China Economic Quarterly Q3 2017

Overall 2017 economy likely to outperform market expectations, despite moderately slower growth in third quarter

November 2017

Major economic indicators p1/Policy updates p10 /Hot topic analysis p13

www.pwchk.com/ceq

ContentI. Major economic indicators 1

II. Policy updates

The 19th Party Congress

Encouraging entrepreneurship in China

10

10

12

III. Hot topic analysis

How Fintech is Shaping China’s Financial Services

A Chinese perspective on rising commodity prices

13

13

18

China’s GDP growth for the third

quarter has slowed down to 6.8%, 0.1

percentage points less than the previous

two quarters of the year. Thanks to the

strong contribution from the service

sectors, total GDP for the first three

quarters together increased to 59.33

trillion yuan with 6.9% growth rate. As a

result, we expect that the economic

growth rate in 2017 would demonstrate

a better performance than that of 2016,

and beat the market expectation of 6.7%,

as forecasted by the International

Monetary Fund (IMF) — 6.8% for 2017

and 6.5% for 2018.

In spite of the gentler growth during the

third quarter, China has contributed

34.6% in growth to the world economy

in 2017, according to IMF. Meanwhile, it

is worth noting that the World Bank also

upgraded its forecast for the Chinese

economy for this year and the next.

China’s strong growth resonates well with

the new trend of economic rebound of

major emerging markets (BRICS), which

all grew for the first time in three years,

thanks to their favourable government

policies and a rise in gains for energy

and metal commodities in 2017.

Quarterly GDP values and quarterly and annual GDP growth rate

Major economic indicators

I

PwC 1

1.70%

1.80%

1.80%

1.80%

2.00%

1.70%

1.80%

1.50%

1.30%

1.90%

1.80%

1.70%

1.30%

1.70%

1.70%

7.30%

6.90%6.70%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

0.00

5.00

10.00

15.00

20.00

25.00

Quarterly GDP value Quarterly growth Annual GDP growth

GD

P (

Trilli

ons o

f R

MB

)

2 China Economic Quarterly Q3 2017

12.0

1%

11.2

9%

11.2

1%

11.2

5%

10.9

6%

10.8

5%

10.6

7%

10.2

4%

9.7

5%

9.0

9%

47.1

2%

45.9

0%

46.0

4%

46.1

7%

44.9

1%

43.6

5%

42.8

6%

40.5

6%

39.6

6%

40.1

9%

40.8

7%

42.8

1%

42.7

5%

42.5

9%

44.1

3%

45.4

9%

46.4

7%

49.2

1%

50.6

0%

50.7

3%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

primary secondary services

Perc

enta

ge

GDP composition

For the first three quarters, the output of

primary, secondary and tertiary

industry was 4.12, 23.81, and 31.40

trillion yuan respectively. The tertiary

industry or services, accounting for

52.9% of total GDP, grew by 7.8% year-

on-year, which was the highest growth

rate relative to other segments.

More specifically for the secondary

industry, manufacturing and utilities

(electricity, water, gas supply and etc.)

went up by 7.3% and 8.4%, respectively,

during the last three quarters in 2017.

These sectors performed much better

than mining, which continued to have a

negative growth.

Fixed Asset Investment: Accumulated Growth

Total fixed asset investment reached

45.85 trillion yuan and expanded 7.5%

year-on-year in the first three quarters.

The overall growth has declined by 0.7%

compared to the same period last year.

State sector investment rose by 11%

year-on-year while private investment,

accounting for 60.5% of total

investment, remained low, increasing by

only 6% year-on-year, relatively better

than 3.2% in 2016. How to provide a

better business environment and

encourage more private investment

remains a big challenge for the Chinese

economy.

From January to September, industrial

investment went up merely by 3.3%

year-on-year to 16.95 trillion yuan, of

which manufacturing investment

increased by 4.2% to 14.10 trillion yuan.

On the other hand, fixed asset

investment in service sectors,

accounting for 59% (27.18 trillion yuan)

of the total investment, rose by 10.5%

year-on-year, while infrastructure

investment went up by 19.8% to 9.97

trillion yuan during the first nine

months of 2017. High-tech

manufacturing, equipment

manufacturing and technological

upgrading recorded high growth, while

investment into high energy-intensive

industries fell by 1.9% from last year.

