CHINESE FINANCIAL SYSTEM REVELAED

PRESENTED BY UDIT PANDEY VIKRAMADITYA HITEN MAHAJAN MANDEEP SINGH GAGAN VIJ

Flow of presentation

• CHINA’S HISTORY• BANKING REFORMS• REGULATORS• MAJOR SECTORS OF THE ECONOMY• STOCK MARKETS• WHAT SETS CHINA APART• CURRENT TRENDS• BLUECHIP CHINESE FIRMS

BEFORE WE START A FEW REASON WE MUST REPECT CHINA FOR

WHEN THE WHOLE WORLD WAS DOWN CHINA CHUGED ALONG TO SAVE THE GLOBAL ECONOMY WITH DOUBLE DIGIT GROWTH

Brief history of chinaChina is one of the world’s four ancient

civilization.

THE MAN WHO CREATED CHINA

Structure of the post-revolution economy transformation

On October 1 , 1949 ,The Communist Party of China (CPC) took power in Beijing and tried to solve the problem of low levels of gross domestic output, high rates of inflation, high levels of urban unemployment and problem of food shortage.

Mao Zedong called for the rapid eradication of feudal landlords system in order to restore the food production.

He also established people’s court at all level of jurisdiction, peasant jurisdiction throughout the countryside, and workers' councils in industrial enterprise

CPC settled new economic policy like providing farmers with guaranteed market for some of their output, buying rice, grain, and other basic goods through state

purchasing stations (established in 1952) for resale in the cities and towns. Government gained control of the pricing and allocations of the key commodity,

which reduced the unplanned price inflation.

Adoption of Mixed economy approach Banks and most of the industries confiscated from the

private owners. Many private capitalist enterprises, particularly those

engaged in "light manufacturing" were allowed to operate. The government not only controlled the profits generated

in industry but would also control the allocation and pricing of the outputs and inputs of industry, both state-owned and privately owned enterprises.

The First Five Year Plan (FYP)

• The first FYP was launched in 1953, with the aim of developing the Chinese economy on the Soviet model. As the USSR was the only existing communist economic system and was the only source of technical aid for the PRC.

• The first FYP gave priority to heavy industry, all industry and larger commercial enterprises were nationalized. Soon, all private property was abolished as well

1958-1962 The Great Leap Forward Movement(GLF)

• This meant the reorganization of state and collective farms into huge communes. Furthermore, the peasants in these communes were ordered not only to work the land, but also to make their own tools out of the iron that they were to smelt into steel.

• But this movement turned into the great disaster. The peasants could not smelt iron into steel for tools in their backyard furnaces. At the same time, this work took away the time needed to work the land, so that crops rotted in the field.

• Poor planning and bad management lead to crop failure in various provinces and starve 30 million people to death.

1966-1976 The Cultural Revolution• After the turmoil of the GLF, most of the party member turned against

the Mao. In order to regain the power Mao decide to fight against his party opponents by attacking the intellectuals.

• As his weapon he choose young particularly frustrated high school students, which were dissatisfied with educational system, which favored the children of party bureaucrats and high military officers.

• These students had been raised as loyal supporters of Mao, and formed units of Red Guards. Red guards were fighting pitched battles with government troops outside of the Foreign Ministry Building.

• Later on in the Cultural Revolution , Red guards units ended up fighting with each other for supremacy. In the summer of the 1967, there were massive riots in both Hong Kong and Macau.

•

CHINA’s UNSUNG HERO

Deng’s Reforms

After the death of the Mao and his successor. Deng Xiaoping took over the charge and created the open door policy, and China began to open to the outside world, Tourism was allowed, student began to go overseas, special economic zones were established , and joint ventures with foreign firms were encouraged to bring in foreign technology, investment, managerial skills and market access.

He encourage the elimination of the rural commune and turned over the land to the rural households (for production, and income , but not for the real ownership).

Agricultural productivity jumped and free markets were created to sell food.

He also developed closer relation with United States and Japan

CHINA OPENS UP WITH BANKING REFORMS

The First Stage of Reform (1978-92)

• Main Goal: To change the mono-banking system into a plural-banking system consisting of a central bank and various kinds of financial institutions.

