INDUSTRY OVERVIEW OVERVIEW. China s Economy

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1 This section contains information and statistics on the industry in which our Bank operates. We have extracted and derived such information and statistics, in part, from statistics relating to our Bank prepared in accordance with IFRS, and, in part, from various official or publicly available sources where such information and statistics were derived from data prepared in accordance with PRC GAAP or other applicable GAAP or accounting standards that may differ from IFRS in certain significant respects. We believe that the sources of such information and statistics are appropriate and we have taken reasonable care in extracting and reproducing such information and statistics. We have no reason to believe that such information and statistics are false or misleading or that any fact has been omitted that would render such information and statistics false or misleading. The information and statistics have not been independently verified by us, the Joint Sponsors, the Underwriters or any other party involved in the [REDACTED] and no representation is given as to their accuracy. Accordingly, such information and statistics should not be unduly relied on. OVERVIEW China s Economy Leveraging from the extensive economic reform implemented by the PRC government, China s economy achieved significant growth over the past three decades. China became the world s second largest economy in 2010, which ranked only second to the U.S. Moreover, the market potential is further enhanced as the PRC government streamlined administration, promoted decentralization and loosened governmental restrictions. After a rapid growth over the past three decades, China s economy has entered a new normal stage; while the economic growth slows down, the economic structure continues to be optimized and upgraded, and the tertiary industry and consumer demands further drive the economic growth. At the same time, China s economy is also changing gradually from productionand investment-driven to innovation-driven. Under the new normal, the PRC government has attached greater importance to promoting cooperation with different countries and regions. The expansion of China s free trade zones, represented by Shanghai Free Trade Zone ( ), is the new driver behind the regional economic development. The PRC government is further opening up the market through the establishment of the New Silk Road Economic Belt ( ), linking China and Europe through Middle Asia and West Asia, and the 21st Century Maritime Silk Road ( ), linking China, Southeast Asia, Africa and Europe. This strategy will further provide new drivers for China s economic development in the future. The Beijing-Tianjin-Hebei region s coordinated development, the Yangtze River Delta Economic Zone, and the Pan-Pearl River Delta Regional Cooperation would also lay a solid foundation for the sustainable economic development in China. The new normal will provide new growth opportunities for development of China s capital market. According to the data from the NBS, the nominal GDP of China increased from RMB40.89 trillion in 2010 to RMB63.65 trillion in 2014, with a CAGR of 11.7%. Leveraging from the national economic growth, per capita national disposable income also increased. From 2010 to 2014, per capita disposable income of urban households in China increased from RMB19,109 to RMB28,844, at a 80

2 CAGR of 10.8%. The table below sets forth China s annual nominal GDP, per capita GDP, per capita disposable income of urban households, fixed assets investment and total value of imports and exports of goods for the years indicated. For the Year ended December 31, CAGR ( ) Nominal GDP (RMB billion)... 40,890 48,412 53,412 58,802 63, % Per capita GDP (RMB)... 30,567 36,018 39,544 43,320 46, % Per capita disposable income of urban households (RMB)... 19,109 21,810 24,565 26,955 28, % Fixed assets investment (RMB billion)... 25,168 31,149 37,469 44,629 51, % value of imports and exports of goods (USD billion)... 2,974 3,642 3,867 4,159 4, % Source: The NBS The PRC banking industry experienced rapid development as a result of high-speed growth of China s economy. According to statistics of the PBOC, the total RMB-denominated deposits of financial institutions in China increased from RMB71.82 trillion as of December 31, 2010 to RMB trillion as of December 31, 2014 at a CAGR of 12.2%. The year-on-year growth rates of the total RMB-denominated deposits from December 31, 2011 to December 31, 2014 were 12.7%, 13.4%, 13.8% and 9.1% respectively. From December 31, 2010 to December 31, 2014, the total RMB-denominated loans increased from RMB47.92 trillion to RMB81.68 trillion at a CAGR of 14.3%. The year-on-year growth rates of total RMB-denominated loans from December 31, 2011 to December 31, 2014 were 14.4%, 15.0%, 14.1% and 13.6% respectively. The table below sets forth the total RMB- and foreign currency-denominated loans and deposits at financial institutions in China as of the dates indicated. As of December 31, CAGR ( ) RMB-denominated loans (RMB billion)... 