13.50%

11.40%

10.30%10.00%

10.70%

9.00%

8.20% 8.10%

9.20%8.60%

7.50%

Perc

enta

ge

PwC 3

Growth rates in real estate

4 China Economic Quarterly Q3 2017

-33.8%-33.1%

-31.7%

-19.4%

-11.7%

-6.5%-5.9%

-3.0%

-7.8% -8.5%-6.1% -5.5%

-4.3% -3.4%

6.2% 5.7%

8.1%

5.3%

8.8%

11.1%10.1%

12.2%

1.3%

2.2% 2.6%

-1.0%

14.7%16.8%16.8%

15.6%15.3%14.8%15.5%15.5%15.0%15.2%

7.0%

11.5%11.4%9.9%

11.2%

9.7% 9.0%

8.0%2.0%

1.3% 1.0%

3.0%

6.2% 7.2% 7.0% 6.1% 5.3% 5.4% 5.8% 6.6% 6.5%6.9%

8.9%

9.1%

9.3%

8.8% 8.5% 7.9% 7.9%

8.1%

-40.0%

-35.0%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Growth rate of land purchased Growth rate of resources of funds Growth rate of investment

The overall real estate market in the

first three quarters remained stable, with

investment growing by 8.1%

year-on-year to 8.06 trillion yuan, 2.3%

higher than a year ago. Investment in

residential building, accounting for

68.3% of total real estate investment,

stood at 5.5 trillion yuan, up by 10.4%

from last year. In September, floor space

sold and sales volume of the commercial

buildings went up by 10.3% and 14.6%,

and residential housing sales rose by

11.4% from last year.

As the national and local governments

are stepping up their restrictive policies

to further curb the speculation, property

sales might decrease in the fourth quarter

and the next year.

In terms of sources of funds, there were

funds worth 11.31 trillion yuan available

from January to September, of which

domestic loans account for 17%, growing

by 19.5%; self-financing constitutes

32.3% (3.65 trillion) of all funds,

declining by 0.3%; other funds including

deposit and advance payment, personal

mortgage loans (5.75 trillion yuan,)

account for 51%, growing by 10.4%. As

regulation and control over real estate

keeps getting tighter, sources of funds

might become a challenge for many

developers in the fourth quarter and the

year 2018.

Growth rate of land purchased reached

12.2% in the first three quarters, with

space of land purchased stood at 1.67

trillion square metres.

Purchasing Managers’ Index

PwC 5

53.8%53.4%

54.4%

53.8% 53.7% 53.7%

54.5%

55.1%54.9%

55.4%

50.2%49.8% 49.7%

50.2%50.0%

50.4%

51.4%51.8% 51.7%

52.4%

46.0%

48.0%

50.0%

52.0%

54.0%

56.0%

Perc

enta

ge

Non-manufacturing Manufacturing 50% breaking point

China’s Purchasing Managers’ Index

(PMI) for manufacturing sector in the

past three months has become even

stronger, with September hitting a new

high of 52.4% since May 2012.

Production index and new order index

stood at 54.7% and 54.8% respectively,

both at high levels in recent years. A

strong manufacturing PMI indicates

steady growth and prospects for the

sector. Thanks to the global economic

upturn and positive outlook of China’s

economy, manufacturing sector is likely

to keep expanding in 2018.

Non-manufacturing PMI remained at

high level, with business activity index

reaching 55.4% in September, the

highest level since June 2014. With

manufacturing production gathering

pace, production related services

experienced rapid growth, with business

activity index reaching 59.7% in

September, 5.1% higher than last month.

PMI of wholesale, telecommunication,

internet, software and IT, financial

services, insurance, capital market

services surged to high level of over 60%

in September. Construction industry

returned to booming period, with

business activity index reaching 61.1% in

September, 3.1% higher than in August.

6 China Economic Quarterly Q3 2017

Growth of Industrial Added Values (for companies over certain scales)

6.80%

5.70%5.90%

6.80%

6.20% 6.10% 6.00%

7.60% 7.60%

6.60%

Perc

enta

ge

The growth of Industrial Added

Values (for companies over certain

scales) went up by 6.7% year-on-year in

the first three quarters, 0.7% higher than

the same period last year.

