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Equity November 17, 2020 | 07:14PM CST

Research

Digital Currency
Reinventing the Yuan
for the Digital Age
China is at the forefront of digital currency development and will
likely be one of the first countries to issue a sovereign digital
currency (known as “DC/EP”). As a gradual replacement for
physical cash, in the early stages DC/EP will facilitate small
payments for consumables such as meals, groceries and
transport, but over time will expand to larger and more complex,
value-added services such as government subsidies and
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cross-border payments. Even in a cashless environment, DC/EP


will be an attractive alternative to fintech platforms given its
anonymity, the ability to operate outside of wireless networks,
and interconnectivity among different payment methods.
Successful adoption will ultimately require government
promotion, which has the wherewithal to drive a rapid uptake.

In ten years we expect DC/EP to reach 1 billion addressable


users, Rmb1.6tn in issuance, Rmb19tn in annual Total Payment
Value and account for 15% of total consumption payments.
Incorporating digital currency wallets into bank apps will level the
playing field in the Rmb 3tn revenue pool for retail finance by
bringing consumers back to bank channels, thereby expanding
their customer base and MAUs. This will likely slow the rate that
banks have been ceding ground to fintech, and even reverse
market share losses over the long-term if DC/EP gains in

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popularity. In the meantime, PAB and CMB will benefit most from
DC/EP as they are best placed to commercialize returning app
users thanks to their leading retail franchises, premium client
bases, superior fintech capability and strategic focus on retail
finance.

Shuo Yang, Ph.D. Yingqi Lin


+86 10 6627-3054 +86 21 2401-8691
shuo.yang@ghsl.cn yingqi.lin@ghsl.cn
Beijing Gao Hua Securities Beijing Gao Hua Securities
Company Limited Company Limited

Derek Su
+852 2978-7436
derek.su@gs.com
Goldman Sachs (Asia) L.L.C.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result,
investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this
report. Investors should consider this report as only a single factor in making their investment decision. For
Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as
research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc.
Goldman Sachs China Financial Services

Table of Contents
PM Summary: Digital Currency — Reinventing the Yuan for the Digital Age 5

China at the forefront of digital currency development 7

Cash for the 21st Century 15

Petty cash payments and red packets to start 23

China already on the path to becoming cashless 32

Boost competition, level the playing field for banks 43

Gateway to banks’ retail finance channels; CMB and PAB best placed to capitalize 54

Rmb 3tn revenue pool for retail finance by 2025, 9% CAGR 63

Appendix 73

Acronyms 75
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References 76

Disclaimer for company logos 77

Disclosure Appendix 78

We would like to thank Piyush Mubayi, Elsie Cheng and Thomas Wang for their contributions
to this report.

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17 November 2020 2
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17 November 2020
Goldman Sachs

3
China Financial Services

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20 FAQs on Digital Currency / Electronic Payment
Will DC/EP reduce banks' balance sheet?
What is the PBOC's objective for DC/EP? Yes, if DC/EP is converted from deposits; No,
A substitute for cash (M0). if converted from cash.

What is the PBOC’s motivation to issue DC/EP?


What will its main application be?
Address the challenges posed by other digital
Facilitate small payments for consumables (e.g.
currencies (e.g. Libra), improve efficiency in the
meals, groceries, transport).
payment system, reduce the cost of cash.
When will DC/EP be launched? What is the “dual offline" transfer?
No timeline has been provided. Testing has Payments can still be made without mobile
already started in four cities and DC/EP will internet access or network connectivity (e.g.
feature at the 2022 Beijing Winter Olympics. An subway, airline, mountainous area).
official launch looks most likely in 2023.

Will DC/EP be anonymous? Can DC/EP be used for government subsidies?


Yes, for small transactions. Large payments Yes, real-time tracking can be used to monitor a
may require ID verification. transaction and it can be disabled once reaching
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the intended recipient.

Will DC/EP pay interest?


Do users need a bank account to use DC/EP?
No, according to the PBOC.
No, unless replenishing a DC/EP wallet.

Will DC/EP charge fees?


Will the PBOC distribute DC/EP to customers?
Unlikely, but the PBOC could charge a fee to
No, commercial banks will circulate DC/EP to
enable a negative interest rate on DC/EP.
consumers after the PBOC distributes it to
commercial banks.
Is DC/EP necessary in an already cashless society?

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Will DC/EP disintermediate banks? Yes, still DC/EP has advantages over fintech:
No, DC/EP will not pay interest, caps can be anonymity, dual-offline transfers, inclusion and
set on wallets and commercial banks will be interconnectivity among payment methods.
the 2nd pillar in the two-tier issuance system.
Will banks be the only institutions operating DC/EP?
Is DC/EP a cryptocurrency? Yes, as DC/EP is the digitalization of legal tender.
No, the DC/EP system will be built on a However, fintech firms can add DC/EP as a
centralized ledger, not a blockchain. payment method in their apps.

Will take rates for consumption payments fall?


No, take rates would be stable as DC/EP
Is DC/EP legal tender?
payments still need to use existing offline
Yes, it has the same legal status as Rmb cash.
channels and infrastructure.

What will be the impact on banks?


Will DC/EP expand the PBOC's balance sheet? Incorporating DC/EP wallets into bank apps will
Not likely as DC/EP can be converted from bring consumers back to bank channels,
bank deposit reserves. expanding their customer base and MAUs.
Goldman Sachs China Financial Services

PM Summary: Digital Currency — Reinventing the Yuan for the Digital Age

China at the forefront of digital currency development


The People’s Bank of China has already started testing a central bank digital currency,
known as Digital Currency/Electronic Payment (DC/EP), while most other countries are
in the early stages of research and development. Although no official timeline has been
announced, pilot testing recently commenced in four cities and digital currency will
feature at the 2022 Winter Olympics in Beijing. If successful, China could be one of the
first countries to issue a sovereign digital currency. With DC/EP to eventually replace
physical cash, it will embed similar characteristics such as anonymity, offline payments,
financial inclusion, and ease of use.

