Financial Industry Blog - Kapronasia

A couple of days ago, media announced that Alibaba had made a substantial investment in InTime, which is a Hong Kong company that manages mainland China upper-end retail malls. These malls are typically branded InTime, but are multi-brand inside where each brand has a small section and potentially dedicated staff to that section. 

After the PBOC’s suspension of QR code payments and virtual credit cards, they have begun soliciting comment on draft guidelines on “Payment Institutions Network Payment Business Management Approach” (provisional).

This past weekend Alibaba and Baidu met with the People's Bank of China (PBOC) in a closed door session to discuss the ongoing challenges with Chinese online finance regulation. The fact that the regulators are consulting with the industry is a great sign that the regulations will (hopefully) be built on consultation and discussion, and as both Baidu and Alibaba have intentions of setting up their own private banks, it's likely in their best interest to sit down with the regulators as well.

Over the past week news headlines have been awash with how Chinese banks are pushing back against Alibaba's Yuebao and Laicitong as the online finance products have rapidly grown their AUM at the expense of bank deposits. The banks now are expanding their push though and are challenging money funds' market share in China.

On March 15, 2014, the PBOC announced that the daily RMB/USD exchange rate float range in the Chinese interbank market would increase to ±2%, which will be implemented on March 17. The chart below shows the expansion of fluctuation range for RMB/USD spot, which is meaningful to Chinese FX market.

Analysts from Kapronasia believe that it is an important step towards fully internationalization of RMB. The data below also illustrate that Chinese government is accelerating the process of internationalization of RMB. We are looking forward to further FX market reform, in the Shanghai Pilot Free Trade Zone, or in the whole country in 2014.  


RMB interbank spot rate

In another foray from the Internet giant into high finance, Alibaba recently announced that one million virtual credit cards will be issued next week. 

File under: 'another bank losing out to money funds', but numbers from Ping An Bank show just how difficult things are getting for banks in China.

On March 3, 2014, the chairman of the council of the Shanghai stock exchange Gui Minjie declared that there is no technical barrier for the release of T+0 trading mechanism specially for blue-chip stocks traded on Shanghai Stock Exchange. The chart below showed that the large-cap stocks based indices have lower turnover rate than the indices with more proportion of small and mid-cap stocks. The T+0 in Shanghai Stock Exchange could possibly stimulate the trading of large-cap stocks on A-share markets. The speech of Mr. Gui implied that the T+0 mechanism might be close to launch in 2014.  

China Market Turnover

An interesting graphic from IDC and WSJ looks at the declining growth rate in smartphone sales in China. China's smartphone market is maturing.

Money funds in China have been around for a long time with the first launched just over a decade ago in 2003. For the most part, these funds existed in relative harmony with the banking industry and occupied a small niche in the investment market. However, the emergence of Yuebao in 2013 started to change that. Money funds have now grown significantly in prominence and present an increasing threat to traditional banking services.

The Basics

If you haven’t been following Chinese online finance innovation industry, here’s a quick brief: leveraging mainly underlying high-yield interbank deposits as assets, China’s main internet giants including Tencent, Alibaba and Baidu have launched online finance products where users can quickly and easily move money out of their banks accounts onto these platforms. Tencent uses their nearly ubiquitous Wechat app as the main user interface which Alibaba uses their Alipay platform to distribute the products; the underlying funds are managed by an external asset manager.

The typical returns of Chinese online finance innovations are between 5-8% and greatly eclipse traditional bank deposits, which yield less than 1%. With this kind of return, it’s not surprising that consumers are moving assets over to the platforms at an astonishing rate with some funds accumulating over 400 billion RMB (~US$66B) in AUM in less than a year making the asset managers some of the largest in China.

At the same time, taxi booking apps are growing incredibly rapidly in in China’s eastern coastal cities – some with the support of the internet giants as well. Over US$40 million of investment has gone into the taxi booking apps over the past two years and it’s not uncommon to ride in a taxi where the driver will have 3-4 phones all running the apps on his/her dashboard.