47,920 54,795 62,991 71,896 81, % RMB-denominated deposits (RMB billion)... 71,824 80,937 91, , , % foreign currency-denominated loans (USD billion) % foreign currency-denominated deposits (USD billion) % Source: The PBOC Economy of Zhejiang and the Yangtze River Delta Area Located in the south of the Yangtze River Delta Area, China s South-East coastal areas, Zhejiang borders on the East China Sea in the east, Fujian in the south, Jiangxi and Anhui in the west, and Shanghai and Jiangsu in the north. The Yangtze River Delta Regional Plan ( ), approved and implemented by the State Council in 2010, confirmed the strategic importance of developing the Yangtze River Delta Area as a key center of service industry that would improve the development of the Yangtze River Delta Area, and facilitate the all-round, coordinated and sustainable development of the Yangtze River basin area and even China as a whole. The Yangtze River Delta Regional Plan also indicated that to become one of the most dynamic competitive world-class city clusters in China, the Yangtze River Delta Regional Plan shall also accelerate the development of the 81

3 financial service industry, improve the internationalization level of regional centers, like Hangzhou, and accelerate the progress of modernization and integration. As a key pillar in the Yangtze River Delta Area, Zhejiang has always been one of the most economically dynamic provinces in China. Leveraging from the Yangtze River Delta Regional Plan, the regional economic integration and the PRC government s policy support for the development of such sectors as modern service industry, Zhejiang has recently experienced rapid economic growth and realized significant achievements. From 2010 to 2014, the nominal GDP of Zhejiang increased from RMB2,772 billion to RMB4,015 billion at a CAGR of 9.7%, which ranked fourth in the nation for five consecutive years. The per capita disposable income of urban households in Zhejiang ranked first for five consecutive years nationally (excluding the provincial level municipalities), which has created a sound market environment for the development of financial service. The table below sets forth the nominal GDP, per capita GDP, per capita disposable income of urban households, fixed assets investment and total value of imports and exports of goods in Zhejiang for the years indicated. For the Year ended December 31, CAGR ( ) Nominal GDP (RMB billion)... 2,772 3,232 3,461 3,776 4, % Per capita GDP (RMB)... 51,711 59,249 63,374 68,805 72, % Per capita disposable income of urban households (RMB)... 27,359 30,971 34,550 37,851 40, % Fixed assets investment (RMB billion)... 1,145 1,408 1,710 2,019 2, % value of imports and exports of goods (USD billion) % Source: The NBS and Zhejiang Provincial Bureau of Statistics Private-sector economy is well developed in Zhejiang. A majority of private enterprises in Zhejiang are small and micro enterprises, which are also the source of vitality of Zhejiang s economy. They play a vital role in enhancing the regional economic competitiveness. As of December 31, 2014, the total loan balance of small and micro enterprises in Zhejiang ed to RMB2,597 billion, accounting for more than 10% of the total loan balance of small and micro enterprises in China, which ed to RMB20,701 billion. In 2015, the government of Zhejiang promulgated the Three-year Growth Plan of Zhejiang Province for Small and Micro Enterprises ( ) ( ( ) ) with a view to improve the sustainable and healthy development of small and micro enterprises, facilitate the transformation, upgrade and improve the quality and effectiveness of Zhejiang s economy. According to this plan, Zhejiang aims to realize an increase of 100,000 small and micro enterprises in seven major industries by From January 1, 2015 to December 31, 2017, if the annual taxable income of a small and low-profit enterprise is lower than RMB200,000 (inclusive), its taxable income is collected on the basis of 50% of its income and its corporate income tax is levied at a rate of 20%. We believe that this measure will strongly facilitate the development of small and micro enterprises in Zhejiang. The banking industry in Zhejiang has grown rapidly along with the growth of Zhejiang s economy. According to the statistics of Hangzhou Central Branch of the PBOC, as of December 31, 2014, the total RMB-denominated deposits of financial institutions in Zhejiang reached RMB7,715 billion, representing an increase of 7.2% compared with that of December 31, The total 82

