The Fintech Industry In China [PDF]

The Fintech Industry In China A new road to financial inclusion

October 7, 2016

Raphaël Goué Chairman Consumer and NBFI Group EUCCC Founding Partner - Euracific Strategies

Outline of China Economics

China GDP keeps increasing during the past decade, while the growth rate is slowing down GDP in Tn $ 17.95

China and Peer Group’s GDP (2015) China Developed Countries BRICS (ex. China) Other developing Countries

10.87

3.36

2.42

1.77

1.33

2.07 0.31

1.14

0.86

0.40

China and Peer Group’s GDP Growth (2015) Annual % Growth China Developed Countries BRICS (ex. China) Other developing Countries

7.6%

6.9%

4.8% 2.4%

1.7%

2.5%

2.8%

1.3%

1.2%

-3.8%

-3.7%

• China is now the world’s second largest economy, which is testament to its record of successful reforms and development policies. But the country is far from rich: per capita income (PPP basis) was 24% of the U.S. level in 2014, and 14% in U.S. dollar terms. • Growth in 2014 fell to 7.5% and, in 2015, is reported to slow further to 6.9% on the back of slower investment, especially in real estate. With China slowing, India is certainly carrying the day in terms of best growth rate. • China is moving to a ‘new normal,’ characterized by a slower yet safer and more sustainable growth. The transition is challenging, but the authorities are committed to it. They have made progress in reining in vulnerabilities built-up since the global financial crisis and embarked on a comprehensive reform program. • This slowdown, which is in line with the authorities’ target of around 7.0%, reflects progress in addressing vulnerabilities, including slower total social financing (TSF) growth, tighter oversight of shadow banking, a correction in real estate, and a new budget law. To ensure further progress in addressing vulnerabilities, GDP growth should be permitted to slow to 6% to 6.5% next year.

Source: National Bureau of Statistics of China; World Bank Data; Euracific Analysis Eurofinas – Athens – October 7th 2016

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IMF forecasts China GDP to reach 16 trillion US$ in 2020 and the growth rate to be stable around 6%. China GDP and Growth Rate (20112020)

GDP in Tn $ 18.0

Inflation and Unemployment Rate (2011-2020) Annual % Growth

9.5% 16.1

16.0

7.8% 7.7%

14.0

14.6

7.3%

6.9%

12.0

13.3 6.5% 6.2% 6.0% 6.0% 6.0%

10.0% 9.0%

4.09% 4.09% 4.05% 4.09% 4.05% 4.05% 4.05% 4.05% 4.05% 4.05%

8.0% 7.0% 6.0%

10.0

12.3

9.5

2.0

2.0%

8.5

7.5

2.0% 1.4% 2011

2012

49.2%

2013

2014

2015

Inflation

0.0% 2012

2.0%

2.2%

3.0%

2016E 2017E 2018E 2019E 2020E

1.0%

0.0 2011

1.8%

2.6%

3.0%

10.4

4.0

2.6%

4.0%

10.9

6.0

2.7%

5.0%

11.4

8.0

in %

5.4%

2013

2014 2015 2016E 2017E 2018E 2019E 2020E GDP Growth

Investment and Gross National Saving (2011in % of GDP 2020) 49.0% 48.0% 48.0%

Unemployment Rate

•Inflation: Inflation average consumer prices (Annual %) •Unemployment: Percent of total labor force

Exports Volume of Goods and Service (2011-2020) Annual % Growth 14.6%

46.0% 47.3%

46.5% 46.5%

44.4% 42.9%

45.9%

8.8% 41.5%

43.3%

5.9%

40.1% 41.8%

40.9%

4.8%

38.8% 40.1%

39.2%

1.2%

38.1% 2011

2012

2013

2014

2015

Investment *

2016E 2017E 2018E 2019E 2020E

1.8%

2.6%

2.9%

3.3%

-2.1% 2011

2012

2013

2014

2015 2016E 2017E 2018E 2019E 2020E

Gross National Saving

Investment and Gross National Saving: in Percent of GDP

*Export

volume of goods and services: Annual % Growth

Source: National Bureau of Statistics of China; International Monetary Fund (IMF), World Bank Data; Euracific Analysis Eurofinas – Athens – October 7th 2016

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By 2020, Chinese consumption will grow by $2.3 trillion in $trillion

Expected Nominal Consumption, 2020 Consumption Growth, 2015-2020

15

Household Final Consumption Expenditure (20062014) in % of GDP

Private Consumption, 2015

56.9

2.6

Incremental growth in Chinese Consumption over the next five years will roughly equal a market 1.3 times the size of Germany or the UK

