PMBA6094 China and the Global Economy

Full-Time MBA (2021)

Topic 6: China’s Capital Markets and Financial Market Reforms

Heiwai Tang
HKU Business School
Associate Global Institute
 Today

• China’s Banking System and Shadow Banking

• Currency, Capital Control, and RMB Internationalization

• Financial Risks (past decade and most recently)

• Chinese outward investment spree in 2013-2016

• The rise of Fintech

• Case Study: Ant Financial
China’s Banking System
 Largest Banks in the World (assets)
(by assets; source: Bloomberg, as of Dec, 2018)

Total Assets
Rank Bank Name HQ Country
($trillion)

1 IND & COMM BK OF CHINA-A China 4.11

2 CHINA CONSTRUCTION BANK-H China 3.40

3 AGRICULTURAL BANK OF CHINA-H China 3.30

4 BANK OF CHINA LTD-H China 3.05

5 MITSUBISHI UFJ FINANCIAL GRO Japan 2.70

6 JPMORGAN CHASE & CO United States 2.62

7 HSBC HOLDINGS PLC United Kingdom 2.60

8 BNP PARIBAS France 2.59

9 BANK OF AMERICA CORP United States 2.34

10 CITIGROUP INC United States 1.93

 Largest Banks in the World (market cap)
(by market capitalization as of Dec, 2018; source: Bloomberg)

Rank Bank Name HQ Country Market Cap ($billion)

1 JPMORGAN CHASE & CO United States 324.63

2 IND & COMM BK OF CHINA-A China 267.85

3 BANK OF AMERICA CORP United States 241.82

4 WELLS FARGO & CO United States 216.91

5 CHINA CONSTRUCTION BANK-H China 207.18

6 AGRICULTURAL BANK OF CHINA-H China 180.51

7 HSBC HOLDINGS PLC United Kingdom 165.20

8 BANK OF CHINA LTD-H China 146.68

9 CITIGROUP INC United States 127.14

10 ROYAL BANK OF CANADA Canada 98.70

 Overview of the Banking System

• A three-tier structure:

1. Big 4 banks (ICBC, BOC, CCB, and ABC) + Bank of

Communication and the Postal Savings Bank + policy banks

2. Stockholding banks (most of them listed);

3. Regional banks; non-bank institutions

– Support old growth model: absorbing social savings => (low

cost) loans (investment) to key industries
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 Institutional Background: Banking Sector

Source: Deng et. al (2012)

 Bank Loan allocation by sectors
(RMBbn)
3,500 Household ST loans Household LT loans

NFI ST loans NFI LT loans

3,000
New RMB loans

2,500

2,000

1,500

1,000

500

(500)
Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18

NFI = non-financial institution

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 Rise of Shadow Banking (Wealth Management Products)

• After a series of reforms, the largest Chinese banks have

become stalwarts of the financial system.

• Reforms in the banking and shadow banking sectors:

• liberalization of interest rates, downsizing of the risky part of
the shadow banking sector

• On-balance sheet activities: NPLs under control

• Off-balance sheet activities:

• fast growth since the 2009 fiscal stimulus; rollover risks;
credit expansion led to debt burden of the economy
 RMB 4-trillion Stimulus and Credit Expansion
(newly issued bank loans and GDP growth)

New Bank Loan as a Percentage of 2004 GDP

80.0% 80.0

70.0% 70.0

60.0% 4 trillion 60.0

50.0% stimulus 50.0

40.0% 40.0

30.0% 30.0

20.0% 20.0

10.0% 10.0

0.0% 0.0
Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

New Bank Loan/2004 GDP GDP (trillion RMB)

Banks Banks’ Wealth Management Products/Net assets
Booming shadow banking sector
Shadow Interest Rate vs Official Lending Rate
Currency, Capital Controls, and RMB Internationalization
 Developments in the RMB Market