4 RMB-denominated loans reached RMB6,857 billion, increased by 9.5% compared with that of December 31, The table below sets forth the total RMB- and foreign currency-denominated loans and deposits at financial institutions in Zhejiang as of the dates indicated. As of December 31, CAGR ( ) RMB-denominated loans (RMB billion)... 4,529 5,128 5,698 6,260 6, % RMB-denominated deposits (RMB billion)... 5,344 5,973 6,489 7,199 7, % foreign currency-denominated loans (USD billion) % foreign currency-denominated deposits (USD billion) % Source: Hangzhou Central Branch of the PBOC History and Development of the PRC Banking Industry From 1949 to the 1970s, the PBOC was not only the central bank of China, but also engaged in commercial banking businesses such as deposits, loans and settlement. Since the late 1970s, the banking industry, as part of China s economic reform, underwent major transformations, and the four major commercial banks have played the role of state-owned commercial banks. The State Council officially authorized the PBOC to perform the functions as the central bank of China and the main regulatory organ of the PRC banking industry. To begin with, the State Council granted limited autonomy to four major commercial banks for commercial operations. In line with the progress of China s economic reform, however, the State Council further loosened the restrictions on the four major commercial banks business scopes. In the middle 1980s, a number of new commercial banks and non-banking financial institutions were established. Some of them were approved to conduct commercial banking business nationwide; other commercial banks were allowed to conduct operations in the local market only. During this period, however, China s banking system was severely restricted by the governmental development plans and policies, and these banks failed to realize independent and commercialized operations. In the middle 1990s, the PRC government accelerated the economic reform and began to encourage the four major commercial banks to deepen their commercialized operations. In 1994, the PRC government set up three policy banks China Development Bank, Export-Import Bank of China, and Agricultural Development Bank of China which performed the functions as significant instruments of policy-based lending that were previously conducted by the four major commercial banks. Subsequently, the four major commercial banks transformed towards the direction of being state-owned commercial banks. In 1995, the Commercial Banks Law of the People s Republic of China and the PRC PBOC Law were promulgated, which further delineated the scope of business for commercial banks and the functions and powers of the PBOC as the central bank of China and the regulatory organization in the PRC banking industry. In 2003, the CBRC was established. It undertook a large part of the supervision and regulation functions of the PBOC and became the main regulatory organization in the banking industry. Due to historical reasons, the PRC banking industry had been burdened with a large of non-performing loans. Since the late 1990s, the PRC government had adopted a number of measures to improve the asset quality of PRC commercial banks and replenish their capital base, including issuances of special government bonds, purchases of non-performing loans and capital injections. With 83

5 the rapid growth of China s economy and the implementation of the aforesaid measures, the asset quality of large PRC commercial banks improved considerably and laid a foundation for the future growth of the PRC banking industry. Moreover, upon completion of writing off non-performing loans and various capital injections of Central Huijin Investment Co,. Ltd., the Bank of Communications, China Construction Bank, Bank of China, Industrial and Commercial Bank of China and the Agricultural Bank of China were successfully listed on the Shanghai Stock Exchange and the Hong Kong Stock Exchange. Meanwhile, many nationwide joint-stock commercial banks improved their asset quality and reduced their non-performing loan ratio using their own resources with reference to the international standards and methods. Many nationwide joint-stock commercial banks improved their asset quality by tightening their credit risk management and writing off non-performing loans. Moreover, in order to enhance their capital strength, many PRC commercial banks have been listed on the PRC and overseas stock markets over the past decade. COMPETITIVE LANDSCAPE Current Competition in the PRC Banking Industry The banking institutions in the PRC banking industry fall into six major categories: Large Commercial Banks, nationwide joint-stock commercial banks, city commercial banks, rural financial institutions, foreign financial institutions and other banking institutions. The table below sets forth the number, total assets, holders equity and net profit of various types of banking institutions in China as of the date and for the period indicated. As of December 31, 2014 For the year ended December 31, 2014 Number of legal entity institutions assets Shareholders equity Net profit (RMB billion, except the number of institutions and percentage) Large Commercial Banks , % 5, % % Nationwide joint-stock commercial banks , % 1, % % City commercial banks , % 1, % % Rural financial institutions (1)... 2,350 21, % 1, % % Foreign financial institutions (2) , % % % Other banking institutions (3)... 1,548 27, % 2, % %... 4, , % 12, % 1, % Source: The CBRC (1) Including rural credit cooperatives, rural commercial banks and rural cooperative banks. (2) Including branches of foreign banks, wholly foreign-owned banks, Sino-foreign joint venture banks, wholly foreign financial companies and their branches and subsidiaries. (3) Including policy banks (including China Development Bank, the Export-Import Bank of China and Agricultural Development Bank), Postal Savings Bank of China, new-type rural financial institutions (including rural banks, finance companies and rural mutual aid societies for fund) and non-banking institutions (including financial companies under corporate groups, consumer financial companies, trust companies, financial leasing companies, money brokerage firms, auto financing companies, Sino-German Bausparkasse and financial assets management company). 84