Cash for the 21st Century


China’s DC/EP system will feature (1) two-tier issuance, with the PBOC issuing digital
currency for commercial banks to distribute and interface directly with customers; (2)
controllable anonymity, with DC/EP wallets independent of bank accounts for smaller
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transactions; and (3) centralized processing instead of a distributed ledger, meaning


DC/EP will not be a cryptocurrency. Converting household deposits to DC/EP wallets
will not result in banking-sector disintermediation as the objective of DC/EP is to replace
cash not deposits, DC/EP wallets will not be paid interest, and most transactions will be
small.

Petty cash payments and red packets to start


In the early stages, DC/EP will primarily facilitate small payments for consumables such
as meals, groceries and transport. However, as safety, security and functionality improve
over time, applications will expand to larger and more complex, value-added services
such as traceable government subsidies and cross-border payments.

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China already on the path to becoming cashless
Use of cash at the point of sale and the M0 to M2 ratio in China is already among the
lowest globally. Even in a cashless environment, DC/EP will have attractive features
relative to current fintech offerings including anonymity, financial inclusion, the ability to
operate outside of wireless networks, and interconnectivity among different payment
methods. Successful adoption will require promotion from the government, which has
demonstrated the wherewithal to drive a rapid uptake. As the second pillar of the DC/EP
system, commercial bank networks will likely be mobilized in this process.

In ten years we expect DC/EP to reach 1 billion addressable users, Rmb1.6tn


(US$240bn) in issuance, Rmb19tn (US$3tn) in annual Total Payment Value (TPV)
and Rmb162bn (US$24bn) in annual cost savings — although our forecasts could
differ from actual figures given limited details, including the timing of a public launch.
While direct cost savings to the financial system from replacing physical cash with
digital currency will likely be small relative to bank earnings and GDP, DC/EP will reduce
the invisible cost of cash and have a significant impact on China’s payment system.

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Goldman Sachs China Financial Services

Boost competition, level the playing field for banks


DC/EP will become the third pillar of China’s payments system alongside banks and
fintech, and in the process, increase competition. By 2029, we expect DC/EP to account
for 15% of total consumption payments (TPV of Rmb128tn) as fintech market share
tapers off (albeit still dominating the space) and usage of cash and physical bank cards
shrink.

Within the payment ecosystem, commercial banks will be clear beneficiaries as they
compete on a more level playing field, third-party payment digital wallet issuers will face
stiffer competition in the long term (but limited in the early stages), third-party payment
acquirers will benefit from higher volumes and increased demand for mobile payments,
and software/hardware vendors will benefit from R&D outsourcing and hardware
upgrades. We provide a list of companies that have already participated in DC/EP
development or may have exposure to the DC/EP system once it rolls out.

Gateway to banks’ retail finance channels; CMB and PAB best placed to capitalize
Incorporating digital currency wallets into bank apps will bring consumers back to bank
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channels, expanding their customer base, MAUs and stickiness. A 10% increase in the
bank app users would lift revenues by 2%-5%. PAB and CMB are best placed to
commercialize returning app users given their leading retail franchises, premium client
bases, superior fintech capability and strategic focus on retail finance. We reiterate our
Buy ratings on CMB-H/A (A on the Conviction List) and PAB.

Rmb 3tn revenue pool by 2025, fintech to continue capturing incremental market share
We forecast a Rmb 3tn revenue pool for retail finance by 2025 (excluding mortgages) at
9% CAGR 20-25E as growth in payments and retail lending slows but wealth
management and insurance agency remain brisk. Over the next five years, we expect
Fintech to grow revenues at almost double the rate of banks as they continue to capture
incremental market share across the retail finance ecosystem. The DC/EP roll-out will

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likely slow the rate that banks cede ground to fintech, and even reverse over the
long-term, albeit in a more competitive environment.

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Goldman Sachs China Financial Services

China at the forefront of digital currency development

Chief Asia Economist The People’s Bank of China has already started testing a central bank digital
Andrew Tilton explains the
currency, known as Digital Currency/Electronic Payment (DC/EP), while most
impact of a digital currency
on China’s economy in his
other countries are in the early stages of research and development. Although no
companion report “Asia official launch timeline has been announced, pilot testing recently commenced in
Economics Analyst: four cities and digital currency will feature at the 2022 Winter Olympics in Beijing.
China’s digital yuan and its
If successful, China could be one of the first countries to issue a sovereign digital
macro implications
currency. With DC/EP to eventually replace physical cash, it will embed similar
characteristics such as anonymity, offline payments, financial inclusion, and ease
of use.

Pace of digital currency development accelerating globally


Central banks have been researching Central Bank Digital Currency (CBDC) issuance
since 2014-2015 following the melt up of cryptocurrencies (Exhibit 1). Facebook’s Libra
proposal (a decentralized blockchain) in mid-2019 increased the urgency of central banks
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to research and develop a CBDC given concern about the impact to monetary
sovereignty. This year in particular has seen significant progress:

n US Fed officials said in August 2020 that they have conducted in-house
experimentation of a “hypothetical digital currency oriented to central bank uses”
through the Federal Reserve Board’s Technology Lab in collaboration with MIT;
n Pilot testing of China’s DC/EP system recently commenced in four cities (Shenzhen,
Suzhou, Xiong’an and Chengdu) and digital currency will feature at the Beijing Winter
Olympics in 2022;
n The ECB said in May 2020 that they have set up a task force to examine the viability
of its own CBDC within the euro system;

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n Sweden’s Riksbank begun testing its e-krona project this year, although it is yet to
provide any further updates.