By sectors, manufacturing went up by

7.3% year-on-year, utilities sector went

up by 8.4%, and mining sector fell by

1.6% year-on-year. Furthermore,

industrial added values of

manufacturing of equipment, computer,

telecom and automobile grew by over

10% in September.

In the first three quarters, profits of

industrial enterprises over certain

scales rose by 22.8% compared to same

period last year. The mining sector led

the growth in profits, jumping by 4.7

times year-on-year, profits for

manufacturing grew by 19.6% year-on-

year, while profits for power, heat, gas

and water declined by 18.3% over the

same period last year. We expect the

growth of industrial added values to stay

bullish in 2018.

Total retail sales of consumer goods

reached 26.32 trillion yuan and went up

by 10.4% in the first three quarters.

Consumption continued to be the largest

driver of economic growth, contributing

to 64.5% to China’s GDP in the first

three quarters of 2017.

Catering consumption (2.84 trillion

yuan) grew by 11% year-on-year from

January to September, while the goods

consumption (23.48 trillion yuan) went

up by 10.3% year-on-year. Among goods

consumption, sale of sports and

recreational articles increased by 17.4%,

cosmetics up by 12.1% and construction

and decoration materials grew by 12.6%.

In addition, China’s online sales reached

4.88 trillion yuan in the first three

quarters, 34.2% higher than the same

period last year. Among them, sales of

material goods, accounting for 14% of

total retail sales, stood at 3.68 trillion

yuan, up by 29.1%, while sales of non-

material goods reached 1.2 trillion yuan,

increasing by 52.8% year-on-year.

Retail Sales of Consumer Goods: Accumulated Growth Rate

PwC 7

10.56%

10.41%

10.50%

10.70%

10.30% 10.30%

10.40% 10.40%

10.00%

10.40% 10.40%

Perc

enta

ge

Thanks to the moderate recovery of

global economy and fairly strong

domestic demand, China’s imports

and exports had the best performance

among all major economic indicators.

The total trade value registered at 20.29

trillion yuan in the first nine months, up

by 16.6% year-on-year. Among them,

exports went up by 12.4% year-on-year

to 11.2 trillion yuan, and imports grew

by 22.3% year-on-year to 9.13 trillion

yuan, with a trade surplus of 2.03

trillion yuan. Machinery products

continued to dominate China’s exports

(accounting for 57.5%), growing by 13%

year-on-year in the first three quarters.

Hiking commodity prices was a key

reason for the rising total trade values.

For instance, during the first three

quarters, import prices of iron ore,

crude oil, copper and coal went up by

38.4%, 33%, 29.2%, and 75.4%

respectively. The rise in commodity

prices increased import value by more

than 10% and contributed 52.5% to

imports growth.

For the fourth quarter of this year and

2018, we expect trade would continue to

grow at a higher pace than overall GDP,

as the global market improves further.

8 China Economic Quarterly Q3 2017

¥100

¥200

¥300

¥400

¥500

¥600

¥700

¥800

¥900

¥1,000

¥1,100

¥1,200

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Net Export (RMB billion) Export Growth Import Growth

Gro

wth

Quarterly Balance of Trade

(Billion)

526.62 918.01 861.22 1118.34 933.93 898.77 838.16

0.06% -1.50% -13.93% -8.62% -1.17% 8.99% 20.83%

3.36% 8.64% -2.31% -1.59% 1.25% 0.80% 12.46%

101.92 788.11 755.53 1007.20 810.26 967.14 458.51 800.7

-1.07% 0.95% -17.46% -13.83% -7.89% 1.95% 30.27% 16.43%

-6.05% 12.71% 4.90% -5.44% -4.26% 0.34% 10.47% 7.66%

PwC 9

1.38% 1.39% 1.60% 1.60%

2.30%1.88% 1.92% 2.08%

0.90%

1.50% 1.60%

-4.56%-4.81%

-5.95%-5.90%

-4.30%

-2.60%

0.10%

5.50%

7.60%

5.50%

6.90%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

CPI PPI

Gro

wth

(contr

actio

n)

rate

Producer Price Index (PPI) went up

by 5.5%, 6.3% and 6.9% year-on-year

respectively in July, August and

September, maintaining a high level of

6.5% since the beginning of the year.

