio of A-share listed banks
Ping An Bank
CITIC
Industrial Bank
Hua Xia Bank
Bank of Nanjing
Bank of Beijing
The big four
Bank of Ningbo
Bank of China
ICBC
0%
3Q2012
100%
3Q2013
200%
3Q2014
14
300%
400%
500%
While publicly available statistics
covering bank NPL ratios by industry
tend to be a lagging indicator,
company reports for the first half of
2014 show notable NPL trends in the
categories covering wholesale and
retail and manufacturing (see Figure
8). As shown in the survey results
below, many market participants are
expecting NPLs in primary and
secondary industries to rise as SOE
reform progresses and as overcapacity
is gradually wrung out of the system.
Figure 8: TOP 3 NPL ratios classified by industry at selected banks
1H13
Industry
Industry
NPL ratio
(%)
Manufacturing
industry
2.68
Wholesale and
retail industry
3.18
Other industry
2.35
Manufacturing
industry
3.15
Wholesale and retail
industry
2.27
Other industry
1.71
industry
2.53
Wholesale and
retail industry
3.62
Manufacturing
industry
1.66
Manufacturing
industry
1.85
Real estate industry
0.90
Real estate industry
0.83
industry
5.83
Wholesale and
retail industry
5.15
Software and IT
services industry
4.14
Software and IT
services industry
3.82
Manufacturing
industry
2.62
Manufacturing
industry
3.18
industry
1.52
Manufacturing
industry
2.16
Manufacturing
industry
1.23
Wholesale and
retail industry
1.64
Education and
culture industry
0.76
Financial industry
1.37
industry
1.22
Manufacturing
industry
1.94
Manufacturing
industry
1.19
Wholesale and
retail industry
1.53
Other industry
0.74
Mining industry
1.52
industry
2.97
Wholesale and
retail industry
3.43
Manufacturing
industry
1.40
Manufacturing
industry
1.78
Leasing industry
0.39
Construction
industry
0.59
Agricultural Bank
of China
ICBC
China
Construction
Bank
Shanghai Pudong
Developement
Bank
China Merchants
Bank
CITIC
1H14
NPL ratio
(%)
Key
Rose 0.50 pp or more YoY
Rose less than 0.50 pp YoY
Declined YoY
15
The big four
Figure 9: Listed banks’ overdue loans
Ping An Bank
CITIC
Industrial Bank
Hua Xia Bank
Bank of Nanjing
Bank of Beijing
Bank of Ningbo
Bank of China
ICBC
1H12
0
20
40
60
80
100
120
RMB (billion)
140
1H13
160
1H14
180
200
The build-up of NPLs is likely to
continue well into 2015. The total
value of overdue loans—those for
which borrowers have missed
repayments of principal or interest
but which have yet to be classed as
non-performing—at the 16 listed
banks grew RMB 247bn to RMB
898.7bn at the end of 1H14 (see
Figure 9). This was 61% higher than
the total value of NPLs on these
banks’ books at the end of 1H14, up
from 36% at the end of 2H13.
16
In particular, there was a sharp rise in
the value of overdue loans of less than
three months in duration to RMB
394.8bn, up 44% YoY. This suggests
that a slew of NPLs may be in the
pipeline: when overdue loans exceed
three months they should, in most
cases, be classified as nonperforming.
Furthermore, the value of overdue
loans of more than three months in
duration exceeded the value of NPLs
at seven of the 16 listed banks in
1H14 (see Figure 10). This compares
with just three banks at the end of
1H12 and four at the end of 1H13.
While overdue loans of this duration
do not all automatically qualify as
NPLs, most do, unless adequate
collateral or other reliable means of
repayment are available.
Figure 10: Comparison of overdue loans to NPLs in 1H14
300%
250%
200%
150%
100%
50%
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0%
China’s local
government debt has
risen so sharply that
pundits have often
labelled it a “time
bomb” that could
trigger a systemic
crisis.
That a growing proportion of overdue
loans are not being classified as NPLs
raises concerns that these loans are
non-performing in all but name, given
generally deteriorating credit quality
across the economy as a whole.
However, although credit quality is
likely to remain weak and the value of
NPLs will continue to rise, at current
levels they remain manageable, even
taking into account the portion of
overdue loans that are essentially
non-performing. The flood of NPLs
from property developers and local
government financing vehicles
(LGFVs) predicted by more bearish
analysts has yet to materialise.
Moreover, policymakers appear to be
accelerating efforts to move a portion
of these NPLs off banks’ balance
sheets. In July 2014, five provincial
and municipal governments—
Jiangsu, Zhejiang, Anhui, Guangdong
and Shanghai—were formally
authorised by the CBRC to set up
asset-management companies (AMCs)
that are able to bid for bad assets,
adding to the four national AMCs that
already carry out this practice. News
Chengtou bonds are issued by local government
finance vehicles (LGFVs) on behalf of local and
regional
governments that are restricted from
issuing debt directly.
reports on 24 November 2014
suggested that CBRC had approved
the creation of local AMCs in five
more provinces and municipalities—
Beijing, Tianjin, Chongqing, Fujian
and Liaoning—allowing these
provinces to participate in the NPL
transfer process.
Accompanying the overall concern
about a deteriorating credit asset
quality is uncertainty as to the end
game for the large sums of
outstanding local and regional
government (LRG) debt. Though local
governments’ access to credit has
been restricted since the 1990s, LRG
debt has nonetheless swelled,
primarily through the use of LGFV
loans, chengtou bonds1 and
infrastructure trusts. In 2013, a
national audit estimated that the total
liabilities of local governments had
swelled to RMB 17.9trn (USD 2.9trn),
up 67% from 2010. China’s LRG debt
has risen so sharply that pundits have
often labelled it a “time bomb” that
could trigger a systemic crisis.
1
17
Figure 11: Local government revenue from land sales
60%
50%
YoY % change
40%
30%
20%
10%
0%
-10%
-20%
3Q
4Q
1Q
2Q
2012
3Q
2013
4Q
1Q
2Q
3Q
2014
The rising risk profile comes from
three main sources. First, with fiscal
revenue growth slowing, many local
governments are struggling to repay
the rising interest and principal on
debts. Land sales accounted for 37%
of local government revenue
(excluding central government
transfers) in 2013, but local
government revenue from the sale of
land-use rights increased only 0.5%
YoY, in 3Q14 (see Figure 11). This is
down sharply from 14.3% YoY growth
in 2Q14 and is the slowest pace of
growth in two years. Second, Beijing’s
clear intention to slim down the size
of the shadow finance system could
reduce financing available from
trusts, a key source of local
government funding (see Chapter 5).
Third, if the property market cools
down, the amount of financing
available to local governments from
land sales to developers would
decline—hitting another key source
of local government funding.
Recognising these risks, China’s State
Council unveiled a wide-ranging
series of reforms in September 2014,
outlined in Document 43. These
included moving existing LGFV debt
that local governments are directly
responsible for onto their balance
sheets, to be repaid through bond
issuance. Any remaining LGFV debt
18
would be the sole responsibility of
these enterprises.
These changes will reportedly be
implemented from the beginning of
2016, but the process of demarcating
local government and LGFV debt has
already begun. Local governments
had until 5 January 2015 to classify
local debt as either government debt
or not, and have already started to
distance themselves from new LGFV
debt issuance. Several LGFVs
cancelled bond issuances after local
authorities withdrew their backing
for the debt. In December 2014,
authorities in Shandong province
became the first to explicitly ban new
debt-raising by LGFVs.
Chengtou bond issuance will also
likely be affected by the early
December 2014 announcement by
China’s Securities Depository and
Clearing Corporation that lowergrade corporate bonds, including
chengtou bonds not explicitly backed
by local governments, would no
longer be allowed as collateral for
repo agreements.
The disruption of established
channels of local government finance
clearly conflicts with the central
government’s plans to accelerate
infrastructure projects in the home
stretch of the 12th Five-Year Plan, and
will thus require significant
developments in alternative funding
options in 2015. Since the central
government has been adamant that
there will not be a sharp increase in
its fiscal spending in the coming year,
part of the solution will come from
increased private investment. Yet the
role played by private capital would
have to increase significantly in order
to compensate for the likely drop-off
in other funding channels that
currently account for a far larger
share of investment. In the first 11
months of 2014, private investment
accounted for only 26% of total
infrastructure fixed-asset investment,
with YoY growth in investment from
this source showing little sign of
accelerating.
It is more likely that a gradual
increase in funding through private
investment will be combined with
other measures, in particular the
establishment of a municipal bond
market. At the end of last year,
China’s minister of finance
announced that more local
governments will be allowed to
directly issue municipal bonds this
year, while the Ningxia Hui
Autonomous Region, one of the
provincial governments taking part in
the pilot municipal bond scheme, has
announced plans to issue China’s first
offshore municipal bond.
Survey findings
Most of our survey respondents see
the current rash of NPLs as the
protracted aftermath of the 2010
stimulus package, and expect the
resultant clean-up of bad loans to
extend into 2016. The severity of the
NPL situation in the coming year was
seen as largely dependent on liquidity
and property market conditions; tight
credit and falling real estate prices
will inevitably lead to more instances
of insolvency.
Many banks reported that a trend of
credit asset deterioration remains a
major concern, though most saw the
risk as isolated in particular
industries and regions. Overall, SMEs
were identified as the epicentre of
rising NPLs, specifically in midmarket enterprises that have
outstanding loans in the tens of
millions of dollars range. Sectors that
are coping with overcapacity, such as
steel, aluminium, cement, solar and
energy-intensive industries, were
singled out as high risk, as well as
those affected by sinking global
commodity prices, such as mining, oil
and the manufacture of related
equipment. In terms of geography,
most respondents believed that
deteriorating credit quality is
primarily concentrated in eastern
coastal areas, though several said that
the problem is spreading to western
provinces.
The different market segments
covered in our survey outlined
differing approaches to coping with a
rising tide of bad debts. Foreign banks
were the most sanguine on the issue,
saying that a conservative lending
approach and a focus on top-tier
borrowers will help insulate them
from the worst effects of credit asset
deterioration. Domestic banks tended
to argue that healthy profits in recent
years mean that they have the
capacity to write off or directly sell
problem loans—i.e., China’s asset
management companies will help
clear up their ledgers if NPLs rise to
problematic levels. As the frontline
lenders to SMEs, new market entrants
such as P2P and internet finance firms
were clearly concerned about
worsening risk profiles among their
borrowers, yet many said that
advanced risk analysis using big data
will help them keep risks under
control. Several P2P companies also
said that they will favour non-cyclical
industries if economic conditions take
a turn for the worse.
A concern for many bankers is how
failed loans are dealt with as they
arise. Bankers told us that the
collateral liquidation process should
become more efficient and
transparent.
