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 18th 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%.
With a wide range of channel choices for retail customers, banks need to be aware of the usage and preferences for each channel which can vary for multiple reasons including the purpose of the transaction, complexity and where the person is from.
On the digital channel, customers usually require a fast and convenient service such as simple transaction or checking an account balance, but for branch service, customers, especially affluent customers require tailored personal interactions such as loan servicing, investment advice, and other complex transactions.
In self-service channels, Asian customers not only need a convenient and easy channel, but also a personalized interactive service to increase their loyalty to the bank as competition is rising and switching costs are lowering, especially in the wealth management space.
These wealthier customers produce higher value for banks, and usually they have a wide range of choices on banking services. In Asia, affluent customers show greater loyalty to their banks, while in most European countries and the U.S., affluent customers have relatively lower loyalty to their banks. Thus, maintaining affluent customers is important for banks to generate higher revenues.
Citi, one of the major players in Asia's wealth management space offers tailored services in Singapore. Their Citigold service provides a dedicated center for nonresident Indians. The personalized interaction improved the loyalty from their affluent customers because Citigold satisfied nonresident Indians’ special requirement on banking services.
However, China is showing a significant gap between affluent and mass-market customers on loyalty because the affluent customers receive much better service from their bank than mass-market customers do.
Banks should not only rely on channel innovation but also focus on improving service on the existing channels. Maintaining the existing affluent customers with tailored service is crucial to the bank since the affluent customers will continually show a high loyalty to their banks in Asia, but enhancing a required service or product for mass-market customers through different bank channels will also increase the overall customer loyalty.
Hongkou is a geographic district in Shanghai, on the west side of the Huangpu River, north of the center of Shanghai and close to Pudong District. The Hongkou Hedge Fund Park was officially established on Oct. 18, 2013, as the first test-bed specifically for developing local hedge fund industry and introducing foreign hedge funds in China. Through market reforms and special incentives, the Hongkou government hopes to make the Hedge Fund Park a key part of Shanghai, and indeed China’s, hedge fund industry.
The latest figures from Tianhong Asset Management show that the AUM (asset under management) of Yu’ebao deposits, the currency market fund which is co-launched by Alibaba and Tianhong on 13 June, 2013, has rocketed from June 13th to November 14th, 2013, from 0 to CNY100B. Now Yu’ebao is the largest fund in China leveraging it's enormous Taobao, T-mall and Alipay customer base.
The success story of Yu’ebao has not only encouraged the Chinese IT giants and online payment providers to enter the asset management market, but also is a worry to the traditional asset management firms. Currently, most public funds in China sell their products on their own websites or choose to cooperate with the online platforms to sell their products. Asset managers do recognise the benefit of selling funds online including low cost and convenience, but struggle as they simply just do not have the customer base of Alibaba/Alipay.
|Date||13 June||30 June||9 Sept||14 Nov|
From purchasing property with Bitcoins, to the world’s largest Bitcoin exchange, to incredible mining operations, China over the past few months has become the largest Bitcoin market in the world and a key part of the Bitcoin story.
To a large extent, Asian banks are in a somewhat enviable position. China is certainly the economic giant of the region, and if China’s economy slows, it does have knock-on effects, yet, the economies of individual countries in Asia, while interdependent, often expand and contract quite independently. This can mean a bank facing slower growth in Indonesia, might look to the Philippines or Malaysia for expansion.
Kapronasia attended the Battle of Quants Shanghai event on Nov. 13, 2013 in the newly launched Hongkou hedge fund park in Shanghai, China. There were two main topics that we discussed at the event: Chinese traders’ demands for trading platforms and key success factors for China's further economic reform.
This is a great image from Fiatleak.com that shows the global flow of Bitcoins to various countries sourced from data from the world's biggest Bitcoin exchanges. Go to their site to see the real-time animated image, which is rightly described as a bit hypnotic.
The Asian Retail banking business has developed rapidly in the past two decades as both economies and businesses have increased in sophistication and wealth. Japan is still the largest retail banking market in Asia, however, China will surpass Japan to be the largest in Asia in 2015.
Bitcoin acceptance in China has now extended into real estate with a residential developer in Zhangjiang Hi-Tech park in Shanghai finding a new way to promote sales through the acceptance of Bitcoin virtual currency.
Shanda Group, one of the large IT giants in China, through its real estate development arm, opened sales of its first real estate investment project on October 25th, 2013. 300 apartments in the soon to be built buildings ranging from 42-81sqm were available for sale and sold out in a few minutes as demand far outstripped supply.
Here's to a happy prosperous buying future with Bitcoin
As part of the promotion, Shanda accepted Bitcoins for payment. Although the exchange rate was ‘fixed’ at 1,000 Chinese Yuan (CNY) to one Bitcoin and the developer reserved the right to adjust the rate, the deal represents one of the first times that Bitcoin could be used for such a large scale 'public' purchase. The exchange rate was about 1,200 CNY : 1 Bitcoin on BTCChina that day, so the developer was obviously trying to hedge a bit in case Bitcoin fell through, but considering the rate is rapidly reaching nearly 2,000 CNY : 1 Bitcoin, it would have been a great deal for the developer – Bitcoin is one of the few investments in China that has been increasing faster than real estate in 2013.
The program was specific for the Zhangjiang Hi-Tech park as there are, as you would expect, a number of high-tech companies in the zone with younger workers would presumably be more aware of and in-touch with Bitcoin. The advertised price for the apartments was between 21,000-28,000 CNY / sqm, which is roughly what you might expect, if not a bit cheap.
The current run-up in the price of Bitcoin is an indicator of the interest in the currency, but is likely largely due to speculation. However, examples like this property development show how Bitcoin could be used for non-speculative purposes in nearly every industry. Regular bank transactions to pay for property would typically involve a stack of paperwork and likely a solid afternoon in the bank. With Bitcoin, the transaction could be completed in minutes.