1. Fixed vs floating exchange rate

2. Capital account convertibility

– Country’s level of restrictions on inflows and outflows of financial
capital

3. Internationalization
– The use of a currency in settling cross-border trade
– i.e., an international medium of exchange
– E.g., previously if Chinese seller and SGP buyer would settle in
dollars

• Reserve currency
– Conditions 1-3 generally believed necessary for RMB to become
an international reserve
RMB-Dollar Exchange Rate, Daily, 1999-2019

RMB Appreciation
It takes fewer RMB to
Hard Peg buy a dollar

RMB Depreciation
It takes fewer RMB to
buy a dollar
 The Mundell-Fleming Trilemma

• Idea: a government can only choose 2 out of the followings: fixed

exchange rate, monetary autonomy and free capital flow.
• US
– Free capital flows
– Independent monetary policy
– Fixed exchange rates
• Germany or Hong Kong
– Free capital flows
– Independent monetary policy
– Fixed exchange rates
• China before 2005
– Free capital flows
– Independent monetary policy
– Fixed exchange rates
 Intuition for the Trilemma

• US
– Free capital mobility
– The Fed sets monetary policy
– But this means that we cannot fixed our exchange rate. Why?
• Suppose Fed raised interest rates. There would be an inflow of
capital into the US (b/c of high rates)
• This raises the demand for $, making the currency appreciate
• China (before 2005)
– China’s fixed exchange rate and conducts monetary policy
– But it must restrict international flow of capital
– Otherwise, money would flow into and out of the country, forcing the
domestic interest rate to match those set by foreign central banks

• China is gradually embarking on reforms to make the exchange rate

more flexible, and to open the capital account
 Exchange Rate Regimes

• Two Types
– Floating – currency’s price determined by market
– Managed – currency’s price determined by policy

Breakdown of Exchange Rate

• There are many flavors of managed regimes Regimes of the World
– Managed float – Japan
– Peg – Hong Kong, Germany
– Bands – Chile

Source: Feenstra and Taylor

(2008)

• The choice of exchange rate regime is an explicit policy choice by

governments
 Fixed Exchange Rates Tradeoffs

• What are the tradeoffs of fixing an exchange rate?

• Benefits
– Reduces uncertainty for exporters and importers
– Adds credibility for macroeconomic policy
– Under-valued exchange rate spurs exports

• Costs
– Benefit one set of agents over another set
• In China’s case: benefit exporters at the expense of importers
– Can suffer from speculative attacks
– Makes managing monetary policy more difficult
 China’s FX Reserves

Source: PBOC (2019)

 Becoming a Reserve Currency

• To become a reserve currency, three conditions are necessary

– Floating exchange rate
– Capital account convertibility
– Internationalization
 China’s Liberalization of its Capital Account

• China has gradually been liberalizing its capital account

– Establish Shanghai as a global financial center
– Achieves China’s desire to move to FX flexibility

• Liberalizing outflows:
– Chinese households opportunity to diversify savings
– Creates competition for banks/firms that depend on captive
domestic sources of funds

• Liberalizing inflows:
– Allow foreign investors to play a larger role in further developing
and deepening China’s financial markets
– Would trigger more entry of foreign bank, which would increase
competition in banking sector -- benefit private savers and
borrowers
 (Gradual) Capital Account Liberalization
• Channels for Inflows
– QFII (Qualified Foreign Institutional Investor), launched 2002
• Allows foreigners to convert foreign currency to RMB
• Oct 2015: 277 institutions, 8 central banks, 10 sovereign wealth funds
– RQFII (Renminbi QFII), launched 2011
• Allows investment of offshore RMB into Chinese securities

• Channels for Outflows

– QDII (Qualified Domestic Institutional Investor), launched 2006
• Chinese institutions to invest in offshore products
• Nov 2015: 132 institutions
– QDII2, proposed in 2013 not yet launched
• Retail investors with $160k in assets to invest in offshore products

• Two-way Flows: Shanghai Free-Trade Zone, launched 2013

– Foreign-invested enterprises can convert foreign currency to RMB any
time
 RMB Internationalization

