Mingchun sun senior partner chief economist china broad capital ltd january 6 2014
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Shadow Banking and Internet Finance in China. Mingchun SUN Senior Partner & Chief Economist China Broad Capital Ltd. January 6, 2014. China’s financing system. Social financing aggregate (SFA). Bank acceptance bills. Corporate bonds. Equity financing. Entrusted loans. Trust loans.

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Mingchun SUN Senior Partner & Chief Economist China Broad Capital Ltd. January 6, 2014

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Mingchun sun senior partner chief economist china broad capital ltd january 6 2014

Shadow Banking and Internet Finance in China

Mingchun SUN

Senior Partner & Chief Economist

China Broad Capital Ltd.

January 6, 2014


Mingchun sun senior partner chief economist china broad capital ltd january 6 2014

China’s financing system

Social financing aggregate (SFA)

Bank acceptance bills

Corporate bonds

Equity financing

Entrusted loans

Trust loans

Others

Bank loans

Shadow banking system (SBS)


Mingchun sun senior partner chief economist china broad capital ltd january 6 2014

Social financing aggregate (SFA)

The distribution of SFA

(total: RMB98trn, as of September 2013)

Newly increased bank loans

& its share in SFA

Source: PBOC, CEIC, and China Broad Capital Ltd.


Mingchun sun senior partner chief economist china broad capital ltd january 6 2014

The shadow banking system (SBS)

The size of the shadow banking system

(total: RMB24trn; as of September 2013)

The ratio of the SBS to GDP

(3Q2013 vs. 4Q2010)

Source: PBOC, CEIC, China Leasing Alliance, Ministry of Commerce, and China Broad Capital Ltd.


Mingchun sun senior partner chief economist china broad capital ltd january 6 2014

The recent surge in SBS was a combined result of over-investment…

Annual fixed-asset investment vs.

newly increased bank loans

Cumulative financing amount by category

(2002 -- 3Q2013)

Source: PBOC, WIND, CEIC,and China Broad Capital Ltd.


Mingchun sun senior partner chief economist china broad capital ltd january 6 2014

… and excessive regulation

  • Local governments were not allowed to issue municipal bonds

  • Property developers were not allowed to do equity financing or issue bonds in domestic markets after 2010

  • Banks were restricted by loan quotas, loan-to-deposit ratio ceiling, guidelines on allocation of loans to particular sectors (e.g. property), and other regulations

  • Corporate bond issuance needed approval by NDRC or CSRC, forcing PBOC to open a leeway in the inter-bank bond market

  • A sudden prohibition of banks from rolling over loans to local government financing vehicles (LGFVs) in 2011 forced LGFVs and banks to turn to trust loans

Changes in the components of SFA

(3Q2013 vs. 4Q2008)

Source: PBOC, CEIC, and China Broad Capital Ltd.


Mingchun sun senior partner chief economist china broad capital ltd january 6 2014

Borrowing costs are very high in SBS

Expected yields of trust products by types of underlying projects

(as of October 2013)

Average lending rates

(as of September 2012)

Source: WIND and China Broad Capital Ltd.


Mingchun sun senior partner chief economist china broad capital ltd january 6 2014

China’s SBS will likely grow rapidly

Annual fixed-asset investment vs. newly increased bank loans

Source: WINDand China Broad Capital Ltd.


How high is the risk

How high is the risk?

Its contribution

Without SBS, China’s economy would have encountered a major crisis during 2011-13

Major risks

Credit risk

Liquidity risk: maturity mismatch

Some turbulences seem inevitable

Some defaults will likely occur in 2014

But a systemic implosion is unlikely within 2-3 years

The real challenge may be in 2016-2018


Potential solutions

Potential solutions

Slowing investment growth to a more sustainable level

Reduce incentives for local governments to over-invest

Reduce investments in sectors with over-capacity

Broadening and deepening the financial markets in China

Accelerate the development of the bond/credit markets

Promote equity financing, including the restart of IPO, the issuance of preferred shares, launching more regional exchanges for SME shares, encouraging private equity and venture capital activities, etc.