The primary driver was rising producer

prices for production goods, which

increased by 7.3%, 8.3% and 9.1% year-

on-year respectively in July, August and

September. On the other hand, producer

price for consumer goods only rose by

0.5%, 0.6% and 0.7% in the

same period.

Furthermore, mining and raw materials

prices went up by 17.2% and 11.9%

respectively, triggered by rising

commodity prices. PPI for the rest of

2017 and 2018 is expected to continue to

increase if commodity prices grow again.

Compared to high level of PPI, growth in

consumer price index (CPI) has

been fairly moderate. CPI increased by

only 1.6% year-on-year in September

and averaged 1.5% for the first nine

months in 2017. Due to strong supply,

food prices declined by 1.4% in

September while the prices of services

went up by 3.3%. Price of healthcare

increased at an average of 5.7% during

the first nine months, making it the

highest among all major items.

Education, culture and recreation, and

residential housing came in next with an

average growth rate of 2.5%.

We expect CPI to remain stable in 2018

and price of healthcare might decrease

to a lower level as government releases

more supporting policies on reducing

the medical cost of patients.

Producer Price Index and Consumer Price Index

● The 19th Party Congress

The 19th National Congress of the ruling

Communist Party of China (CPC) held in

Beijing from October 18-24, 2017, has

made some very important decisions. It

elected a new central leadership headed

by General Secretary Xi Jinping, adopted

a new theory — the “Xi Jinping Thought

on Socialism with Chinese Characteristics

for a New Era”, and set a long-term

vision on China’s future development.

The meeting claims that the “principal

contradiction” in today’s Chinese society

has evolved to “the contradiction

between unbalanced and inadequate

development and the people’s ever-

growing needs for a better life.” The

near-term target is to build China into a

“moderately prosperous society” and

eradicate poverty in rural areas by 2020,

as stipulated in the 13th Five-Year Plan.

The Party has adopted a “two-step

approach” for China’s long-term

growth — the first step is to basically

realise socialist modernisation from

2020 to 2035, and the second step is to

work for another 15 years to build China

into a “great modern socialist country”

that is “prosperous, strong, democratic,

culturally advanced, harmonious, and

beautiful” by the middle of the

21st century.

The five guiding principles — innovation,

coordination, ‘greenness’, openness and

inclusiveness — as enshrined in the 13th

Five-Year Plan will be adhered to during

the development process. Fourteen

fundamental principles were laid out as

the foundation of developing China’s

roadmap and action plans for future

reform and progress in the next 30 years.

On economic policy, the Party decided to

pursue supply-side structural reform as

the “main task” and work harder for

better quality, higher efficiency and

more robust drivers of economic growth

through reform. It also called for new

industrialisation, IT application,

urbanisation, and agricultural

modernisation to go hand in hand.

In the next three years, priorities will be

given to forestall and defuse major risks,

especially financial risks; carry out

targeted poverty reduction; and prevent

and control pollution so to ensure that

the goal of building a “moderately

prosperous society” will be achieved

by 2020.

II

10 China Economic Quarterly Q3 2017

Policy Updates

PwC 11PwC 11

1. The Party will assume “absolute

leadership” over work in all areas of

endeavour in every part of the

country, and advocates “centralised

and unified leadership” within the

Party with General Secretary Xi

Jinping as the “core”;

2. The Party has moved to put more

emphasis on “quality and efficiency”

of future economic development and

purposely set no “quantitative”

targets for GDP growth;

3. SOEs, with strong Party and state

support, will play a more prominent

role in China’s future economic drive,

while SOE reform will gather pace;

4. Foreign companies and the private

sector are expected to enjoy improved

market access and fairer treatment as

the Party vows to provide a

favourable business environment for

all types of business entities;

5. The Belt and Road Initiative,

representing a China-driven new

model of international economic

cooperation, is poised to gather new

growth momentum;

6. Other than economic growth, the

Party has devoted more attention to

environmental protection and

improving people’s livelihood. This

more balanced and inclusive

approach will not only make China’s

growth more sustainable, but also

open up much more business

opportunities to foreign and domestic

companies.