Bring it together

A key part of the internet giants’ strategy has been to bring everything together in one platform. Tencent, already with a significant user base through it’s ‘whatsapp on steroids’ Wechat app allows you to invest in their online finance product called Licaitong and they have integrated a taxi booking app called Didi Taxi where you can ‘tip’ taxi drivers a pre-selected extra amount to come and pick you up.

Money for nothing and your taxi for free

So, all of the above is well and good. Where it gets interesting is the level of competition in the marketplace and what companies are doing to gain marketshare. A Chinese friend related her experience:

She initially called a taxi via Didi taxi. Didi is running a promotion where you can get 12 RMB (~US$2) back on your taxi ride when you use the app. Base fare in a taxi is 14 RMB (~US$2.33), so she paid 2 RMB (~US$0.33) for the taxi ride. But wait, there’s more…

The taxi driver then asked if she could pay using Alipay and she said yes. Why? Because Alipay is running a promotion where she could get 13 RMB (~US$2.15) back and the taxi driver then likely also received some reward. The taxi driver then gave her the 14 RMB in cash and she sent him 14 RMB via Alipay.

So let’s do the math:



Taxi Driver

Internet Giant








Initial Ride

-14 RMB

-14 RMB

+14 RMB

+14 RMB



Bonus for using Didi

+12 RMB

-2 RMB


+14 RMB

-12 RMB

-12 RMB

Driver pays rider cash

+14 RMB

+12 RMB

-14 RMB



-12 RMB

Rider pays driver w Alipay

-14 RMB

-2 RMB

+14 RMB

+14 RMB


-12 RMB

Bonus for Using Alipay

+13 RMB

+11 RMB



-13 RMB

-25 RMB



11 RMB


14+ RMB


-25 RMB

So basically, my friend was paid to ride the taxi. She can then take that 11 RMB and instantly put it on her online finance account where she’ll earn about 6% and the internet giants are out a combined 25 RMB.

Of course in the internet space, we’ve seen plenty of companies providing products or services for free or nearly for free, but the scope with which this is happening in China is amazing. And it’s happening more and more.

Take your lessons to go

Time is compressed here. Group buying developed over years in the US and took another couple to fade away. In China, it was started and finished in less than 3 years. Will taxi booking and online finance be similar?

Although both products are essentially in the middle of a ‘perfect storm’ of a huge potential user base, very tight liquidity (giving high overnight lending / fixed deposit rates) and tremendous mobile and internet penetration and momentum, the winds are shifting in terms of innovation and it has put fear into the financial industry.

Both banks and securities firms are feeling the pinch from internet finance. Banks are facing eroding deposits in the face of gradually liberalizing interest rates, while brokers and asset managers are seeing their customers move to relatively high-return products that carry very few fees.

Although the same ‘perfect storm’ may not be happening in the west, paying attention to how things are developing in China is important as more Walmarts and Tescos move into the banking space. Not that banks were ever really known for innovation, but here in China, it's clear that the innovation is certainly not - which is putting them in an increasingly tight position.

The latest figures from the China Banking Regulatory Commission (CBRC) shows that China commercial banks’ deposit net interest margin has been increasing from 2.57% in 2013Q1 to 2.68% in 2013Q4, despite of the pressure from the interest rate liberalization.

February 2014, represented another month of decreasing commission fees in China's capital markets as the entrance of China's technology giants in internet finance starts to affect not just banks, who are losing deposits, but securities brokers whose fees are being squeezed. 

According to the latest figures from the China Banking Regulatory Commission (CBRC), both commercial banks' balance of Chinese bad loans and the ratio of bad loans increased throughout 2013.

The continuing increase of bad loans is an indication of the challenges in China's economy currently. With an economic transition happening and increased lending on bad loans, this is not likely to decrease in 2014 which will pose even more of a challenge for banks as they face increased interest rate liberialization and other financial industry reform. 