6 Nationwide Joint-stock Commercial Banks As of December 31, 2014, there were total 12 nationwide joint-stock commercial banks in China, which are approved to engage in the business of commercial banks nationwide. Their importance in the PRC banking industry is growing. A majority of nationwide joint-stock commercial banks were founded in the late 1980s or the early 1990s, and their market is gradually expanding. As of September 30, 2015, of the 12 nationwide joint-stock commercial banks, four were listed on both Shanghai Stock Exchange and Hong Kong Stock Exchange, three were listed only on Shanghai Stock Exchange, and one was listed only on Shenzhen Stock Exchange. The table below sets forth the total assets, total deposits and total loans of the nationwide jointstock commercial banks as of the date indicated. As of December 31, 2014 assets deposits loans (RMB billion, except percentage) China Merchants Bank Co., Ltd.... 4, % 3, % 2, % Industrial Bank Co., Ltd.... 4, % 2, % 1, % Shanghai Pudong Development Bank Co., Ltd.... 4, % 2, % 2, % China CITIC Bank Corporation Limited... 4, % 2, % 2, % China Minsheng Bank Corp., Ltd.... 4, % 2, % 1, % China Everbright Bank Co., Ltd.... 2, % 1, % 1, % Ping An Bank Co., Ltd.... 2, % 1, % 1, % Hua Xia Bank Co., Limited... 1, % 1, % % China Guangfa Bank Co., Ltd.... 1, % 1, % % Evergrowing Bank Co., Ltd % % % Our Bank % % % China Bohai Bank Co., Ltd % % %... 32, % 20, % 14, % Source: 2014 annual reports of the banks (according to PRC GAAP) The Competitive Landscape of the Banking Industry in Zhejiang The table below sets forth the total assets, total deposits, total loans and relevant market data of various types of banking institutions in Zhejiang as of the date indicated. Number of institutions (1) As of December 31, 2014 assets deposits loans (RMB billion, except the number of institutions and percentage) Large Commercial Banks , % 3, % 3, % Nationwide joint-stock commercial banks (excluding the head office of our Bank) , % 1, % 1, % City commercial banks , % % % Rural financial institutions , % 1, % % Foreign financial institutions % % % Other banking institutions % % % , % 7, % 7, % Source: The CBRC Zhejiang Office (1) Including City commercial banks and rural financial institutions incorporated in Zhejiang and Large Commercial Banks, nationwide joint-stock commercial banks, foreign financial institutions and other banking institutions incorporated or had branches in Zhejiang. 85

7 According to the CBRC Zhejiang Office, as of December 31, 2014, the total assets, total loans and total deposits of our Bank in Zhejiang were RMB487 billion, RMB119 billion and RMB123 billion, respectively, accounting for 4.5%, 1.7% and 1.6% of total assets, total loans and total deposits of banking institutions in Zhejiang. DEVELOPMENT TREND OF THE PRC BANKING INDUSTRY Increasing Proportion of Nationwide Joint-stock Commercial Bank Due to historical reasons, Large Commercial Banks hold a large proportion of total assets of the PRC banking institutions. However, in recent years, nationwide joint-stock commercial banks have increased their market s, and the proportion of total assets of nationwide joint-stock commercial banks to China banking institutions increased from 15.8% as of December 31, 2010 to 18.2% as of December 31, Nationwide joint-stock commercial banks usually operate in more developed regions, and obtain market through offering innovative products and high-quality customer services. Our Bank believes that compared with Large Commercial Banks, nationwide joint-stock commercial banks can better adapt to the changing market conditions and meet customers requirements; compared with other regional financial institutions, nationwide joint-stock commercial banks have certain competitive strengths, such as nation-wide sales network, larger capital base, more resources, diversified products and services, and advanced technical infrastructure. Our Bank estimates that these nationwide joint-stock commercial banks will continue to expand their market. The table below sets forth the market data of total assets of various banking institutions in China as of the dates indicated. As of December 31, Large Commercial Banks % 47.3% 44.9% 43.4% 41.2% Nationwide joint-stock commercial banks % 16.2% 17.6% 17.8% 18.2% City commercial banks % 8.8% 9.3% 10.0% 10.5% Other