19
Forecast
We expect non-performing loans
(NPLs) to grow further in 2015, both
in absolute terms and as a share of
total lending. Even if we do see more
near-term loosening measures, this is
unlikely to ease NPL pressure until
3Q15 at the earliest. Even if easing
measures begin to mitigate these
rising NPL risks, and policymakers
are able to accelerate efforts to move
a portion of these NPLs off bank
balance sheets, bad debt is likely to
remain a significant risk for China’s
banking sector in the coming year.
However, the impact is likely to be
largely contained on bank balance
sheets rather than triggering broader
systemic risks, given that overall bad
debt levels, while rising, remain
manageable.
Furthermore, with policymakers
seemingly achieving some success in
breaking the linkage between
traditional banks and shadow finance
and deepening the monetary
management framework, we may
finally see real defaults of bonds, as
well as trusts and other shadow assets
in 2015. Despite rising default risks,
policymakers were clearly at pains to
avoid real defaults in 2014 for fear of
generating broader systemic panic.
Although policymakers will likely
remain cautious in 2015, the systemic
risks associated with shadow finance
defaults do appear to have ebbed
somewhat, making it more likely that
real defaults may be sanctioned this
year.
20
Nevertheless, the worst-case scenario
for Chinese policymakers in 2015
remains a default chain reaction
emanating from the shadow finance
system, coupled with capital flight
pressure due to global turbulence.
These risks will continue to be the
prism through which all policy
decisions are viewed.
Reform of local government finances
is likely to be a recurring theme in
2015, as Chinese authorities move to
implement a series of radical
overhauls to local government
financing and debt that have been
proposed in recent months. In the
short-term, efforts are likely to be
focused on building up sufficient
alternative funding channels to make
the wide-reaching reforms
announced this year implementable
without significantly raising shortterm risks.
Following the State Council’s
announcement on 2 October 2014 of a
much tougher stance on the
correlation between local
governments and LGFVs, risks of
related debts have clearly risen
sharply. Now that LGFV borrowing
cannot be backed by government
credit, investors in infrastructure
products will undoubtedly further
consider the safety of their
investments.
Chapter 3
Internationalisation of the RMB
Background
China is in the process of gradually
shifting away from a tightly
controlled export-led money supply
model to an open and
internationalised currency. To
support this transition, policymakers
are working to deepen offshore pools
of RMB while creating transparent
channels through which to guide
capital back to the mainland. The
hope is that this model will help
ensure sufficient domestic credit
while simultaneously lessening the
economy’s reliance on shadow
finance.
The first component of China’s RMB
strategy is to grow the currency’s use
in international trade and finance,
primarily through the establishment
and expansion of offshore RMB
clearing hubs and currency swaps. As
of December 2014, China has
established a total of 11 offshore RMB
clearing hubs and 28 currency-swap
agreements, with many of these
added in the past two years (see
Figure 12).
21
Figure 12: Recent moves to develop offshore RMB markets
2013
2014
February
RMB business officially launched in Taiwan (CNT trading begins and RMB deposits accepted), PBOC appointed
ICBC Singapore as the RMB clearing bank in Singapore
July
QFII quota increased to USD150bn from USD80bn
September
Simplified RMB cross-border settlement process announced; Increased borrowing limits by onshore Mainland
Correspondent Banks (MCBs) from offshore participating banks; Free RMB flow between onshore MCB bank
accounts and offshore RMB accounts permitted
October
Shanghai Free Trade Zone is set up to test offshore RMB market in Shanghai
February
PBOC Shanghai released notice to support expansion of cross-border RMB usage in Shanghai Free Trade Zone
March
RMB RQFII programme launched in France (RMB80bn quota granted)
April
CSRC approved development of Shanghai-Hong Kong Stock Connect programme to establish mutual stock
market access between Shanghai and Hong Kong
June
PBOC appointed CCB as RMB clearing bank in London and BOC as RMB clearing bank in Frankfurt
July
RMB RQFII programme launched in Korea (RMB80bn quota granted) and Germany (RMB80bn quota granted)|
PBOC appointed BCM as RMB clearing bank in Seoul
September
PBOC appointed BOC as RMB clearing bank in Paris and ICBC as RMB clearing bank in Luxembourg.
PBOC authorised CFETS to run RMB-Euro direct trading in interbank foreign exchange market
October
The British Treasury assigned 3 major banks to issue the first non-Chinese sovereign bond in RMB. The proceeds
of the bond will be used to finance the nation's reserves
PBOC authorised CFETS to run RMB-SGD direct trading in interbank foreign exchange market
November
Shanghai-Hong Kong Stock Connect programme launched on 17 November
RMB RQFII programme launched in Australia (RMB50bn quota granted)
2015
January
PBOC appointed BOC as RMB clearing bank in Malaysia
Source: PwC
22
Improved remittance channels for offshore RMB
Programme
Relevant circular and
launch date
Description
Quota limit
R-QFII
CSRC Circular 76
（(December 2011)
Allows investors to use RMB raised in
Hong Kong to invest in PRC listed shares,
bonds, warrants, investment funds, and
other permitted instruments.
RQFII started with an initial quota
of RMB 20bn, which was
eventually increased to RMB
270bn.
CSRC revised RQFII rules
and guidelines (March
2013)
Not only opens the door to new entrants
but also relaxes the restrictions on asset
allocation and product type.
South Korea and Germany are
new additions with RMB 80bn
quotas. Other cities include
Taiwan, S’pore, London, Paris
and HK.
RMB cross-border two-way sweeping
Shanghai FTZ
PBOC Circular 22
(February 2014)
For companies based in Shanghai FTZ,
intra-group cross-border two-way RMB
sweeping is allowed to meet business or
management needs. Only working capital
funding can be included, and no financial
funding is allowed at this stage.
No pre-set quota. Amount is
determined by commercial
banks, based on company
situation. Such remittance does
not consume the company’s
foreign debt quota.
China-wide
State Council Circular
19(May 2014),and PBOC
follow up guidance
(June 2014)
The scheme is expanding China-wide,but
with tighter restrictions. Participants need
annual total cross-border settlement
volume of RMB 100mn. There is also
quota constraint that is likely to be based
on equity or paid-in capital.
Quota for net cross-border
inflow/outflow is 1x net capital of
onshore entities multiplied by
PBoC macro-prudential policy
factor.
Kunshan vs Taiwan banks
PBOC Kunshan Circular 5
(August 2013)
Kunshan-based subsidiaries of Taiwan
firms can borrow RMB from Taiwan
banks, and repatriate proceeds to
Kunshan.
NA
SIP vs Singapore banks
PBOC Nanjing (June 2014)
SIP-based entities can borrow offshore
RMB from Singapore-based banks.
Proceeds can be used in the zone.
CNY 3bn for all SIP-Singapore
loans; no limit on individual deal
size.
SSTEC vs Singapore banks
PBOC Tianjin (July 2014)
SSTEC-based entities can borrow
offshore RMB from Singapore-based
banks. Proceeds can be used in the zone.
CNY 2bn for all SSTECSingapore loans; no limit on
individual deal size.
Qianhai vs Hong Kong banks
PBOC SZ Circular 173
(December 2012)
Qianhai-based entities can borrow
offshore RMB from Hong Kong Als.
Proceeds can now be also used outside
of the Qianhai zone.
RMB 50bn for all Qianhai loans;
no limit on individual deal size.
FTZ vs all offshore banks
PBOC Circular 22
(February 2014)
FTZ-based corporate and non-bank Fls
are allowed RMB loans of more than 1Y in
tenor from offshore banks. Proceeds can
only be used within the FTZ.
Non financial can borrow up to 1x
of paid-in-capital; NBFIs can
borrow up to 1.5x.
Cross-border RMB loans
Entities set up before the FTZ
can choose either 1x of paid-incapital, or existing borrowing gap
model.
Quotas to be multiplied by
PBOC’s macro-prudential policy
factor, which is currently 1.
Stock markets
Shanghai-Hong Kong stock
connect
CSRC Circular 101
(June 2014）)
Sources: Authorities, Standard Chartered Research, PwC
Hong Kong investors can invest in shares
in the CSI180 and CSI380 indices and
shares with A+H listings; Shanghai
investors can invest in shares in the Hang
Seng Composite LargeCap and MidCap
indices, and A+H listings.
HK investment in A-shares up to
an aggregate quota of CNY
300bn and a daily limit of RMB
13bn;
Shanghai investors’ investment in
HK shares up to an aggregate
quota of RMB 250bn and a daily
limit of RMB 10.5bn.
23
With the expansion of offshore
markets, cross-border RMB trade
settlement has grown rapidly in
recent years (see Figure 13).
However, prior to 2013, most of
this RMB remained offshore,
rather than being remitted back
into China.
24
1,600
1,400
RMB (billion)
1,200
1,000
800
600
400
200
0
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
2010
2012
2011
2013
2014
Sources: PBOC, PwC
Figure 14: New RQFII and QFII quotas
160
12
140
10
120
8
100
80
6
60
4
40
2
20
0
0
2Q
3Q
4Q
1Q
2013
3Q
2014
RQFII (LHS)
Sources: State Administration of Foreign Exchange,
PwC
2Q
QFII (RHS)
4Q
USD (billion)
There has also been a recent
marked increase in investment of
offshore RMB in mainland stock,
bond and money markets
through the RMB Qualified
Foreign Institutional Investor
(RQFII) programme, first
launched in 2011. RQFII
programmes have been launched
in a number of overseas markets
over the past 18 months,
including London, Frankfurt,
Paris and Singapore, with the
total value of approved quotas
surging to RMB 283.3bn at the
end of 3Q14, up from just RMB
20bn when the scheme was
launched in 2011. In 3Q14 alone,
quotas grew by RMB 139.65bn
(see Figure 14). RMB can also be
channelled back to China
through the RMB Qualified
Foreign Limited Partner (RQFLP)
programme, which since 2012
has allowed select foreign
institutions to invest offshore
RMB in mainland private equity
funds.
1,800
RMB (billion)
The second and more recent
component of China’s long-term
currency strategy is the creation
of channels enabling the
repatriation of offshore RMB.
One of the most significant
potential developments in this
area is the long-awaited
Shanghai-Hong Kong Stock
Connect scheme, which allows a
controlled amount of capital to
flow between the two markets.
Other reforms include allowing
companies incorporated in
certain free-trade zones to set up
two-way RMB-denominated
accounts and receive RMBdenominated loans of more than
one year in tenor from offshore
banks.
Figure 13: Volume of cross-border RMB trade settlement
Survey findings
In responding to our survey, most
bankers told us they believe that
internationalisation of the RMB
remains a priority for the central
government, though the pace of
change is unclear in the current
economic climate. Uncertainties
about timing aside, an
internationalised currency aligns
with China’s push to exert greater
influence and for its SOEs and large
private enterprises to expand
globally. Bankers therefore expect the
trend of reform to remain largely
uninterrupted.
