#bitcoinconfseoul

1. China & Digital Currencies Today:
Opportunities and Challenges
Zennon Kapron
December 12th, 2014

2. Overview
• China Today
• Macroeconomic Issues
• Moving Mobile
• Mobile Payments
• NFC
• P2P Lending
• Opportunities for Digital Currencies / Digital Technology
• Challenges
• Conclusions
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3. Macroeconomic / Financial Industry Development
• GDP Slowing
• Shadow Lending
• Increased focus on changing the industry
– Private Banks
– Loose regulations around internet finance
China economy still strong, but growth has slowed / structural issues creeping in
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6
8
10
12
Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2
GDP Growth: China
Q1 2010 - Q3 2014 Y-o-Y growth (%)
2010 2011 2012 2013 2014
10.3
9.6 9.8 9.7
9.5
9.1
8.9
8.1
7.6 7.4
7.9
7.7
7.5
7.8 7.7
7.3
7.5
7.3

4. Mobile Uptake
Mobile payments in China are increasing rapidly as more and more users start to
use smartphones and payment options increase.
14-12-16 4
7.47
8.59
9.86
11.12
12.29 12.35
56
64
74
83
91 92
0
10
20
30
40
50
60
70
80
90
100
0
2
4
6
8
10
12
14
2009 2010 2011 2012 2013 2014Q1
China Mobile Phone Users and Mobile Phone Penetration: Unit 100 Million,
Percentage
China Mobile Phone User Mobile Phone Penetration

5. Smartphone Penetration
Increased availability of faster data-services through 3G and 4G has supported an
already strong shift to smartphones.
224 266 390 449
30%
65%
88% 90%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
50
100
150
200
250
300
350
400
450
500
2011 2012 2013 2014
Smartphone sales volume and % of Overall Mobile Phone sales
2011-2014 (Unit: Millions & %)
Mobile Phone Sales Volume Smart Phones as % of Overall Mobile Phone Sales
514-12-16

6. Mobile Internet Usage
Continued growth and availability of data and smart phones has driven mobile
internet usage setting the stage for increased e-commerce and mobile payments
233 303 356 420 500
60.80%
66.20%
69.30%
74.50%
81%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
100
200
300
400
500
600
2009 2010 2011 2012 2013
Mobile internet users and Mobile Internet Usage as % of
Overall Internet Usage
Number of Mobile Internet Users Percentage of Mobile Internet Usage
614-12-16

7. E-Commerce
• In 2013, China became the world’s largest online market, surpassing the US.
• Alibaba’s 2013 ‘Single’s Day’ (Nov 11th, i.e. 11/11) promotional event resulted in e
-commerce sales revenue larger than both Black Friday and Cyber Monday in the US.
China’s e-commerce industry has ballooned in the past few years, as consumers
become used to shopping online; still, it represents < 10% of total consumption
461
783
1320
1885
2786
0
500
1000
1500
2000
2500
3000
2010 2011 2012 2013 2014
China Online Retail Market, Units: Billion RMB
714-12-16

8. Mobile E-Commerce
Increasingly, Mobile shopping represents a growing share of overall e-commerce
98.50% 95.20% 90.90% 86.90% 83.60% 80.10% 75.90%
1.50% 4.80% 9.10% 13.10% 16.40% 19.90% 24.10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011 2012 2013 2014e 2015e 2016e 2017e
Breakdown of e-commerce purchasing Channels in China
Mobile
PC
Source: MOFCOM, iResearch,
Kapronasia Analysis 814-12-16

9. E-commerce in China
E-commerce in China is eclipsing that of the west
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Comparison of China's Singles Day to America's
Cyber Monday and Black Friday US$Billion
Source: Kapronasia, company reports
Singles Day Black Friday Cyber Monday
0
2
4
6
8
10
201420132012
5.75
9.34
2.29
1.2
2.65
1.51
3.04 1.04
1.98

10. Mobile Payment Transaction Volume
• E-commerce was specifically mentioned in the 12th five-year plan with mobile payment
being a crucial aspect of that.
• Development of information and communication technology (ICT) is also a
measurement of the performance of local governments
As measured by value and volume, mobile payments are growing very quickly in
China
1.18 2.47
5.35
16.74
6.59
77.80%
109.32% 116.46%
212.86%
232.20%
0%
50%
100%
150%
200%
250%
0
2
4
6
8
10
12
14
16
18
2010 2011 2012 2013 2014Q1
China Mobile Payment Transaction Volume and Growth Rate:
Unit 100 Million
Completed Transactions Completed Transactions Growth Rate
1014-12-16

11. Mobile Payment Preferences
Promoted by Alipay, “Mobile bundled card” payments where a payment card is
semi-permanently linked to a payment platform, have become the most popular
methods of payment while NFC payments are gradually gaining attention.
0.8%
1.9%
2.9%
4.0%
4.3%
11.7%
17.9%
27.5%
29.2%
0% 5% 10%15%20%25%30%35%
Others
Plug-In Reader
NFC Payment
Bar Code Payment
QR Code
Mobile Phone Bundled Card
Mobile Web Payment
SMS Payment
Mobile App Payment
Source: iResearch
2012 2014
Source: Kapronasia Primary Research, 2014
0.2%
1.5%
3.7%
8.7%
9.9%
18.0%
26.2%
31.7%
0% 10% 20% 30% 40%
Others
Plug-in Card Reader Payment
Barcode Payment
NFC Payment
Mobile Web Payment
SMS Payment
Mobile App
Mobile Phone Bundled Card
Payment (Quick Pay)
Question: What type of mobile payment
method do you prefer to use?
NB: Kapronasia does not know the sample set or specific methodology that iResearch used for collecting 2012, and
so 2012 vs. 2014 data should be used as a broad / general comparison only and should not be compared directly.
1114-12-16

