After a dynamic 2012, China's financial industry faces new challenges and opportunities as we move into 2013 and the upcoming year of the Snake. In our annual look at the Top 10 China Financial Technology trends, we'll examine the key industry trends and how those will affect the technology spend of banks and financial institutions. New for 2013: in addition to the Top-10 China Banking trends that Kapronasia has covered in the past, we have also identified the Top-10 Capital Markets trends for 2013 as we continue to expand our research and service offerings into 2013.

1. Webinar: A look at the Top-10 China Financial
Industry Trends for 2013
February 7th, 2013 - 17:00 – 17:45 Beijing Standard Time
The webinar will start in a few minutes.
For more information about the topics covered in this webinar or
Kapronasia, please visit www.kapronasia.com or send us an
email: research@kapronasia.com. Twitter: @chinafintech

2. A look at the Top-10 China Financial
Industry Trends for 2013
Prepared by Victor Fan, Ken Ding
Moderated by Paul Robinson
Presented by Zennon Kapron
February 7th, 2013

3. Methodology
• Findings based on
• Secondary research - internal knowledge, government,
vendor and financial institutions’ reports.
• Primary research – Interviews with FIs, vendors and industry
experts.
• Report purpose:
• Identify China’s Top-10 trends for 2013
– Banking
– NEW – Capital Markets
• Explore the current situation
• Evaluate the potential opportunities
• Forecast what will happen in 2013

4. China’s Financial Market Situation
• Economy growing; banking assets growing
• 5 year demand for trade finance and international settlement will
remain strong
• Slowing pace of credit lending and non-performing loans are
expected to remain risk factors to continued growth
• China’s financial market will continue to reform; 12th Five-Year Plan:
“financial institutions need more business innovation”
12th Five-Year Plan period : from 2011 to 2015

5. Financial IT infrastructure Outlook
• Continued reforms -> pushing banks to invest in IT infrastructure
• Overlooked opportunities from small and medium banks
• Local vendors are more familiar with market, more competitive;
localization for foreign players is important
Bankcards include credit and debit cards
Source: Kapronasia, PBOC 2010
9.0 10.4 12.4 14.6
0
5
10
15
20
2009 2010 2011 2012
USDBillions
Chinese banking industry IT spend, 2009-2012

6. Top-10 China Capital Market Trends for 2013
1. Increased inflows of foreign Capital into China
2. The gradual recovery of Chinese Stock Market
3. Increased focus on Wealth Management Product risk control
4. Changes in the composition of equity investors
5. Emergence of New Financial Derivatives
6. Consolidation of Market Regulators
7. New IPO Listing / de-listing regulations
8. Pension Funds entering Chinese Stock Market
9. Increasing number of Hedge Funds Entering China
10. Maturation and expansion of Algorithmic Trading

7. Top-10 China Capital Market Trends for 2013
Trend Number 1: Foreign Capital in China
Trend Number 5: New Financial Derivatives
Trend Number 9: Hedge Funds Entering China

8. Top-10 Capital Markets Trends – Foreign Capital in China
Investment and interest in China driven by:
– Increased demand from foreign investors
– Government push for more foreign capital
• Opening of China’s Capital markets to foreign investment will
accelerate in 2013 -> increased inflows
• Although the current scale of QFII and RQFII still small ~1.5%
market cap:
– Number of QFII licensed investors increased greatly in 2012
– Likely see better access to domestic investment products /
services – e.g. QFIIs -> index futures
• QFII 2 and RQFII 2 – For high net worth qualified foreign individual
investors to invest in China
*QFII – Qualified Foreign Institutional Investor
*RQFII – Renminbi Qualified Foreign Institutional Investor

9. Top-10 Capital Markets Trends – Foreign Capital in China
12 14
7
18
0
23
17
13
32
72
0
10
20
30
40
50
60
70
80
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Number of New QFII Licenses
Source: CSRC, Kapronasia, 2013
72 firms obtained QFII licenses in 2012, far more than any year since QFII
program inception in 2003

10. Top-10 Capital Markets Trends – Foreign Capital in China
1.5%
98.5%
Current A-Share
QFII & RQFII Chinese Capital
15.0%
85.0%
Future A-Share
QFII & RQFII Chinese Capital
Expected
CSRC President Guo Shuqing indicated that current scale of QFII and RQFII
should shift from 1.5% -> 15% in future
Source: CSRC, Kapronasia, 2013

11. Trend Number 1: Foreign Capital in China
Trend Number 5: New Financial Derivatives
Trend Number 9: Hedge Funds Entering China

12. Top-10 Capital Markets Trends – New Financial Derivatives
• Likely to be a number of new financial derivatives / products
available in the market during 2013
• Commodity Futures – egg, crude oil, gold, charred coal
– Egg, like pork etc. – key part of daily life
– Lower cost of investment entry
• Account minimums
• Contracts smaller value
• Financial Futures – Government Bond futures
• Options on Futures

