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www.ChinaAcumen.com 1 All Eyes on China Opportunities for the Australian Financial Services Simon Stokes Financial Services Council Annual Conference Brisbane, August 2013 Imagine setting up your financial services enterprise in a Singapore but located in... Shanghai!

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www.ChinaAcumen.com 2 Introduction Spent 7 years living and working in Shanghai Original 2006 Austrade China financial report Lucy Qian and Adam Zhang Identifying and actioning tangible entry points

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www.ChinaAcumen.com 3 We Got it Wrong in Late 2006!

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www.ChinaAcumen.com 4 Our 2006 Prediction What Went Wrong? Hu Jintao turned clock back from 2005 Shift back to State Owned Enterprises (SOEs) Focus on re-regulating the economy i.e. CSRC/CBRC As always the CPC focus on increasing control Winter from 2005-2013 8 years ... but its Spring again!

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www.ChinaAcumen.com 5 Shanghai Unique Characteristics 1920s Chinas commercial capital. 300k foreigners Foreign businesses served by comprador network Shanghai missed out on developments after 1949 Only early 1990s distrusted Shanghai began take-off Source: https://mail.google.com/mail/u/1/#inbox/14024942c3fbd448https://mail.google.com/mail/u/1/#inbox/14024942c3fbd448

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www.ChinaAcumen.com 6 Xujiahui: 1980s and Today Source: https://mail.google.com/mail/u/1/#inbox/14024942c3fbd448https://mail.google.com/mail/u/1/#inbox/14024942c3fbd448

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www.ChinaAcumen.com 7 Shanghai Unique Advantages Population 20+ million. Central China location Superb hardware Global DNA software Shanghai - the next Shenzhen for financial services? Worlds best educational system - Bill Gates (TED)

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www.ChinaAcumen.com 8 Breaking News: Shanghai FTA! Li Keqiang approves Shanghai Free Trade Zone 28 km2 in Pudong. Four existing areas. Goods imported, manufactured and re-exported Limited Customs intervention. First in China Testing ground for foreign-related reform Investment, trade, financial services and regulations Pilot capital account liberalisation and RMB convertibility Red tape for foreign companies will be reduced Restricted industries to be open to foreigners

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www.ChinaAcumen.com 9 FTA Some Detail Yang Xiong - Shanghai Mayor Institutional innovation rather than preferential policies Launch test operations on various policies. Controlling risks CRITICAL: gradually work out complete regulations Your Singapore in Pudong, Shanghai! YangShan Port Shanghai CBD WaiGaoQiao Industrial Pudong Airport

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www.ChinaAcumen.com 10 FTA More Detail Significantly reduce administrative intervention re cross-border capital flows and movement of goods Widening scope of businesses open to foreign investors Outbound investments to be much easier Explicit: interest rates within FTZ liberalized Market forces will determine capital costs Trade in commodity futures domestically Bonded warehouses: allowing physical delivery of commodity futures traded in overseas exchanges Currency? Yuan to flow freely in and out of FTZ?

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www.ChinaAcumen.com 11 Economic: Critical Role of Shanghai FTA Current China dangers WMPs out of control Property bubble Grey banking Regulation/corruption Slowing and rebalancing economy Freeing up private enterprise Less role for government corruption Financial repression/interest rates Better allocation of investment flows

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www.ChinaAcumen.com 12 Political: Critical Role of Shanghai FTA China failure re WTO Wants to engage globally FTZ to enter TPP? Re-engage with foreign businesses Needs 20-30 years of reform for success

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www.ChinaAcumen.com 13 Will it be Derailed? ChinaAcumen Prediction Naturally there is some internal opposition... ... Glaxo under the hammer Vested interests using GSK as problem Hu YaoBang reformist family connection CSRC/CBRC opposed but over-ruled Allowing Tianjin and Qianhai to progress Reasons for optimism... Chen family Chen Yun (father) one of the Eight Elders of CPC Chen Yuan (son) PBOC/CDB side-lined!

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www.ChinaAcumen.com 14 Opportunities for Foreign Financial Services? Wish attract foreign/domestic financial firms Foreign banks able to set up subsidiaries in FTZ Less regulatory paperwork. Register not submit contract Aim: become an international financial centre by 2020 Chinese banks can conduct offshore banking in the FTZ Commodities trading in FTZ considered as offshore Foreign commodity exchanges to own warehouses in FTZ Direct competition to Hong Kong as Chinas sole offshore banking centre

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www.ChinaAcumen.com 15 Opportunities for Australian Financial Services Opportunities for Australian financial services entities? Pension Underfunding

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www.ChinaAcumen.com 16 Opportunities: Pensions Superannuation fund technologies Fund managers advising China pension funds 2011 NCSSF announced overseas fund managers (in progress?) with specific expertise in Global real estate property securities Global resources securities Emerging (ex-China) markets local currency bonds Balanced portfolio with multiple asset classes

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www.ChinaAcumen.com 17 Banks stranglehold on distribution Trusts quasi-legal flexible distributors FMCs currently adrift waiting for market uptick Brokers leveraging off their large client bases Insurers massive assets to put into market Asset Managers: The Players

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www.ChinaAcumen.com 18 Asset Management: The Environment Struggle against distribution dominance of 4 major banks Investors trust banks. So products sold without advice Given lack of sophistication. Above will not change soon CSRC aware of need to liberalise regulatory framework Will the Shanghai FTZ kick-start the process?

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www.ChinaAcumen.com 19 Distribution Opportunities Stress: little likelihood of new investment channels emerging Investigate: establish WFOE to advise JV FMC re global allocation Foreigners set up WFOE although unclear re activities permitted Current online offers confusing, dysfunctional Potential rewards high but regulatory hurdles Worth monitoring developments

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www.ChinaAcumen.com 20 Obstacles Foreigners face disadvantages against local competition Limited supply of experienced financial services professionals High turnover of staff due to lack of share option availability Most foreign brands cannot compete against local banks Little opportunity to market products directly to local population

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www.ChinaAcumen.com 21 Scramble for China Virtually no Australian financial services exports Australia in relatively excellent financial shape Other nations in unfortunate financial condition So currently exerting huge efforts to enter China

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www.ChinaAcumen.com 22 Bridge to Shanghai Importance of Shanghai dialect Lucy Qian and Adam Zhang On-the-ground China experience China: Simon Stokes and Lucy Qian Australian financial services Simon Stokes 20+ years Australian expertise

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www.ChinaAcumen.com 23 Welcome to Shanghai FTZ! All aboard the Fast Train! Fast enough at 431kph or 7.5% pa?

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www.ChinaAcumen.com 24 http://www.youtube.com/watch?v=-DOPQrVSHiY