• The following 4 were separated from PBC:1. ABC (The Agricultural Bank of China) Rural and Agricultural Sector2. BOC (The Bank of China) Foreign trade and Investment.3. PCBC (The People’s Construction Bank of China) Construction and fixed-asset

investment4. ICBC (The Industrial and Commercial Bank of China) SOEs business financing

• These institutions took over the commercial bank business from the PBC.• PBC’s role – Well Defined: Its mission was to carry out monetary policy,

monitor financial markets, issue bank notes, etc. This change basically abolished the commercial bank functions of the PBC. Though

• The PBC was not independent from the government but was a part of the State Council (the Cabinet), and it was required to manage the funding of the SOEs.

The First Stage of Reform (1978-92) CONTD.

• 1986: Bank of communication JSCBs(later) Primarily regional banks but expanded their business areas nationwide

within a few years.• In the mid-1980s, the SOEs’ funding source was changed from

direct grants by the central or local governments to interest-bearing bank loans and the role of the Chinese banks was transformed from that of government grant distributor to that of creditor

• During this period, the total credit balance of Chinese banks increased 11.7 times.

• Driven by the change in the banks’ role and by increases in household income, the funds available in the Chinese financial sector increased rapidly (Refer next slide), which in turn provided room for the establishment of some basic financial markets.

The Second Stage of Reform (1993-97)

• Resolution of the CPC Central Committee on Issues regarding the Establishment of the Socialist Market Economic System.

1. The establishment of an independent macro economic control mechanism by the PBC (independent from local governments, but under the direction of the State Council),

2. The establishment of policy banks, 3. The transformation of state-owned specialized banks to actual

commercial banks, 4. The establishment of unified, open, well-ordered, competitive, and

well-managed financial markets, 5. The reform of foreign-exchange control, 6. The issuance of appropriate guidance for the development of nonbank

financial institutions, and 7. The development of a financial-service infrastructure and the

establishment of a modern financial-management system• A series of arrangements were made to implement this policy.

The Second Stage of Reform (1993-97) CONTD

• The government set up three policy banks in 1994, to separate policy lending from commercial lending. China Development Bank, the Export and Import Bank of China, the Agricultural Development Bank of China.

• The 4 existing specialized banks became known as SOCBs(State owned Commercial Banks)

• There was a focus on promoting the computerization of payment systems.

• Commercial bank laws 1995: To enhance the independence of the commercial banks. However, since this law also required commercial banks to conduct

business under the guidance of the national industrial policies, the SOCBs had to provide lending to inefficient sectors, such as stagnant SOEs, and they accumulated large volumes of nonperforming loans (NPLs).

The Second Stage of Reform (1993-97) CONTD

• In 1994 the PBC established the China Foreign Exchange Trading System (CFETS) In order to operate unified foreign-exchange transactions smoothly using a computer

system, • To introduce order into the interbank money market,

The PBC established local financing centers in 1995 and closed brokerage institutions run by commercial banks, although the lending rates in the local financing centers still varied greatly.

In order to unify these rates, the PBC established the National Interbank Funding Center (which shared its computer system with the CFETS) in Shanghai in 1996 and transformed the local financing centers into the affiliates of the new national center.

• Payment and Settlement System: Late 80s: PBC began the development of the Electric Interbank System (EIS) The commercial banks were also developing their own intra-bank payment systems

during this period. International Advisory Committee(world bank initiative) + China’s Domestic Advisory

Committee: A new system, the China National Advanced Payment System (CNAPS), has gradually replaced the EIS since 2001.

CNAPS has greatly improved Chinese commercial banks’ fund transaction management.

After the concept of the market economy was widely accepted in China, the CPC and government leaders were seeking effective ways to commercialize the SOCBs.

However, it also became clear that the huge SOE support burden of the SOCBs would be a serious obstacle to reform efforts and therefore should be substantially reduced.

Post 1998 reforms(towards Market-Oriented Economy)

• PBC committed to full compliance with the Core Principles for Effective Banking Supervision which were released by the Basel Committee on Banking Supervision in 1997.