COVID has accelerated digital payment adoption as a CBDC can also (1) function as a
sanitized substitution for cash, and (2) be used for direct subsidy payments to individuals
by governments.

n In March 2020, the US economic stimulus package draft bill for the House
Democrats mentioned the creation of a “digital dollar” to aid individuals amid
COVID, although this proposal was removed in a later version of the bill.
n An expert meeting hosted by China’s National Development and Reform
Commission (NDRC, a macroeconomic management agency under the State
Council) noted that China’s CBDC development may be accelerated amid COVID and
be used as a payment mechanism for special subsidies.

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Goldman Sachs China Financial Services

Exhibit 1: China is at the forefront of CBDC development, and although no timetable for a public launch has been provided, will likely be
one of the first central banks globally to issue a sovereign CBDC
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Source: PBOC, Caixin, Xinhua, CNBC, Reuters, Bloomberg, various central banks

Exhibit 2: China and Sweden have started testing their CBDCs; other central banks are still in the R&D stage
Country/area
Country/area Central ba
Central bank
nk P
Project
Prroject
oject name
name P
Progress
Prrogress
ogress Details
Det
Details
ai l s
In Aug. 2020 PBOC said DC/EP will be tested internally in Shenzhen, Suzhou,
China
China PBOC DC/EP Testing
Xiong'an, Chengdu and Beijing Winter Olympics

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Sweden
Sweden Riksbank e-krona Testing In Jan. 2020 Riksbank said it started testing its CBDC

Fed official said in Aug. 2020 that they have conducted in-house
US
US Federal Reserve Unknown Research experimentation through the Federal Reserve Board’s Technology Lab in
collaboration with MIT
In May 2020 the ECB said they have set up a task force to examine the viability
Europe
Europe ECB Unknown Research
of its own CBDC within the euro system

In Jul. 2020 The Bank of France started working on CBDC experiment with
France
France Banque de France Unknown Research
eight firms

UK
UK BOE Unknown Research In Mar. 2020, the BoE issued an in-depth discussion paper devoted to CBDCs

In Jul. 2020 the Bank of Japan has created a dedicated team to intensify its
Japan
Japan BOJ Unknown Research
work on CBDC

In Jan. 2020 HKMA and the Bank of Thailand published a report on a joint
Hong Kon
Hong Kongg HKMA Unknown Research
CBDC research project

In Sep. 2019 the MAS successfully developed a blockchain-based prototype of


Singapore
Singapore MAS Ubin Research
cross-border payment

Source: Various central banks, Reuters, CNBC, Bloomberg

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Goldman Sachs China Financial Services

Exhibit 3: An increasing number of central banks are engaged in Exhibit 4: EMs appear more motivated than DMs in issuing a CBDC
developing a CBDC

Engagement in CBDC work: share of central banks Motivations for issuing a retail CBDC: average importance
surveyed by BIS of central banks surveyed by BIS
Advanced economies Emerging economies
81%
Payment safety/robustness

Domestic payment efficiency

71% Financial stability

Monetary policy implementation


65%
Cross-border payment efficiency

Financial inclusion

2017 2018 2019


0 1 2 3 4

Note: Sample of 66 central banks surveyed by BIS. Note: 1 = not so important; 2 = somewhat important; 3 = important; and 4 = very important.
Sample of 66 central banks surveyed by BIS.
Source: BIS
Source: BIS

PBOC likely one of the first central banks to issue a CBDC


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The PBOC is leading progress globally in developing a CBDC, starting on-the-ground


testing of its digital currency system (Exhibit 5), known as DC/EP (Digital
Currency/Electronic Payment) this year. Research started as early as 2014 and by 2015 a
prototype had been devised. By mid-2020, several Chinese banks had tested the mobile
app internally. Although no official launch timeline has been provided, pilot testing has
already started in four cities (Shenzhen, Suzhou, Xiong’an, and Chengdu) and digital
currency will feature at the 2022 Winter Olympics in Beijing. As of early October, it was
reported that the PBOC opened 113,000 consumer digital wallets and nearly 9,000
corporate wallets in its pilot programs, with DC/EP already used for more than RMB 1.1
bn worth of transactions. If its pilot programs are successful, the PBOC may be one of
the first central banks globally to issue a CBDC.

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Exhibit 5: The PBOC has been researching CBDC as early as 2014, on-the-ground testing has already started in four cities

Source: PBOC, Caixin, Xinhua

Key central bank considerations in issuing a digital currency


The underlying benefits of CBDCs are generally policy goals that central banks aim to

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Goldman Sachs China Financial Services

achieve in the design process, while the concerns are generally risks they are trying to
avoid. Benefits include:

n Competition with other currencies. There have been numerous discussions on


how cryptocurrencies may influence financial stability by circumventing capital
controls and even replacing legal tender, particularly in emerging economies with
relatively unstable currencies. The most recent challenge to financial sovereignty has
come from Facebook’s Libra program as its large global user base has the potential
to disrupt elements of the financial system. On the other hand, issuing a CBDC can
reinforce the competitiveness of legal tender with other currencies.
n Improving efficiency and reducing costs. The printing and operating cost of cash
can be a considerable expense for an economy, and illicit activities and tax evasion
are facilitated by using cash. Beyond that, the inefficiencies of existing domestic and
cross-border payment systems (as evidenced by high cost and slow speed) suggest
significant room to improve. A CBDC can be an efficient and low-cost alternative to
existing payment methods.
n Promote financial inclusion: According to the World Bank, the unbanked
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population (>20%) in some emerging economies is much higher than in developed


countries (<10%, Exhibit 13), which could explain why emerging economies attach
greater importance to financial inclusion when considering CBDC issuance than
developed economies (Exhibit 4). For them, the CBDC can act as another
supplement to bank payments in addition to Third Party digital wallets.
n Enhancing the status of an international currency. As a cross-border payment
instrument, a CBDC can be used to enhance the international status of the country’s
currency, although this is essentially driven by other political and economic
conditions.