financial institutions % 27.6% 28.2% 28.8% 30.1% % 100% 100% 100% 100% Source: The CBRC Interest Rate Liberalization Historically, interest rates on loans and deposits were set by the PBOC, and PRC commercial banks were subject to those restrictions. In recent years, as part of the overall reform of the banking system, the PBOC has implemented a series of initiatives designed to gradually liberalize interest rates and promote a more market-oriented interest rate regime. To further the reform of interest rate liberalization, the PBOC gradually relaxed restrictions on the lending rates and broadened floating range of deposits interest rates. On October 28, 2004, the PBOC decided to remove the cap for interest rates on RMB-denominated loans of financial institutions (excluding urban and rural credit cooperatives). On June 8, 2012 and July 6, 2012, benchmark interest rates for RMB-denominated deposits and loans and their rates floating ranges were adjusted twice, with floor and upper limit of floating ranges of interest rates on RMB-denominated loans and deposits of Chinese financial institutions adjusted into 0.7 times and 1.1 times of the upper limit of PBOC interest rates, respectively. On July 20, 2013, the PBOC announced that banking institutions in China were no longer required to 86

8 have their interest rates on RMB-denominated loans met the lower limit of 0.7 times of PBOC benchmark interest rates, and could set the interest rates level on loans at their own discretion (the interests rate floating range of personal residential mortgage loans remained unchanged and was still subject to the lower limit of 0.7 times of benchmark interest rates and the original housing credit policy; for families who bought a second-home by loan, the upper limit of lending interest rate was 1.1 times of benchmark interest rates). On October 25, 2013, the PBOC announced the official operation of Loan Prime Rate ( LPR ) collective quotation and releasing mechanism. The first nine quoting banks, including Large Commercial Banks, will release LPR quotations on each business day, quoting the LPR applicable to its high-grade clients. Designated to release LPR, the National Inter-bank Funding Centre will release LPR quotation average rates of quoting banks after eliminating highest and lowest quotations, and calculating the weighted average of remaining quotations. In the preliminary period of operation, the mechanism published its one-year LPR. Official operation of new mechanism of LPR was expected to realize a smooth transfer for the pricing benchmark from being determined by the PBOC to being determined by the market, laying regime foundation for promoting interest rate liberalization. Interest rate liberalization in China went further along with the implementation of Regulation on Deposit Insurance on May 1, 2015 and Interim Measures for Administration of Largedenomination Deposit Certificates on June 2, On May 11, 2015, combined with the reform of interest rate liberalization, the PBOC increased the upper limit of floating RMB-denominated deposit rates of financial institutions from 1.3 times to 1.5 times of benchmark deposits rates. The floating cap for RMB-denominated time deposits with term of over one year (excluding of one year) in PRC commercial banks was removed since August 26, 2015, and the upper limit of floating RMB-denominated deposit rates of commercial banks and rural cooperative commercial institutions was removed since October 24, Accordingly, interest rates on RMB-denominated deposits could be determined by commercial banks and rural cooperative commercial institutions with reference to the benchmark deposit rates at their own discretion. Relaxing the rate floating range was an important step towarding interest rate liberalization and financial reform, meaning that interest rate liberalization is accelerating. On October 24, 2015, the PBOC further lowered the RMB deposit reserve requirement ratio for financial institutions by 0.5 percentage points. In order to encourage financial support for agriculture, rural areas and farmers or small and micro enterprises, for financial institutions that satisfy relevant requirements, the RMB deposit reserve ratio was further lowered by 0.5 percentage points. From March 2015 to October 2015, the PBOC lowered the benchmark interest rates on RMBdenominated loans and deposits for five times. Effective from October 24, 2015, the benchmark interest rates on RMB-denominated one-year loans and deposits of financial institutions are 4.35% and 1.50%, respectively. In addition, the inter-bank rates have been liberalized. Since its establishment in January 2007, SHIBOR has become an important reference in the inter-bank market. Although continuous interest rate liberalization may intensify the price competition among banks in China, it may also encourage commercial banks to develop more innovative products and services besides adopting risk-based pricing. Transformation of Commercial Banks In recent years, there has been a trend of financial disintermediation, which will gradually transform the traditional business mode of commercial banks. Investors transfer assets from financial 87