• Financial system reform, mainly focusing on the rehabilitation of the 4 SOCBs, since, as providers of over 70 percent of the country’s total loans, they were regarded as too large to fail.

1. In 1998, the Standing Committee of the National People’s Congress (NPC) passed a plan submitted by the State Council to issue special government bonds to provide for the injection of capital into the SOCBs. The amount of this capital injection was RMB 270 billion.

2. Organisational restructuring – Reducing Branches, laying off employees.3. Public listings of BOCOM, CCB, BOC, and ICBC. Capital surged 30-80%.4. Tax Exemptions: In addition to these arrangements, the MOF allowed tax exemptions

related to the write-offs of NPLs and the organizational restructuring. For instance, the CCB officially announced that its income tax exemption was RMB 15.4 billion in 2004 and RMB 7.4 billion in 2005.

5. The government established four asset management companies (AMCs) to take NPLs off the books of the banks. o They purchased NPLs amounting to RMB 1.4 trillion (21 percent of the loan balance of the SOCBs

at the end of 1998) from the SOCBs and the China Development Bank (CDB) at book value.

Latest trends in the banking sector1. Bank deposit insurance scheme:

– Launched on 1st May, 2015– Under the plan released by the State Council, China’s cabinet, up to 500,000 yuan ($80,550) in deposits made by businesses and individuals per bank will be insured. – Deposit insurance would make it possible for banks to compete via

higher rates without putting customers’ money at risk, and for the government to shift away from the implicit guarantee of all lenders, pressing ahead with a pledge to give the market a bigger role in deciding winners and losers.

– Basing interest rates on market factors, rather than government policy, also could make the financial system more robust and better able to handle capital moving freely into and out of the country

Latest trends in the banking sector CONTD

2. NPLs and distressed assets • After the financial crisis in 2008, the Chinese government introduced a

stimulus package of RMB 4 trillion, which helped expand the production capacity of Chinese enterprises.

• But domestic demand and investment remained sluggish, so China faced the problem of overcapacity, which had its origin in structural and institutional problems.

• A slowing global economy caused Chinese goods to be in less demand, which made it difficult for Chinese enterprises to discharge their obligations. As a result, both the balance and ratio of commercial banks’ NPLs were increasing, posing a threat to the security of banks’ assets.

• In their credit risk management, banks attached importance to formalities, financial analysis, collaterals and product innovation, while neglecting substantive issues, the authenticity of financial information, the recoverability of loans and post-lending monitoring.

NPLs of 9 Listed Banks by Industry(2014)

BOC, BOCOM, HXB, NJCB, BOB and NBCB have not disclosed details of their NPLs by industry

In Millions RMB

Latest trends in the banking sector CONTD

3. Private Banks:– As at 31 December 2014, the first batch of 5 private

banks were piloted.• Kincheng Bank of Tianjin, • Shanghai Huarui Bank, • Wenzhou Civil and Commercial Bank, • WeBank • and Zhejiang Mybank

– The five pilot banks all focus on providing specialized and differentiated services to small and micro-sized enterprises and local communities, targeting to improve the multi-tier banking financial system.

Latest trends in the banking sector CONTD

4

REGULATORS AND STOCK MARKETS

Regulators In China

China Securities Regulatory Commission

• China’s Securities Law(passed December 1998) was the nations first comprehensive securities legislation that gave power to CSRC over the securities and futures market of China.

• China Securities Regulatory Commission performs the following duties in the supervision and administration of the securities market:

Study and formulate policies and development

plans for the securities and

futures markets.

Exercise a vertical administration over

the domestic securities and futures

regulatory institutions.

Supervise the listing, trading and

settlement of domestic contract-

based futures.

Investigate and penalize the activities in

violation of the securities law.

Administer the foreign exchanges and international

cooperation affairs of the securities.

Chairman CSRC

China Banking Regulatory Commission

• CBRC is an agency authorised by the state council to regulate the banking sector of People’s Republic of China except the territories of Hong Kong and Macau.

• It was set up as country’s independent banking regulator in 2003.

