It has been a few weeks since Tradetech China and it’s worth taking a look back at the event itself. Really in China, there are not too many capital markets focused events and WBResearch saw the opportunity and in 2010 setup Tradetech China.

During the first year, although Kapronasia wasn’t in attendance, we had heard that event was quite vendor and sell-side heavy with little actual buy-side attendance. This year we did attend as in 2011 and actually this year had the opportunity to chair one of the tracks on the day two - it is pretty amazing how quickly the event has shifted. Gone are the problems of too many sell-side, now from our own view and my experience from similar events, there were almost too many buy-side and not enough sell-side, which for an event like this was pretty impressive – especially only three years in as buy-side are typically who the events want to attract.

The depth and breadth of the agenda was impressive as well. There were some great panels starting with the first session which covered: “Evaluating the latest technology upgrades that exchanges are introducing and determining what benefits they will bring to both domestic and international participants.” The panel consisted of six heads of IT from the major Chinese exchanges and topics ranged from basic infrastructure to co-location.

Clearly the same issues that have challenged financial technology are still there. For our session, we identified 5 main trends that we have been seeing in the market which included:

1. Capital Markets IT Infrastructure refresh
2. High Frequency / Low Latency Trading
3. Risk Management / Information Security
4. Algo Trading
5. Disaster Recovery 

We had actually talked about these the week before the event internally and looked at some of the key market trends that we had been seeing. During the event, we kept an open mind as to new ideas, but it became clear that these topics were still top of mind for many of the attendees and decision makers; and I wouldn’t say that these issues are much different than those in the US, perhaps a year or two behind the US, but nearly the same conversations.

The other thing to keep in mind is the regulatory situation. We’ve talked about this in the past, but China’s capital markets are coming from a very regulated market to a less-regulated market, whereas the US is going from a somewhat unregulated market to a more regulated one. So a lot of the challenges that the US market faces are largely around regulatory issues, whereas China is still a bit more basic infrastructure (e.g. risk, disaster recovery) and functional (e.g. better algo trading solutions, low latency).

What had changed was the complexity of the conversation. One panel on the second day was a perfect example. The topic was “Unlocking the value of quantitative analysis when trading Chinese stocks and futures” and the one moderator and five panellists were a combination of Quant Trading/Investing Directors, a Chief Investment Officer from a local fund and a Director of Financial Engineering from another. All had at least a Doctorate and most had actual wall street experience. The level of talent that the Chinese institutions are hiring is pretty amazing – a few years ago, getting a panel like that together in one place would have been impossible as firms just didn’t hire that level of staff. Clearly a sign that firms are getting more sophisticated.

All in all, the event was excellent. Some great discussions and comments from the top financial institutions in the market as well as some of the top providers. We also had the pleasure of wrapping up the event with the closing session as well as the final closing comments. A copy of our closing slides is available to all in the Research Reports section of the Kapronasia website. You will need to register for free if you haven’t already to download.

Should you have any questions about the topics of which we spoke, please do not hesitate to contact me directly or email This email address is being protected from spambots. You need JavaScript enabled to view it. with your questions and comments.

Zennon Kapron

In recent years, Chinese banking sector profits have skyrocketed to new levels, in part due to the Beijing imposed ceiling on the rates banks pay depositors, providing banks with a source of cheap funds, which banks then in turn lend out at much higher rates. Net profits for commercial banks grew 36 percent last year, reaching 1 trillion Renminbi. Chinese banks are enjoying year-on-year rises of more than 30 percent in their first-half net profits. In one example, the Industrial and Commercial Bank of China’s fees and commission income for the year 2011 was close to 100 billion RMB, compared to 72 billion in 2010 and 55 billion in 2009.

For years, Chinese banks have enjoyed the extremely low cost-of-capital in a country with one of the highest household savings rates in the world and a tightly controlled monetary system. The problem stems from the combination of low interest rates for deposit accounts as well as relatively high inflation rates as China continues its roaring economic development. For years, much of the banking sector’s profits have been coming at the expense of individual households, who have been given negative real returns on their money since 2004. Exorbitant service charges are also a central cause in the call for reform.