Central banks have noted several risks around CBDC issuance:

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n Lack of adoption: If the CBDC payment system is not competitive with existing
payment instruments, a lack of adoption may impair central bank credibility.
n Operational & security risks: The risk of theft, double-spending (spending the same
money on separate occasions), counterfeiting or system-wide instability are yet to
be fully tested in the real world.
n Bank disintermediation: Since CBDC is legal tender like cash and is backstopped
by central banks, it may appear safer than a bank deposit, resulting in a bank run
during a period of financial stress.
n Immature technology: The use of new technologies such as Distributed Ledger
Technology (DLT) is still somewhat immature and there is divergence in terms of
which technology route central banks will use.

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Goldman Sachs China Financial Services

Exhibit 6: Central bank pros and cons in issuing a CBDC


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Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

DC/EP will eventually replace cash


The PBOC has repeatedly emphasized that key objective of its DC/EP will be to act as
“a substitution for cash (M0)”. In issuing a CBDC the PBOC to is looking to:

1. Protect monetary sovereignty, which faces challenges from other digital currencies

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(such as Libra);
2. Improve the efficiency of the current digital payment system and reduce the cost of
using cash.

With the key objective of cash substitution in mind, we think a DC/EP will need to
incorporate the following features to reduce the social cost of physical cash while
retaining its benefits (Exhibit 7):

n A certain level of anonymity. A DC/EP account should be independent of bank


accounts (for small payments at least) to protect user privacy.
n Enable “dual offline” payments to This would replicate cash’s function as a way of
transacting in an environment without internet access or network connectivity.
n Widely accessible. The entry barrier to using digital currency should be as low as
the cost of owning a smart phone to ensure the financial inclusion of unbanked
citizens.
n Ease of use. The design of a DC/EP app should be straightforward to ensure easy
and rapid adoption.

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Goldman Sachs China Financial Services

Exhibit 7: Using a CBDC to replace physical cash may help reduce its social cost while retaining its benefits

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

In a broader sense, successfully launching a DC/EP system in China will also require:

n Early and committed preparation of the PBOC. It has been six years since the
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PBOC launched DC/EP research and three years since it established a specialized
institute. Per media reports, as of Feb 2020 the PBOC has filed more than 80
patents related to a DC/EP system and its DC/EP technology has gone through
multiple rounds of review and testing, suggesting it may soon be feasible both
theoretically and practically.
n High adoption of digital payments among Chinese residents. According to a
survey by Deloitte, China has the highest smartphone in-store and public transport
payment penetration among major countries (Exhibit 8), theoretically making it
easier for DC/EP to be accepted by customers.
n Economies of scale on a large user base. China’s mobile internet penetration has
risen to 64% of the total population and 76% for urban residents. The ~900mn

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mobile internet population constitutes an unparalleled potential user base, implying
a minimal marginal cost of adoption.

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Goldman Sachs China Financial Services

Exhibit 8: China has the highest smartphone in-store and public transport payment penetration among
major countries, making it easier to adopt a DC/EP system

Smartphone in-store/public transport payment penetration (% of smartphone users)


60%

Smartphone public transport payment penetration


50% Norway
Japan

40% China

India

30%
Sweden South Korea

20%

Australia US
Germany
10% Brazil
UK
Bubble size:
Russia 4G network pentration
France Canada (% of smartphone users)
0%
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0% 10% 20% 30% 40% 50% 60% 70% 80% 90%


Smartphone in-store payment penetration

Note: as of 2017. Sample size: 1,587 per country on average.

Source: Deloitte survey

Exhibit 9: China’s overall smart phone ownership is around the Exhibit 10: ...among smart phone users, 4G network penetration is
mid-range of other countries, although ownership among urban also high
residents is high...

Smartphone ownership %, select countries 4G network pentration, select countries

UK 83% South Korea 88%


Germany 80% China 87%
US 80%
US 79%
Norway 70%
France 78%
Japan 68%
China - urban 76%

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India 64%
South Korea 70% Australia 62%
Russia 66% Sweden 61%
China 64% Canada 56%
France 56%
Japan 57%
UK 53%
China - rural 46% Brazil 44%
Brazil 46% Germany 40%
India 37% Germany 40%
% of total population % of smartphone users

Source: CNNIC, Newzoo Source: Deloitte Survey

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Goldman Sachs China Financial Services

Exhibit 11: China’s mobile internet penetration has increased to Exhibit 12: Online shopping and payments are the most common
64% of the total population and 76% for urban residents internet applications among Chinese residents
China mobile Internet penetration
Total population Urban Rural China Internet application penetration
80% 76%
72%
68% Payment 55%
70% 64% 64%
58% 59%
60% 54% 54% E-commerce 51%
% of total population

49% 50%
50% 45% 46%
43% 41% Online banking 30%
37% 37% 39%
40% 35%
32% 31% 32% Food delivery
29% 28%
26% 25%
30% 23% 22%
17% 18% Travel booking 27%
20% 13% 15%
9%
10% 4% Ride hailing 24%
1%
0% Wealth mgmt. 12%

% of total population

Source: National Bureau of Statistics of China, CNNIC Source: CNNIC, National Bureau of Statistics of China

Exhibit 13: China’s bank account and bank card ownership is lower than developed economies

% of population with bank card and bank account


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110%
Norway
Sweden
100%
Canada
UK
90%
Debit card ownership (% age 15+)

Japan Australia
France
Germany
80% United States
South Korea
70%
China

60% Brazil
Russia

50%

40%

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Bubble size:
India Credit card ownership (% age 15+)
30%
65% 70% 75% 80% 85% 90% 95% 100% 105%
Banked population (% age 15+)

Source: World Bank

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Goldman Sachs China Financial Services

Cash for the 21st Century

China’s DC/EP system will feature (1) two-tier issuance with the PBOC issuing
digital currency for commercial banks to distribute and interface directly with
customers; (2) controllable anonymity, with DC/EP wallets independent of bank
accounts for smaller transactions (no ID verification required); and (3) centralized
processing instead of a distributed ledger, meaning DC/EP will not be a
cryptocurrency. Converting household deposits to DC/EP wallets will not result in
banking-sector disintermediation as the objective of DC/EP is to replace cash and
not deposits, DC/EP wallets will not be paid interest, and most transactions will
be small.