Regulatory Objectives

Combat financial crimes

Maintain market

confidence

Enhance public

knowledge of modern

finance

Protect the interests of depositors

& consumers

Mai

n Fu

nctio

ns Formulate supervisory rules and regulations

Authorize the establishment, changes,

termination and business scope of the banking

institutions

Stay focused on risk-based supervision and improvement

of supervisory process

Chairman -Shang Fulin

China Insurance Regulatory Commission

• CIRC is an agency authorized by the state council to regulate the Chinese insurance products and services market established in 1998.Functions Formulate policies for developing the insurance industry.

Scrutinize and approval of insurance companies, subsidiaries, insurance holding companies.

Supervise the financial health of insurance companies.

Supervise fair competition in industry.

Create standards for risk, forecast, profitability and report to the People's Bank of China.

To investigate and punish unfair competition and illegal conduct, non compliance of registration.

Chairman – Wu Dingfu

The three Industries driving Chinese Economy

1. Manufacturing• China makes and sells more goods than any other country

on this planet. As of 2015, Manufacturing is the largest and the most diverse sector in the country.

• The range of Chinese goods include iron, steel, aluminum, textile, cement, chemical, toys, electronics , rail cars, ships, aircrafts and many other products.

• Almost 80% of the world’s air conditioners are made by China’s businesses. It manufactures 45 times as many personal computers per person than the rest of the world combined. Biggest producer of solar cells, shoes , cellphones and ships.

Contd.• China is has a fair automobile industry. It is the world’s third-largest car

manufacturer, though Chinese Govt. claims it is the world leader.• Though car consumption eventually caught up after 2005, most of these

early cars were destined for the export markets because the vast majority of Chinese citizens were too poor to purchase the products themselves.

• This is a common theme in the Chinese manufacturing sector. Products are frequently churned out for government use or are immediately put on boats and shipped to foreign consumers.

• Compared to other nations, Chinese workers historically buy relatively little of their own high-end manufactured products, which is a problem exacerbated when the government devalues the Chinese currency, having the effect of lowering real Chinese wages.

2. Services

• As of 2013, only the United States and Japan boasted a higher services output than China, which represents a significant shift for the country.

• A 2010 world study found the services sector accounted for 43% of total Chinese production, slightly less than its manufacturing sector. However, there are still more Chinese employed in agriculture than in services, which is a rarity for more developed countries.

• Before economic reform in 1978, shopping malls and private retail markets did not exist in China. As of 2015, however, there is a young and burgeoning services market. This has bolstered tourism and led to a proliferation of Internet and phone products.

• Large foreign companies, such as Microsoft and IBM, have even entered the Chinese service markets. These kinds of moves help to jumpstart the telecommunications industry, cloud computing and e-commerce.

3. Agriculture• There are nearly 300 million Chinese farmers, larger than the entire population of

every country except China, India and the U.S.• Rice is the dominant agricultural product in China, but the country is also very

competitive in wheat, tobacco, potatoes, peanuts, millet, pork, fish, soybeans, corn, tea and oilseeds. Farmers also export large amounts of vegetables, fruits and novel meats to nearby countries, Hong Kong in particular.

• Comparative statistics show that Chinese farms are among the least productive in the world on a per capita basis.

• Farmers are not allowed to own and mortgage farmland and cannot get credit to purchase better capital equipment, two functions which promote innovation and development.

Other growing Industries• One industry not identified but worthy of note is the Chinese health-care

sector. The rise of middle-class households and urbanization has sparked a huge demand for health care services, which is a hopeful sign for a developing economy. Reforms were passed in 2011 to allow competition into the health care market, including wholly foreign-owned entities. This drew investment from major international players such as Pfizer, Merck and GlaxoSmithKline. China boasts one of the fastest-growing health care sectors in the world.

• Large government investments are being made in the areas of biotechnology, information technology, new energy, environmental maintenance, new materials, high-end manufacturing and alternative fuels.

CHINA JOINS THE SDR PARTY

ForeX market in China

• Foreign exchange market China forms an important segment of the national economy of China. The Chinese government, and regulators view forex as a highly leveraged product which carries too much exposure.

• The official currency of mainland China or the People’s Republic of China is known as the Renminbi Yuan or simply Yuan.

