So we’ve just come out of the October holiday here in China and are headed in the final frantic few months before Chinese New Year. The difference this year is the early November once in a decade leadership transition where nearly every Chinese leader and politician will be replaced and/or shifted around in China’s Communist Party. It was never in doubt that the transition would happen towards the end of this year, but it was only in the last few weeks that it became clear it would happen in early November.

This is an important transition for the government and only the second peaceful transition of power in recent China’s recent history. The transition is even more important because of the critical social and economic challenges that the country is facing right now. A slow/stagnant world economy and increased but still limited domestic consumption is limiting China’s economy as a whole which is exacerbating the internal challenges it is facing – one of the most critical being the increasing delta between the haves and have nots. If you have been reading international media recently, we’re starting to see more and more of this discrepancy being uncovered and it does nothing to help the government in the eyes of the people.

More specifically to the financial industry however, the transition means increased change. We’ve seen this already this year especially in the capital markets as the new chief regulators have done quite a bit to open the capital markets this year with increased rumours that regulation on the RFQLP programme should be announced shortly, adding yet another channel for off-shore RMB to come back into China’s mainland markets.

The shift in policy is also indicative of China’s increased awareness of money leaving China. With reports of both wealthy individuals and corporations legally and illegally sending money abroad, the issue which used to be too much hot money coming in, is now too much hot money going out. To a certain extent, this is a bit of a blessing in disguise for China as it will allow regulators to further open the market without risking the hot money inflows – which was viewed as a challenge in the past.

With the party congress set for November of this year, we’re unlikely to see too much more change until after Chinese New Year (Feb 2013). What we should be able to quickly determine though is how open the new leaders are to change and modernization of all industries, not just the financial services industry. As we’ve discussed on our blog before, this will largely depend on how quickly the new leaders can consolidate their power to be able to effect change and in which direction they decide to go.

Regardless, 2013 will be a new watershed for China’s financial services industry. Stay tuned early next year for our 2013 top financial technology trends report to see how we see things changing.

According to the latest semiannual reports issued by China’s commercial banks, e-banking continues to grow in importance as a part of banks’ business. For most of banks, e-banking channels has already contributed to over 60% of total transaction volume with the 5 large commercial banks’ total e-banking transactions showing a 35% growth rate year on year. Benefiting from the advancement of IT and the proliferation of smart mobile phone in China, mobile banking has become increasingly convenient for users and important for banks. 

In order to meet the strong demand for mobile banking, banks continue to update their mobile banking applications and launch new functions to enhance the user experience. For instance, Agricultural Bank released its new iPhone-enabled mobile banking app which not only supports banking transactions but also integrates online shopping. Bank of China launched the first Windows-enabled mobile banking application recently. We expect that in the future banks will offer more value-added services on their mobile banking products through innovations and ensure safe and reliable systems.

Earlier this week, Burberry announced lower than expected earnings which largely disappointed and somewhat scared markets. Their slowdown is global, but a key challenge was declining luxury spend from Chinese consumers – which is seen by many as a bellwether for the rest of a general industry slowdown. We’ve talked about luxury spending in China in the past, but it’s worth considering the implications of a potential slowdown in the luxury industry and the implications if the slowdown is indeed an indicator of a shift in the habits of China’s wealthy.

In 2013, China will take over Japan as the biggest consumer of IT products in Asia. According to IDC, China's total IT market size in 2012 is projected to reach 155 billion US dollars, with 20% growth rate YOY, and in 2013, this number will reach 170 billion dollars, 4% more than that of Japan. During China's Five Year Plan period (from 2011 to 2015), companies must invest more in their IT infrastructure to meet the demands of stable growth and innovations.

In the banking industry,  total IT spending (software and services) in 2011 exceeded 15 billion US dollars, with a 19% growth rate compared to 2010, and, according to IDC, China's banking IT spending will keep a 20% CAGR (Compound Average Growth Rate), hitting 39 billion dollars in 2016. We expect that the new generation of core banking systems, risk control, big data analysis and mobile payment will be the main driving forces behind the IT spend.  

Kapronasia's 3rd Party Online Payment Industry webinar recording is now available in the webinar section of kapronasia.com. Thank you to everyone who attended. We hope you found it useful.

Please keep an eye out for Kapronasia's Q3 and Q4 webinars.