Anthony J. Walton

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China Opportunities Challengesin the
Financial Sector
Anthony J. Walton Vice Chairman, The Americas
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The China Truth There are many Chinas

• 31 provincial administrations
• 22 provinces
• 5 autonomous regions
• 4 municipalities Beijing, Shanghai,
• Tianjin and Chongqing

• Main issues
• Many personalities and tastes
• Wheres the real money?
• How to get focus in this vast country?

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The Real China Economic Regions
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The China Opportunity

• Since China went global in 1992, this has
  happened
• 9 plus growth GDP 4th largest in the world
• 854 Billion FX reserves surpassing Japan
• Largest global destination for FDI - 60 billion
  last year
• Key driver of world growth
• Massive force in global commodity markets
• Growing influence and concern in world financial
  markets
• Critical link in global production networks
• Growing middle class 30 million persons per year

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The China Challenge

• But.
• Lack of legal enforcement
• Tension with trade partners
• Immature capital market
• Constant regulatory change
• Lack of transparency
• Strong government influence / Local leaders role
• People network / GuanXi rules

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Banks in China Today

• 4 State-owned Commercial Mega Banks attracting
  foreign strategic investors 3 IPOs forthcoming
• 12 Joint Stock National Banks listed and
  unlisted, many have attracted Western investors
  and are preparing for overseas listings
• 112 City Commercial Banks 34 large and seven
  with foreign strategic investment
• 3 national policy banks
• 800 urban and 40,000 rural credit co-operatives
• 240 Foreign Banks

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The Rest of Chinas Financial Sector

• 90 Insurance Companies
• 52 Trust Companies
• 50 or so Chinese domestic or Sino-foreign joint
  venture Mutual Fund Management Companies
• lt 100 Securities Firms
• 3000 Credit Guarantee Companies

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Local Banks Hold a Dominant Position
Source PBOC Q3 05 Bulletin
As at June 2005
Others include rural credit co-operatives,
other financial companies
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Chinas Banks Strengths / Weaknesses

• Positives
• Strong loan and economic growth
• Clear government support
• Strengthening regulatory oversight
• Improved financial profile
• - 260 billion injected
• - Asset management companies

• Butrecapitalization to date is only part of the
  solution
• Improved but high NPLs
• Lack of credit culture
• Insufficient profitability
• Pricing regulated and undifferentiated
• Internal disciplines needed
• - HR standard incentives
• - Credit
• - Corporate governance
• - Treasury and risk management

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Bank Liberalisation in 2007

• Foreign banks allowed to conduct RMB business
  with local corporates
• Foreign investments in Chinese Banks
• Relax license approval

• 18 cities opened to foreign banks to conduct RMB
  business. Open all geographies by end 2006
• Allow foreign ownership in State-owned Commercial
  banks, Joint Equity banks, and City Commercial
  banks up to 20
• FX forward, both inter-bank trading and customer
  hedging, consumer products, mortgage, credit cards

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Substantial Investment Reward Potential

• Joint Stock Banks
• - Listed
• - Unlisted
• Specific City Commercial Banks
• - Geographic focus
• - Prospect of national license
• - Relationship with other shareholders
• - Due diligence
• - NPL levels
• Securities Firms
• Trust Companies
• - Broad license
• - Emerging sector

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Final Considerations

• CBRC encouragement
• 2006 rule changes
• Financial sector deregulating
• Multiple Product / Services
• - Funding
• - Cash management
• - Trade finance
• - Global markets
• - Securities services
• - Consumer
• Partner choice be selective

Remember Stay Focused