2013 will remembered as an incredibly dynamic year for China’s financial services industry. From the increasing number of hedge funds in the market to the emergence and regulation of Bitcoin, industry observers, investors, participants and regulators have had their work cut out for them keeping up with the market.

Over the past week, Robocoin Technologies announced they were expanding their Bitcoin ATM offering into Asia with planned ATM installs in Taiwan and Hong Kong.

On November 27, 2013, the Ali-cloud division of Alibaba group announced the launch of Ali Financial Cloud services.

Background

Ali financial cloud services has been developed to provide secure and stable IT resources and internet operation services for financial institutions including banks, funds, insurance companies and securities companies. The service is based on cloud computing, with the cooperation from many well-known financial product solution providers and Alipay’s standard connection portal and a completely sandboxed environment.

At current stage, China's approximately 2,000 small and medium banks are the focus of Ali Financial Cloud as these banks typically do not have enough capital and technology experience to develop their own robust IT structure, so outsourcing is thought to be a low cost and efficient way for these banks to process large amount of data and information.  

The claimed benefits Ali Financial Cloud include:

1. Enable Small and medium banks to have their own online banking system and mobile banking systems and expand e-commerce and online banking services in the rural areas.  
2. Provide stable and strong business processing capabilities for small and medium banks during high demand periods
3. Enable small and medium banks with smaller technology footprints to develop innovative products and solutions that would typically only be available to larger banks
4. Reduce IT support requirements

One example provided by Ali cloud website shows the processing capabilities of Ali cloud. About 300 million transactions of Yu’ebao could be cleared within 140 minutes, or about 35,000 transactions per second. Some financial firms are already using the Ali fianancial cloud including asset management companies, rural banks, regional banks and insurance companies.  

Historical Context

Cloud computing in China's financial services industry, similar to other global markets, has been slow to take off. Players like IBM have in the past setup comprehensive cloud computing research centers to attempt to move the market, but none have been incredibly successful in gaining a foothold. 

2014 might be the year when we see this change. Cloud technology and security has become increasingly sophisticated and with an increasing profit squeeze due to liberalising interest rates, banks will be looking for ways to increase revenue, reduce cost, and more importantly, stay innovative.

2014 - Year of the Cloud

Certainly Cloud will be a key industry topic as we move into 2014 with major players besides Alibaba including IBM, 21Vianet and Tencent all vying for a part of the increasing cloud computing pie.

It will also be interesting to see the level of innovation that happens in the space. Alibaba has rapidly moved beyond just an IT / e-commerce company to provide a variety of products and services beyond just technology. Its Yu-ebao product is forcing banks to re-think their retail investment products and how they price and distribute them – it has completely changed the industry.

With China's cloud services in the financial indusry being a key topic of discussion in 2014, could we see Alibaba do the same thing it has with 3rd Party Payment Platforms?

The China Securities Regulatory Committee (CSRC) announced in December that the currently non-active A-share IPO market would reopen at the end of January, 2014.

It sounds trite if you’ve read my other posts on Bitcoin in China, but ‘wow! What a week it has been for Bitcoin in China’. With the PBOC effectively cutting off (legal) funding of accounts on exchange platforms, is there a future for the currency in China?

Shanghai Stock Exchange and China Securities Index co.ltd announced that the new TMT (Technology, Media and Telecom) industry index and national defense indices would be released on December 25th, 2013.

Kapronasia began researching Bitcoin in China in August 2013. Our Bitcoin in China report released on September 18^th mentioned that in the future there would be two factors that really influence the fate of Bitcoin in China: the Chinese government’s attitude towards Bitcoin and Bitcoin’s acceptance as a method of payment, at least initially, by merchants.

2013 will remembered as an incredibly dynamic year for China’s financial services industry. From the increasing number of hedge funds in the market to the emergence and regulation of Bitcoin, industry observers, investors, participants and regulators have had their work cut out for them keeping up with the market.

The year started out with the prospects of a new government taking a new stance on reforming what had been a highly regulated financial services industry; we weren’t disappointed. Regulators unveiled a reform agenda both at the fall plenary session and throughout the year that has, and will have, a significant impact on interest rate reform, capital market investment in and out of China and the financial industry as a whole. Although some of the measures are still somewhat vague, some of the implementations, including the removal of the floor on lending rates, have already have a significant impact on banking profitability – it will be a new market in 2014.