• The exchange rates of Yuan are determined by the Chinese Central Bank and they are dependent on a number of factors. These factors include the volume of trading of Yuan, the supply of Yuan in the forex market and a number of other factors.

ForeX market in China• China’s Forex market is comprised of 2 parts. The inter-bank or wholesale

market and the retail market.• Major parties involved in the forex market are: 1) CFETS which functions as a trading platform for inter bank markets, and is responsible for clearing the market and for providing the supervisory authorities with market information 2) PBOC and SAFE as regulatory authorities 3) Designated FX banks and non-banking financial institutions and non-financial enterprises authorized by SAFE to engage in foreign exchange business 4) The enterprises that can earn and spend Forex. 5) Individuals who have forex trading needs.• The two factors that most seriously constrain development of China’s FX market

are the compulsory FX settlement system and the rigid exchange rate regime.

Forex- some facts and statistics• China's foreign exchange (forex) market posted turnover of 110.

93 trillion yuan ($16.7 trillion) last year according to the State Administration of Foreign Exchange (SAFE).

• In December, forex market turnover totaled 12.17 trillion yuan, including 2.46 trillion yuan inforex transactions between banks and their clients, 9.71 trillion yuan in interbank forextransactions, 5.53 trillion yuan in transactions on the spot forex market and 6.64 trillion yuanin forex derivatives transactions.

• In 2015, China opened its interbank forex market to overseas central banks and similarinstitutions to promote a market-oriented and more transparent interbank forex market.

SOME STATS

Debt Market/Bond Market• People’s Republic of China bond market is composed of both exchange and Inter-bank

Bond Markets. These two markets complement, interconnect with, and complete each other. Both are integral parts of the Chinese financial markets as a whole.

• The Inter-bank Bond Market is an over-the-counter (OTC) wholesale market, the exchange bond market is a retail market. The Inter-bank Bond Market is an OTC market, and accounts for about 94% of outstanding bond value, as well as 99% of bond trading volume. It was established in 1997 and has recorded an average annual growth rate of over 50% since 2005.

• The initial bond categories of Treasury bonds and corporate bonds have evolved into a wide range of bond varieties. These include policy bank bonds, central bank bills, general financial bonds, subordinated bonds of commercial banks, hybrid capital bonds, super and short-term commercial papers,commercial papers, medium- term notes (MTNs), credit asset securitization products, listed companies bonds, local government bonds, international development institution bonds, and small- and medium-size enterprise (SMEs) collective notes,and private placement notes.

Debt/Bond Market• Bond trading instruments have witnessed an evolution from

spot trading and repurchase trading to bond forwards, forward rate agreement, Renminbi interest rate swap, bond lending, credit risk mitigation agreement, and credit risk mitigation warrant, among many others.

• In China’s bond market, bonds can be issued in two ways: by tender through the issue system of the People’s Bank of China (PBOC) and by book building.

• There are eight major credit rating agencies in China’s bond market. Two of these are Sino-foreign joint ventures; one is engaged in a technical cooperation with a foreign enterprise and the remaining five are domestic-funded agencies.

Credit Rating of Bonds:

Trading of Bonds1. OTC Market• The Inter-bank Bond Market is an OTC market, and accounts for

about 94% of outstanding bond value, as well as 99% of bond trading volume. It was established in 1997 and has recorded an average annual growth rate of over 50% since 2005.

• At present, the Inter-bank Bond Market has over 10,000 members, covering all types of financial institutions such as commercial banks, securities companies, insurance companies, and various kinds of investment vehicles like mutual funds and pension funds. Among these, commercial banks are the most active participants.

Trading of Bonds2. Bond Repurchase Market• Bond repo has two sub-types: collateral repo and outright repo.

The major difference between the two is that the latter involves transfer of bond ownership during the repo period while there is no transfer of ownership in collateral repo.

• The terms of collateral repo transactions range from 1 day to 1 year, and are divided into 11-period categories, including 1-day (overnight) repo, 7-day repo (2–7days), 14-day repo (8-14days), etc.

• Market participants vary from commercial banks, other financial institutions, to non-financial firms and non-institutional investment products.