(Please visit

http://www.pwccn.com/en/research-

and-insights/business-review-of-china-

s-19th-party-congress.html

for details of a PwC commentary on the

business implications of the congress)

Key observations of the congress include:

On September 25, 2017, the Communist

Party of China Central Committee and

the State Council jointly issued a

guideline on encouraging entrepreneurial

spirit and creating a favourable

environment for entrepreneurship.

The guideline states that the

Government will protect the legal rights

and interests of entrepreneurs,

strengthen protection of intellectual

property rights (IPR), fight against

monopolies, unfair competition

practices and regional protectionism,

and remove regulations that undermine

fair competition. The Government will

also introduce a negative list

management programme nationwide to

ensure fair access to industries and

businesses that are not off-limits to

market entities.

According to the guideline, the

entrepreneurial spirit refers to hard

work, pursuing excellence,

craftsmanship, innovation and serving

society — all important features for

promoting an innovation-driven

economic transformation. The

Government promised to introduce

more reform measures to create a better

environment for innovation and

development in the future.

The guideline was introduced at a time

when private investment, accounting for

over 60% of China’s total investment,

remains weak and many wealthy

businesspeople are trying to move their

wealth to foreign countries. In the first

three quarters this year, fixed investment

from the state sector rose by 11% year-

on-year, while private investment grew

by only 6%, slightly better than the

annual rate of 3.2% in 2016.

The release of the guideline represents

that the Chinese government has

recognised the value of entrepreneurs

and is wishing to improve business

environment to restore business

confidence. A lot more detailed work,

however, will be needed at ground level

before entrepreneurs can be certain

about their benefits and legal rights of

making investment.

● Encouraging entrepreneurship in China

12 China Economic Quarterly Q3 2017

IIIHot topic analysis

● How Fintech is Shaping China’s Financial Services

With the new round of technological and

industrial revolutions progressing in the

world, new information technologies such

as cloud computing, data & analytics,

artificial intelligence and blockchain

have made great strides and set off a

wave of financial technology (fintech)

sweeping the globe. How is fintech

shaping China’s financial services sector?

I. China’s Fintech Market

We see three dimensions of fintech in

China, which are services and sales via

internet channels; business model and

service innovations based on

technologies; and most importantly,

financial institutions’ operational

improvements using internet

technologies. The proportion of fintech

involvement will continue to increase

throughout the entire transformation

process of the financial services. Data and

analytics is becoming the foundation of

effective business decision making. More

and more business model innovations

are expected based on technology

breakthroughs and new thinking.

The Fintech journey in China is expected

to go through three stages, in our view:

stage 1.0 was the scenario-based

financial services revolution; the current

stage 2.0 is the technology-driven

revolution; and stage 3 is likely to be the

business model revolution. At stage 1.0,

financial products and services have

been created from different scenarios,

and the main driving forces are internet

companies. At stage 2.0, emerging

technologies are used to change

channels, products and operations of

financial institutions, strengthen the

financial supplies and connect closely

with demand. The main driving forces

are traditional financial institutions and

internet companies. At stage 3.0, the

financial services business model will be

rebuilt, where on-demand financial

services will eventually take place

(i.e. Inclusive Finance).

In 2016, fintech remained the focus of

venture capitals and investment funds in

China. The scale of investment and

financing increased by 182% year-on-

year as shown below 1.

PwC 13

49.2

90.1

2015 2016

Investment amount (in RMB billion)

FinTech investment momentum, 2015 vs 2016

1. Source: Institute of Internet Finance, Shanghai Jiao Tong University, Beijing Capital Investment

Research Report on China's Internet Financial Investment and Financing in 2016

China is likely the largest Fintech market in the world in terms

of volume and transactions, with online (mobile) payment,

transaction volume reaching 100 trillion yuan in 2016. Online

consumer financing and marketplace lending (P2P) business

has grown significantly, although regulations will become

more stringent. Many unique features such as the online

payment system, mobile active level, urbanisation, education,

etc. will help support China's Fintech business, and stimulate

other Fintech related business models to boom in China. In

terms of truly innovative and revolutionary technology,

however, China is still behind the US.