• In the past year, there has been a lot of discussion about the
internationalization of the RMB currency

• Background:
– The dollar is the world’s international currency
– Backed by the faith and credit of the US govt
– Freely exchangeable and can be held in a wide range of tradeable
assets (deep and liquid)

• Some obvious benefits of internationalization:

– Invoiced trade in RMB:
• If Chinese importer and Argentinian exporter wanted to trade,
they would settle in dollars (neither party wants each other’s
currency, why?)
– Widely held currencies are much less likely to fluctuate, and
subject to currency attacks.
 What needs to be done to internationalize the RMB?
• In 2009, China began a pilot to allow companies to invoice in RMB.
• 20+% of China’s trade is now settled in RMB
– Most of the settlements have been on the import side (ie, a US
exporter is happy to receive RMB probably because the
anticipated appreciation)
– But since China exports more than they import, the opportunities
to earn RMB has been low

• Hard choices:
– In order for the RMB to become a more global currency, China
needs to allow foreign companies to earn more RMB
– Where do foreigners hold RMB?
• Options are slim (so called “dim sum bonds” sitting in HK)
• Only real option is to liberalize capital flows
– Because of the trilemma, this means giving up fixed XR
• But this exposes a country’s financial sector – will investors
have confidence during crises? Will it lead to rapid outflows?
 What Beijing has done to internationalize the
redback?
• China has used RMB-denominated accounts in Hong Kong to test the
market
– Selected banks can offer offshore RMB deposit accounts
– Settlement of trade transactions with RMB
– Allowing the issuance of RMB-denominated (“dim sum”) bonds in
Hong Kong and other offshore financial centers

• Bilateral swap agreements with foreign central banks

– As of 2015, the People’s Bank of China had signed over 30 such
agreements, for a total value of $468 billion. These swaps allow the
People’s Bank of China to make the redback available to other
countries while maintaining tight controls over its use abroad.

• Greater economic interdependence with China, such as infrastructure

lending and borrowing for the Belt and Road Initiatives.
RMB as World Payment Currency by Rank
The share of CNY in international payment (March 2019)

30
RMB as World Payment Currency by Value
(in %)
The USD will likely still be the dominant global currency
for a long time
 Digital RMB

• In May 2020, the People’s Bank of China (PBOC) disclosed the latest
progress on digital RMB.
• Internal beta testing of digital RMB has been piloted in various cities
• In August 2020, the Ministry of Commerce issued the Overall Plan for
Comprehensively Deepening the Pilot Program of Innovative
Development of Trade in Services
– implementation of digital RMB pilot projects in the Beijing-Tianjin-
Hebei Economic Zone, Yangtze River Delta, Guangdong-Hong
Kong-Macao Greater Bay Area and other regions in Central and
Western China.
Benefits
• RMB internationalization
– towards a new settlement system independent of SWIFT
– Traceability lessens the need of capital control
• Efficient allocation of resources, such as the deployment of future
fiscal stimulus.
 Recent China’s Financial Market Reforms

• Jan 16, 2020: The Chinese government brought forward the planned
opening of its capital market by 8 months, permitting global investment
banks to form fully owned units to do a broad array of investment
banking and securities dealing in China.

• Simplification of a registration system for initial public offerings on the

ChiNext board, the relaxation of state-owned enterprise listing in the
domestic market

• Introduction of derivative products in Hong Kong for mainland-traded

shares.

• “It is a timely reminder to foreign investors not to worry so much, and

that opening up measures in China are indeed materialising.”
• Wall Street Moves Into China, Despite Tech and Trade Battles | WSJ
Bloomberg: China Accelerates Capital Market Reform to Counter Virus, U.S.