Trading of Bonds3. Proprietary Trading Systems• CFETS, also known as the National Inter-bank Funding Center, is the

unified trading platform for the inter-bank Bond market in China.• CFETS has been operating the inter-bank bond market trading

platform since 1997, and is now developed into a unique OTC electronic bond-trading platform in China with comprehensive functions of trade, post-trading service, risk management, and information service.

• CFETS has been operating the inter-bank bond market trading platform since 1997, and is now developed into a unique OTC electronic bond-trading platform in China with comprehensive functions of trade, post-trading service, risk management, and information service

SHANGHAI STOCK EXCHANGE

• The current exchange is a non-profit organization directly administered by the China Securities Regulatory Commission (CSRC)

• The world's 5th largest stock market by market capitalization at US$5.5 trillion as of May 2015

• The Shanghai Stock Exchange is still not entirely open to foreign investors due to tight capital account controls exercised by the Chinese mainland authorities and often manipulated by the decisions of the Central Government

• Major listings-:Bank of China – Ping An Insurance– PetroChina– Industrial and Commercial Bank of China

SHENZEN STOCK EXCHANGE

• Shenzhen Stock Exchange (SZSE), established on 1st December, 1990, is a self-regulated legal entity under the supervision of China Securities Regulatory Commission (CSRC).

• Market cap of around $2.2 trillion • Average monthly trade volume $800 billion• Globaly 4th largest stock exchange by volumes

HONG KONG STOCK EXCHANGE

One of the world's largest securities markets by market capitalization, the Hong Kong Stock Exchange traces its origins to the founding of China's first formal securities market.• The Association of Stockbrokers in Hong Kong, in 1891. • A second market opened in 1921, and in 1947 the two

merged to form the Hong Kong Stock Exchange• 6th largest stock exchange with market cap of $3.2 trillion• Some major listings are

– PetroChina– Industrial & Commercial Bank of China– HSBC Holdings

Shares Categories

• Non-tradable shares a. Legal person shares b. State-shares• Tradable shares a. A-shares: denominated in RMB (1264) b. B-shares: denominated in US$ and HK$ (53,57) c. H-shares: PRC-registered listed in HK d. Red-chips: Chinese companies registered overseas and listed abroad

Daily trade snapshot

HANG SENG VS SHANGHAI SSE COMP• Chinese companies may have Shanghai listed trading as well as Hong Kong

listed trading. A-shares are listed on the Shanghai exchange and are largely available only to domestic investors. H-shares are listed on the Hong Kong Stock Exchange; they are available mainly to non-chinese investors (like QDII, International investors). But in both cases, the origin of business should be Mainland China.

• There is a huge price difference at which mainland companies trade in both the exchanges, and interestingly there is no channel to arbitrage. A-shares trade at a huge premium over H-share counterparts (or even what is being quoted in London exchanges). This is largely due to huge imbalances between supply and demand of high quality stocks in China. High restrictions/regulations combined with high demand from newfound investible wealth is pushing premiums up.

• To track this, there is an index called Hang Seng China AH Premium Index" which measures the the spread between the A-shares and H-shares of dual-listed companies domiciled in Mainland China. This means that A-shares as a group are currently trading at a premium of about 80% over the H-shares and that at one point they were trading at a premium of more than 100% !!

Contd.• The spread is going up constantly, perhaps due to China being a

closed market whereas Hong Kong is a fiercly open economy; thus it reacts more sharply to international economic developments. A recent credit crisis left many markets crashing, impacting HK markets as well. Again, the HK currency is pegged to the USD, implying a greater hit for investors!

• While the Hang Seng has traditionally been viewed as a "back door" to gaining access to mainland Chinese stocks, this is a common misconception

• Monthly returns between the Hang Seng and Shanghai Composite indices have deviated quite dramatically in recent years

DIFFRENCE IN CUMALATIVE RETURNS

Everything in a gist

What should an outsider know about China’s Financial System?

• Capital markets to a large extent are closed- you cannot simply inject capital into China’s Market without permission from the government.

• Investing with a trusted partner and in a Business Plan that makes a lot of sense – good connections with the central and the state.

• A business plan that is anti to the State is not advisable because it is not a free market economy- ‘State directed Capitalism’.