In 2017, four Chinese Fintech companies (all in online lending

business) got listed in NYSE and one listed in Nasdaq. In

addition, an insurtech company and an online auto financing

company got listed in HKSE in 2017. Global capital market

understands China Fintech much better now than anytime in

the past. PwC was involved in five of the seven recent IPOs.

For Chinese financial institutions, the focus of attention on

fintech is mainly in the following areas, according to a PwC

survey:

Strategies and mindset: Strengthen innovation through

internal efforts and partnerships with fintech companies in the

next three to five years;

Resource allocation: Commit to investing in emerging

technologies and intend to allocate nearly a third of annual

turnover to fintech investments.

Action plan: Plan to increase partnership with fintech

companies, but concerns around IT security, regulatory

uncertainty and IT compatibility need to be addressed.

II. The impact of fintech

From PwC’s perspective, fintech will impact the financial

services sector in five aspects:

1. Fintech companies tend to snatch away the revenues of

traditional financial institutions and force them to be more

competitive and vibrant;

2. Technology disrupts the logic of traditional financial

institutions and empowers them to adjust their strategic

direction;

3. Electronic channel services occupy the entrance, driving

traditional financial institutions to achieve full channel

integration and coordination;

4. Innovations in fintech companies have sprung up,

inspiring traditional financial institutions to innovate their

business models;

5. Business innovation drives management innovation,

forcing traditional financial institutions to reform their

organisational model and IT architecture.

III. Typical applications of ABCD (AI, Blockchain,

Cloud Computing, Data & Analytics) in financial

services

The rapid development of technology has brought

tremendous changes in the traditional financial service model

from both demand and supply ends. We have our fintech

jigsaw shown in the chart below and we’ll explain them one by

one from market situation and application scenarios

perspective in China.

14 China Economic Quarterly Q3 2017

Improve service efficiency

Reduce operating costs

Improve customer experience

Promote the systematic development

of business

… …… …

Enhance customer loyalty

Lead the new business landscape

Develop technical agreements

and industry standards

Explore new financial models

A — Artificial

intelligenceB — Blockchain

D — Big DataC — Cloud Computing

IoT UAV …

A — Artificial Intelligence

The AI market in China is developing rapidly.

China’s 2020 AI market is expected to grow from

1.2 billion RMB in 2015 to 9.1 billion RMB. In

2015, nearly 1.4 billion RMB (up 76% year-on-

year) funds flowed into the AI market 2.

In terms of government policies, China’s National

Development and Reform Commission released a

three-year implementation plan including

Internet Plus and Artificial Intelligence in May

2016. The plan identified the support to AI

development in six specific areas: funding, system

standardisation, intellectual property protection,

human resources development, international

cooperation and implementation arrangements 3.

AI is a hot topic in China, but compared to

developed countries, there’re still a lot to catch up

with basic theory, chip, system, ecology, hardware,

software and project layout.

In China, AI’s application scenarios in financial

industry has four aspects:

1. Speech recognition and natural language

processing applications, such as smart

customer service and voice data mining;

2. Service robotics applications, such as room

inspection and intelligence robot;

3. Machine learning, neural network application

and knowledge map, such as customer

persona, anti-fraud, intelligent risk control and

robo-advisor;

4. Computer vision and biometrics applications,

such as portrait surveillance warning,

employee irregularities monitoring and core

area security monitoring.

B — Blockchain

In China, most of the Blockchain entrepreneurial

projects are in early stage and before “A round” of

financing. As shown in the chart below, digital

currency, corporate services and finance are top

three applications of blockchain in China in 2015

and beyond. In the blockchain area, Chinese are

more inclined to do business application startup

other than the underlying technology platform. To

standardise the digital currency market, China

announced a ban on Initial coin offerings (ICOs)

funding in early September 2017. Chinese

regulators established a Central Bank Digital

Currency Institute in 2016, with the goal of

issuing a legal digital currency based on national

credit in the future.

Source: 36 Kr Research Institute Fintech Industry Research Report 2017

There are several scenarios for blockchain in China, such as customer credit

investigation, syndicated loan, money management, bill payment platform and

medical insurance. There is still a long way ahead before a mature solution on the

market.