In the latest round of calls for reform, China's bank regulator has warned lenders they will be "severely punished" for charging excessive fees. The Chinese Banking Regulatory Commission began an investigation into banking fees on April first, promising punishment for banks found to be charging high fees for routine services, but has yet to define what constitutes as “high fees” or what the punishment will be. Aside from high service charges, unwillingness to lend to small businesses is another major concern and area of possible reform. Lending at China’s big four banks are heavily skewed toward large State-Owned-Enterprises (SOEs) and Town-Village-Enterprises (TVEs), passing over small business demands for capital in the process.

Compare to the slow pace of reform in previous years, we forecast 2012 to be a year of hard-hitting and swift reform, due to Beijing’s blunt appeals for change and the perhaps the not-so-surprising cooperation from the major banks. Wen Jiabao, the premier of China, has already stated that China’s state-controlled banks are a “monopoly” that needs to be broken up, a frank and very public warning. Banks, on the other hand, have mostly agreed to the need for reform and stated that they will comply with new measures, perhaps due to Beijing’s threat of “severe” punishment. The area that most likely will be first improved is the high service fees, since Chinese banks are charging for matters as small as changing an internet password, an issue to cause public ire, indeed.

2012 has been a perfect storm to push industry reforms, and more changes are on the horizon. People’s Bank of China, the state planning agency, and the CBRC have worked together to draft a new set of rules for the banking sector, which states that banks must give three months notice for any increases in service fees, and that subsidiary branches of the same bank will not be able to set different version of services charges.

The Chinese mobile payment market is virtually doubling in size every year and is expected to be worth more than US$80 billion with 441 million active users by 2015, according to the latest report from Kapronasia. China has already overtaken the US as the largest smartphone market in the world; the number of mobile payment users will dwarf other markets worldwide.

Kapronasia’s latest report “Mobile Payments in China” thoroughly assesses the current mobile payments business models, analyzes the market environment, and identifies the opportunities and challenges facing the industry. This 2012 report is unprecedented in both breadth and depth of its analysis of the Chinese business environment in relation to mobile phone payments. The Chinese mobile payments industry has made significant advances in 2011 and will continue to grow even faster over the next four years.

Some of the key findings in the report include:

• The mobile payment market was estimated to be worth US$7.6 billion at end 2011, rising to US$84 billion by the end of 2015 – roughly doubling in size every year
• Mobile payment users reached 218 million at end 2011 and will grow to 441 million users by the end of 2015.
• Though China surpassed the U.S. as the biggest smart mobile phone market worldwide, the penetration of smart phones is still low: less than 10% of the total 900 million mobile phone users, leaving tremendous scale for growth in terms of more advanced phones and services.
• There is expected to be some slowdown in the Chinese growth rates in 2012 as businesses wait for China to finalise new standards and regulations covering the mobile payments market.
• However, technology standards in the mobile payments industry may not be as important as thought before. The most important thing for main players to consider is to develop killer applications with a good user experience in order to acquire and retain customers, rather than to debate the best standard.

“2012 will prove to be a crucial year for the mobile payments industry as Chinese authorities establish final technology standards,” said Zennon Kapron, managing director of Kapronasia. “Firms must continue to push for innovation in both technology and business models in order to stay competitive in this rapidly growing market.”

Offering a relatively cheap and certainly more convenient method of making payments than traditional cash or card methods, payments made through the mobile phone promise to change the way we pay for goods and services and are a rapidly growing area of the global financial industry.

The report was discussed in detail during Kapronasia’s oversubscribed webinar on April 25th. A full recording of the webinar will be available on http://www.kapronasia.com/en/webinars.

For the latest analyses on financial technology developments in China, subscribe to Kaproasia's blog on this site.

Since the first QDII quota of US$500 million was allocated to the HuaAn fund in 2006, the quota allocated to security companies and fund companies has maintained steady growth. As of the end of February 2012, US$44.4 billion of investment quota was allocated to fund companies and security companies, compared to US$44.4 billion and US$40.6 billion for 2011 and 2010.

However, contrary to the stable increase of the QDII quota, the performance of QDII funds as a whole was barely satisfactory in these years. All the QDII funds in 2008 suffered great losses due to the global turmoil. Although the performance slightly showed signs of recovery in 2010 after a one-year suspension of QDII program, almost all the QDII funds were trapped again in a bad situation in 2011. Only 2 out of all 48 QDII funds realized positive returns in 2011. High volatility and global uncertainty created by European sovereign debt crisis carries some of the blame for the poor performance, but domestic fund managers are still facing other challenges.