Differences in Financial System• In the U.S if a firm borrows money from the debt capital markets,

investors are aware about the business of the firm, whether it is risky to invest or not. If they do, they make sure that the interest rates are very high – Capital gets allocated to the firms with best businesses.

• In China this hasn’t been working so well because of mainly two reasons: 1) Default is considered as an extremely adverse result in China and when a corporation gets into trouble, either the central or the State Government is prone to bail it out- means as an investor in Corporate bonds, I really don’t care much about the company I am buying bonds of because most of them are going to pay off eventually- Companies with goods business plans don’t have any significant advantage.2) China has a very nascent Bond Market. Shockingly China has as much corporate debt as the United States (U.S Corporate debt is two-thirds of its securities market) but a tiny fraction is obtained through Bond Markets.

Implications

• Its not possible for China to grow at the rate it has been unless it develops an effective bond market because if corporations get larger and larger, they cant just simply rely on Bank loans to sustain themselves, they need access to bond markets to get cheap Capital and boost operations.

How do China’s Big Banks work?

• Four large Banks Bank of China, China Construction Bank(CCB), Agricultural Bank of China(ACB), Industrial and Commercial Bank of China (ICBC), analogous to J.P Morgan, BOA, Goldman Sachs, Citi Bank- but more than fifty percent of the stake is owned by the central Government of China.

• To be the CEO of one these top four banks, one needs to be selected from the Chinese Communist Party and eventually acquire a ministerial rank in the Government – leads to biased money lending.

• Hence act more as Government agencies rather than free corporations, listed on stock exchanges having public shareholders.

Shadow Banking• Estimated to be more than $70 trillion worldwide.• It is not just about risky investment products and lending between

the individuals, shadow banking also covers loan shark operations and pawn shops as well as respectable activities like derivatives and securities lending.

• In brief summary it includes, non-bank financing, entrusted loans and banker’s acceptance bills.

• What makes them Shadowy is that they operate outside the banking sector hence prone to regulations.

• According to Financial Stability Board, Shadow Banking poses Systemic Risks to the financial systems- hence making it difficult to control economy using interest rates and money supply.

Shadow Banking in China• Shadow Banking in China looms

largest.• Estimated to be more than $6 trillion-

65% of the Chinese overall economy because - Saving deposit rates in China are low and most small businesses do not get loans and turn to other sources of lending.

• In 2013, China tried to rein-in wealth management products(bundled assets sold to bank customers) resulting is worst cash crunch in more than a decade.

• Shadow banking acted as an alternative source of funding to the

real estate sector and local government financing vehicles to boost the GDP.

• The decline in shadow banking was wrapped into a larger political economic stance warning that an economic slowdown was a natural part of restructuring.

China Current Trends• After more than doubling the value in the last years despite

a slowing economy and a weak corporate earnings report- stock markets in China are in a free fall- 43.55% ($4.5 trillion wiped out) crash since 12th June 2015.

Source: Bloomberg(22-01-2016)

Current Trends• Since 21st November 2014, the People’s Bank of China has reduced interest rate

six times – encouraging to borrow more at cheap rates to boost consumption, and again lowered the amount of cash that banks have to deposit as reserves.

• Role of Circuit Breakers- Markets getting hammered 7% in just 14 minutes of trading raises questions about the efficiency of CBs.

• Various brokerages and funds announced plans to buy massive amount of stocks, essentially funded by Chinese state funded margin finance companies- which was given a ‘direct line of liquidity from the central bank’ the previous year.

• China's central bank injected 150 billion yuan ($22.80 billion) into banks on Wednesday through its short-term liquidity operations (SLO), The PBOC injected 55 billion yuan via a 3-day SLO on 18th Jan, 2016. It also injected 410 billion yuan into the nation's banking system via its medium-term lending facility (MLF) and lowered rates for three-month and one-year tenors on 19th January.

Implication: Chinese central bank is creating more money out of thin air and giving it to people to boost consumption and investment to prop up their economy on paper- devaluing everything in the economy.

Trends(Contd.)

• CSRC banned shareholders with stakes of more than 5% from selling shares for six months last July whose expiry date is approaching- worry signs for the market.