The RMB’s role in cross-border
settlement is growing quickly, though
it still comprises a small portion of the
overall total. Even banks that
currently have low volumes of RMB
settlement activity are positioning
themselves to meet future demand.
Respondents told us that European
corporates are notably more inclined
to use the currency than their
American counterparts.
For most bankers, the key bellwether
of RMB reform is the development of
the Shanghai Pilot Free Trade Zone
(SH PFTZ). They expressed optimism
about the potential of SH PFTZ, and
many reported that they have already
opened branches in the zone in order
to capitalise on emerging
opportunities. Nevertheless, our
respondents noted that the progress
of the zone and its related policy
reforms has been slow, and thus it
remains uncertain as to when the
pilot programme will reach its full
potential.
In the near term, banks see a strong
trend of RMB flowing back to the
mainland, primarily due to the lower
cost of foreign capital and a lack of
other investment products for
offshore RMB. Demand for RMB will
also be further fuelled by QE
tapering. In the long term,
respondents pointed out that wider
channels for RMB repatriation will
lead to a gradual price convergence
between onshore and offshore
capital, which may narrow arbitrage
opportunities. On the other hand,
some respondents said that the
continuance of relatively tight
lending controls on the mainland
guarantee that demand for
repatriated RMB will remain robust.
While most bankers see RMB
internationalisation as inevitable,
there are still significant limitations
to the currency’s utility in
international finance. In particular,
survey respondents cited a lack of
hedging vehicles and complex
instruments as major drawbacks. At
present, banks holding RMB have
relatively few options: they can lend
it out, buy Dim Sum bonds, or hold
the currency speculatively. Within
these narrow confines, the roles of
innovation and market acuity are
diminished, thereby restraining the
creation of sustainable profit growth.
25
In 2015 we expect
policies that will help
domestic enterprises
access lower-cost
offshore money
markets.
Forecast Rather than being viewed as a
separate, external process, RMB
internationalisation is now tightly
integrated with the central
government’s wider aim to recast
China’s monetary policy. Efforts to
build up RMB reserves offshore and
remit them back onshore through
official channels reflect the highervalue export model that China is
pursuing, selling value-added goods
and services directly to foreign
countries, and receiving payment in
RMB. More fundamentally, the
channelling of offshore RMB back
into the mainland financial system,
often tied to specific uses or
locations, is also an attempt to make
China’s entire financial system more
transparent, more market-driven and
less reliant on domestic formal and
informal financing on the one hand,
and the USD on the other.
Given the centrality of RMB
internationalisation in China’s policy
agenda, reforms are likely to
continue in the coming year, though
at a cautious pace. In 2015 we expect
policies that will help domestic
enterprises access lower-cost offshore
money markets, increasingly in RMB,
26
as part of the central government’s
efforts to loosen credit for SMEs. In
order to expand opportunities for
RMB remittance, the scope of the
Shanghai-Hong Kong stock connect
will be enlarged, though instability in
the domestic or global economy could
delay progress. Despite the overall
trend towards liberalisation, we still
expect the PBoC to act aggressively in
warding off influxes of hot money, as
it has since speculative inflows spiked
in 2013.
The internationalisation of the RMB
will be accompanied by the
globalisation of Chinese enterprises,
with SOEs and large private
companies seeking out new markets
for high-value goods and
infrastructure services. This process,
which is underpinned by strong policy
support from the central government,
will present opportunities for both
Chinese and foreign banks. For
Chinese banks, there will be a
growing number of opportunities to
develop international payment
clearing business in their clients’ new
markets. Foreign banks also stand to
benefit, as foreign corporates will
increasingly need their services to
process and invest the RMB they earn.
In the near term, the RMB will have a
relatively small impact on overall
trade finance, as most settlements are
simply a redenomination of the same
underlying trade. A dramatic increase
in RMB volumes will only occur as
commodities are priced in the Chinese
currency. There have been gradual
steps made in this direction, but the
offshore demand for RMB is not yet
sufficient to encourage the use of
RMB-denominated letters of credit.
Given the rapid growth in offshore
RMB, however, banks should begin
positioning themselves to participate
in this trend sooner rather than later.
Although there are relatively few
channels through which to reinvest
offshore RMB now, the situation will
steadily change as the government
relaxes policies governing bonds and
equities. This will create new inroads
for investors holding offshore RMB, as
well as profitable opportunities for
banks poised to innovate.
Chapter 4
Wealth management products
and trusts
Background
China’s combination of low deposit
rates and high demand for credit
outside the formal bank lending
system has led to the rapid expansion
of higher-yield investment products,
particularly in the forms of wealth
management products (WMPs) and
trusts. Both of these asset classes have
enjoyed tacit approval—and often
implicit guarantees—from regulators,
but their fast pace of growth has led
to rising risk profiles, and in turn,
increasingly stringent regulation
since 2013.
China’ s policymakers have made a
more concerted effort to spread risk
away from the banking sector and
increase transparency in alternative
forms of financing. The effect of these
efforts has been a slower pace of
growth in wealth management
products (WMPs) and trusts and a
shift in the overall composition of
finance, with asset classes now less
interconnected, thereby decreasing
systemic risk.
restricted sectors of the economy,
such as local government financing
vehicles (LGFVs) and property
developers.
This change can be seen in China’s
interbank market, which was until
recently the key conduit through
which banks channelled liquidity
from deposits and sales of WMPs into
non-standard (or shadow) finance
assets.
This practice was reflected in the
close correlation between the value of
outstanding WMP assets, trust assets
under management (AUM) and
interbank assets, as well as in the
surge in interbank asset growth seen
from 2Q12 until 2Q13.
Prior to the shift, banks were
increasingly reliant on short-term
WMPs to boost deposits in order to hit
loan-to-deposit (LTD) requirements,
channelling money raised from
high-yield, short-term WMPs through
the interbank market into higheryielding “non-standard” assets such
as trusts. This enabled them to meet
LTD ratios and continue to lend to
27
Since June 2013, however, there has
been a marked slowdown in interbank
activity, in line with much more
stringent regulation of shadow
finance and interbank market
practices. This included a
requirement announced in May 2014
that banks classify their interbank
holdings as either “standard” or
“non-standard” assets (see Figure 15).
The new regulations and tighter
liquidity conditions have made it
more difficult for banks to access
non-standard assets through
interbank markets. After consistently
trending above both WMPs and
trusts, the value of interbank assets
fell significantly below the level of
these two key asset classes,
underlining significantly tighter
interbank liquidity (see Figure 16),
illustrating the increased delinking of
WMPs, interbank markets and trusts.
Figure 15: Recent shadow finance regulations
Date
Regulator
Target
Requirements
Mar-13
CBRC
Non-standard assets
Specified the maximum amount of
non-standard assets held by financial
institutions, especially commercial
banks
May-13
SAFE
Letters of credit
Restricted cross-border financing
activities
May-13
CBRC
BAs
Regulated the illegal trading of BAs
among rural financial institutions
Nov-13
CBRC
Interbank
Intensified scrutiny and regulation of
interbank financing
Dec-13
State Council
Shadow finance
Ordered financial institutions to classify
their shadow finance holdings
May-14
PBOC
Interbank
Ordered banks to categorise their
interbank holdings as either "investment'
or "non-investment" assets
Sources: Domestic media, PwC
Figure 16: Outstanding WMPs, trust AUM and interbank assets
16
14
12
RMB (trillion)
10
8
6
4
2
0
4Q
2010
4Q
2011
1Q
2Q
2012
3Q
4Q
Outstanding WMPs
1Q
Trust AUM
Sources: CTA, company reports, PwC
Note: Outstanding WMPs in 3Q14 are estimated
28
2Q
3Q
2013
4Q
1Q
2Q
3Q
2014
Interbank assets
A recent report from the China
Banking Regulatory Commission
(CBRC) estimated that the share of
banks’ interbank assets invested in
non-standard assets had fallen below
30% during 1H14, from over 40% at
the end of 2012.
Detailed below are key developments
in WMPs, trusts and alternative
finance channels.
Trends in wealth
management products
Total WMP AUM grew to RMB 13.6tn
($2.19tn) at the end of 3Q14, though
the pace of growth has slowed, with
AUM expanding 37% YoY, its slowest
advance in recent years (see Figure
17).
RMB (trillion)
Figure 17: AUM and growth of WMPs
16
70%
14
60%
12
50%
10
40%
8
30%
6
20%
4
10%
2
0
4Q
1Q
2Q
2012
3Q
2013
AUM of WMPs (LHS)
4Q
1Q
2Q
3Q
0%
2014
YoY growth (RHS)
Sources: CBRC, WIND, PwC
29
The slowdown in WMP sales is the
result of the recent rise in equity
markets that is increasingly absorbing
personal savings, and by tighter
shadow finance regulations. This
regulatory tightening comprises:
•A limit on the proportion of WMP
proceeds invested in non-standard
assets to 35% of a bank’s total WMP
assets or 4% of its assets overall.
•Rules that restrict the investment of
interbank assets in non-standard
assets. The latter addresses the
widespread problem of interbank
markets being used to channel
WMP assets into shadow finance.
Figure 18: Annualised average return of WMPs
6.0%
5.5%
5.0%
4.5%
2012
2013
Sources: Gaotime, PwC
30
2014
Nov
Sep
Jul
May
Mar
Jan
Nov
Sep
Jul
May
Mar
Jan
Nov
Sep
Jul
May
Mar
Jan
4.0%
These regulations caused a sharp
decline in the proportion of WMP
assets invested in non-standard
assets, with banks instead
channelling WMP assets into less
risky and lower-yielding assets such
as bonds.
As the proportion of WMP assets that
banks could channel into nonstandard assets has fallen, so has the
yield offered on WMPs. The average
annualised return on bank WMPs fell
from a peak of about 5.8% in
February to 5% at the end of August,
before recovering to 5.4% in
December 2014 (see Figure 18).
Figure 19: Bank RMB deposits
120
17%
16%
100
15%
RMB (trillion)
80
14%
13%
60
12%
40
11%
20
10%
9%
2012
2013
Nov
Sep
Jul
May
Mar
Jan
Nov
Sep
Jul
May
Mar
Jan
Nov
Sep
Jul
May
Mar
Jan
0
2014
YoY growth
Cumulative RMB deposits
Sources: PBOC, PwC
The attractiveness of bank WMPs has
been further eroded by growing
competition from non-bank WMPs,
most notably those offered online and
by other financial institutions. As the
attraction of bank WMPs has faded,
growth in deposits has notably slowed
(see Figure 19). Internet WMPs
(which are in effect perceived as
savings products, rather than
investments, by the general public)
offer almost the same rate of return as
those offered by banks (see Figure
20), but in contrast to bank WMPs,
which have set maturities, they have
the advantage of being open-ended,
enabling virtually instant withdrawal
of deposits.