• June 19, 2020: BENCHMARK REVAMP: The Shanghai Stock

Exchange will adjust the timing for newly listed stocks to be included
in the benchmark index and include Chinese Depositary Receipts of
so-called red chips -- Chinese companies incorporated overseas and
listed in Hong Kong -- as well as Star board companies.
• June 12, 2020: CHINEXT REFORM: China unveiled a series of rule changes for Shenzhen’s ChiNext board, including doubling daily price
limits for all stocks, a registration-based system for IPOs and scrapping price caps altogether for stocks in their first five days of trading.
• May 29, 2020: SAME-DAY SETTLEMENT: The Shanghai exchange said it’s studying a “T+0” mechanism that will likely increase trading in
stocks on its startup board. The new arrangement would allow investors to sell shares on the same day of purchase once per session, while
currently they can only do that the next day.
• March 1, 2020: TWEAKED RULES: On March 1, China’s latest amendments to the Securities Law took effect, which, among other things,
replaced a stringent approval system with a registration-based method for companies to issue exchange-traded debt. It also eased IPO rules
and stiffened penalties for violations in the country’s capital markets.
• February 21, 2020: BOND FUTURES: China allowed some of its biggest banks to trade bond futures for the first time since 2013, a step
toward luring more investors to its government-debt market.
• February 14, 2020: FOLLOW-ON STOCK OFFERINGS: The securities regulator significantly relaxed its grip on public companies’ follow-on
stock offerings. Among key changes to the rules on selling additional equity, the China Securities Regulatory Commission shortened by half
the lock-up period for shares placed privately and allowed companies to provide bigger discount to lure investors.

• January 16, 2020: FOREIGN FIRM ACCESS: China brought forward

the planned opening of its capital market by eight months, enabling
access for global investment banks such as Goldman Sachs Group
Inc. The firms can apply to form fully owned units to do a broad array
of investment banking and securities dealing.
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The role of Hong Kong

39
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 Takeaways

• Given its size and economic clout, China is adopting a unique

approach to the RMB’s role in the global monetary system

• As with all other major reforms, China is charting its own path to open
the capital account

• Directionally, the trend is clear:

– The country moving towards a more open capital account and a
more flexible exchange rate

• The RMB will play an increasingly larger in global trade and finance,
and will increasingly be used as a reserve currency

• But in the foreseeable future, unlikely to challenge the USD as the

single leading dominant currency.
Financial Risks in the Chinese Economy
 Financial risks in the Chinese economy

• Rapidly rising leverage and a booming shadow banking sector

• Skyrocketing housing prices across China

• Unstable capital flow and exchange rates

• Volatile stock market and intensive speculation

• Recommended: “Risks in China's financial system” by Song and

Xiong (2019)

• Recent policy risks?

 Specifics

• The 2015 stock market crash wiped out 3 trillion USD in share value.
– Despite the government's rescue plan (so-called national team) to
buy more than one trillion RMB worth of shares.

• China accumulated almost 4 trillion USD in foreign reserves by 2014.

• Foreign reserves of 1 trillion USD were lost in 2015 and 2016.
• The net capital outflow amounted to 1.5 trillion USD in 2015-2016.

• A mild but sudden depreciation of the Chinese yuan occurred in

August 2015. In 2016, the Chinese yuan depreciated by 10% against
the USD, increasing the cost of capital controls.
Increasing investment share despite economic slowdown

45
Rising debts
Public Debt : City-level Debt-to-GDP Ratio

47
 China’s Debt Problem?

• Credit expansion coincided with slowing Chinese economy

• This suggests that many investments are likely to be non-performing

• In 6 years before crisis, 1 RMB of new credit resulted in about 5 RMB

of economic output. In 6 years after crisis, estimate of multiplier is
about 3 RMB (Economist, 2015.04.15)

• Some predict massive deleveraging which would sharply slow growth

rate, but:
– Much of debt is held within country
– Held by (and issued to) state sector – evergreening can buy time
– Debts concentrated at provincial level (not central, or households)
• SOEs, property developers, construction firms

 Debate over hard vs soft landing

 Another unintended consequence

• Findings from “Local Crowding Out in China” (Huang et al., 2019)

• In China local public debt issuance in 2007-13 crowded out the

investment of private firms by tigtening their credit constraints.