36.7

56.3

37.6

57.6

56.6

36.6

35.7

57.4

57.3

37.7

36.6

57.6

36.6

57.3

36.0

57.1

36.5

6.5 12.4 2.3 3.0 4.2

1.6

1.3 U.S.

China

India

2.8 0.4 2.4

2.2 0.5 1.8

2.1 0.3 1.8

1.7 0.4 1.3

Japan

Germany

UK

France

Note: Assumes annual GDP Growth rate of 5.5%. Because of rounding, not all numbers add up to the totals shown.

• • •

In early November 2015, the government lowered its official five-year annual GDP growth target to 6.5%, the slowest pace since the 2008– 2009 global financial crisis. China’s consumer economy is projected to expand by about half, to $6.5 trillion, by 2020—even if annual real GDP growth cools to 5.5%, below the official target. The Chinese consumer market, moreover, is in the midst of a transformation that offers tremendous new opportunities. Three great forces are ushering in this transformation: the rise of upper-middleclass and affluent households as the drivers of consumption growth; a new generation of freer-spending, sophisticated consumers; and the increasingly powerful role of e-commerce.

2006

2007

2008

2009

China

2010

2011

2012

2013

2014

European Union

• In 2010, China’s economy dipped below 10% growth for the first time in decades. During the years 2010 to 2014, China’s stable economic growth has enabled the country to rank as the 2nd economic power. Despite the global economic crisis and major natural disasters, annual GDP in China enjoyed an average growth rate of 7.84% in the past 5 years. • For the13th Five-Year Plan for 2016-2020 adopted in March 2015, the Chinese Central Committee has come to terms with this economic slowdown by adjusting growth expectations downward to what it is now known as the ’new normal’. Under this new concept, Chinese leaders expect to see moderately high growth that will allow them to meet the goals of doubling GDP and per capita income over the next five years.

Source: WEF; Economist Intelligence Unit; BCG analysis; World Bank Data; Euracific Analysis Eurofinas – Athens – October 7th 2016

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While China’s 12th 2012-2015 plan initiated GDP rebalancing, the 13th plan focus on consumption development, consumer finance being a driver Key achievements of China 12th Five Year Plan

Elements impacting the Financial Services

Economic Achievements • Over the past 5 years, China enjoyed rapid GDP growth, increasingly large economic aggregate and remarkable development achievement. • GDP in 2015: 10.87 Trillion USD • Ranked second in the world, just after the US. • Average annual GDP growth during these five years: 7.84% • This growth rate is more than 2 times of the world average GDP growth • China is the rapidest growing one among all main economies. • The economic structure has been optimized. • Final Consumption Expenditure contributed 66.4% to the GDP growth in 2015, increased 21.5% compared with 2010. • In 2015, Tertiary Sector (Service) takes the leading position among the three sectors for the first, with the 51.6% contribution to GDP, which is 8.7 percent more than Secondary Sector (Manufacturing). • Science and technology education markedly increased • The spending on R&D has exceeded 2% of GDP by the end of 2015, reaching the average level of OECD countries. • The urbanisation has reached to 55% during these 5 years.

Much of China’s 13th Five Year Plan for financial services focusses on further financial reforms. Financial Services, recognizing that there is still room for further development and improvement of China’s financial services sector. The Plan details measures to address the duality of financial reform and financial stability. Areas covered include: • Further opening-up of China’s financial markets to foreign issuers and investors • Steadily moving forward with RMB internationalization • Establishing a green financial system consisting of green loans, green bonds, a green development fund and other innovative green financial products • Improving market access for financial services and encouraging more private sector investment (China’s financial services sector is dominated by state-owned enterprises. For example, in the banking sector, there are currently only a handful of privately owned banks.) • Enhancing the macro prudential regulatory framework and consumer financial protection • Further regulating the development of internet-based finance, including peer-to-peer lending • …

Eurofinas – Athens – October 7th 2016

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China Financial Service Sector

Up to the development of the financial innovation, China regulatory framework was complex and bringing constraints to the industry development Product Mapping Type of entity

Cash Loan

Incorporated bank

Unsecured Loan

POS Loan





Private Label Card

Credit card partnership

Credit Card

Car Loan





 