Figure 20: Annualised interest rates of selected products
Platform/Issuer
Annualised rate
Internet product
Licaitong
Tencent Weixin
5.64
Lingqianbao
Suning
4.72
Baizhuan
Baidu
4.85
Xianjinbao
163.COM
4.52
Yuebao
Alibaba Taobao
4.47
Bank/mutual money market product
Ruyibao
China Minsheng Bank
4.52
Xinjinbao
Industrial and Commercial Bank
of China
3.85
Pinganying
Ping An Bank
4.54
E-wallet
Easy Foda Fund
4.75
Qiandaizi
GFFund Management
5.37
Bank WMPs
Average annualised rate
5.30
Note: Annualised rates as of 15 January 2015
Source: PwC
31
The fact that WMP issuance value
now greatly exceeds outstanding
value is due to the increasingly short
tenor of these products as issued by
domestic banks. 65-70% of WMPs
issued in 1H14 had a tenor of three
months or less, up from 55-60% in
1H13. Given growing competition for
deposits, banks have become
increasingly reliant on short-term
WMPs to improve deposit figures near
quarter-end in order to meet loan-todeposit ratios and continue to lend, as
well as compete with internet WMPs.
The CBRC recently implemented new
rules aimed at curtailing this practice,
but it is currently unclear as to how
strictly they will be enforced.
Figure 21: Issuance and AUM of WMPs
80
70
60
RMB (trillion)
But while growth in the total
value of WMP assets has slowed,
the value of newly issued WMPs
surged in 2014. The total value of
the WMPs issued during the first
three quarters of 2014 was RMB
60.8tn, more than double the total
issued in 2012 and equivalent to
86% of the total issued in 2013
(see Figure 21).
50
40
30
20
10
0
2008
2009
2010
2011
AUM of WMPs
2012
2013
1H14
3Q14
(est.)
Issuance amount of WMPs
Sources: CBRC, PwC
Figure 22: AUM and YoY growth of trusts
14
80%
12
70%
60%
RMB (trillion)
10
50%
8
40%
6
30%
4
20%
2
0
10%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
2011
2012
AUM of trusts (LHS)
Sources: CTA, PwC
32
2013
2014
YoY growth (RHS)
0%
Trends in trusts
In the past year regulators made
substantial changes to the rules
governing trusts, resulting in slower
growth and heightened default risks.
To date, the government has been
wary of the potential systemic impact
of trust defaults and has stepped in to
prevent losses, resulting in an implicit
guarantee for investors. This looks set
to change. With bank and local
government exposure to trusts being
gradually reduced, regulations
enhanced and insurance schemes
established, trust default risks now
appear far more contained and
controllable.
Total AUM of officially licensed trust
companies in China hit RMB 12.95tn
(USD 2.08tn) at the end of 3Q14, up
28% YoY. However, this was a slight
deceleration from 32% YoY growth in
the second quarter, and significantly
below growth rates seen throughout
2013 (see Figure 22).
The slowdown in trust AUM growth is
closely linked to regulatory attempts
since June 2013 to squeeze shadow
finance liquidity and gradually repeal
the implicit guarantee of trusts that
has distorted risk pricing.
Significant developments included
Document 107, issued by the State
Council in December 2013, which, for
the first time officially defined China’s
shadow banking system - including
trusts - as a “non-standard” asset, and
required banks and financial
institutions to classify their holdings
accordingly.
In April 2014, the CBRC issued
Document 99, which introduced
stricter guidelines for trust
companies on product design, sales
and risk disclosure, control and
resolution. It also required
shareholders to support trust
companies that run into difficulties.
The net effect of this was a
strengthening of trust companies’
capital bases. Throughout 2014, 24
trust companies conducted capital
injections or share transfers, with
16 reporting an increase in net
capital totalling RMB 29bn. This
trend has continued into the
beginning of 2015.
Allied to these have been attempts to
better regulate the trust industry. In
October 2014, the CBRC announced
plans to establish a national trust
registration centre in Shanghai.
Although firm details have yet to be
released, such a move should
centralise the registration of trusts,
promote the transfer of trust products
between financial institutions and
better facilitate default resolution
across different institutions and
regions. At present, although trust
companies are required to report
products sold to local regulators,
there is no coherent nationwide
framework in place.
In October 2014, the State Council
published Document 43,
strengthening the supervision and
management of debts incurred by
local governments. Among other
regulations, the document stated
that local governments would be
prevented from borrowing from
local government financing vehicles
(LGFVs) or corporate channels.
This is likely to further hit
infrastructure trust issuance, as
LGFVs had previously raised
significant funds for local
governments by issuing
infrastructure trust products.
Document 43 also encouraged local
governments to issue fiscal and
municipal bonds, rather than
relying on trusts and other forms of
financing.
Furthermore, in December 2014, the
CBRC announced that it would set up
a trust insurance fund, jointly
established by the China Trustee
Association and 13 trust firms, with
initial paid-in capital of RMB 11.5bn.
Each firm in China’s trust industry
will be required to contribute a
proportion of their net assets and
proceeds from each trust product into
the fund. While the details remain
hazy, these funds would likely be
used to support trust companies or
recipients of trust funding that run
into difficulties, rather than to
compensate investors in the event of
defaults.
This should provide regulators with
the confidence to permit a number of
real trust defaults to occur, perhaps
starting in 3Q15, although the timing
will depend on the broader economic
situation.
33
Key trends in securities
A key development over the past 18
months has been the rapid growth in
asset management products sold by
securities companies. Total AUM of
the asset management subsidiaries of
securities companies hit RMB 6tn at
the end of 1H14, up from RMB 1.5tn
at the end of 2012 and just RMB
300bn at the end of 2011.
This rapid growth has been driven by
rule changes in 2012 that allowed
securities firms to issue financial
products invested in non-standard
assets. Securities firms and fund
management companies have also
capitalised on the squeeze in trust
growth, in particular, since mid-2013.
They have done this by launching
new products to tap into continued
demand for high-yielding products
among investors and the continued
need for liquidity in sectors starved of
credit from the formal banking
system.
34
Regulators appear to be encouraging
this shift of high-risk, high-return
lending products away from banks
and trusts to dedicated asset
managers such as securities houses,
fund management companies and
AMCs. This is likely due to a desire to
delink shadow finance sources from
the formal banking sector. In
addition, investors in products sold by
securities and fund firms are
perceived as more aware of the risky
nature of such investments, which fits
with the regulators’ goal of building
greater risk awareness into the retail
investment market, which is seen by
many Chinese investors as risk-free.
Should rapid growth in alternative
sources of shadow finance continue, it
has the potential to offset the
slowdown in trusts. One direct
positive of this could be to diminish
default risks for the estimated RMB
4tn-4.5tn in trust products due to
mature this year, providing financing
to enable their repayment or roll over.
However, the contribution of
securities firms to overall shadow
financing remains only about half
that of trusts.
Trust companies
report that they plan
to focus more on
internet sales channels
in the coming year.
Survey findings
Respondents told us that regulations
governing WMPs are likely to become
increasingly stringent in the coming
year, but demand for these products
will nevertheless continue to
gradually expand. As one interviewee
put it, the interplay between the
banks’ development of WMPs and the
regulatory requirements is always “a
game of cat and mouse.”
Overall, banks told us that they think
that systematic risk in WMPs is slight.
There will certainly be isolated
instances of default, but the overall
scope of the problem will be relatively
small. In the future the development
of financial services will be to
constrain systemic risk to the banking
system while allowing product
development and innovation where
this does not lead to an implicit
guarantee by the institution issuing
them.
Although our respondents told us that
trusts carry a relatively high default
risk, many believe that they are
inherently more transparent than
WMPs.
Banks told us that they believe that
regulators are more concerned about
the effect of defaults on individuals
than on institutions; however, the
effect of current policies still
constitutes a subsidisation of risk for
large-scale investors. Because of the
high minimum investment threshold
for trusts, most shareholders are
wealthy individuals, SOEs and
financial institutions. By contrast,
most middle class investors are
limited to securities that are not
backstopped by the government.
Trust companies report that they plan
to focus more on internet sales
channels in the coming year because
of the comparatively lower costs of
raising capital.
Liberalised deposit ratios will not
have a substantial effect on the
industry, but trust companies said
that if the CBRC were to ease existing
restrictions on bank loans to property
developers and local governments,
trust investment would be negatively
affected. These restrictions have been
in place since 2010, and have played a
significant role in the growth of trusts
and WMPs. With the economy
slowing, some analysts have
hypothesised that the central
government would gradually unwind
these restrictions in line with general
credit easing measures. However,
none of our survey respondents
singled this out as a likely near-term
outcome.
35
Forecast
We expect the slowdown in WMP
AUM growth to continue in 2015,
with returns on WMPs also likely to
maintain their downward trajectory
due to further limits being placed on
banks’ ability to channel WMP capital
to non-standard assets, as well as
rising activity in the A-share market.
Recently announced rules aimed at
preventing banks from windowdressing their deposit levels by
issuing short-term, high-yielding
WMPs at month- or quarter-end are
likely to further hit AUM, issuance
and returns, even though we have
doubts about how strictly this policy
will be enforced and respondents
expect banks to attempt to find ways
around it. Non-bank investment
products will also continue to attract
a growing share of retail investor
capital, at the expense of banks.
Although the continued channelling
of a portion of WMP assets to nonstandard assets poses risks, given
maturity mismatches and the risky
nature of some of the products that
these assets are channelled into, we
believe that the risks posed by WMPs
are relatively low and falling, for
three main reasons:
•The proportion of WMP AUM being
directed into opaque shadow
finance assets is falling.
•Short-tenor WMPs, which account
for the bulk of WMPs issued in
1H14, generally have lower
exposure to non-standard assets
and offer lower rates of return.
Bank WMP managers tell us that
products with annualised returns of
around 5% YoY are generally
36
invested in standard, lower-yielding
assets, while those offering returns
in the region of 8% YoY tend to be
invested in non-standard assets
such as trusts—the only asset
classes offering sufficient yields to
maintain banks’ interest rate
spreads.
•We have seen very few WMPs run
into difficulties in recent years.
Some WMPs that are invested in
property- or mining-related assets
may still face default risks in the
coming months, but we do not see
systemic risks stemming from the
WMP sector at this time.
We believe that the
risks posed by WMPs
are relatively low.
Additional recent restrictions on
directing WMP and interbank assets
to trusts and other shadow finance
products are likely to cause a further
slowdown in trust issuance growth,
especially given rapid growth in
alternative financing sources, such as
bonds, and the asset management
divisions of securities firms and fund
companies.