Two-tier issuance will jointly mobilize the PBOC and commercial banks
China’s DC/EP system will be based on two-tier issuance with the PBOC designing,
issuing and clearing digital currency (Exhibit 14) and commercial banks distributing
digital currency and managing the 2C (to-customer) interface (Exhibit 15). In our view
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this model will play to the strengths of each:

n Commercial banks already have the necessary infrastructure (branches, personnel


and apps) that the PBOC can leverage.
n It will mitigate against potential bank disintermediation (consumers shifting deposits
to DC/EP wallets) as digital currency will circulate within the banking system, not
inside bank accounts.
n Single-tier issuance would require the PBOC to directly engage with all customers,
which would be a considerable burden for a single institution to manage given
China’s large and disparate population.
n Commercial banks will be free to choose whatever technology they prefer (such as

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DLT or traditional centralized ledger in DC/EP exchange; QR code of NFC for offline
payments). The PBOC’s technology neutrality stance will create open competition
that encourages innovation, with institutions including the big four banks having
already worked independently on their own applications.

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Goldman Sachs China Financial Services

Exhibit 14: China’s DC/EP framework will be based on two-tier issuance that leverages existing commercial bank channels
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Source: PBOC, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 15: Two-tier issuance will see different entities carry out separate functions

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Source: PBOC, Goldman Sachs Global Investment Research, Gao Hua Securities Research

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Goldman Sachs China Financial Services

Independent DC/EP wallet ensures anonymity, up to a point


To replicate the anonymity of physical cash, DC/EP wallets will be separated from
traditional bank accounts and other real-name digital wallets, at least for smaller
transactions. This is defined as a “loosely coupled account link” as distinct from
“tightly coupled account links” that are part of current bank accounts:

n Users can set up an independent DC/EP wallet on a mobile phone by downloading


the app. This would not necessarily require an identity to be disclosed or verified.
n Users can exchange cash for digital currency in their DC/EP wallet by direct transfer,
but certain caps on wallet balance and transaction value may apply. Disclosing
personal information or binding a bank card to the DC/EP wallet would enable the
user to obtain a higher quota.
n To charge a DC/EP wallet, the user can bind it with a bank account and convert
DC/EP from bank deposit or other means of digital money.
n There will no need to verify the digital wallet holder’s identity for small
payments, allowing the user to remain anonymous to the counterparty as well as
to banks. The PBOC has not yet released details about the threshold for small
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payments (for users to be anonymous when making a payment) but recent testing
by China Construction Banks on a DC/EP app had set a range of balances/payment
caps for different types of wallets (see Exhibit 22).
n To ensure payment integrity and mitigate against potential money laundering, the
system will require linking to a bank account and identity verification for larger
transactions. The PBOC may also undertake big-data supervision of digital currency
transactions.

a2810045d5314637bdba4864b34fcf51

17 November 2020 17
Goldman Sachs China Financial Services

Exhibit 16: DC/EP wallets will be incorporated into bank mobile apps but separated from bank accounts (for smaller transactions)
For the exclusive use of MEGAN.RILEY@GS.COM

Source: PBOC, Goldman Sachs Global Investment Research, Gao Hua Securities Research

DC/EP will not be a cryptocurrency


Contrary to the popular opinion, China’s DC/EP system will not be built on distributed
ledger technology (DLT, or blockchain), and therefore, strictly speaking, will not be a
“cryptocurrency”. Instead, DC/EP will be built on a centralized ledger with all
transactions be processed at the PBOC.

One of the key limitations of DLT is its slow processing speed, with a bitcoin system

a2810045d5314637bdba4864b34fcf51
only able to process 7 transactions per second (Exhibit 17). Libra has proposed using a
hybrid structure combining both decentralized and centralized exchanges but its
processing speed is only 1,000 transactions per second. In contrast, NetsUnion
(introduced by the China banking regulator in 2017 as a clearing house between third
party providers and banks) processed 92,000 transactions per second during the peak
hour of the “double eleven” e-commerce festival in 2018.

Cryptocurrencies are also subject volatile underlying values (Exhibit 18), token theft,
evasion of foreign exchange controls, and money laundering. The current design of
China’s DC/EP aims to avoid these shortcomings. Notwithstanding, DC/EP will
incorporate some features of cryptocurrencies, such as digital payments, a certain
degree of anonymity, and independence from bank accounts.

Although DLT will not be used in the core architecture of China’s DC/EP, the PBOC has
indicated that it could be applied in other areas of the DC/EP system:

1. DC/EP verification. The PBOC may establish an “online currency detector” built on
DLT for customers to confirm authenticity. Such a verification ledger would be

17 November 2020 18
Goldman Sachs China Financial Services

separate from the DC/EP issuance database to protect the core registration
database, while at the same time enhancing the credibility of verification.
2. Wholesale payments. Similar to the Bank of Canada’s Jasper project, Singapore
MAS’ Ubin project, and the ECB-BOJ’s Stella project, the PBOC may look further
into DLT applications in wholesale payments, which have less demanding
processing speeds than retail payments. As DLT performance is still evolving, this is
still at an experimental stage.