9 intermediation, such as savings and deposit banks, to direct investment. Such trend affected the deposit level of commercial banks and the funds available for loan business to generate interests. In addition, financial disintermediation may also result in less loan demand from enterprises (especially large enterprises). Financial disintermediation has prompted commercial banks in China to transform, strengthen the diversity of financial products and services. New-type financing business that supports financial market and transaction, such as inter-bank deposit, large deposit business of enterprises and institutions, securities margin trading and collateral loans encounters new development opportunities; various opportunities will also become available to payment settlement business, agency sales and custody. Strengthened Regulation and Supervision China s banking regulatory authority is establishing prudent regulation framework, and steadily advancing reforms in the financial industry of the PRC in the aspects of corporate governance, internal control, compliance and risk management. In addition, China s banking regulatory authority has implemented regulations to reinforce information disclosure requirements as well as its coordination and cooperation with domestic and overseas regulatory authorities. Since 2008, against the backdrop of international financial crisis, the CBRC and other regulatory authorities have promulgated regulatory measures aimed at strengthening the regulation of the banking industry, which mainly include: Š Š Š Š Prudent supervision: the CBRC has introduced a series of regulations to direct commercial banks to further improve their risk management system, and to implement prudent measures for avoiding high-risk markets and industries. Such regulations cover extensive potential risks such as credit risk, market risk, operational risk and liquidity risk. As a part of prudent supervision, the CBRC promulgated a series of measures and guidance in accordance with the development of Basel Accords, so as to strengthen the capital management capacity of commercial banks, including the disclosure of information about capital adequacy ratio and leverage ratio, and the methods of capital measurement and risk exposure calculation. In addition, the PBOC issued various policies to improve the effectiveness of capital supervision and the risk management ability of commercial banks. Intensified regulation on certain industries and customers: the CBRC promulgated a series of regulations relating to the real estate industry and local government financing vehicles, limiting the lending level granted by the PRC commercial banks to such clients, and require commercial banks to strengthen risk control on such sectors. Improving corporate governance: the CBRC requires banks to establish corporate governance structures that consist of a Board of Directors comprising independent directors, an audit committee, a remuneration committee, a nomination committee and other special board committees, as well as a supervisory committee comprising external supervisors, a nomination committee, an administration committee and other special board committees. In addition, the CBRC also requires PRC banking institutions to establish an independent internal audit function which has clear policies and procedures. Strengthened regulation on wealth management services: since 2005, the CBRC has promulgated a series of measures to regulate the development of personal wealth management business of PRC commercial banks, requiring commercial banks to submit reports to, or obtain approval from, the CBRC when engaged in certain personal wealth 88

10 management business, and imposing restrictions on the total of non-standard debtbased assets (including trust plans) in which banks could utilize investing capitals for investment. In terms of regulation on internet finance, the PBOC suspended QR code and virtual credit card payment on third-party online payment platforms in March In accordance with China Financial Stability Report (2014) ( ) issued by the PBOC in April 2014, the PBOC will enhance the regulation of internet finance to facilitate the sound development of the banking industry. In July 2015, ten ministries and commissions under the State Council, including the PBOC, promulgated Guiding Opinions on Promoting Healthy Development of Internet Finance ( ), raising series of policies and measures for encouraging innovation and underpinning stable development of internet finance. The guiding opinions advocate innovation in platforms, products and service of internet finance, promote cooperation among practitioners, extend their financing channels, curb the power of bureaucrats, improve fiscal and taxation policies, and accelerate the construction of credit infrastructure and auxiliary service system. The guiding opinions also raise structural opinions on major forms of internet finance, such as internet payment, network