• Patterns similar to the U.S crash of 1929 which led to the economic depression.

• Lets see how do the regulators all over the world and the Chinese Government prevent such a catastrophe.

Current FYP

Baidu Inc.Baidu was founded in 2000 by Internet pioneer Robin Li, with the mission of providing people with the best way to find information and connect users with services.

Why should we invest in Biadu?• It is the second-most visited website in the world, used by approximately 1 billion users in

South Korea and China combined.• As Biadu offers a Chinese language search platform. This provides Baidu with the incredible

market that can still be tapped.• With the so-called Great Firewall of China, Baidu is naturally protected from foreign

competition.• Since 2010, Baidu Inc. has increased its revenue each year. In 2010, the company generated

$1.27 billion and in 2014, generated revenue was $7.9 billion and total revenue of $7.7 billion till third quarter in 2015, and there is still plenty of potential here.

• Mobile Internet penetration crossed 85% in the China. Given the trend of consumers using mobile devices for e-commerce, Baidu has invested heavily in transforming itself from a desktop based business to a mobile leader. Baidu stated that mobile revenues comprised 54% of its total revenues.

Alibaba• HQ- Hangzhou, China• Jack Ma (Chairman)• Daniel Zhang (CEO)• NYSE: BABA• Last 5 years revenue: 6,417 20,025 34,517 52,504 76,204 (2011-

15) in Millions CNY.• Alibaba.com, the primary company of Alibaba, is the world's largest

online business-to-business trading platform for small businesses.• Alibaba reported sale of $14.32 billion on China's Singles' Day on

11 November 2015, up 60 percent from 2014.• Investors see Alibaba as a stock that reflects the state of the

Chinese economy, and so long as the Chinese economy is under this slowdown, bearish bets on the stock is expected in US.

Market Cap of $46.51 Billion and providing solution in 19

sectors

Has over 30240 patents and major

facilitator of 5G projects

Founded in 1987 by Ren

Zhengfei

Started by manufacturing phone switches

and is the largest telecom

equipment manufacturer in

the world

Out of 170000 employees 76000

are engaged in R&D

Owns the semiconductor fabrication unit called HiSilicon

which is the largest domestic designer of ICs

Set up Financial Risk Research

Centre in London to manage global

finance risks and efficiency.

Largest telecom equipment

manufacturer in the world

TECHNICHAL ANALYSIS• Huawei is becoming a major force in the consumer

smartphone market backed by strong R&D. Global smartphone sales have risen by 16% led by emerging markets demand and Huawei is a major player with global presence.

• Even in developing countries like India, Huawei has secured contracts worth $150 million to upgrade Airtel and Idea wireline network.

• It is actively involved in the process of research and subsequently rolling out 5G services by 2020. Overall the current trends indicate an upside to investments for a term of 5 to 6 years down the line with good return.

• Sinovac Biotech Ltd. is a China-based biopharmaceutical company that focuses on the research, development, manufacturing, and commercialization of vaccines that protect against human infectious diseases

• Developed the first H1N1 vaccine in the world in 2009.• The Company is currently developing a novel vaccine

against enterovirus 71, causing the severe hand, foot and mouth disease (HFMD) among the children.

• Total sales in the first nine months of 2015 were $44.6 million, an increase of 4.2% from $42.8 million in the same period of 2014. Total sales in the third quarter of 2015 were $16.8 million, a decrease of 2.0% compared to $17.1 million in the same period of 2014. The slight decrease is attributable to the depreciation of the Chinese RMB against the US dollar.

Sinovac

TENCENT HOLDINGS• Tencent Holdings Limited is an investment holding company. • The Company and its subsidiaries are principally engaged inthe provision of

Internet and mobile value-added services (VAS), online advertising services and eCommerce transactions services to users in the People’s Republic of China.

• The Company operates in four segments: VAS, Online advertising, eCommerce transactions

• Some firms under the banner are– QQ instant messenger– WeChat– Epic Games– Riot Games– GLU mobile– PaiPai.com– TenPay

• Data is the new oil for the world now and with all the masses of Most populous state glued to one’s services t gives immense power and to a certain extent monopolistic existence hence bulls may favor tencent over a long run.