Foreign exchange rate risk

The foreign exchange rate risk is an inevitable challenge to all the QDII program participants. Normally, compared to investing in a single oversea market, investing in multi-markets, as some participants have already done, would further spread the exchange rate risks. However, it did not work under the situation in 2011 because renminbi appreciated simultaneously against several other major currencies. For example, renminbi has risen 5.1%, 7.9% and 5.2% against US dollar, Euro and British pound respectively on an annual basis. In this case, both the bad performance of the global capital markets and the appreciation of renminbi brought great losses to all the oversea investors.

In fact, the renminbi has kept appreciating unilaterally against the US dollar in recent years, which is a big concern for those investors investing in the U.S. capital markets. But the good news is that, this year, the central bank plans to further improve the renminbi exchange rate formation mechanism and enhance two-way floating renminbi exchange rate flexibility, which will change the former appreciation unilateral situation and mitigate the foreign exchange rate risk in overseas investment.

Domestic trading systems

In the past few years, QDII funds have experienced large transitions and innovations, with changing from first investing in only Chinese companies listed on HKEx to broadening coverage of stocks, bonds, futures, ETF and FOF in both developed and emerging world-wide capital markets. QDII fund managers’ oversea investing experience, how to enter different countries’ capital markets, and how to establish advanced backend systems suitable for different markets and different portfolios are big concerns and challenges for the funds.

Although fund managers currently exhibit a strong preference for a passive approach like ETFs and FOFs, more active global strategies will be considered in the future, and the demand of sophisticated trading systems will increase to support those active strategies.

The current functionality of most domestic trading systems is limited and most cannot be enhanced to handle the additional demands of sophisticated portfolio management in a complex overseas investment environment. More advanced backend systems are needed to minimize the time latency of transmitting oversea market data, optimize the investment portfolio, carry out the valuation and settlement of international assets, and balance the assets under multi-currency and multi-accounting rules.

On March 28, 2012, Trunkbow, a provider of Mobile Payment services in China, announced that it has teamed up with CUP (China Union Pay, the only bankcard switch in China) for the development and deployment of a mobile online-to-offline payment system which will be launch in Q2 2012.

A new POS payment method, but only in a pilot area

Like other mobile payment services in China, this OTO (online-to-offline) payment service will initially only be available in Shandong Province as a pilot as it is one of the most popular tourist destinations in China. It will be deployed with the Shandong Tourist Administration to enable the purchase of tickets of sightseeing spots throughout the province.

Under the terms of the partnership, Trunkbow and China UnionPay will enable users to purchase attraction tickets via a smart phone browser or dedicated smart phone application. The purchase is verified and completed when the user input or scans the received code on a CUP’s POS terminal at the sightseeing location. Payment is processed through the China UnionPay clearing system at the time of redemption. Trunkbow is set to receive sales commission, transaction fees, as well as advertising revenue from this system and related apps.

A little bit creative but not competitive

Though OTO services are still new in China and Trunkbow calls this new POS payment service “an innovation”, but similar, although not widely commercialized, services are already available in China. For example, Alipay, China’s biggest online payment provider, wanted to extend its business from online to offline by launching its barcode services in 2011, which enables users to purchase online through Mobile Internet and pay offline by scanning barcode on a barcode scanner at the merchant location. Alipay’s innovative payment service has not been widely used so far: first, became of technologic limitation, sometimes a scanner cannot precisely identify each barcode from different screens of mobile phones; second, this payment service is not much more convenient than traditional payment means, such as bankcards and even cash, as no additional value-add services are provided by barcode payment.

In this Trunkbow case, though the new POS payment method is creative, it will not be competitive, as local travel agencies have already been offering a very convenient online payment service which enables customers to pay for attraction tickets through Internet and just show the received confirmation on mobile phones before entering into sightseeing spots.

Therefore, even though CUP has almost 150,000 POS terminals shared with Trunkbow in Shandong province, Trunkbow should really think about how to retain users through value-added services and how to expand its OTO payment service from tourist payment to other segments of the market. Perhaps looking at location based services or couponing.

For more information on China's Mobile Payment's market, please take a look at Kapronasia's 2012 China Mobile Payments report.