China's finance in 2013 also brought an increased focus on development zones and centers. Opened to much fanfare, but little detail, the Shanghai Pilot Free Trade Zone (FTZ) was formally established in late September. Although it is still early days, if news reports and indications from the regulators are to be believed, the FTZ promises to be a new test-bed of reform for ‘value-add’ services similar to what Shenzhen was to the manufacturing / production industry in the late 70s and early 80s; arguably, one of the most important developments in China’s economic history. Smaller initiatives such as the Hongkou Hedge Fund Center in Shanghai sought to make it easier for hedge funds to enter the market and trade on China’s expanding base of capital markets products.

And last but certainly not least, we would be remiss if we didn't touch on Bitcoin. Chinese investors and tech enthusiasts were truly ‘chomping at the bit’ in 2013 as Bitcoin went from a little known US$13 cryptocurrency, to a US$1,000 potential economic destabilizer. China topped the world in Bitcoin wallets in May 2013 and then surpassed that again in November with over 150,000 wallet downloads. With the world’s biggest Bitcoin exchange and increasing popularity, China had little choice but to weigh in on the matter and in early December the People’s Bank of China annouced that Bitcoin was not a currency, banks could not deal in it, yet it could continue to be used in China. The price of Bitcoin fell, only to rise almost immediately afterward.

Will the sequel to 2013 in 2014 be as exciting? Will Xi Jinping continue to push reforms? Can the PBOC accept Bitcoins as a legitimate currency? Whatever happens, 2014 will be another dynamic year for Chinese markets and we’ll be here every step of the way to help you understand what’s happening in China’s financial services industry. 

After 18 years of economic development, China’s Tier 2 Banks, mainly city commercial banks, are growing to fill a gap in-between state-owned banks, and rural commercial banks. As part of their growth, many city commercial banks are attempting to expand their branches in other regions, however, the Chinese Banking Regulatory Committee (CBRC) regulations are, in certain cases, holding them back.

The recent tight regulation regarding supra-regional city commercial banks is largely the result of increasing internal fraud cases in city commercial banks such as Qilu Bank and Hankou Bank. The good news is that the CBRC is not prohibiting city commercial banks from expanding supra-regionally. Instead, the approval process is just longer and the standard of regulatory evaluation indicators such as asset scale, capital adequacy ratio, profit margin, and non-performing loan ratios are higher than before. In this case, if city commercial banks attempt to expand outlets in other regions, they need to enhance their internal control and risk management abilities above the required standard.

Because the asset scale and business model vary based on the local economies in each city, the evaluation regulation will be different. If the investment in other regions is excessive, the CBRC will require a higher capital adequacy ratio; if the risk management does not match the fast growing asset scale, the CBRC will restrict the expansion of these city commercial banks. Thus, regulators support supra-regional expansion if the tier 2 banks meet the entire set of regulatory requirements.

China’s tier two banks are some of the more dynamic banks in China in terms of business models and innovation – they have had to be in order to compete with their larger counterparts that typically have much larger deposit bases and distribution networks.

The tier-2 banks are still focused on expanding their asset base and while supra-regional expansion will help them accomplish this, it is not the ultimate goal of the banks, at least not in the near future. The regulations do serve a valuable purpose to ensure that banks’ expansion is based on quality assets and business practices.  

As fixed interest rates in China start to loosen up, banks' bottom lines are starting to feel the pressure. According to the latest figures from China major banks’ annual reports, the net profits of China Mingsheng Banking Corp.(Minsheng), Industrial & Commercial Bank of China Ltd.,(ICBC), Bank of China Ltd. (BOC) and Agricultural Bank of China (ABC) in the third quarter 2013 shrank on a YOY base. 

As shown in the graph below, the net profits growth rate of Minsheng, a relatively smaller bank, dropped dramatically almost 25% comparing with the same period last year, likely due to its relatively large interbank business, which was heavily affected by high interest rates in the middle of June. The high interest rates in China also had a big impact on ICBC. The banks' profitability growth rate dropped to around 7.5%.