AFC



CFC

Only on clients having already a POS loan



 To be approved by the CBRC on a case by case approach

Guarantee company

It’s not be possible to manage the entire process with the client









Only guaranty

Only guaranty

Only guaranty

Only guaranty

Small loan company











tbc

Cash cards





Village Bank





Source: PBOC, CBRC, Euracific Analysis Eurofinas – Athens – October 7th 2016

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Digital Finance China

The new collaborative economy supported by the development of smartphones and appropriate trading platforms contributes to the development of digital finance

Car sharing

Owner Asset owner expecting to get an unexpected return on his/her asset

P2P lending

P2P lending

User Get the benefit to have access to an asset at an affordable price

Accommodation renting

If US in leading the game, China has been entering recently but promptly in the collaborative economy creating already large players Eurofinas – Athens – October 7th 2016

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Smartphone penetration is the second factor enabling the interaction with customers and prospects everywhere without barrier Smartphones subscription (2014-2020) In million units

Smartphones penetration in selected Asian markets 2015 In %

+3,513 mn units 90.9

6,079

85

1,351

84.8

82.2 74.2 68

2,566

51.3

50.8 42.3

3,316

40.3

365 27 19.4

1,379 368 603

253 269 300 2014

441 2015

2016

West Europe

Latin America

2017

2018

North Amercia

2019 APAC

2020 CEMA

APAC will be the highest contributor to smartphones growth with China and emerging Asia the highest growth potential development Source: Ericsson, McKinsey, Internet Live Stats, Euracific Analysis Eurofinas – Athens – October 7th 2016

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P.R. China has the largest Internet population with 688 million users as of December 31st 2015. Among them, 60% are online shoppers. • China has a massive number of internet users on PC or other devices. Chinese were 298 million internet users in 2008, 367 million in 2010 and 668 million in 2015 • Internet penetration is still low (EU: 73.5%, North America: 87.9%, Latin America: 53.9%) • China’s online users have a daily usage of 3.7 hours,

China Internet key facts

Mobile Internet Users

Total population

Internet Users

Daily Internet Usage

1.38 bn (45% rural – 55% urban)

688 mn (50.3% penetration)

3:44 h

620 mn (90.1% of the Internet penetration)

Online Shoppers 413 mn (60.0% penetration)

Pure Mobile Internet Users

127 mn (18.5% of the Daily Mobile Online Internet Internet Usage for Penetration) Shopper

mobile users

340 mn (Growth Rate: 43.9%)

3:00h

Source: CNNIC, Natural Bureau of Statistics of China, World Bank, Iresearch, EU SME, Internet World Stats, Euracific Analysis Eurofinas – Athens – October 7th 2016

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As disposable income rises, consumption is increasing, most of it being done online thanks to the increased internet and smartphone penetration Internet Usage

Consumption Indicators Disposable Income annual per Consumption’s capita disposable income of Contribution to GDP, in % 66.4% urban households in China

Internet users above 30 y.o % of total online population

Online retail market size transaction volume in trillion 6.5

46.0%

31,195 28,844

50.0%

50.2% 3.8

27.9% 19,109

2010

2014

2015

2013

2014

2006

2015

• Disposable income and consumption rise will generate value on internet transactions. • According to CNNIC, online payment users have increased 14.3% yoy to 413 million Chinese people by the end of December 2015. • CNNIC indicated that China’s mobile online shopper has increased to 340 million by the end of 2015, with a 43.9% yoy growth rate. • China is aiming to double its 2010 GDP and per-capita income of residents both in cities and rural areas by 2020, and will significantly raise the contribution of consumption to economic growth from 2016 to 2020, according to the Communist Party of China.

2015

2015

2018E

Chinese online transaction value (2010-2018) In Bn RMB

Annual % Growth

7000

70.0%

6000

6504.6

58.9%

53.6%

5000

48.2%

5680.9

45.0%

50.0%

4794

4000

33.9% 3835.2

3000 2863.7

2000 1000 545.9 867.4

40.0% 30.0%

25.0% 18.5%

1975

60.0%

1285.6

20.0% 14.5% 10.0%

0

0.0% 2010

2011

2012

2013

2014

2015 2016E 2017E 2018E

Source: CNNIC-; China Internet Network Information Center; Natural bureau of Statistics of China, World Bank, ANZ, CCCWS, Iresearch, EU SME, Euracific Analysis Eurofinas – Athens – October 7th 2016

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China has been fast to take as leadership in the digital industry as for instance in in the car pooling sector Digital Private Car Service Companies latest fundraising in bn USD Uber

10.20

Didi

6.90

Lyft

1.36

Olacabs

1.31

Grab Taxi

0.54

BlaBlaCar

0.28

Yongche

0.28

Get Taxi

• Founded in March 2009 in U.S and entered China in August 2013 • China Internet giant, Baidu, is one of the investors

0.21

Turo

0.10

Hailo

0.10

• China’s home grown car pooling company, founded in September 2012 • Merged with Kuaidi In Feb 2015. • Apple and Alibaba are two of the investors

• Founded in 2010 • Closed Series D in Oct 2015

On August 1st 2016, Uber sold its China operations to Didi in exchange for a 17.7% economic interest in the new company.