12. NFC
• Development of NFC standards in China (and globally) stymied by disagreement on
standards
• Agreement in 2013 has led to increased focus from all players
• Mobile Network Operators (MNOs), China Unionpay, Banks and
• Overview of key efforts
• Apple and China Unionpay tie-up for iTunes
• Apple Pay in China
• Android Pay
Near Field Communications (NFC) standards have been set => China may be
ahead of other markets
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13. Source: Kapronasia Primary Research, 2014
NFC – Preferences and Reasons for Using NFC
Metric
Would Pick
NFC
1
Likely to
Pick NFC
2
No Impact
3
Likely to Pick
Other Mobile
Payment
Method
4
Would Pick
Other Mobile
Payment
method
5
Notes
Transaction
Speed
Convenience of
Bundle w/
bankcard
Example: Quickpay
Convenience of
wallet
functionality
Current SIM-NFC solutions
often have multiple cards in
a single mobile wallet
Simplified
Operation
Perception that NFC
payment simplifies payment
Higher Security
NFC payments’ generally
seen as safer
Widely Known
and Used
NFC marketing has helped
awareness
Broad Usage
Available solutions in the
market
Try New
Payments
Curious about new
payment methods
Used Currently for
Payment
Many users are used to
their current payment
method, so there seems to
be stickiness.
2.33
2.50
2.24
2.42
2.22
2.65
2.42
2.13
2.83
1314-12-16

14. 3rd Party Payment Companies
China’s large internet services have also provided social ‘hubs’ with integrated
payment functions, completely avoiding the need to work with MNOs and Banks
• Wechat, an online chat app from
Tencent, has become incredibly popular
in China.
• Functionality
– Book taxis
– Pay friends
– Buy movie / show tickets
– Pay bills
– Mobile top-up
• Increasingly, the more successful
payment models are the ones that adapt
to China users needs.
• May be potential to cooperate with 3rd
party companies for SanDisk
1414-12-16

15. Peer to Peer (P2P) Lending
• Small and medium enterprises have been starved of cash
• Online P2P lending has been in existence since 2007, really only gained traction in
previous 4 years
• The lending solves a problem => allowed by the government
The tacit acceptance of the government of P2P has allowed the industry to grow
rapidly
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16. Check Point China
• Economy is not in the best of shape, but still better than most
• Consumers are getting online and getting mobile – mainly on smartphones
• As more people are mobile, shopping and payments are following
• Younger generation is increasingly used to doing everything online
• Regulators are pushing change – 2013-2016 reforms:
– Direct Banks Implemented
– Private Banks on the way
– P2P lending continuing w/o regulation
– HK / Shanghai connect
– Deposit Insurance
– Stock Options
– Financial Futures
– Interest Rate Liberalization
– Online Finance
– Growth Enterprise Board
– Negotiable Deposit Certificates
– NFC Standards
– Credit Asset Securitization
An increasingly online / mobile user base is enabling a massive shift to online
payments and finance.
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And the list goes on…..

17. Opportunities for Digital Currencies / Digital Technology
• Younger generation, and increasing the older generation are used to new technology
• QQ coins have been around for ages => population is used to virtual goods
• Solutions that focus on making something easier
• Chinese government’s attitude towards Bitcoin
• Will they regulate further?
• Law targeting virtual currency in 2009; forbade virtual currency for purchase of real
items.
• Focused on Q Coin, paid for online services such as games. However, it seemed to
be easily applied to Bitcoin
• Unlike Q coin, the Ministry of Commerce and the Ministry of Culture can’t target a
company or entity to regulate or to submit the circulation and transaction volumes
of Bitcoin.
• Is the government happy enough with the status quo? Not much has changed,
what were they unhappy about before?
China’s financial industry is still relatively immature => scope for providing new
and innovative solutions
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18. Challenges
• P2P Lending allowed as fits with reform and helps the industry by reducing risk
• Bitcoin was speculation => didn’t solve any issues in the market
• Too many business models for too few users => demand needs to increase
• Crypto is a solution searching for a problem
• Current Bitcoin business models don’t fix much in China:
– Merchant fees are low with CUP cards
– Security no longer seems to be a concern for users
– Real time domestic payments through banks or 3rd party platforms
– Exists on its own – not tied into social
However, solutions need to fit with the government’s path for the economy and
reform
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19. Conclusions
• We will look back at China’s financial industry in 5 years as the most innovative globally
• Crossing the river by feeling the stones => path to reform
• Government is not anti-bitcoin, they are just anti-risk
• Think of business models that help rather than hurt the industry
• Stop pitching ‘RMB to whatever’ business models. It’s illegal no matter how you spin it.
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20. Visit www.kapronasia.com or send us an email: research@kapronasia.com
Twitter: @chinafintech
Thanks / Q&A