China's Bad Loans

According to the latest figures from the China Banking Regulatory Commission (CBRC), Chinese commercial banks’ accumulated net profits reached 1.4 Triliion RMB in 2013, up 179.4 Billion RMB from 2012. However, the growth rate of net profits has been decreasing in recent years. In 2011, profits grew 36.33%, then dropped dramatically to 18.96% in 2012, and again in 2013 to 14.48%.

Research shows that the decreasing trend of Chinese commercial banks’ profitability growth rate seems to be in line with China’ declining GDP growth rate, shown in the chart below. It reflects that with the acceleration of interest rate reform and the influence from internet finance, China’s commercial banks profit margin faces continuing pressure.

Chinese Bank Profitability struggles

Yu’ebao had already made Tianhong Asset Management the largest one in the public fund industry in China in early 2014. However, the scale of Yu’ebao has continued to grow with the latest figures showing the AUM of Yu’ebao reaching RMB400bn on Feb 14, 2014, a leap of 60% compared to only one month ago. The speed of capital inflow is still accelerating in 2014. We may witness Yu'ebao becoming the largest money market fund in the world soon. 

The fast expansion of Yu'ebao crosses 400B under managementYue bao AUM data of Chinese money market funds, especially the ones leveraging Internet Finance, reflects the large wealth management demand potential of Chinese market and new innovative finance forms that will appear in the Chinese market in 2014.  

After what seems like forever, on February 18th, the regulators gave us a milestone reform for cross-border trade.

Not satisfied with just taking deposits from banks, online finance platforms are facing more competition from each other.


Over the past weekend, Alipay announced that it processed about US$150 billion in mobile payments in 2013 which is potentially more than PayPal and Square combined. PayPal cleared US$27 billion in 2013 and Square's number is not public, but likely far less than even PayPal's. 

Mobile Payment Transaction Value

That's a huge number and makes Alipay the largest mobile payments platform in the world. It wasn't really a question of if it would happen, but when. With over 300 million users and 100 million mobile users, Alipay's mobile payment growth has tremendous market scale which is part of the reason for the success of their Yu'ebao investment product that just seems to keep growing and growing... 

According to data from the China Securities Depository and Clearing Corporation Limited (CSDC), there were 261 new Qualified Foreign Institutional Investor (QFII) accounts opened in 2013 which represents about 43% of the total QFII account number from 2003 to 2013. Compared to 2012 figure. Number of QFII accounts rises by 129%.

So why are foreign investment institutions so interested in opening up accounts to trade the Chinese market when returns are so low? One reason is that the mainland regulators have been pushing towards more open markets and lowering the QFII requirements with the intent of introducing foreign capital to provide better liquidity in an anemic a-share mainland market. In addition to new accounts, more than $49.7 billion in QFII investment quota was approved in 2013.

The potential second reason is that foreign investors see potential opportunities in the mainland market either with current relatively low valuations or in the anticipation of future market growth if the market does pick up. 


New QFII account growth

As Chinese New Year wraps up and people (very!) gradually come back to work in mainland China, we wanted to take a step back and look at where we are with Bitcoin in China for the year of the horse.

Thank you to everyone who attended the Top-10 China Financial Technology trends webinar just over a week ago.

The sheer size of China's population and geography means that you get some pretty amazing statistics out of it. Couple that with increasing internet and mobile penetration and you have some pretty sizable numbers.

For decades, China has been known as the imitator and not the innovator. The argument goes that the West came up with social networking, mobile payments, group-buying, etc. and China imitated it, sometimes better, sometimes worse. C2C – copy to China. R&D – rob and duplicate. There are numerous terms to describe it. 

The Shanghai Stock Exchange has been in the doldrums for the past couple of years and was the worst performing Asian exchange of 2013.

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.


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?

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