13. History of Government Bond Futures
• Government Bond futures are actually not completely ‘new’
• 1992 – Shanghai Stock Exchange launched Government Bond
Futures
• On 27 March, 1995, the market went through a tremendous
fluctuation due to a ‘battle’ between a government supported bull
side and a Wanguo Securities supported bear side
• Although Wanguo ‘prevailed’ in end, government intervened,
arrested chief manager of Wanguo and shut the market down
• Re-opening of bond futures market -> important market signal
New futures options
• Which are completely new to the market, will likely be launched in in
2013; testing already in progress -> will be an important hedging
tool as a ‘2nd-order’ derivative
Top-10 Capital Markets Trends – New Financial Derivatives

14. Trend Number 1: Foreign Capital in China
Trend Number 5: New Financial Derivatives
Trend Number 9: Hedge Funds Entering China

15. Top-10 Capital Markets Trends – Hedge Funds
Markets today:
• A-share market is at near-term lows -> relatively cheap opportunity
to get into the market
• Although growing more slowly, Chinese economy is still one of the
fastest growing in the world -> better investment returns compared
to other markets
• Demand for more mature finance industry from govern. / investors
– Government initiatives: Shanghai IFC 2020
– Investor needs: lack of investment channel / product for HNWIs
Market seems to be ripe for Hedge Funds to enter, but…

16. Barriers to entry…
1. Lack of a mature credit system
– SMEs struggle to obtain bank financing -> informal lending
– Banks are lending mainly to SOEs
– Pilot reform in Wenzhou, Zhejiang -> innovative SME financing
2. Regulators still unsure -> hedge fund governance not clear cut
3. Multiple government industry regulators & ‘ownership’ is unclear ->
moving forward in any particular direction is challenging
4. Local competing products: PE funds, trusts and wealth
management services in China considered substitutes
5. QFII / QDLP are really only 2 legal means for hedge funds to enter
• QFII quota not allocated to hedge funds -> some additional
legal structuring needs to be done
• QDLP is currently more suited for PE rather than hedge funds
and typically not really suitable for large scale financing
Top-10 Capital Markets Trends – Hedge Funds

17. Basic entry options:
1. Opening private retail accounts using Chinese citizen ID cards,
which is within the grey area of current regulations
2. H-Shares in Hong Kong another option -> exposure to economy
and financial markets; yet not a perfect hedge
3. Additional China-hedge products in HK
So although opportunities are large, there are challenges for
hedge funds entering, yet we see this being an area of strong
development in 2013
Top-10 Capital Markets Trends – Hedge Funds

18. Top-10 China Banking Trends for 2013
1. Core Banking Systems for Small and Medium Banks
2. Mobile Payment in China
3. Online-to-Offline (O2O) Business
4. PBOC 3.0 – China’s EMV Migration
5. Big Data Era for China’s Banks
6. Risk management update for Chinese commercial banks
7. China's National Advanced Payment System 2 (CNAPS2)
8. Prepaid Card Market Trend
9. Overseas Shopping
10. The Development of China’s Rural Payment Market

19. Trend Number 3: Online-to-Offline Business
Trend Number 5: Big Data Era for China’s Banks
Trend Number 7: China’s CNAPS2

20. Top-10 China Banking Trends – Online-to-Offline Business
148 187 221 270 314 363
32.4% 35.2% 36.8%
41.2%
45.7%
50.2%
0%
10%
20%
30%
40%
50%
60%
0
50
100
150
200
250
300
350
400
450
500
2010 2011 2012 2013e 2014e 2015e
PopulationMillion
China's Online Shoppers, 2010-2015e
Population of Online Shopper (Million)
Num of Online Shoppers / Num of Online Users
Source: China Internet Network Information Center, Kapronasia, 2012
Enormous amount of online Shopping in China…
• E-commerce transactions projected to rise from 7.5 trillion in 2012
RMB to 18 trillion 2015 to become the largest global market
• Hand in hand with development of e-commerce, online shopping
increasingly popular – 221M shoppers by end 2012

21. • O2O trend is driven by:
– Increasingly fierce competition in offline consumption => more
physical retailers want to focus online
– Online shopping growing rapidly, but low profit because of price
competition => needs innovative / value-add services
• As an emerging trend, O2O connects online with offline
– Flexible payment methods => customers shop offline and then
pay online or vice versa
– More ‘interaction opportunities’ for users and businesses
– Other value-added services: LBS (location-based services),
group buy, COD (cash on delivery)
Top-10 China Banking Trends – Online-to-Offline Business

22. • Number of O2O users (for shopping) increased 65% in 2012, and is
projected to account for over 80% of total online shopping in 2015
• The total market size (shopping value) of O2O in 2012 was 75 billion
RMB and will grow 50% annually from 2013 to 2015
39
82
135
185
240
293
0
50
100
150
200
250
300
350
2010 2011 2012 2013E 2014E 2015E
Million
Number of O2O Users in China, 2010-2015E
Source: iResearch, Kapronasia, 2012
Top-10 China Banking Trends – Online-to-Offline Business