Source: CB Insights, Companies, Euracific Analysis Eurofinas – Athens – October 7th 2016

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From digital sales to financial innovation, new champions developing new consumer finance models are emerging in China • Internet giants (Tencent and Alibaba) in China were established in 1998 and have developed their own digital banks. • Focused primarily on their internal market due to high number of potential customers, digital players are looking to international markets. 11/1998

2003

2004

2005

2006

08/2010 09/2011 10/2012 03/2014 09/2014 09/2014

Launch of digital platforms

Sina, online media Tencent, social network, portals, online games Alibaba, business platform

Yirendai, P2P platforms by Credit Ease, IPO in NYSE. It’s the first IPO of China P2P platform

09/2015

10/2015

High path transformation JD target international customers

JD, B2C platform Alipay payment platform

Taobao overtook ebay as the leader of C2C website Alibaba Launch Taobao, consumer platform

12/2015

12/2014 06/2015 07/2015

08/2016

Establishment

Alibaba IPO markets the company up to 225 Mn USD

Establishment of Lufax by Ping An Bank

of CreditEase

PBOC put its online payment interbank clearing system

Development of project “Financial innovation”

Establishment of Mybank by Alibaba Group

Establishment of Ant Financial Service by Alibaba Group

Establishment of Webank by Tencent Inc Establishment of Beijing Internet Lending Association, the first in China

CBRC, together with other 3 regulators, issued the regulation of P2P platforms.

2,113 P2P platform 3Q transaction volume amounted 627 Bn RMB, up 212% yoy

JD Blank Note ABS is first listed to trade in Shenzhen Stock Exchange

Internet finance is written in 13rd P2P platform 5-year-plan typically have Guideline by more than 1000State Council for the first time staff

CBRC and PBOC issued guidelines for P2P lending and 2015 1st half third party active investor payment more than 8 millions and active borrowers more than 1.6 million.

Source: PC World, Companies, Euracific Analysis Eurofinas – Athens – October 7th 2016

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Enhanced by the development of big data and smartphones, new lending models appeared in the past 10 years Leading P2P lending platform cumulative loan value - 2015 USD Mn

Leading crowdfunding platform cumulative transaction volume - 2015 USD Mn

LendingClub

Equitynet

11,880

Prosper

250

Fundable

3,700

211

CircleUP Upstart

275

GBP Mn

GBP Mn

Zopa

1,240

Funding Circle

201

Crowdcube

960

CrowdBnk

114 38

RMB Bn

RMB Bn Hongling Capital

91

Lufax

PE

Crowdfunder

1,010

Ratesetter

Renrendai

145

Jingdongzhon gchou Taobaozhong chou

52

Suningzhongc hou

13

Bank

1,317 1,070 360

Private

Source: Company website, Euracific Analysis Eurofinas – Athens – October 7th 2016

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The new normal financial innovation launched in 2014 in China has pushed a new financial industry to take off Payment

P2P Lending

Crowd Funding

Insurance

Big Data Source: PBoC Fintech Lab; Euracific Analysis Eurofinas – Athens – October 7th 2016

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Thanks to the financial innovation, China is building a leadership in collaborative finance, bringing financial inclusion to its wide underserved population P.R. Digital Finance Development Number of P2P Platforms in unit of platforms

•

P.R. China digital banking development kicked off from third party payment, by end of 2014, the total transaction volume by third party payment reached 11.8 RMB Tn in 2015, a total of 270 enterprises holding third party payment license.

•

As an important component of digital banking, P2P lending first appeared in China in 2006 and experienced rapid growth since then. Currently, there are 4,948 P2P platforms in China. However, only a few platforms realized pure digitalization while the rest platforms rely heavily on offline operations for loan approval.