• The Chinese 4 trillions fiscal stimulus reduced investment by private

manufacturing firrms, and left SOEs unaffected.

• Reallocation of investment from private to SOEs is likely to reduce on

China's long-run growth potential
Number of Bond-Issuing Local Governments’ Financing
Vehicles (a result of the 2009 Stimulus Package)
 Skyrocketing housing prices

Fang et al. (NBER 2017)

Speculative stock markets
 Chinese financial outlook

• Looks risky, but two comforting news:

1. The rising leverage is mostly from state banks to state firms and
local governments
• A western style debt crisis (like the on in Greece) is unlikely,
even though the efficiency of capital allocation is a key concern
• Reading: Evergrande

2. The housing boom is heavily related to local governments

• A housing crash is less likely, although high housing prices
may distort resource allocation and activities in the economy
 Potential solutions?

• Grow fast, escape the r>g trap.

• Deeper financial market liberalization.

– The dual track and experimental approach in the financial market
increased risks (e.g., shadow banking)

• Expectation management is important.

– Intervention (in the markets) sometimes may backfire.
 Recent policy risks?

Priorities: to remove the so-called “Three Mountains” on livelihood:

Stresses on people due to pressure from
high housing costs, education, and medical and health services

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Debt owed by non-financial firms has been rising – thus
need to deleverage

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 Recent policy risks

Ongoing regulatory crackdowns on

• Platform companies (and other anti-trust regulations)

• Private tutoring

• Online banking

• E-gaming

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 Regulations over the real estate sector

• Reasons: high housing costs, sources of wealth inequality, but also

real estate companies are highly leveraged

• Goal:
– deleverage and improve financial health for the real estate sector
– Provision of affordable housing

• Policies: the Three Red Lines

– liability to asset ratio < 70%
– net gearing ratio = net debt/ total equity < 100%
– cash to short-term debt > 1.

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 Other risks?

• Electricity supply disruption

– Brewing energy crisis?

• COVID outbreaks and the corresponding restrictions?

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Revised China’s economic outlook

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Sudden increase in private outward investment
 Outward direct portfolio investment are rising

Z. Huang and H. Tang (2017) “Why China Is Curbing Outbound Direct Investment”
 The share of foreign assets owned by the Chinese private
sector is rising

Z. Huang and H. Tang (2017) “Why China Is Curbing Outbound Direct Investment”
China’s “Going Out” (走出去) strategies (since 1999)
 4 famous examples of key private-sector outward investors
1. Dalian Wanda (万达集团), a residential real estate company
– 700 billion yuan assets in 2017
– Some assets acquired since 2013:
• US AMC Theaters
• Sunseeker International, a British luxury yacht manufacturer
• Australian cinema chain Hoyts
• US Propaganda GEM, a firm marketing company
• US film production and mass media company Legendary Entertainment

2. Anbang Insurance Group (安邦保险)

– 1.9 trillion yuan assets in 2017
– Some assets acquired since 2014:
• Belgium insurer, Fidea Verzekeringen.
• Waldorf Astoria New York hotel from Blackstone for nearly US$2 billion.
• Iowa-based insurer Fidelity & Guaranty Life
• Four office towers of Bentall Centre in Vancouver
• 16 landmark US hotels, including several Four Seasons resorts and Manhattan's
JW Marriott Essex House hotel.
• Allianz’s South Korea operations
 4 famous examples of key private-sector outward investors
3. HNA Group (海航集团, before restructuring in 1997 called Hainan
Airlines)
– Some assets acquired just in 2015:
• Bermuda-based container leasing group
• 15 percent stake in Red Lion Hotels Corporation from Columbia Pacific Advisors.
• Airport ground handler Swissport International Ltd. from PAI Partners SAS for 2.73
billion Swiss francs (US$2.8 billion).[61]
• Single largest shareholder of Azul Brazilian Airlines
• London-based, ICE - International Currency Exchange
• US Carlson Rezidor Hotel Group (owner of the Radisson brand)
• 80% stake in the Zurich-based aircraft maintenance organization SR Technics
from Abu Dhabi's state investment company Mubadala.[74]
• 25% percent of Hilton Worldwide Holdings Inc. from the Blackstone