Further liberalization of the formal banking sector

Lower the entry barriers for private capital to set up banks

Reduce excessive regulation on banks’ routine operation


Mingchun sun senior partner chief economist china broad capital ltd january 6 2014

Internet finance in China

Internet finance in China

Wealth Management

Payment

Lending or Fund-raising

Insurance

Credit Data Collection

Stock Trading

Banks

Brokers

P2P

Insurance companies

Brokers

Banks

Mutual funds

Brokers

Internet companies (NCF online)

Micro lending (Ali-loan)

Internet companies (Alipay, WeChat Payment)

Internet companies (inins.com,Zhongan.com)

Insurance companies (Pingan’s Lufax.com)

Credit search (Rong360)

Telecom operators (China Mobile)

Internet companies

(YuEBao, Eastmoney.com)

Crowd-funding (Zhong-chou)


Mingchun sun senior partner chief economist china broad capital ltd january 6 2014

It is growing rapidly

Chinese internet population

Amount of 3rd-party payment via internet

Source: China Internet Information Center, WIND and China Broad Capital Ltd.


Mingchun sun senior partner chief economist china broad capital ltd january 6 2014

Going mobile is the trend

Chinese population using mobile internet

3rd-party payment using mobile phones

Source: China Internet Information Center, WIND and China Broad Capital Ltd.


Mingchun sun senior partner chief economist china broad capital ltd january 6 2014

P2P lending is becoming “hot”

Monthly P2P transaction value: Shenzhen Index

Average interest rate of P2P loans:

Shenzhen Index

Source: Shenzhen E-commerce Association, WIND and China Broad Capital Ltd.


Mingchun sun senior partner chief economist china broad capital ltd january 6 2014

This is likely just the beginning

Alipay 1-day transaction value

on Nov. 11th Online Shopping Festival

E-commerce transaction value

Source: China E-commerce Research Center, WIND and China Broad Capital Ltd.


Mingchun sun senior partner chief economist china broad capital ltd january 6 2014

The demand for online WMP is high

Interest rates/expected yields for household deposits/WMP

Household bank deposit amount

Note: WMP stands for wealth management products.

Source: WIND and China Broad Capital Ltd.


The competition is fierce

The competition is fierce

Internet companies are entering the financial arena aggressively

Those with established online business and large installed customer base: Internet portals, social media, search engines, B2B or B2C platforms

New entrants starting from scratch

Financial institutions are fighting back

Banks, insurance companies, brokers, and asset management companies are forced to reshape their internet business strategy

Some are even spinning off their online functions and set up separate companies specializing in internet finance business

Some are entering non-financial businesses and trying to expand their existing online business into B2B or B2C platforms


But cooperation is also a trend

But cooperation is also a trend

Internet companies form joint ventures with financial institutions

Alibaba, Tencent, Ctrip and Ping An Insurance launched a joint venture Zhongan.com, which offers insurance policies online, in October 2013

Internet companies acquire controlling stakes of financial institutions

Alibaba acquired 51% shares of Tianhong Fund in October 2013

Internet companies and financial institutions form strategic partnership

Minsheng Bank and Alibaba signed a contract in December 2013 to cooperate in eight business areas including credit card, WMP, and IT

Sinolink Securities signed contracts with Tencent in November 2013 to promote its online brokerage and WMP via Tencent’s platforms

Financial institutions leverage internet companies as a channel

China AMC and Harvest AMC are selling MMF via Baidu’s Baifubao.com


Many issues need to be addressed

Many issues need to be addressed

What are the essential differences between internet finance and traditional finance?

Will internet companies be able to stay long in the financial arena?

Will traditional financial institutions succeed in transforming themselves into the internet model?

Will the boundaries of financial institutions change in the future, due to the fierce competition from internet companies?

How high are the risks hidden in the rapid growth of internet finance?

How should financial regulators react to the rapid expansion of internet finance in China?


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