We expect more near-defaults, by
energy and mining trust products in
particular, with the possibility of full
defaults to follow. Trust default risks
elsewhere should continue to be
mitigated by the growth of alternative
financing sources – in the short term,
at least. Nevertheless, the large
number of trust products coming due
at a time of sluggish revenue growth
for SMEs, local governments and
smaller property developers, in
particular, continue to suggest that
some defaults in these areas are
almost inevitable.
With recent regulation limiting the
direct exposure of both banks and
local governments to trusts, and with
an improved resolution framework
being built, trust default risks now
appear far more contained and
controllable. Regulators appear to be
setting the stage for a series of
controlled trust defaults, perhaps
starting in 3Q15, once the
mechanisms are in place and well
understood by market participants,
although the timing will depend on a
broader reading of the economic
situation.
Of course, the possibility of an
uncontrolled reaction to such defaults
cannot be discounted, and systemic
risks, while significantly diminished,
remain high.
Enabling real trust defaults will serve
the purpose of addressing the
distortions to Chinese interest rates
seen in recent years, in which trust
products offering annual returns in
excess of 15% were in effect seen as
risk-free assets and therefore
attracted significant capital. This
could help to reduce interest rates for
lower-risk assets while raising them
for higher-risk assets, introducing a
more rational risk-based pricing
mechanism without policymakers
having to resort to aggressive
measures such as interest rate or
required reserve ratio (RRR) cuts,
which they have been keen to avoid
thus far.
Chapter 5
New market entrants
Background
China’s private-sector internet giants
are making an aggressive foray into
the nation’s financial sector, cutting
into traditional banking by offering
investment channels and payment
solutions that are attracting hundreds
of millions of individual consumers
and investors.
37
It is generally assumed that WeBank
and Zhejiang Internet Commerce
Bank will focus on areas under-served
by existing banks. During his WeBank
visit, Li Keqiang said that Internet
banking “will lower costs for and
deliver practical benefits to small
clients, while forcing traditional
financial institutions to accelerate
reforms.” Ant Financial’s stated aims
for its Alipay payment system and the
new bank is to seek growth in rural
China and globally, with the bank
focused on consumers and ‘microenterprises’. Their payment system
and e-commerce mean that Tencent
and Alibaba already have valuable
records of SME transactions and
consumer payments, which should
allow them to both understand
customer needs and efficiently
manage credit risk.
It is not yet clear what services the
online banks will offer and when, or
even if, they will offer savings
accounts to consumers. Much
depends on what the regulators
allow: official statements talk up the
efficiencies of online banking, the use
of big data and the innovations that
Internet companies promise to bring
to the financial sector. However it is
clear that disruption of the banking
industry will not be tolerated. Nor are
the big banks standing still: in 2014,
38
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
2013
Dec
Nov
Oct
Sept
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan
Dec
Nov
0
Oct
On 4 January, 2015, Premier Li
Keqiang visited the offices of
Shenzhen Qianhai WeBank to
ceremonially push a button that
granted a loan of RMB 35,000 to a
truck driver. Carrying an annual
interest rate of 7.5%, this online loan
represents a potential breakthrough
in the supply of affordably priced
credit to consumers and small
businesses. WeBank, which is
30%-owned by Internet giant Tencent
and obtained a banking license in
2014, is a forerunner in China’s
emerging field of internet banking.
Competing with WeBank is Zhejiang
Internet Commerce Bank, a
subsidiary of Ant Financial Services
Group, which is closely connected to
Alibaba Group. Both banks are online
only, with no bricks and mortar
branches.
Figure 23: Internet MMF returns
Sep
Internet banking
2014
Annualised return on Yu’ebao
Annualized return on licaitong
Demand deposit rate
7-day SHIBOR
One-year time deposit rate
Sources: Company report, PwC
ICBC, Minsheng and 13 other banks
launched web-based “direct banking”
for wealth management, credit card
repayments and other services.
market fund (MMF) four months
after Yu’ebao’s inception. Its AUM had
grown to RMB 59bn by the end of
September 2014.
Web-based wealth
management
The appeal of internet finance is
relatively straightforward, as Chinese
investors are persistently in search of
alternatives to demand deposits.
Firms such as Yu’ebao offer MMFs
with comparatively high annual
yields by directly investing in the
interbank market through negotiated
deposits (which account for more
than 60% of internet MMF assets).
Tight liquidity conditions in 2013
boosted interbank lending costs, and
thereby propelled Yu’ebao’s annual
yield to double the benchmark
one-year time deposit rate (see Figure
23). Annual yields for Yu’ebao and
Licaitong ended 2014 at 4.72% and
4.22%, respectively.
Online wealth management products
(WMPs) have proved extremely
attractive for China’s yield hungry but
risk averse retail investors, effectively
transforming internet companies into
some of the nation’s largest fund
managers.
Alibaba Group’s Yu’ebao, the most
popular internet-based WMP,
attracted 124m buyers in the year
after its June 2013 launch. This
turned Tianhong, the asset
management firm that manages the
product (and in which Alibaba owns a
majority stake), into China’s largest
mutual fund by assets. As of
September 2014, Yu’ebao’s
outstanding assets under
management had risen tenfold from a
year earlier to total RMB 535bn.
Tencent, another internet giant,
launched its Licaitong internet money
Online MMFs are also attractive
because they are extremely liquid –
they can generally be redeemed on
the same day, in many cases within
30 minutes. By contrast, traditional
MMFs require two to three days to
settle withdrawals, while bank
WMPs, which offer similar returns to
MMFs, tend to carry a holding period
of at least a few weeks.
Since the start of 2014, however, the
central bank has steadily injected
cash into the banking system, thereby
lowering the interbank rate and
cutting into MMF profits. Though the
short-term picture for online
financing giants is complicated by
liquidity surges from the
government’s targeted easing
programme, the experience of the
past year shows the sector’s ability to
eat into bank deposits.
In reaction to the explosive growth of
internet MMFs, some banks have set
limits on their customers’ transfers to
services such as Yu’ebao and
Licaitong. For example, China
Merchants Bank (CMB) and Minsheng
Bank limit transfers to Licaitong
accounts to RMB 5,000 per day.
Meanwhile, many large banks
(including the Big Four) have
launched their own internet T+0
redemption MMFs. Bank MMFs
returns are usually lower than those
of internet MMFs, but higher than
bank deposit rates.
P2P lending
While internet MMF products attract
conservative investors seeking a
relatively safe haven for their money,
P2P lending appeals to a smaller
group of wealthy investors who are
far more willing to take risks.
Industry insiders estimate that there
are currently around 200,000 P2P
investors in China, far short of the
70m-plus investors in online WMPs.
While still a relatively small segment
of China’s overall financial industry,
new P2P lending totalled an
estimated RMB 136bn in 2014, up
from RMB 68bn in 2013 (see Figure
24). Meanwhile, more than 30
domestic P2P platforms received
venture capital investments in the
first half of 2014. Money continues to
flood in despite a series of scandals,
sudden website closures and
regulatory uncertainty.
Figure 24: P2P lending transaction volume
P2P
136.6
68.3
0.15
1.37
8.42
2009
2010
2011
22.86
2012
2013
2014 (est.)
RMB (billion)
Sources: iResearch report, PwC
A significant number of funds have
run into difficulties in the past year.
According to Waidaizhijia, the
industry portal, 74 P2P lending
platforms went bust in 2013. While
authorities recognise the potential
benefit that P2P can bring to SMEs,
the sector’s growing risk profile will
likely attract new regulation in the
coming year.
39
Bank profits are also being challenged
by the growing popularity of thirdparty online payment platforms, such
as Alipay and Tenpay. The rapid
growth in e-commerce means that
Chinese consumers are now paying
for a wide range of goods and services
online. Whereas in many other
markets the bulk of online
transactions are paid for by credit or
debit cards, third-party payment
systems predominate in China,
meaning that internet companies are
cutting out the traditional financial
sector. Third-party online payments
totalled an estimated RMB 7.4tn in
2014, accounting for almost 60% of
all online payments.2 Some industry
forecasts suggest that third-party
online payments could grow to RMB
810.4tn in 2015.
The emergence of third-party online
payments is hurting banks’ bottom
lines. In a traditional credit card
transaction, the merchant pays a
1-2% fee that’s split between the
banks and the payment processor
(usually China Unionpay). The banks
In China, thirdparty payment
systems predominate,
meaning that internet
companies are cutting
out the traditional
financial sector.
generally receive over half of this
amount. With a transaction on a
third-party platform, however, banks
get only a fraction of the fees received
through traditional payment means.
As with online WMPs, Alibaba and
Tencent are leading the field in this
area. Alipay and Tenpay, their
respective online payment platforms,
offer online shoppers the chance to
build up reward points, with
consumers able to top up their
accounts through a variety of
channels, including by using their
smartphones and at convenience
stores.
debited directly from user accounts
when making purchases in-store. A
number of bricks-and-mortar
retailers, including clothing and
convenience store chains, have
already begun accepting in-store
mobile payments through Alipay and
Tenpay. Meanwhile, many taxi drivers
in Shanghai and Beijing now have
multiple smartphones and tablets
installed in their cabs, enabling them
to accept mobile payments directly
from passengers.
The two companies are also
developing off-line payment
capabilities, enabling customers to
make payments in face-to-face
transactions. Chinese consumers
made at least RMB 2.9tn in mobile
payments through third-party service
providers in 2014, up from RMB 1.2tn
in 2013 and a mere RMB 151bn in
2012, according to iResearch
estimates (see Figure 25). Further
growth in this area will be supported
by technological advancements such
as near-field communications, which
allow wireless mobile payments to be
Figure 25: Third party online and mobile payments
12
10
RMB (trillion)
Third-party digital
payment systems
8
6
4
2
0
2009
2 iResearch, China Confidential
2010
online
Sources: iResearch report, PwC
40
2011
2012
mobile
2013
2014
(est.)
2015
(est.)
Auto finance companies
In the course of this year’s survey,
PwC also interviewed five auto
finance companies (AFCs). Although
auto finance is not a new concept in
China, its popularity only started to
grow rapidly in recent years.
Previously, buyers tended to use
savings to pay off the full value of the
car upfront. When buyers were short
on funds they borrowed from family
and friends rather than applying for
loans. This has begun to change,
however, as the comparatively
spendthrift post-1980 generation has
entered the market and older
consumers have become wiser about
managing their wealth. As one of our
survey respondents put it, “The days
of showing up at the dealership with a
bag of cash are over.”