Exhibit 17: Centralized payment systems have vastly superior Exhibit 18: The underlying value of cryptocurrencies has been
processing speeds than DLTs extremely volatile

Price of bitcoin and litecoin


Processing speed of different payment networks
Bitcoin Litecoin (RHS)
China Netsunion
25,000 350
92,000
Visa 24,000 300
20,000
Ripple 1,500 250
Libra 1,000 Payment systems 15,000

$ per unit

$ per unit
200
Paypal 193
10,000 150
Bitcoin Cash 60
100
Litecoin 56 5,000
For the exclusive use of MEGAN.RILEY@GS.COM

Cryptocurrencies 50
Dash 48
Ethereum 20 0 0

Jan-17

Jul-17

Jan-18

Jul-18

Jan-19

Jul-19

Jan-20

Jul-20
Mar-17

Sep-17

Mar-18

Sep-18

Mar-19

Mar-20
Sep-19
May-17

May-18

May-19

Nov-19

May-20
Nov-17

Nov-18
Bitcoin 7

Transactions per second

Note: China Netsunion data was peak data recorded in the 2018 “double eleven” e-commerce Source: Bitcoin, GDAX
festival.

Source: howmuch.net, PBOC

DC/EP is basically cash you can’t see or touch


To compare DC/EP with other forms of money, we refer to IMF’s taxonomy framework
of four attributes: nature, value, backstop, and technology (Exhibit 19):

n Nature: An object as opposed to a claim. Using an object, a transaction is settled

a2810045d5314637bdba4864b34fcf51
immediately as long as the parties deem the object to be valid. In contrast, a
payment using a claim transfers ownership of a claim from one person to another,
such as debit card or a third party payment digital wallets.
n Value: A unit of account rather than fixed/variable value. The key question when
classifying a claim is whether redemption of the claim will be at a fixed or variable
value. When classifying object-based means of payments (such as DC/EP and cash),
the key question is whether denomination will be in a domestic unit of an account or
their own.
n Backstop: Central bank rather than private. Deposit insurance policy requires bank
deposits to be partly backstopped by the government and partly by the bank. DC/EP
and cash are fully backed by the central bank.
n Technology: Centralized rather than decentralized. DC/EP uses a centralized ledger
whereas cash and cryptocurrencies are decentralized as transactions are conducted
on a P2P level.

Based on these four attributes, cash is the closest comparable to DC/EP, consistent with
the intent and design of the PBOC.

17 November 2020 19
Goldman Sachs China Financial Services

Exhibit 19: DC/EP differs from other forms of money in nature, value, backstop and technology

Source: IMF, Goldman Sachs Global Investment Research, Gao Hua Securities Research
For the exclusive use of MEGAN.RILEY@GS.COM

Exhibit 20: Traditional payment methods vs Digital Currency: DC/EP will use a centralized ledger to process transactions and is separate
from banks accounts (for smaller transactions)

a2810045d5314637bdba4864b34fcf51
Source: PBOC, Libra, IMF, Goldman Sachs Global Investment Research, Gao Hua Securities Research

DC/EP will have a limited impact on bank balance sheets


In a two-tier issuance framework, households will exchange DC/EP for deposits (or
cash) from commercial banks before banks exchange DC/EP with the PBOC. The chart
below illustrates the effect when commercial bank depositors convert a notional Rmb
1mn deposit into digital currency (Exhibit 21):

n To obtain DC/EP, a commercial bank will need to exchange a deposit reserve with
the PBOC. On the asset side of the commercial bank, deposit reserves would
decrease by Rmb 1mn and DC/EP would increase by Rmb 1mn.
n At the same time, on the liability side of the PBOC, reserves would decrease by
Rmb 1mn and DC/EP would increase by Rmb 1mn.

17 November 2020 20
Goldman Sachs China Financial Services

n As depositors convert a Rmb 1mn deposit to DC/EP, commercial banks’ DC/EP


assets would decrease by Rmb 1mn, and liabilities to the household would decrease
by the same amount.

Net, households exchanging cash for digital currency will have the same effect on bank
balance sheets as a cash withdrawal.

n If deposits are converted into digital currency, DC/EP (on the asset side) and
deposits (on the liability) would be reduced by side by the same amount, therefore
contracting bank balance sheets.
n If cash in circulation is converted into digital currency, there will be no change to
commercial bank deposit reserves or balance sheets.

As the PBOC has repeatedly emphasized that DC/EP will only replace M0 (as opposed
to M1 and M2), we expect only a minimal impact on bank balance sheets. In addition,
the PBOC will manage the amount of DC/EP issued at the macro level to maintain
stability in the financial system.
For the exclusive use of MEGAN.RILEY@GS.COM

Exhibit 21: Converting a notional Rmb 1mn deposit into digital currency would have the same effect on bank balance sheets as a cash
withdrawal

Source: PBOC, Goldman Sachs Global Investment Research, Gao Hua Securities Research a2810045d5314637bdba4864b34fcf51

Negligible risk of DC/EP disintermediating banks


The PBOC may need to implement certain rules to mitigate the risk of funds flowing out
of bank deposits and into DC/EP, particularly in times of financial stress:

n No interest payments: The PBOC has already indicated that DC/EP will not pay
interest. With China’s risk free rate still at c.3% (the government bond yield; Exhibit
23), the current yield spread may also curb flows into DC/EP. Furthermore, the PBOC
could charge fees to enable a negative interest rate on DC/EP if necessary.

17 November 2020 21
Goldman Sachs China Financial Services

n Caps on payments/balance: Alternatively, the PBOC could restrict the amount of


DC/EP that households can hold using caps on DC/EP wallets. (China Construction
Bank’s test DC/EP had a range of balance/payment caps based on different types of
digital wallets, see Exhibit 22). As DC/EP is currently designed for small personal
payments, a cap can be set at a level that is adequate to meet general consumption
needs.
n As previously discussed, in China’s two-tier issuance framework, commercial
banks will be jointly mobilized to participate in digital currency circulation and
operation, further limiting the risk of disintermediation.