0

5

10

15

20

25

2012 2013 2014 2015 2016

Financial Digital currency Corporate Services Others

China blockchain project set up number

2. Source: AI, Machine Learning and Data Fuel the Future of Productivity, Goldman Sachs Research

3. Source: AI, Machine Learning and Data Fuel the Future of Productivity, Goldman Sachs Research

PwC 15

C — Cloud Computing

At present, China’s financial cloud market is at an initial stage of development with

low market penetration, but is growing fast. Meanwhile, domestic policies encourage

the financial sector to fully tap the financial cloud market, therefore big potential

can be expected.

16 China Economic Quarterly Q3 2017

Note: * Permeability refers to the proportion of institutions with cloud applications;

* * The average growth of cloud services market in 2016-2020 is 32%

Despite the favourable policies, there are four major challenges for China’s financial

institutions’ cloudification: cloud migration and other capabilities are not enough;

high requirements of safety and risk control; low degree of automation; no positive

effect after cloudification makes it difficult to promote.

There are a large number of common modules that can be used directly for financial

sectors, while some can be customised according to sub-sectors, such as retail

platform, institutional platform, SME platform for banks, underwriting and claim

systems for insurers, information and investment systems for trust, fund and

securities.

100

140

196

274

330

10%

20%

38%

57%

73%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

2016 2017 2018E 2019E 2020e

0

50

100

150

200

250

300

350

Market size penetration

Forecast and Penetration Rate of China’s Financial Cloud Market * Forecast

(100 million yuan) 4

4. Source: 2016 China Cloud Computing White Paper — China ICT Research Institute, 2016-2017

Medical Cloud Application Trends Research Report, iResearch Cloud Services Report, IDC Report,

China Banking Regulatory Commission, People’s Bank of China, PwC Analysis

Source: 2016-2022 China big data industry market operation trend and development prospect

report, Zhiyan Consulting Group

In China, policy benefits, large amount of accumulated data and huge analytical

demands will jointly promote the rapid development of the industry. However, a lot

still needs to be done because of the gap of data quality, data processing and

analysis expertise.

China’s financial sector features the following big data applications: large deposit

marketing; credit risk control; intelligent enterprise risk control; managing the

marketing opportunities; precise marketing; public opinion analysis; big data

governance, and so on.

47.3 59.0

75.7

102.0

137.9

188.5

258.6

0

50

100

150

200

250

300

2012 2013 2014 2015E 2016E 2017E 2018E

Revenue scale (100M RMB)

China big data market size forecast

IV. Recommendations

Looking forward, we would like to suggest Chinese financial institutions to take the

following actions on fintech innovation to reap the full benefits brought by fintech:

• Develop a fintech driven top-level design and incorporate it into long-term

development strategies;

• Establish independent fintech innovation system and explore new mode of

financial services;

• Explore emerging technologies implementation roadmap, launch pilots on

digitising and transformation of existing business processes; and

• Focus on technology-driven capacity-building, effectively promote deep

integration of finance and technology.

(For inquiries or questions, please contact James Chang, Leader of Financial

Services, Consulting, PwC China at james.chang@cn.pwc.com and Vivian Ma,

Partner of Financial Services, Assurance, PwC China at Vivian.ma@cn.pwc.com)

D — Data & Analytics

Data, which is rapidly expanding and growing, can be a great accelerator to future

development of enterprises as it can help enterprises better understand the market

and realise the optimal allocation of resources.

PwC 17

● A Chinese perspective on rising commodity prices

During the first three quarters, rising

commodity prices pushed up the value of

China’s imports by more than 10% and

contributed 52.5% to imports growth. As

total imports were valued at 9.13 trillion

yuan, a 10% price hike means 913 billion

yuan or roughly US$138 billion. This is

not a small amount for international

commodity market, and it has brought

dramatic impact on China’s economy.

Going forward, however, continued

increase in commodity prices might not

be sustainable because of the change in

China’s economic growth model.

Based on 2015 data, China’s demand

accounts for over 50% of global iron ore,

alumina, nickel and thermal coal

demand, and over 40% of global zinc,

copper, lead, zinc, steel and coking coal

demand, and more than 10% of global

crude oil demand. During the past

decade and more, China was by far the

largest consumer of global commodities.

Thus, China’s economic growth and its

demand for raw materials have

significant impact on the demand and

supply situation as well as prices of the

global commodity markets.