The upward trend in consumer
finance is especially pronounced in
the luxury car segment, where
middle-class wage earners are
aspiring to premium brands. Wealthy
customers have realised that
financing through relatively lowinterest auto loans can help them
maximise their investments. For
instance, a car buyer may perceive he
is better off taking an 80% loan and
lending the funds to shadow banks at
an interest rate of 10%. When the
loan comes due, the customer repays
the loan that carries interest of 4-6%
and pockets the extra gains from the
informal lending - all well and good
of course unless the product defaults.
Despite the increase in nonperforming loans (NPLs) at banks in
the past year, AFCs report that they
have not seen a significant rise in bad
debts. Premium brands report being
particularly well insulated because
their borrowers tend to have
relatively deep credit histories. A
much larger problem for the AFCs is
fraud. Luxury brands told us that they
have instituted sophisticated tools to
detect suspicious patterns in customer
data and have introduced training to
help staff identify forged documents.
Yet our respondents describe
substantial fraudulent behaviour that
is likely to continue until it is met with
a corresponding level of legal
enforcement and cooperation
between credit institutions.
From a growth perspective, AFCs
described the China market as
immature and under penetrated.
While demand for auto finance is
growing rapidly, AFCs report
repeatedly hitting the ceiling of the
lending quotas that are set by the
regulators. This has forced them to
cooperate with local banks to
maintain adequate levels of available
credit. AFCs in China are not allotted
a foreign debt quota from the CBRC,
so all of the funding focus is centred
on mainland banks and financial
leasing companies.
Respondents told us that they see
some indications of greater
liberalisation in the industry, but new
regulation covering risk management
and compliance will be a greater
burden going forward. Even so, AFCs
told us that in the long term China’s
regulators will adopt the same best
practices seen in other developed
markets, including allowing greater
wholesale funding of the sector
through the capital markets.
Respondents described China’s auto
finance market as relatively
straightforward; customers are not
looking for highly complex products.
Auto leasing is not popular and is
viewed by consumers as no different
from renting, so most AFCs are only
focused on instalment lending for the
time being. However, leasing
opportunities may emerge along with
ride-sharing services in the future if
regulations governing car ownership
significantly tighten in major cities.
AFCs flagged weak economic growth,
the effects of anti-corruption drives
and expanding vehicle and license
plate restrictions as major factors
affecting business in the coming year.
Overall, we heard that the challenge
will be adapting to the “new normal”
of slower growth in China’s economy.
As one respondent put it, this
transition will be “where the winners
and losers come out.”
41
Survey findings
In responding to our survey, financial
institutions showed confidence that
all sub-sectors of internet finance and
banking will retain strong growth
momentum in the coming year.
However, there are obstacles to
smooth operating conditions. The
most significant impediment that
respondents noted is a lack of clear
regulation and uncertainty as to how
this will change in the near future.
Most agreed that greater regulation is
likely in 2015, and the eventual effect
will be a streamlining of the market,
creating a more competitive and
consolidated industry. In the long
term, only a handful of dominant
players will survive.
In the long term, only
a handful of dominant
players will survive.
Respondents within the P2P industry
had three general hopes for
forthcoming regulation. Foremost,
lending companies want authorities
to clarify P2P’s position in the legal
and regulatory framework. They also
want regulators to use P2P industry
associations to establish standards for
compliance management, operational
risk management and investor
protection. Lenders also suggested
that the PBoC could help create an
environment conducive to the healthy
development of the P2P industry by
allowing qualified lenders to access
the central bank’s credit system.
Better systems to identify and
quantify risk are seen as key issues for
healthy growth, and could also open
doors for some lenders to expand into
smaller-scale loans. Indeed the
announcement by Ant Financial on
28 January 2015 of its intention to
launch a retail credit rating service is
a step in this direction.
Industry insiders told us that the
recent attention that internet finance
has attracted from PE and VC firms
reflects the expected potential of the
industry, and that greater
involvement from such investors
should, overall, be a healthy
influence. However, one respondent
emphasised that regulations are
needed to protect the internet finance
industry from rapid and potentially
destabilising inflows/outflows from
institutional investors.
P2P lenders told us that, because of
the lack of credit channels to SMEs,
they are relatively insulated from
changes in the cost of capital. Recent
interest rate cuts will indirectly help
their business by encouraging growth
in formal lending, which will in turn
spur demand for credit among smaller
business that cannot access bank
loans. Both banks and P2P lenders
downplayed the idea of competition
between them, saying that overlap in
their business remains minimal.
Leaders in the emerging field of
internet banking told us that their
products fill a niche by providing
credit to small businesses and
individual consumers that cannot
receive reasonably priced credit
within the formal system. Web
companies are well placed to service
these customers because their
substantial databases of consumer
behaviour allow them to compile
credit risk data at a lower cost than
traditional lenders. Though most of
these firms are focused on small-scale
loans, some envisage moving into
servicing medium-sized companies as
their businesses expand.
One of the leading internet finance
companies we spoke with said that
they take a cautious approach
towards innovation in financial
services, adopting the maxim of
“innovate discreetly, embrace
regulation.” In general, these firms
described themselves as highly risk
adverse in the development of new
products.
Regarding the biggest risks in the
coming year, internet finance
companies told us that the economic
slowdown’s effect on the credit risk of
borrowers topped their concerns.
Within the P2P market, respondents
said that unethical practices by some
lenders pose a threat to the industry
as a whole. In particular, they pointed
to a trend of Ponzi scheme-like
practices through which lenders have
pooled funds from buyers without
matching them to sellers. Many of the
P2P companies that have recently
gone bust were reportedly of this
type. Survey respondents told us that
repeated fraud-related bankruptcies
will raise the risk profile of small
players in the P2P industry and
thereby benefit platforms backed by
large companies with trusted
reputations. P2P companies also
identified data security risks as a key
issue affecting the long-term growth
of the internet finance and banking
industry. If institutions cannot
dependably protect customers’
personal information and accounts,
the pace of growth in the industry
will slow.
In the area of digital payments, many
of the banks we spoke with said that
there are more opportunities for
cooperation, rather than competition,
Industrial and Commercial Bank of China
(ICBC), China Construction Bank Corp, Bank of
China, Agricultural Bank of China and Bank of
Communications.
3
42
“innovate discreetly,
embrace regulation.”
with emerging online players - a
sentiment that was reciprocated by
the internet finance companies we
surveyed. Consumer banking is,
however, likely to feel the squeeze as
deposits migrate from the Big 5
banks3 to the internet giants Baidu,
Alibaba and Tencent (BAT). The
competitive advantage of BAT may
erode over time, however, as tighter
regulation raises compliance costs.
Once regulated, respondents said
most of the emerging finance models
will be subject to the same controls as
traditional banks and the yields of
their products will thus be similarly
constrained.
Forecast
The central government has been
generally supportive of financial
innovation in internet finance,
particularly to the extent that it frees
up credit for SMEs and helps shift risk
away from the banking sector. With
policymakers maintaining tight
controls on bank lending and
investment activities, internet finance
provides the economy with welcome
channels for growth, provided risk
profiles remain at modest levels and
investment strategies do not
undermine the broader goal of
reducing the role of shadow finance.
Nonetheless, several areas of internet
finance face major challenges in the
coming year.
already opting for products with
longer maturities, which could
potentially lead to a maturity
mismatch in their portfolios and
instability further down the road.
Recent scandals have highlighted the
risky nature of P2P, greatly increasing
the likelihood of firmer regulation.
While the extent and timeline of
regulation remains unclear, closer
government oversight will have a
major impact on the sector’s
development and is likely to benefit
larger players at the expense of
smaller rivals. The legitimacy of the
industry will be greatly enhanced by
the development of a unified credit
information system, which will help
lenders identify and quantify risk.
Although the rapid growth of the
internet finance industry undoubtedly
contains challenges for banks, it also
brings new opportunities for
cooperation and innovation. While
some see the rise of digital payments
as a boon for disruptors, major retail
banks are well positioned to
participate in and even lead this
trend. The problem thus far has been
a lack of cooperation between
financial institutions, mobile
operators and major retailers.
With the appeal of online MMFs
largely dependent on high interbank
rates, many internet finance firms will
be pushed into riskier and less
lucrative territory as the central
government’s targeted easing policies
continue. Firms such as Yu’e Bao are
43
Chapter 6
Red flags in 2015
Survey findings
With China’s economy on a path of
moderating growth, financial
institutions are increasingly
vulnerable to lateral pressures from
business cycles and regulatory shifts.
The top three risks highlighted by our
survey respondents were the
interconnected issues of rising bad
debt, tight credit conditions and
policy changes.
•Deteriorating credit asset
quality – Almost all respondents
reported that rising NPLs present a
risk both to their business and the
economy as a whole. Financial
institutions with high exposure to
SMEs were the most concerned, but
even respondents who are relatively
insulated from them said they could
face indirect effects.
•Liquidity shortages – The key
factor determining the severity of
credit/asset quality deterioration is
whether or not the central bank can
maintain robust liquidity. Banks
told us that liquidity conditions
were good throughout 2014, but
they feared that the credit crunches
seen in 2013 could resurface in the
coming year.
44
•Policy reform – Respondents
agreed that the central
government’s broad policy objective
of financial reform and
liberalisation is necessary for
China’s long-term development. Yet
banks and other financial
institutions are increasingly
concerned that reform may be
pushed forward too quickly at a
time of slowing growth. In
particular, moves toward
liberalising deposit rates threaten
banks’ already thinned net interest
margins.
There were also several noteworthy
risks mentioned by a minority of
respondents:
•City commercial banks – Some
respondents believe commercial
banks in second- and third-tier
cities are at risk, as breakneck
growth has exposed the banks to a
broad range of non-performing
assets. These fears are heightened
by the likelihood that China will
introduce deposit insurance in
2015, paving the way for bank
failures.
standard assets, defaults of bonds and
trusts and other shadow assets in
2015 look increasingly likely. Despite
rising default risks, policymakers
were clearly at pains to avoid real
defaults in 2014 for fear of generating
broader systemic panic. Although
policymakers will likely remain
cautious in 2015, systemic risks
appear to have ebbed somewhat,
making it more likely that real
defaults may be sanctioned this year.
•Rising compliance and risk
management costs – In line
with global trends, China’s
deregulation of the financial
industry entails shifting
administrative responsibilities from
regulators to banks. Respondents
said that this should not be
interpreted as a relaxation of
regulations, but as an increased
compliance burden for banks.
•Political risk – The Xi Jinping
administration’s bold reforms and
anti-corruption drive were cited as
a general political risk by one
respondent, as stagnating economic
conditions could cause a backlash
from opposing political factions.
Trust companies showed a specialised
set of concerns. Topping their list was
a fear of customer flight, particularly
into stocks if A-shares maintain
long-term policy support. With trust
profits slowing and the government
seemingly withdrawing the implicit
guarantees enjoyed thus far, investors
may migrate toward securities
companies and brokerages. Indeed,
data over the last month tends to
support this.