Exhibit 22: China Construction Banks test DC/EP app set Exhibit 23: With China’s risk free rate still at ~3%, the yield spread
balance/payment caps on different types of DC/EP wallets may curb flows into DC/EP
10y gov’t bond yield
China US Japan Germany
5%

4%

3%
For the exclusive use of MEGAN.RILEY@GS.COM

2%

1%

0%

-1%
Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20
Oct-13
Feb-14

Oct-14
Feb-15

Oct-15
Feb-16

Oct-16
Feb-17

Oct-17
Feb-18

Oct-18
Feb-19

Oct-19
Feb-20
Source: CCB Source: Wind

a2810045d5314637bdba4864b34fcf51

17 November 2020 22
Goldman Sachs China Financial Services

Petty cash payments and red packets to start

In the early stages, DC/EP will primarily facilitate small payments for consumables
such as meals, groceries and transport. However, as safety, security and
functionality improve over time, applications will expand to larger and more
complex, value-added services such as traceable government subsidies and
cross-border payments.

Near-term application: Small consumption payments


n Description: DC/EP will be primarily used for small value consumption, functioning
in the same way as cash. Payments will typically be conducted at the point of sale,
such as restaurants, retailers and on transport. DC/EP may also be used for online
consumption such as e-commerce, food delivery, and ride hailing.
n How it would work:
a. For offline payments, customers will scan a QR code from the merchant or let
For the exclusive use of MEGAN.RILEY@GS.COM

the merchant scan their QR code on the DC/EP app. For online payments,
customers can make payments directly on a pop-up screen (Exhibit 25).
b. The DC/EP payer app will send a query that will be verified and confirmed by
the PBOC.
c. The PBOC will make the transfer from the payer account to the payee account
and send a notification to the merchant.
n Comparison with existing payment methods: The user experience will be similar
to paying with digital wallets provided by Third Party Payment providers and banks,
except that the user will remain anonymous when making the payment.
n Outlook: In the near-term we expect small value payments to become the primary
application for DC/EP transfers.

a2810045d5314637bdba4864b34fcf51

17 November 2020 23
Goldman Sachs China Financial Services

Exhibit 24: Offline consumption payments will be the primary application for DC/EP
For the exclusive use of MEGAN.RILEY@GS.COM

Source: PBOC, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 25: How to pay with a DC/EP digital wallet

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research a2810045d5314637bdba4864b34fcf51

Near-term application: “Dual-offline” transfers


n Description: Another notable feature of DC/EP akin to cash is offline transfers of
small P2P (peer-to-peer) payments. NFC (Near Field Communication) technology
enables short-range communication between mobile devices without network
connectivity.
n How it would work: Using peer-to-peer transfers as an example:
a. When the payer and payee are near each other, they can open their DC/EP

17 November 2020 24
Goldman Sachs China Financial Services

wallets simultaneously to make a transfer.


b. The transfer results will appear on their apps in real time.
c. When wireless signals are accessible, DC/EP wallets will update the payment
info with PBOC, and the payee can spend the money received.
n Comparison with existing payment methods: A significant drawback to existing
payment methods is that they generally cannot work in places with little or no
wireless signals, such as in subways, mountainous areas and airplanes. The ability
for DC/EP wallets to operate independent of network connectivity is unique
and rarely seen in other digital payment methods.
n Outlook: We expect DC/EP’s dual offline feature to be a point of difference that will
enable it to be used in areas with insufficient coverage or in extreme situations such
as power shutdowns and network interruptions.

Exhibit 26: “Dual offline” transfers enable payments in environments without mobile internet access or network connectivity
For the exclusive use of MEGAN.RILEY@GS.COM

a2810045d5314637bdba4864b34fcf51
Source: PBOC, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Long-term application: Traceable special subsidies


n Description: Central government subsidies to the private sector are usually paid
through the bank accounts of local provincial, municipal and district governments.
The effectiveness of these funds relies on local governments, but there is usually a
time lag in reporting and the funds could be used for unintended purposes. A smart
tracking application could enable real-time transaction tracking, which would enable
more direct monitoring of transactions and potentially better control of fraud, money
laundering and tax avoidance. A subsidy can even be remitted directly to an
individual’s DC/EP wallet using an individual’s ID.

17 November 2020 25
Goldman Sachs China Financial Services

n How it would work


a. A commercial bank would design a smart app to track the real-time flow of
DC/EP. When the funds reach each level of a local government’s DC/EP
account, the app will notify the central government.
b. When the subsidy reaches the end-receiver, the tracking function will be
turned off to ensure the user’s privacy.
n Comparison with existing payment methods: The current bank account payment
system cannot track subsequent fund flows, although commercial banks may devise
such functions in the future specifically tailored to monitor subsidies.
n Outlook: This is a hypothetical application suggested by the PBOC that we think is
more likely to be used once DC/EP usage becomes prevalent. In the meantime, an
identity authentication system could first be set up to avoid fraudulent claims.

Exhibit 27: The central government could use DC/EP to track the flow of special subsidies in real time
For the exclusive use of MEGAN.RILEY@GS.COM

Source: PBOC, Goldman Sachs Global Investment Research, Gao Hua Securities Research

a2810045d5314637bdba4864b34fcf51
Case study: DC/EP’s “red packet” testing
In this section we compare DC/EP’s “red packet” testing in Shenzhen with WeChat’s “red packet”, which
was first launched in 2014. Despite their differences, a DC/EP “red packet” application could be an
effective promotional tool and be used to distribute government subsidies to citizens.

Tencent’s WeChat “red packet” a killer app promoting payment


In 2014, WeChat Pay launched “red packet” – a digital twist on China’s traditional cash-filled red envelope
that people give each other during festivals. WeChat users were able to gift money up to Rmb200
(c.US$29) to friends and family – with recipients even competing with each other to grab a red packet
when they were less than the number of people in a group chat (Exhibit 28). The launch went viral with
around 16mn red packets exchanged on Chinese New Year’s Eve in 2014. A year later, that number jumped
to 1 billion, surging to 14bn in 2017. Thanks to its “red packets”, WeChat Pay rapidly expanded its user base
in a short period of time. By the end of 2014, more than 100mn users had linked their bank accounts with
WeChat Pay and QQ Wallet (Tencent’s other payment system, which is tied with its QQ messenger

17 November 2020 26
Goldman Sachs China Financial Services

program). In the 2019 Spring Festival, c.800mn users distributed or received WeChat’s “red packet”, or
nearly 60% of China’s population, demonstrating the incredible penetration of WeChat payments.