4. Fosun International, an investment company (复星国际)

– Asset Management: IDERA (in Japan); Resolution Property (in UK); Fosun Eurasia
Capital (in Russia); Rio Bravo Investmentos (in Brazil)
– Insurance: Peak Reinsurance; Fidelidade; NAGICO (through Peak Reinsurance)
– Real estate: 126 Madison Avenue (New York); 28 Liberty Street (New York); Citigroup
Center (Tokyo); 73 Miller Street (Sydney); Lloyds Chambers (London)
 Why the spending spree?
Beddor and Tang (Foreign Policy 2017)

Based on my student’s (who used to be Reuters) interview:

• Foreign investments office of one of these conglomerates:
– his team was given targets to prioritize the speed of acquisition
over the quality of investment. Only those in the upper echelons of
the firms know exactly why these targets were given.

• Mid-ranking staff speculate that it may in part be a desire to bulk up in

order to become “too big to fail.”
– Get large enough, and the cost in jobs, prestige, and financial
fallout if you go under might be big enough that the government
will keep throwing money at you

• Often speculated reasons: executives may be shifting assets abroad

to keep them safe (especially after the 2015 stock market decline)
The return on China’s outward FDI declined from 15 percent
in 2014 to only 0.4 percent in 2016

Z. Huang and H. Tang (2017) “Why China Is Curbing Outbound Direct Investment”
 Restrictions on Outward Investment in 2017

• June 2017, China Banking Regulatory Commission (CBRC) asked banks

to provide information on overseas loans made to Dalian Wanda, Anbang
Insurance, HNA, and Fosun International;

• Some of them were subject to multiple rounds of punishment for their

foreign ventures.

• July 2017, banks were ordered to stop making loans to Wanda to finance
its foreign entertainment acquisitions;

• July 2017, National Development and Reform Commission expressed its

focus on “irrational” investment, especially in the field of real estate, hotels
and sports clubs;

• August 2017, Rules on Financial Management of Overseas Investment by

State-owned Enterprises, which was released in June, started to be
implemented.
 Non-financial Outbound Direct Investment dropped since 17
Huang and Tang (PIIE)
Billions of USD, monthly, 12-month moving average
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2011-03
2011-08
2012-01
2012-06
2012-11
2013-04
2013-09
2014-02
2014-07
2014-12
2015-05
2015-10
2016-03
2016-08
2017-01
2017-06
Fintech in China
FinTech Credit: E-commerce Platform Lending
 Platform as Lenders to SMEs
• There is a finance gap for small and medium-sized enterprises (SMEs)
– About 40% of SMEs are financially constrained (surveys)
– Total finance gap amounts to $5.2 trillion (IFC; 2017)

• SMEs without alternative financing sources.

– Low scales, opaque income sources, no collateral and financial
statements: hard to access credit from financial institutions due to
high credit risk
– Financial under-development: credit market segmentation
– Financial inclusion: rural and remote areas

• Can FinTech credit help?

– FinTech companies provide financial services using information
advantage and big data algorithm
– FinTech credit has a low-cost distribution channel at the platform
for the borrower without physical collateral and credit reference.
 FinTech and BigTech credits
Hyperlink
Per cent ofBIS
total Fintech credit in 2017 USD

The bars show the share of BigTech and other FinTech credit in selected jurisdictions in 2017, while dots show total FinTech
credit per capita.
Sources: Cambridge Centre for Alternative Finance and research partners; BIS calculations. Data for WeBank are taken from the
public balance sheet: https://render.mybank.cn/p/s/render/404.