P2P lenders reported that their
greatest risks in the coming year are
related to gaps in China’s personal
credit rating system, with most of
their borrowers lacking collateral,
proof of assets or proof of
employment. Network security risk
was identified as a key risk for the
industry, with both transactions and
user information vulnerable to
hackers.
Analysis
To varying degrees, all of the “red
flags” noted by survey respondents
align with our analysis. Like most of
our respondents, we expect NPLs to
expand in 2015. Even if easing
measures begin to mitigate these
rising NPL risks, and policymakers
are able to accelerate efforts to move
a portion of these NPLs off bank
balance sheets, bad debt is likely to
remain a significant risk for China’s
banking sector for at least the next
year. The impact is likely to be largely
confined to bank balance sheets,
however, rather than triggering a
broad crisis.
Furthermore, with policymakers
seemingly achieving some success in
breaking the linkage between the
formal banking sector and non-
It will be extremely challenging for
policymakers to manage overall
liquidity in 2015. Domestically, the
central bank was largely able to resist
calls for reserve requirement ratio
(RRR) and interest rate cuts in 2014,
while gradually de-linking the formal
and shadow finance system, and
accelerating financial reform efforts.
This has given it room to launch more
aggressive loosening measures in
2015, if required. The government
has significant policy options to
ensure sufficient liquidity to drive the
economy. It also appears to have
made enough progress in its reform
efforts to prevent any additional
liquidity from flowing back through
undesirable areas, such as LGFVs and
non-standard assets.
However, the speed and extent to
which these measures can be
implemented will depend heavily on
the global financial environment. An
increasingly volatile international
environment, featuring economies at
different stages of the monetary cycle
and commodity price deflation resulting in deflationary pressures will test Chinese policymakers’ ability
to manage domestic liquidity while
ensuring healthy economic growth.
The build-up of offshore RMB and
guiding its gradual return onshore
will also be key factors in managing
liquidity in 2015.
While policymakers have room for
overall liquidity loosening in 2015,
we do not think that the central bank
has a clear timetable for when—if at
all—such loosening would be most
appropriate. Policy moves are
therefore likely to depend heavily on
the leadership’s reading of domestic
and global economic conditions.
45
Chapter 7
Conclusion and
recommendations
Summary of key survey findings
The results of our 2014 survey
underscore the rapid pace of change
in China’s financial industry and the
uncertain conditions that banks and
other institutions face in the coming
year.
46
Most banks agree that interest rate
liberalisation is inevitable, though
some doubt that policymakers will
press the issue during a sustained
economic slowdown. Whenever rates
are eventually liberalised, a
consensus view among our
respondents is that net interest
margins will fall to around 2%, which
is common in other mature markets.
Lending margins will also be
trimmed as SOEs and large private
firms begin to shift their financing to
the capital market, a transition that
the government is encouraging in
order to spread risk away from the
banking sector. A common prediction
among respondents is that banks will
have to adjust their business to be less
reliant on deposits and lending.
Deteriorating credit
conditions
Internationalisation of the
RMB
While all respondents note a rising
tide of bad debts, executives have
broadly diverging views on the
severity of situation. Many foreign
banks tend to believe that they will be
insulated from the worst of the
problem because of their focus on
top-tier clients, while domestic banks
seem confident China’s asset
management companies will again
absorb problem loans if the situation
worsens. Sectors that are coping with
overcapacity, such as steel,
aluminium, cement, solar and
energy-intensive industries, were
singled out as bearing the highest
risk, as well as those affected by
sinking global commodity prices,
such as mining. Despite the rising
trend of NPLs, most banks have built
up sizeable reserve levels that will
help them absorb problem loans in
the coming years.
Respondents are confident that the
internationalisation of the RMB
remains a priority for the central
government, as it supports China’s
push to exert greater influence abroad
and for its SOEs and large private
enterprises to expand globally. The
timing of further progress in opening
up channels for RMB services and
activities remains uncertain,
however, especially during the
current economic slowdown. Despite
the RMB’s increasing role in
international finance, executives told
us that a lack of hedging vehicles and
complex instruments remain major
drawbacks. At present, banks holding
RMB have relatively few options for
creating sustainable profits.
47
WMPs and trusts
New market entrants
Regulations governing WMPs are
likely to become increasingly
stringent in the coming year, but
demand for these products will
nonetheless continue to gradually
expand. Overall, respondents
predicted that there will be isolated
instances of WMP defaults in the
coming year, but the overall scope of
the problem will be relatively small.
Banks told us that the competitive
advantage of new players in internet
banking and finance is likely to
decline as more stringent regulation
increases compliance costs.
Nonetheless, the dominant new
players in this industry will be able to
leverage their huge investor bases and
customer insight to create new and
compelling products.
Trust companies said that they plan to
shift focus to internet sales channels
in the coming year because of the
comparatively lower costs of raising
capital.
Forthcoming regulation was the
hottest topic among P2P companies,
with industry executives hoping that
clearer oversight and enforcement
will help shape practices and
distortions in the industry.
Across all forms of internet banking
and finance, respondents singled out
improved data security as a key factor
in creating conditions for continued
growth.
Respondents predicted
that there will be
isolated instances of
WMP defaults in the
coming year.
48
Summary of key policy themes for 2015
Xi Jinping and Li Keqiang have
repeatedly stressed their commitment
to wide-ranging reform since being
unveiled as China’s new leaders, a
theme encapsulated in a communiqué
released following the conclusion of
the third plenum, a key political
conclave held in Beijing in November
2013, outlining plans for groundbreaking reform. In the year
following the third plenum, there has
been meaningful progress on a
number of fronts, but also frustrations
and delays in other areas. In 2015 we
expect the central government to
continue the pace of reform, with
particular focus in three main areas.
Continued support for
A-share markets
RMB internationalisation
to sustain momentum
A confluence of policy and reform
factors should provide on-going
support for Chinese mainland stock
markets. These include: attempts to
encourage the growing pool of
offshore RMB to flow back onshore
through targeted channels, such as
the recently launched Shanghai-Hong
Kong Connect scheme; on-going
reform of state-owned enterprises
(SOEs); and a continued regulatory
clampdown on the banking sectors
exposure to non-standard assets.
RMB internationalisation has been a
policy objective for a number of years,
and China has also emerged as
increasingly influential international
investor in infrastructure and
construction projects worldwide.
Although market performance is
unlikely to follow a smooth upward
curve, supportive conditions for
A-share markets are likely to remain
in place throughout 2015 and beyond,
whether to ensure reasonable
valuations for SOEs passing into
private ownership or sufficient
attraction to lure back some of the
growing pool of offshore RMBdenominated liquidity being built up
via Beijing’s ambitious going-out plan.
But what now seems increasingly
clear is that these two trends are part
of a broader attempt to develop a new
monetary and currency framework at
home and overseas. With domestic
money supply no longer driven by
export-led capital inflows, outflow
risks elevated by the ending of
quantitative easing in the US, and the
risks posed by the rapid build-up of
liquidity in opaque shadow finance
assets now widely acknowledged.
49
Local government
financing shake-up
Changes to fiscal and tax regimes will
be a major theme in 2015, as Chinese
authorities move to implement a
series of radical overhauls to local
government financing and debt that
have been proposed in recent months.
In the short-term, efforts are likely to
be focused on building up sufficient
alternative funding channels to make
the wide-reaching reforms
announced this year implementable
without significantly raising shortterm risks.
In September, China’s State Council
unveiled a wide-ranging series of
reforms. Existing local government
financing vehicle (LGFV) debt that
local governments are responsible for
will be moved onto their balance
sheets and be repaid through bond
issuance, while any remaining LGFV
debt will be the sole responsibility of
these enterprises. Moreover, in the
future, LGFVs will be prohibited from
raising new debt for local
governments, which will be reliant on
municipal bonds, fiscal and fund
revenue, and private investment to
fund new projects.
No timeframe was given for these
reforms, but before they can be
introduced, a substantial reworking
of how local governments raise funds
will be necessary. The rise of LGFVs
was the result of a mismatch between
local government revenue and
expenditure. The development of a
municipal bond market, fiscal reforms
50
– such as the reallocation of revenues
between central and local authorities
– and private investment in
infrastructure projects, will have to
accelerate before the role that LGFVs
currently play as financing platforms
can be abolished.
The development of a mature bond
market is likely to involve a greater
number of defaults, both in bonds, in
order to encourage better pricing of
risk, and other asset classes such as
WMPs and trusts. This will help to
correct for the “risk free” perceptions
of higher-yielding assets that have
diverted money from bond markets in
recent years.
In 2015, Chinese policymakers will
have to tread a delicate path,
balancing longer-term reform
objectives against the short-term need
to ensure economic stability in an
increasingly challenging
environment. While the policy
decisions required to support these
goals are complex, based on our
survey findings and analysis, we offer
the following three general
recommendations to support stability
and continued growth in China’s
financial sector.
Recommendations for regulators
Chinese policymakers are searching
for a sustainable, transparent new
money supply model. By creating
liquidity in offshore centres and
enabling a portion of this liquidity to
flow back to the mainland through
transparent, guided channels,
policymakers are looking to ensure
sufficient liquidity to support the
domestic economy, while preventing
a further build-up of shadow finance
assets.
The People’s Bank of China (PBoC)
has significantly quickened the pace
of RMB internationalisation,
establishing global settlement and
clearing. Crucially, it is also actively
building up channels to enable this
offshore RMB to flow back onshore –
most notably through the ShanghaiHong Kong Connect Scheme and by
expanding the RMB Qualified Foreign
Institutional Investor (RQFII)
programme. In parallel, Beijing has
announced a series of investments
and deals with overseas governments,
selling high-value equipment such as
high-speed trains and undertaking
large-scale construction projects,
receiving payment offshore in RMB.
As well as bolstering its regional and
global influence, this policy enables
Beijing to channel this money back
onshore to support the domestic
economy. Rather than being viewed
as a separate, external process, RMB
internationalisation can in fact be
viewed as part of a wider attempt to
recast China’s monetary policy.
Provided moves such as ShanghaiHong Kong Connect and the
broadening of RQFII programmes do
not result in undue market volatility,
we expect further efforts to build up
offshore RMB liquidity and create and
widen channels to entice this capital
back onshore. RMB
internationalisation increasingly
appears central to China’s domestic –
as well as foreign – policy.