lending, equity crowd funding, internet fund sale, internet insurance, internet trust and internet consumption finance, and raise detailed requirements on management of the internet industry, customer funds third party custody system, information disclosure, risk warning and qualified investor system, protection of consumer rights and interests, network and information security, anti-money laundering and financial crime prevention, industry self-discipline, supervision coordination and data statistics monitoring. See Supervision and Regulation for details of regulatory measures concerning the PRC banking sector. Positive Prospect of the Financing Business of Small and Micro Enterprises In recent years, small and micro enterprises in China developed vigorously, and the loans of small and micro enterprises increased rapidly as well. According to the CBRC 2014 annual report, as of December 31, 2014, the loan balances of small and micro enterprises were RMB20.7 trillion, accounting for 23.9% of total loans of China financial institutes (including domestic and foreign currency). Loans to small and micro enterprises increased by 17.5% to RMB3.1 trillion from the beginning of 2014, which is 4.2 percentage points higher than the growth rate of total loans of China financial institutes (including domestic and foreign currency). In 2005, the CBRC raised six mechanisms for small and micro enterprises loans, encouraging banks to develop business in respect of small and micro enterprises. In response to the State Council s call for encouraging the development of, and innovation in financial services for, small and micro enterprises, in 2015, the CBRC promulgated Guiding Opinions of the CBRC on the Financial Service for Small and Micro Enterprises ( ) in 2015, further offering policy support for the development of small and micro enterprises business. The guiding opinions endeavor to achieve: while increasing the loans efficiently, the growth rate of loans to small and micro enterprises being not lower than the average growth rate of each loan and the number of small and micro enterprises loan customers and the approval rate of such loans being not lower than that of the previous year in the same period. In addition, the guiding opinions also call on the construction of special service institution of small and micro enterprise and extension of the outlets and institutions network for serving small and micro enterprises. Along with the continuous development of capital market, it is expected that part of financing of large enterprises and group clients will shift 89

11 from commercial banks to capital market, and small and micro enterprises will become more important client sources of commercial banks. Encouraged by national policies and driven proactively by banking institutions in China, it is expected that financing service for small and micro enterprises will become a larger part of overall business of PRC commercial banks. Increasing Demands for Personal Finance The increasing consumers requirements on diversified banking products and services (such as residential mortgage loans, credit cards, wealth management services, personal consumption loans and other consumer financial products) brought great development opportunity for personal finance business market in China. The table below sets forth the total of domestic personal RMB-denominated loans and their percentage of total domestic RMB-denominated loans as of the dates indicated: As of December 31, CAGR ( ) (RMB billion, except for percentage) of domestic personal RMB-denominated loans... 11,254 13,601 16,130 19,850 23, % As a percentage of total domestic RMB-denominated loans % 24.9% 25.7% 27.7% 28.4% N/A Source: The PBOC In addition to traditional personal finance business, with rapid growth of household disposable income and expansion of affluent population, strong demands for wealth management services emerge in the market in recent years. PRC commercial banks have commenced to offer customized and professional services, such as asset management and wealth management services, to mid- and highend customers. Following the private banking services set up by foreign banks, PRC commercial banks also began to establish their own private banking departments to increase the market penetration rate of their personal banking business among high-net-worth individuals in the PRC. Development of Electronic Banking With the continued development of internet technology and banking information system in China, PRC commercial banks are able to develop new self-service banking products and services through electronic banking systems such as online banking and telephone banking. Through the integration of physical outlet services and electronic networks, banks can provide more convenient traditional banking services and sophisticated innovative banking products to customers with more convenience. Electronic banking has opened up a vast new channel for PRC commercial banks to expand the scale and coverage of the banking business. 90

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