23. Future Trends:
• Internet companies, payment companies, and e-commerce
merchants will invest more into various O2O business models
– Alipay, the 3rd largest payment provider, invested 500 million
RMB in O2O -> distributed 60,000 POS terminals for COD
– Baidu, China’s biggest search engine, setup its LBS (local-based
service) Department specifically to develop their O2O business
• Going mobile is a promising direction of O2O business
– Dianping.com* emerging as most popular mobile O2O platform -
432 million downloads of Dianping mobile app as of end 2012
• More opportunities for IT vendors
– Software solutions: O2O platform, data mining, loyalty and other
value added services
– Hardware: IT infrastructure, POS terminals, mobile devices
Top-10 China Banking Trends – Online-to-Offline Business
*Dianping is similar to Yelp in the west - local directory
service with social networking and user reviews.

24. Trend Number 3: Online-to-Offline Business
Trend Number 5: Big Data Era for China’s Banks
Trend Number 7: China’s CNAPS2

25. Top-10 China Banking Trends – Big Data & China’s Banks
Big Data is something somewhat new for China’s banks…
• Extraordinary progress on China’s banking industry => massive
amounts of data, especially for large commercial banks
• Data consolidation into centralized data-warehouses complete for
most banks => need cost-effective / easy solutions to manage
tremendous data volume
• Competition domestically and from global players; regulators’ push
on finance reformation => need to innovate to handle and use data
Big Data is coming => banks must enhance customer experience
and acquire more customers through deep data mining and
analysis.

26. More Challenges for banks…
• Vast and real-time sensory (customer behavior) data
• Different types of data from different channels: social media, mobile,
online, and physical branches
• How to collect, store and analyze big data
• High performance and stable IT infrastructure to support data mining
• How to analyze data and make the right decision, build stronger
customer relationships, and improve risk management
• Global expansion => improve competitive edge, especially for big
banks, such as ICBC and BOC
Top-10 China Banking Trends – Big Data & China’s Banks

27. 60
74
96
117
144
180
0
20
40
60
80
100
120
140
160
180
200
2009 2010 2011 2012 2013E 2014E
USDMillion
China Data Mining / BI (Business Intelligence)
Bank Spend, 2009-2014E
Leading to more opportunities for vendors:
– Analyze massive data sets that cannot be dealt with by using
traditional databases and architectures
– Being able to provide high-end analytics based on big data is
real value for banks
Source: Kapronasia analysis, 2012
Top-10 China Banking Trends – Big Data & China’s Banks

28. Trend Number 3: Online-to-Offline Business
Trend Number 5: Big Data Era for China’s Banks
Trend Number 7: China’s CNAPS2

29. Top-10 China Banking Trends – China’s CNAPS2
Background:
• Launched in 2007, the China National Advanced Payment System
(CNAPS) is composed of three parts:
1. High Value Payment System (HVPS) => real-time processing of
large-value payments
2. Bulk-Entry Payment System (BEPS) => small-value payments
3. Settlement Account Processing System (SAPS) for common
operations related to settlement accounts
• 2nd generation of CNAPS was launched in 2012 to make the
processing of both domestic and cross-border RMB payments
more efficient among banks

30. Currently In the past
Unified connection -> banks can
connect with PBOC’s payment system
through only one MBFE (Merchant
Bank Front End)
Each bank needed several MBFEs =>
more cost and less efficient
Facilitates cross-border RMB payment
and settlement by adopting the
international messaging (SWIFT
standards) => promoting the global
use of the Chinese currency
Chinese payment messages needed
to be converted manually to
international standards: labor-intensive
and high cost process
Key advantages of CNAPS2: efficiency, safety and lowered cost
Top-10 China Banking Trends – China’s CNAPS2

31. Implications for banks:
– Need to update their payment systems and optimize their MBFE
to connect with the new system
– More efficient and faster processing means higher standards on
risk control
– Spending on payment systems will continue to grow in 2013
Source: Kapronasia analysis, 2012
220
262
311
366
428
504
0
100
200
300
400
500
600
2009 2010 2011 2012 2013E 2014E
USDMillion
China Banking Payment System Spend, 2009-2013E
Top-10 China Banking Trends – China’s CNAPS2

32. Vendors’ solutions must:
– Connect banks’ systems with CNAPS smoothly => make sure
payments are processed in real-time
– Strong processing capability and stable performance
– Automatic account checking
– High efficiency and able to process large amounts of data
– Easy to find and correct errors through the monitoring system
– Fault - tolerance and repair function
Top-10 China Banking Trends – China’s CNAPS2

33. Report Availability
• Slides will be available in next few days on Kapronasia.com
• General availability February 13th
• Will also be available on:
– www.kapronasia.com

34. Webinar: A look at the Top-10 China Financial
Technology Trends for 2013
For more information about the topics covered in this webinar or Kapronasia, please visit
www.kapronasia.com or send us an email: research@kapronasia.com. Twitter: @chinafintech
Thank You