51
Match interest rate
liberalisation with
corresponding
deregulation
Faced with shrinking profit growth,
increased competition for deposits
and greater restriction on their
investment activities, many banks
will struggle to adapt to a sharp rise
in deposit rates. To ensure market
confidence in the formal banking
system, progressive and clearly
signposted steps toward market rates
should be offset by the assurance of
policy support to shift profit focus to
other areas. In particular, regulators
should relax caps on fee income,
along with accompanying rules
requiring banks to clearly disclose
charges to consumers. While the
current restrictions to fees may have
been rational in a period of relatively
high net interest margins, these
limitations have also decreased
incentives for banks to differentiate
the services they provide to
customers. A market approach
reinforced by regulations governing
transparency will create the best
outcomes for consumers.
52
Increase access to personal
credit ratings data
Raise the profile of
consumers in regulation
China’s personal credit data is
currently highly fragmented, with
many new market entrants blocked
from access to the central bank’s
Credit Reference Centre (CRC).
Internet giants such as Alibaba and
Tencent have compiled their own
databases, but smaller players are
often forced to make credit quality
judgements based on limited
information. Ubiquitous access to
credit data across the financial
industry will help encourage
innovation from both small and large
institutions and reduce risks of
non-performing loans. Better
gathering and sharing of credit scores
is also particularly important during
the current growth slowdown, since
credit performance has not yet been
tested by widespread economic
distress since the CRC database began
nationwide operation in 2006. A more
open exchange of credit information
will also aid regulators’ anticorruption and anti-money laundering
initiatives.
In implementing reform, regulators
should seek to create an environment
that encourages the financial services
industry to meet customer needs. To
date, China has been largely effective
at fostering conditions for financial
innovation among new market
entrants, some of which have trickled
down into the traditional banking
sector. Yet banks lack sufficient
freedom and motivation to lead the
charge in creating better value and
protection for customers. An
improved system will incentivise
comprehensive solutions to consumer
needs within the core of the
regulatory framework.
Recommendations for banks
In order to better cope with the rapid
pace of change in China’s financial
landscape, we recommend that banks
take the following general steps to
position their business for sustained
success in the coming years.
Decrease reliance on net
interest income
In response to shrinking net income
margins as interest rate liberalisation
proceeds in the coming years, banks
will have to diversify the focus of
their profit-making activities. The
first and most obvious solution is to
increase fee income. Yet increased
fees must be accompanied by a
meaningful improvement in the value
of services delivered to customers.
Fees should be segmented by income
groups and enhanced services, with a
focus on customer experience as the
key differentiating factor.
In the longer term, the development
of alternative forms of financing for
SOEs and large private firms will also
allow banks to shift focus to new
opportunities for profitable lending to
SMEs that are currently excluded
from the formal lending system.
the past. Institutions will need to
adopt more sophisticated techniques
for data analysis if they are to thrive
in China’s increasingly diverse and
competitive financial system.
Adapt to digital innovation
through cooperation
In the face of growing competition
from new market entrants, banks
have adopted a wide variety of
responses to innovation in digital
services. Some banks decided to “go it
alone”, spending sizeable sums to
develop digital products, such as
mobile payment solutions, in-house,
only to realise after the fact that the
costs and complexity of these projects
are much greater than originally
estimated. Cooperation tends to yield
much better results. For example,
banks, retailers and mobile operators
are far more likely to be successful at
implementing digital payment
platforms in cooperation than
individually.
Manage risk through
better analytics
As data sources and analysis improve,
China’s lenders need to adopt new
tools for asset liability management
and customer/product profitability
assessment. Even with the rise of big
data and advanced analytics, many of
China’s financial institutions still
make decisions based on programmes
determined by what has worked in
53
Appendices
List of Participants
Banks ( Domestic and Foreign)
Non-Bank Financial Institutions
Banco Santander
Ant Financial
Bank of America Merrill Lynch
Baohua Trust
Bank of China
BMW Auto Finance
Bank of Chongqing
CCB Trust
Dianrong
Bank of East Asia
Lufex
Bank of Tianjin
Nissan Auto Finance
Barclays Bank
PaiPai Dai
BNY Mellon
Suning
Volkswagen Finance
Chongqing Rural Bank
Volvo Automotive Finance (China) Limited
Citibank
Xinhua Trust
Commerzbank
Zhong Tie Trust
Deutsche Bank
Ren RenDai
Hang Seng Bank
Kai Jin Dai
HSBC
Tou Na
JPMorgan Chase
Minsheng Bank
National Australia Bank
Ping An Bank
Postal Bank
Rabobank
Royal Bank of Scotland
Standard Chartered Bank
Wells Fargo Bank
WestPac
Zheshang Bank
54
Number of legal entities and staff of banking institutions
(As of end-2013)
Institutions / Items
Number of staff
Large commercial banks
Policy banks and the CDB
Number of banks
1,720,705
5
63,059
3
Joint-stock commercial banks
364,103
12
City commercial banks
278,470
145
Rural credit cooperatives
473,874
1,803
Rural commercial banks
284,294
468
Rural cooperative banks
48,578
122
Finance companies of corporate groups
8,568
176
Trust companies
13,961
68
Financial leasing companies
2,335
23
Auto financing companies
5,232
17
Money brokerage firms
538
5
Consumer finance companies
901
4
Banking asset management companies
8,082
4
Foreign financial institutions
45,424
42
232,303
1,052
3,550,427
3,949
Other institutions
Banking institutions in total
Note: Other institutions include new-type rural financial institutions, Postal Savings Bank of China and
Sino-German Bausparkasse.
Source: CBRC
55
Partners in success
About PwC
PwC firms help organisations and individuals create the value they’re looking
for. We’re a network of firms in 157 countries with more than 195,000 people
who are committed to delivering quality in assurance, tax and advisory
services. Find out more and tell us what matters to you and find out more by
visiting us at www.pwc.com.
PwC China, Hong Kong, Taiwan and Macau work together on a collaborative
basis, subject to local applicable laws. Collectively, we have around 620
partners and strength of over 15,000 people.
Providing organisations with the professional service they need, wherever they
may be located. Our highly qualified, experienced professionals listen to
different points of view to help organisations solve their business issues and
identify and maximise the opportunities they seek. Our industry specialisation
allows us to help co-create solutions with our clients for their sector of interest.
We are located in these cities: We are located in these cities:
Beijing, Shanghai, Tianjin, Chongqing, Shenyang, Dalian,
Xi’an, Chengdu, Qingdao, Nanjing, Suzhou, Wuhan,
Hangzhou, Ningbo, Xiamen, Guangzhou, Shenzhen, Hong
Kong, Taipei, Chungli, Hsinchu, Kaohsiung, Taichung,
Tainan, and Macau
56
Contacts
Financial Services
Matthew Phillips
Hong Kong/China Financial Services
Industry Leader
+852 2289 2303
matthew.phillips@hk.pwc.com
Raymond Yung
China Financial Services Industry
Leader
+86 (10) 6533 2121
raymond.yung@cn.pwc.com
Florence Yip
Hong Kong /China Financial Services
Tax Leader
+852 2289 1833
florence.kf.yip@hk.pwc.com
James Chang
Beijing
Consulting
+86 (10) 6533 2755
james.chang@cn.pwc.com
Banking & Capital Markets
Peter Li
Hong Kong
Assurance
+852 2289 2982
peter.pt.li@hk.pwc.com
Jimmy Leung
Shanghai
Assurance
+86 (21) 2323 3355
jimmy.leung@cn.pwc.com
James Quinnild
Hong Kong
Consulting
+852 2289 3422
james.m.quinnild@hk.pwc.com
William Yung
Shanghai
Regulatory Consulting
+86 (21) 2323 1984
william.sw.yung@cn.pwc.com
Shuyen Liu
Beijing
Actuarial
+86 (10) 6533 2592
shuyen.liu@cn.pwc.com
Chris Chan
Hong Kong
Transactions and Deals
+852 2289 2824
chris.st.chan@hk.pwc.com
Jeffrey Boyle
Hong Kong
Consulting
+852 2289 5005
jeffrey.boyle@hk.pwc.com
Duncan Fitzgerald
Hong Kong
Risk and Controls
+852 2289 1190
duncan.fitzgerald@hk.pwc.com
William Gee
Beijing
Risk and Controls
+86 (10) 6533 2269
william.gee@cn.pwc.com
Capital Markets and
Accounting Advisory
Services
Asset Management
Marie-Anne Kong
Hong Kong
Assurance
+852 2289 2707
marie-anne.kong@hk.pwc.com
Alex Wong
Shanghai
Assurance
+86 (21) 2323 3171
alex.wong@cn.pwc.com
Addison Everett
Beijing
Assurance
+86 (10) 6533 7319
addison.l.everett@cn.pwc.com
Insurance
Lars Nielsen
Hong Kong
Assurance
+852 2289 2722
lars.c.nielsen@hk.pwc.com
Xing Zhou
Beijing
Assurance
+86 (10) 6533 7986
xing.zhou@cn.pwc.com
57
Services we offer
Assurance
Advisory
Audit and Assurance
Transactions
•Actuarial services
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reporting
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services
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diligence
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(buy and sell)
•M&A/JV special reviews
•Post deal services
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•Business Recovery Services
•Distressed asset disposal
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Capital Markets &
Accounting Advisory
Services
•Equity IPO advisory and
readiness reviews
•Structured finance and
securitization advisory
•Derivatives and hedging
advisory
•Financial reporting improvement
•Specialized finance advisory
•Implementation of new
accounting standards
Risk Assurance
•Internal audit strategy and
advisory
•Internal Audit co-sourcing and
outsourcing services
•Internal controls consulting
•Fraud risk & controls
•Enterprise risk management
services (business resilience and
risk management)
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(including Board of Directors
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SEHK Listing rules) compliance
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58
Strategy Consulting
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Finance Consulting
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simplification
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management
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Regulatory and Risk
Consulting
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Assessment Process (ICAAP)
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transformation
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management
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support
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Acknowledgements
The following individuals from PwC China and Hong Kong contributed to the
production of this report
Core Editorial Team
Matthew Phillips
Raymond Yung
Jimmy Leung
William Yung
Richard Zhu
Project Management
CEO Interviews
Cyndi Yan
Colin Hong
Ian Willson
Jane Xue
Jesse Tong
Peter Craughwell
Jimmy Leung
Jeffrey Richart
Jeff Deng
Linda Yip
Jessica Tse
Winnie Xu
Margarita Ho
Jackrun Wang
Michael Hu
Shinny Mo
Patrick Zhou
Vivian Lee
Richard Zhu
Tina Li
Too Poh Tang
Vincent Yao
Design & Layout
Zona Chu
Jacky Chan
Lois Luo
Venus Guo
Vivian Ma
Wang Wei
William Yung
59
www.pwccn.com
This content is for general information purposes only, and should not be used as a substitute for consultation
with professional advisors.
© 2015 PricewaterhouseCoopers Zhong Tian LLP. 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
www.pwc.com/structure for further details. HK-20150122-1-C1

Banking and finance in China: The outlook for 2015

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