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
loans
Entrusted
loans
Trust
loans
Corporate
bonds
Equity
financing
Shadow banking system (SBS)
2
Bank
acceptance
bills
Others
Social financing aggregate (SFA)
The distribution of SFA
(total: RMB98trn, as of September 2013)
Corporate
bond, 8.8 ,
9.0%
Equity
financing, 2.9
, 3.0%
Others, 1.4 ,
1.4%
Newly increased bank loans
& its share in SFA
% share
RMB trn
12
100%
10
90%
8
Bank
acceptance
bill , 6.5 ,
6.7%
80%
6
70%
4
60%
2
% share in new SFA, RHS
Source: PBOC, CEIC, and China Broad Capital Ltd.
3
2012
Jan-Oct 2013
New bank loans, LHS
2011
2010
2009
2008
2007
2006
2005
50%
2004
0
2003
Entrusted
loans, 7.6 ,
7.7%
Bank loans,
66.1 , 67.6%
2002
Trust loans,
4.5 , 4.6%
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)
% of GDP
Micro lending
704
3.0%
50%
Pawn loans,
67, 0.3% Others, 1,204,
5.1%
42%
40%
Financial
leasing, 1,900,
8.0%
Entrusted
loans, 7,571,
31.8%
Credit
guarantee
1,362
5.7%
Bank
acceptance
bills, 6,540,
27.5%
30%
20%
Trust loans,
4,463, 18.7%
10%
0%
Source: PBOC, CEIC, China Leasing Alliance, Ministry of Commerce, and China Broad Capital Ltd.
4
29%
2010
3Q2013
The recent surge in SBS was a
combined result of over-investment…
Annual fixed-asset investment vs.
newly increased bank loans
RMB trn
70
RMB trn
45
40
35
Cumulative financing amount by category
(2002 -- 3Q2013)
New bank loans
Fixed-asset investment
66
60
50
30
40
25
30
20
15
20
10
5
3
0
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E
Source: PBOC, WIND, CEIC, and China Broad Capital Ltd.
5
9
10
Bank loans
Corporate bond
Equity financing
… and excessive regulation
Changes in the components of SFA
(3Q2013 vs. 4Q2008)
% change

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, loanto-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
800
687
700
600
534
557
500
368
400
300
200
198
155
137
100
-
Source: PBOC, CEIC, and China Broad Capital Ltd.
6
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)
%
25
%
10
10.0
9.2
20.6
20
8.8
8.8
Infrastructure
Industry and
commerce
8
17.2
15
6
10
7.2
4
6.2
6.2
5
2
0
Bank loans
Bill
discounting
Mortgage
Wenzhou
private
lending
Source: WIND and China Broad Capital Ltd.
7
Wenzhou
micro lending
0
Property
Mining
China’s SBS will likely grow rapidly
Annual fixed-asset investment vs. newly increased bank loans
New bank loans
RMB trn
90
Fixed-asset investment
86
78
80
70
70
61
60
53
50
45
37
40
17
18
2017E
2018E
12
15
2016E
11
2015E
2008
9
2014E
5
8
2013E
4
8
2012
3
11
14
2011
2
2007
11
2006
2
9
2005
3
2003
6
24
2002
10
7
14
22
2010
20
17
31
28
2009
30
2004
0
Source: WIND and China Broad Capital Ltd.
8
How high is the risk?

Its contribution



9
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



10
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
Internet finance in China
Internet finance in China
Payment
Banks
Brokers
Internet
companies
(Alipay,
WeChat
Payment)
Telecom
operators
(China
Mobile)
11
Lending or
Fund-raising
P2P
Micro
lending
(Ali-loan)
Credit
search
(Rong360)
Crowdfunding
(Zhongchou)
Wealth
Management
Brokers
Banks
Mutual funds
Insurance
companies
(Pingan’s
Lufax.com)
Internet
companies
(YuEBao,
Eastmoney.c
om)
Stock
Trading
Brokers
Insurance
Insurance
companies
Internet
companies
(inins.com,
Zhongan.c
om)
Credit Data
Collection
Internet
companies
(NCF
online)
It is growing rapidly
Amount of 3rd-party payment via
internet
Chinese internet population
Million
% yoy
RMB trn
300
6
Online payment
5.7
150
Amount, LHS
Online shopping
% yoy growth, RHS
Online banking
120
Online stock trading
200
4
3.7
90
2.2
100
60
2
1.0
30
0.5
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
0
Source: China Internet Information Center, WIND and China Broad Capital Ltd.
12
0
0
2009
2010
2011
2012
2013
Going mobile is the trend
Chinese population using mobile internet
Million
% ratio
100
500
3rd-party payment using mobile phones
RMB bn
300
Mobile internet population, LHS
Mobile internet
Ratio of mobile internet to total internet population, RHS
400
80
SMS
Near field
250
200
300
60
150
200
40
100
100
20
50
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
0
Dec-06
0
Source: China Internet Information Center, WIND and China Broad Capital Ltd.
13
0
Q12013
Q22013
Q32013
P2P lending is becoming “hot”
Monthly P2P transaction value:
Shenzhen Index
Average interest rate of P2P loans:
Shenzhen Index
% p.a.
RMB mn
7000
6,368
23.9
23.7
Jun-13
Jul-13
24
20.6
6000
5000
18
4,798
4,310
4000
12
3000
2000
6
1000
0
May-13
Jun-13
Jul-13
Source: Shenzhen E-commerce Association, WIND and China Broad Capital Ltd.
14
0
May-13
This is likely just the beginning
Alipay 1-day transaction value
on Nov. 11th Online Shopping Festival
E-commerce transaction value
RMB bn
RMB bn
8,000
40
B2B
Online shopping
7,000
35
6,000
30
5,000
25
4,000
20
3,000
15
2,000
10
1,000
5
0
2008
2009
2010
2011
2012
Source: China E-commerce Research Center, WIND and China Broad Capital Ltd.
15
0
35.02
19.10
5.20
0.05
0.94
2009
2010
2011
2012
2013
The demand for online WMP is high
Interest rates/expected yields for
household deposits/WMP
Household bank deposit amount
RMB trn
% p.a.
6
45
40
5.53
5.58
3-month
WMP
1-year
WMP
5
35
3.76
4
30
25
3.00
3
2.60
20
2
15
10
1
0.35
5
0
Note: WMP stands for wealth management products.
Source: WIND and China Broad Capital Ltd.
16
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
0
Current
account
deposit
3-month 1-year time 1-week
time
deposit
WMP
deposit
The competition is fierce


17
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

Internet companies form joint ventures with financial institutions


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

18
Alibaba, Tencent, Ctrip and Ping An Insurance launched a joint venture
Zhongan.com, which offers insurance policies online, in October 2013
China AMC and Harvest AMC are selling MMF via Baidu’s Baifubao.com
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?
19