•

There are currently 3 internet banks in China formed by three internet giants: ○ Webank by Tencent Inc, established in December 2014 ○ Mybank by Alibaba Group, established in June 2015 ○ Baidu Internet Banking announced late 2015 as a JV with Citic ○ Both banks operation were delayed in running a full online model because of the regulations requiring face to face requirements

4948

2358

523 50

148

2011

2012

2013

2014

2015

Source: PWC, Wangdaizhijia; Bank for International Settlement, Morgan Stanley Global Marketplace Lending 2015 Lufax， P2P Eye; Wangdaizhijia, iresearch, Euracific Analysis Eurofinas – Athens – October 7th 2016

15


A soft regulation has enabled the industry to develop extremely fast Chinese P2P by lending volumes and number of borrowers May 2015-May 2016

Chinese P2P by purpose

mn RMB 120000

1200000

100000

1000000

80000

800000

60000

600000

40000

400000

20000

200000

0

0

Comments

Transaction Vol(RMB Mn)

No' of borrowers

• Most of those platforms were founded between 2012 and 2014, Credit Ease, the first platform in China, was founded in 2006 • Regulation is under development since the financial innovation was launched in March 2014 • PBoC and the CBRC clarified that P2P platforms should be positioned as information intermediaries -2014 • CBRC guidelines clarify the definition of internet lending (P2P lending and internet small loans) - July 2015 • P2P is excluded from third party payment • Cap on interest rate by the Supreme Court to 36% • New regulation issued on August 26, 2016 Source: CBRC, PBOC, Wangdaizhijia, Lufax, Euracific Analysis Eurofinas – Athens – October 7th 2016

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Initiated by Credit Ease in 2006, large digital players and banks have benefitted from the financial innovation • Founded in 1998, Alibaba set Taobao, a C2C e-commerce platform and few years after Tmall a retail website. In 2004, Alibaba launched Alipay, a third party payment platform. Alibaba

Tencent

• For digital finance, Alibaba Group set up Ant Financial Service in October 2014 to integrate the group’s operations in finance sector. • Founded in 1998, Tencent is providing value-added Internet, mobile and telecom services and online advertising through internet platforms (QQ, WeChat, SoSo, PaiPai, Tenpay…). Tencent has the largest community split between interests :communication, information, entertainment, e-commerce, even if entertainment is its main business. • In digital finance, Tencent Inc has Tenpay, Licaitong and Webank, the first internet bank in China

Ping An

• Founded in 1988, Ping An is the first insurance company in China to adopt a shareholding structure. Today, it has developed into a personal financial services group with three core businesses of insurance, banking and investment, enjoying parallel growth of its core and internet finance businesses. • In digital finance, Ping An set up Lufax in 2011, leading P2P platform in China, and Yizhangtong.

Minsheng Bank

Credit Ease

• Founded in 1996, Minsheng Bank is the first national commercial bank set up by private sector capital in China. The bank is listed in Shanghai Stock Exchange in December 2000 and in Hong Kong Stock Exchange in November 2009. It ranked 281 in Fortune Global 500 list in 2015. • In digital finance, Mingsheng has msyidai, P2P lending platform based on its e-commerce platform, and mindai, internet financial service platform. • Founded in 2006, Credit Ease is among the first batch companies operating in P2P lending in China. In addition to P2P lending, the company also operates in wealth management, credit risk assessment and management, credit information consolidation. • Credit Ease has two important subsidiaries as yirendai and itoumi, which are both leading P2P platform in China targeting on “white collar” customer and lower income group respectively

Source: Companies, Euracific Analysis


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Digital Finance China Conclusion

Some intakes from China • The China fintech industry offer an investment based model where consumer finance provides the yield to the asset manager • Digital Finance Industry is mostly localized with few international players involved •

Investec or Standard Chartered have invested the Chinese fintech world where few international players are involved

• Digital Finance enables a new category of companies entering the financial services industry with having being multibillion valuation •

In a developing and regulated market as China, it helps supporting the underserved customers, complementing the banking offering

• Banks are not staying apart of the game viewing the P2P industry as a future acquisition channel •

Ping’An created one of the leading player, Minsheng is entering the arena

• The regulator can protect the banking industry and is currently regulating an industry which was low regulated • •

In forbidding the client to apply on line, it obliges the new digital banks to develop a costly traditional model which does not disadvantage the traditional banks On August 2016 the CBRC has issued a dedicated regulatory framework

• China has built quickly a new category of players, developing its expertise which could be potential international partners, some of its leaders considering going to India, Korea or the USA for instance


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