In addition, there are a few other factors

at play that contributed to pushing up

the commodity prices. Firstly, the global

economy experienced a better-than-

expected recovery, triggering both IMF

and the World Bank to raise their

forecast for global GDP in 2017 and

2018. Secondly, the Chinese economy

also registered better performance than

market expectations, meaning stronger

demand for commodities. Meanwhile,

further progressing of China’s on-going

supply side structural reform has

resulted in reduced production and

supply of steel, coal and etc. and this has

led to rising prices and rising imports

from abroad.

0

20

40

60

80

100

120

140

160

180

China Commodity Price Index: General Index (2008-2017)

Source: Wind

18 China Economic Quarterly Q3 2017

Over the past decade, while many major

economies were in recession, China has

contributed more than 30% to global

economic growth, according to IMF. In

the meantime, Chinese consumption was

a major driver for the booming of

international commodity markets,

particularly for base metals.

As President Xi described in his report

delivered to the 19th National Congress

of the Communist Party of China (CPC)

in October, “China’s economy has been

transitioning from a phase of rapid

growth to a stage of high-quality

development.” It means that there will

be significant changes to the old growth

model, and quality will exceed quantity

as the new priority for growth.

Take the housing and manufacturing

sectors, the two key consumers of

commodities over the past decades. As

the workshop of the world, growth of

China’s traditional manufacturing

capacity has slowed down, as the

country has shifted its focus to

developing advanced manufacturing,

exemplified by the Made in China 2025

initiative, in its bid to become a global

manufacturing power. Consequently,

growth in demand of commodities from

Chinese manufacturing industry is likely

to fall to a lower level in the future.

On housing, President Xi reiterated in

his speech at the 19th Party Congress

that “Housing should be for living in, not

for speculation”. The governments at

central and local levels have

promulgated new policies to constrain

new investment into the housing market,

curb market speculations and reduce

housing prices. As a result of these new

policies, we expect the real estate market

to cool down. Consequently, a gentler

Chinese real estate market would

certainly consume less commodities, and

this will bring a negative effect on

international commodity prices.

As we pointed out earlier, China’s

demand accounts for a large proportion

of the price hikes for base metals. New

growth model and weaker demand from

China for commodities will have a direct

impact on the prices of commodities.

The key message to the global

commodity market is that in 2018 and

the future years, China’s central

government will tolerate a slower GDP

growth rate, which is likely to stay above

6.8% in 2017. Going forward, however,

the market should not be surprised if it

drops to below 6.5% in the near future. It

is also possible that the official GDP

growth rate might be adjusted to a

slightly lower level as needed.

Since China’s overall economic growth

might be slower, its demand for

commodities may decline. The phasing

out of obsolete industries, which are

poor in efficiency and quality, will also

help reduce demand for commodities, as

China’s supply side reform progresses.

Finally, international commodity prices

are determined by many factors, but

mostly by supply and demand. It is

widely accepted that a steady and

moderately growing commodity market

is a positive factor for the global

economy, particularly for many raw

material producing emerging countries.

However, it might be difficult for

international commodity prices to reach

and maintain a high level, mostly

because the peak demand from the

Chinese market might already be history.

134.77

150.15

194.55 181.09

125.43

157.69

195.93

147.97

194.40

238.99

278.58

331.83

307.26

358.71

229.54

283.38

332.80

305.30 295.01

280.17

229.96

176.14

192.51

0

50

100

150

200

250

300

350

400

Core Commodity CRB Commodity Index — Year End Data (Thomson Reuters)

Source: Bloomberg

PwC 19

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2017 PricewaterhouseCoopers Limited. All rights reserved. PwC refers to the Hong Kong member firm, and may sometimes refer to

the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.CN-20171107-5-C1

www.pwchk.com/ceq

Authors

Allan Zhang Chief EconomistPwC China+86 (10) 6533 7280allan.zhang@cn.pwc.com

G. Bin ZhaoSenior Economist PwC China+86 (21) 2323 3681bin.gb.zhao@cn.pwc.com

Acknowledgements

Special thanks to Sanjukta Mukherjee, Lan Lan and Smriti Mathurfor their contributions to the report.