Frost, Gambacorta. Huang , Shin and Zbinden ( 2019)

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 What is Special about Fintechs as Lenders?

 Advantages over traditional banks:

 Platform as cheap distribution channel

 Information advantage Sales

Performance

Owner Service
 Platform recycles funds Characteristic Rating

 Enforcement advantage
Usage of Credit Credit
Information

Non-sales
Performance

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Ant Financial would have been the largest bank
 FinTech’s Advantages
• Advantage over traditional banks:
– Information advantage
– Cheap distribution channel
• The ability to identify good borrowers
– Geography include the remote and rural areas
– E-commerce’s trading platform allows information gathering that is
not feasible at banks
– Big data: not only own sales history, but also the business
conditions along the supply chain, other indicators of credit quality
including service quality and track record of business network Real-
time data (as opposed to regular bank account information)
• FinTech are in a better position to manage credit risk ex post
and new form of collateral
– They potentially lose the trading platforms after default
– Default will hurt their access to other consumer credit
– Platform activities are valuable collateral
 FinTech’s Advantages (cont)
• Who are those excluded from the banking channel because of
information asymmetry?
– Small
– Young (without sufficiently long track record and customer
capital)
– Areas where banks have limited information about borrower
quality
– New business products/industry where banks do not have
enough data to assess potential default rate

• These are likely the businesses that need financing the most
and have the highest growth potential

• Do we see these patterns in the data? That is, credit availability

and credit use are stronger for
– Younger businesses (age < 1 year)
Ant Financial’s Market Share in E-Payment
Ant Financial’s Diversified Businesses
The revenue share from digital
payment is shrinking, losing to Wechat
and other payment platforms.
Ant Financial created a money ecosystem
 4 Main business lines
1. Payments
– launched in 2004 as a service for Alibaba’s ecommerce clients, now widely
used now, with more than 80m merchants taking payments.
– processed RMB 118tn of transactions in mainland China in 2019
– but increasingly under pressure from Tencent’s WeChat (Ant’s revenue from
payment dropped from 55% in 2017 to 36%)
2. Lending
– fastest growing revenue stream for Ant (grew 87% year-on-year to RMB 42bn)
– close to 500m customers took out loans through Alipay in the past 12 months
(with a balance of RMB 1.7tn as of June 30)
– 98% of the credit extended by its 100 partner banks or securitized by Ant to be
sold to the market
3. Wealth management
– introduced its Yu’E Bao fund in 2013, allowing customers to invest cash in
their Alipay accounts.
1. Ant’s Tianhong Asset Management invested all of the money, ranked as the
world’s largest money market fund.
4. Insurance and other projects
Because of government regulation, the size of wealth
management already peaked in 2018
 Taobao and Ant Financial
• Ant financial collects information from
Taobao platform and applies a credit
model with machine learning to decide
on credit qualification.

Taobao • Qualified online shops receive an

Online credit line including loan rate, max
Shops loan amount (up to 1 million RMB),
maturity (6m to 1y) and loan contract.
Ant
Financial • Shops decide whether to accept the
non-collateral loan

• “3-1-0” online lending: a service

standard characterized by a 3-minute
Alibaba's Taobao.com: >80% online application process, and 1-second
retail (10% total retail) in China loan granting and all with zero manual
intervention.
Automated Credit Allocation Process
• Automated Credit Approval Process: Credit scoring with information
advatange and big data algorithm
– Credit score will be generated and updated on monthly basis
following the Value-at-Risk model
– Credit score is continuous in firm characteristics and trading history
– Credit core cut-off is 480 that reflects its aggregate risk preference,
which is similar to FICO score – a cut off of 660

– Automated Credit Access Process: Cheap distribution channel

– no collateral
– 16 % annual loan rate ( vs. 30 % P2P lending rate)
– < 2% default rate
– 2.3 RMB per loan transaction ( vs. 2,000 RMB by banks)
– repay any time
Thank you

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