2014 Top 10 Financial Industry Trends in China

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1. Webinar: A look at the Top-10 China Financial Industry Trends for 2014 January 23rd, 2014 - 17:00 17:45 Beijing Standard Time The webinar will start in a few minutes. For more information about the topics covered in this webinar or Kapronasia, please visit www.kapronasia.com or send us an email: research@kapronasia.com. Twitter: @chinafintech 2. A look at the Top-10 China Financial Industry Trends for 2014 Top 10 Capital Markets Trends in Brief Top 10 Banking Trends in brief Prepared by Victor Fan, Fiona Zhao Moderated by Paul Robinson Presented by Zennon Kapron January 23rd, 2014 3. Top-10 China Capital Market Trends for 2014 1. Asset management industry moving towards common retail wealth management industry 2. Chinese domestic a-share market faces more uncertainty in 2014 3. Money market products will take more share from bank deposits and put pressure on banks 4. ChiNext market will continue to grow strongly 5. Emergence of new financial derivatives including stock options 6. Expansion of the Over the Counter Bulletin Board (OTCBB) 7. Restart of IPOs, challenges and opportunities 8. Deepening Internet Finance influence on the Chinese capital market 9. Increasing number of hedge funds entering China; development of local hedge fund industry Shanghai Hongkou Hedge Fund Park 10. Ambiguous future of algorithmic trading in china 3 4. Top-10 China Capital Market Trends for 2014 Trend Number 1: Asset Management Industry Trend Number 4: ChiNext Market Trend Number 7: Restart of IPOs 5. Top-10 Capital Markets Trends Asset Management Asset management industry moving towards common retail wealth management industry The combination of Internet finance and finance industry has changed the landscape of asset management industry 2014 => generally available wealth management products will keep being a competitive focus for AM firms Drivers: 1. Large population and large total wealth management demand 2. Undeveloped wealth management products and services 3. Less knowledgeable investors 4. Immature financial system in China Favorable products: low threshold, low risk, stable and relatively high return 5 6. Top-10 Capital Markets Trends Asset Management AUM growth of Yuebao product => largest fund product in the market currently => Tianhong Asset Management now second largest AM in China. Source: Tianhong Asset Management, 2014 6.6 55.65 100 185.3 0 20 40 60 80 100 120 140 160 180 200 June 30, 2013 Sep 9, 2013 Nov 14, 2013 Dec 31, 2013 AUM of Yu'ebao managed by Tianhong Fund (CNYbn) 6 7. Top-10 China Capital Market Trends for 2014 Trend Number 1: Asset Management Industry Trend Number 4: ChiNext Market Trend Number 7: Restart of IPOs 8. Top-10 Capital Markets Trends ChiNext Market ChiNext market or growth enterprise board in Shenzhen Stock Exchange preforming much better than SSE in 2014. Growth index ended 2014 at 1304.44, +82.73% Reasons for ChiNext growth: 1. Listing firms like the typically higher P/E ratios which mean higher valuations than SSE 2. Threshold for getting listed in ChiNext lower than the SSE and compared to the OTC market, liquidity and financing is much better 3. More than 50% of the first batch pre-IPO firms have applied to list on ChiNext market 8 9. Top-10 Capital Markets Trends ChiNext Market -6.79% -10.91% 82.73% -20.00% 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% Shanghai A-share Shenzhen A-share ChiNext 2014 Stock Market Returns Source: Shanghai Stock Exchange, Shenzhen Stock Exchange, 2014 9 10. The first batch of 50 new IPO firms will be listed in January 2014. Among which 6 firms will be on the SSE, 20 on the the SME board, and the remaining 24 on ChiNext Top-10 Capital Markets Trends Growth Enterprise Board Source: Shanghai Stock Exchange, Shenzhen Stock Exchange, 2014 6 20 24 Number of the First Batch IPO Firms In A- share Market In January 2014 Main-board SME-board ChiNext 10 11. Top-10 China Capital Market Trends for 2014 Trend Number 1: Asset Management Industry Trend Number 4: ChiNext Market Trend Number 7: Restart of IPOs 12. Top-10 Capital Markets Trends Restart of IPOs IPO facts A-share market struggling; worry that IPOs will further strain liquidity The first batch of 50 firms will be listed on main-board, SME board and Growth Enterprise Board Estimates are that IPO-based financing could reach RMB250B New approval mechanism called IPO registration mechanism will replace the previously complicated authorization pre-IPO process Impact of new IPOs 1. A-share market will drop as new IPOs come on 2. Newly listed companies will have to contend with lower valuations 3. Examination of firm quality for registration => markets / investors One potential solution is the implementation of a delisting mechanism 12 13. Top-10 China Banking Industry Trends for 2014 1. Emergence of Private Banks 2. Deposit Insurance System 3. Bankruptcy Regulations 4. Expansion of Credit Asset Securitization 5. Issuance of Banks First Preferred Stock 6. Negotiable Certificate of Deposit (NCD) 7. New Business Model: The Emergence of Direct Banks 8. Near Field Communication (NFC) Mobile Payments 9. Micro-chat Banks 10. Banks Opportunities Arising from Free Trade Zone (FTZ): Cross -boarder RMB Business Development 11. Challenge from Money Funds such as Yuebao 12. Banks shifting to business such as Financing Products 14. Top-10 China Banking Trends for 2014 Trend Number 1: Emergence of Private Banks Trend Number 2: Deposit Insurance System Trend Number 3: Bankruptcy Regulations 15. Emergence of Private Banks Concept Concept There is no agreed definition of private bank in China Private bank definition from Hexun: private banks are owned and run by non-governmental organisations. Modern financial enterprise with a singular owner. Non-governmental owned Direction from and risk on non-state investors 16. Emergence of Private Banks Background Commercial banks play a vital role in the economy to enable finance. Historically used to government to guide the economy Although non-government ownership in banks has increased, it is still very low in most banks PBOC: China Bank Regulatory Commission 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Big Five Banks Nationwide Joint-Equity Commercial Banks 145 City Commercial Banks Rural Financial Institutions 5.30% 41% 54% 90% The Share of Non-governmental Captial (end-2013) 17. Emergence of Private Banks Background Non-government capital hasnt changed governance -> capital typically flows into infrastructure projects or SOEs, rather than private enterprises (50% of Chinas economy) SMEs face a serious capital shortage => turn to shadow banking Private banks will hopefully fill the gaps and bring some stability to shadow banking / SME lending July 5th, 2013 General Office of the State Council published Guiding Opinions which set guidelines for private banks Suning Bank pre-approved on September 12th -> invested by Suning Commerce; first A share company to invest in a private bank End 2013: roughly 67 private banks with approved names by State Administration for Industry and Commerce including 30+ listed firms On January 6th, 2014, Shang Fulin, China Banking Regulatory Commission (CBRC) chairman started pilot of private banks 18. Emergence of Private Banks Establishment criteria Non-confirmed Criteria Details Parent company qualification Excellent corporate finance, business performance; adequate capital; strong corporate governance and risk control Limited licenses Encouraged to specialized in particular field Prudent regulatory standards Qualified indicators such as Capital Adequacy Ratio based on size; changing over time Risk handling system Clear risk management procedures including bankruptcy procedures 19. Top-10 China Banking Trends for 2014 Trend Number 1: The Emergence of Private Banks Trend Number 2: The Deposit Insurance System Trend Number 3: Bankruptcy Regulations 20. Deposit Insurance System Overview A key part of mature economies to to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay; key component of a financial system safety net that promotes financial stability Accelerated interest rate marketization -> deposit Insurance system is the precondition to push the liberated interest rate Accelerated liberated interest rate -> increasing competition among banks => banks need deposit insurance to guarantee savers benefits Private banks will also need deposit insurance to help develop their business 21. The Deposit Insurance SystemTimeline the upcoming of deposit insurance system 2007 deposit insurance system was on the agenda during the 3rd National Financial Work Conference March 2011 The Twelfth Five-Year Plan for National Economic and Social Development of the Peoples Republic of China indicates acceleration of establishment of deposit insurance system Nov 2013 3rd Plenum of the 18th Communist Party of China (CPC) establishes idea of deposit insurance system Jan 2014PBOC states that China is ready to start deposit insurance system 22. Top-10 China Banking Trends for 2014 Trend Number 1: The Emergence of Private Banks Trend Number 2: The Deposit Insurance System Trend Number 3: Bankruptcy Regulations 23. Bankruptcy Regulations Background China commercial banks are heavily influenced by central or local governments; governments typically prevent banks from failing In this context, commercial banks seems to depend on the government; bad loan balance growing for 7 successive quarters 433.3 422.9 407.8 427.9 438.2 456.4 478.8 492.9 526.5 539.5 563.6 0 100 200 300 400 500 600 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 Commercial Bank Balance of Bad Loans; Billion RMB PBOC: China Bank Regulatory Commission 24. Bankruptcy Regulations Overview Need for bankruptcy rules increased by setup of private banks Risk control and management even more important as interest rate liberalization continues. Goes hand in hand with deposit insurance Direction PBOC states that they need to further research the fade-out mechanism for financial institutions including risk premium and risk allocation mechanism. Currently there is no official announcement on bankruptcy regulation specifics. The framework and details are still in discussion. 25. Webinar: A look at the Top-10 China Financial Technology Trends for 2014 For more information about the topics covered in this webinar or Kapronasia, please visit www.kapronasia.com or send us an email: research@kapronasia.com. Twitter: @chinafintech Thank You