Exhibit 28: How to snatch a WeChat “red packet”


For the exclusive use of MEGAN.RILEY@GS.COM

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

A DC/EP “red packet” could be used to distribute government subsidies


In October 2020, the Shenzhen government launched a public test of DC/EP, distributing “red packets”
valued at Rmb200 ($US30) to 50,000 residents to be used in 3,000 local retailers and restaurants.

1. To apply for the red packet, Shenzhen residents submit personal information on the web page or app of
the Shenzhen government;
2. 50,000 users (among 19mn applicants, a 0.3% success rate) to were randomly selected to participate;

a2810045d5314637bdba4864b34fcf51
3. Selected users can download the DC/EP app and open a DC/EP digital wallet from one of the big four
banks without having a bank account at that bank, unless they want to pay above Rmb200 for any given
consumable or if they want to charge their DC/EP wallet.
4. Using the red packets, users can make payments at 3,000 retailers and restaurants that have enabled
DC/EP payments, comprising most of Shenzhen’s popular consumption spots.

Highlights from the DC/EP “red packet” test


n The test confirms that China’s DC/EP system will be a “two-tier” issuance, with the PBOC designing,
issuing and clearing DC/EP while banks will operate the digital wallets.
n The DC/EP “red packet” is different from WeChat in that the former is a means of consumption
payment while the latter is derived from instant messaging. That said, both are promotional tools for
these new payment methods.
n COVID has increased China’s urgency to develop a CBDC. Amid a pandemic or other need, DC/EP “red
packets” could be used to distribute government payments to individuals as they are easy to use and

17 November 2020 27
Goldman Sachs China Financial Services

widely accessible, with no bank necessary.

Source: Company data, mpaypass.com.cn, Caixin, Sina

Long-term application: Cross-border payments


n Description: Cross-border transactions remain expensive and are relatively slow to
execute. In its Cross-border E-commerce Pilot Zone Plan, the Xiong’an District
government indicated that it would encourage transactions in Rmb and test DC/EP
cross-border payments, possibly suggesting a future direction.
n How it would work: With only limited information from the PBOC thus far, we
would expect payments to initially be conducted in Rmb only and not involve foreign
exchange. Regulatory oversight would be required to ensure control over anti-money
laundering and control of capital flows.
n Comparison with existing payment methods: According to the Financial Stability
For the exclusive use of MEGAN.RILEY@GS.COM

Board (FSB), cross-border payments are broadly classified as: (a) correspondent
banking; (2) single platform; (3) interlinking; and (4) peer-to-peer (Exhibit 30). The
correspondent bank model (SWIFT) is the dominant means of payment for FX
conversion, whereas Libra and DC/EP are more like single platform payment
methods. According to the World Bank, cross-border remittance fees are still as high
as ~7% despite a decline over the last few years (Exhibit 29). With 34% of the cost
of an international payment related to Nostro trapped liquidity (Exhibit 31), DC/EP
would reduce transaction costs and increase speed and convenience.
n Outlook: DC/EP cross-border payments have significant long-term potential, not
only because they would be cheaper and quicker, but also because they could
promote Rmb internationalization. However, at this stage, we expect DC/EP to be

a2810045d5314637bdba4864b34fcf51
limited to domestic payments only given the PBOC’s focus on DC/EP eventually
replacing cash.

Exhibit 29: Cross-border remittance fees still as high as ~7% Exhibit 30: There are four models of cross-border payment
despite a decline over the past few years

Average cost of sending US$200 from G20 countries

9.4%
9.2% 9.2%
9.0%
8.9%

8.1%
8.0%

7.6%
7.5%

7.2% 7.2%
7.1%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: World Bank Source: FSB

17 November 2020 28
Goldman Sachs China Financial Services

Exhibit 31: 34% of the cost of an international payment is related to Exhibit 32: The Rmb’s share in SWIFT payments is much lower than
Nostro trapped liquidity China’s share of global GDP

Cost composition of cross-border payment Share of world GDP vs. share in SWIFT payment
Network mgmt.,
Overhead, 3% 2% Region share of GDP Currency share in SWIFT payment
Payment
operations, 8%
39%
Nostro-vostro 36%
liquidity, 34%

Compliance, 12%
24%

s16% 16%

FX cost, 14%
6% 7%
3% 3%
Claims and 2%
treasury
operations, 27%
US/US$ China/Rmb Euro zone/Euro Japan/JPY UK/GBP

Source: McKinsey Source: IMF, World Bank, SWIF

Long-term application: Transforming P2P lending


n Description: Under the traditional custodian account model, funds at P2P lending
For the exclusive use of MEGAN.RILEY@GS.COM

platforms face risk of potential misuse, and lack effective means to ensure security
and transaction consistency. The PBOC described a DC/EP-based wallet application
that eliminates the custodian account of the P2P platform, and uses joint signatures
to monitor the flow of funds. In this way, P2P lending platforms would play a more
transparent and regulated role as value-added service providers instead of a funding
intermediary.
n How it would work:
a. The P2P lending platform would issue a smart contract based on DC/EP.
b. The borrower would submit an order and lenders would bid for the order.
c. The smart contract would match the two parties and the DC/EP system would

a2810045d5314637bdba4864b34fcf51
transfer money directly from the lender’s account to the borrower’s account.
d. For smart contracts with targeted borrowing purposes, the borrower may
require the lender’s digital signature to make the DC/EP transfer effective so
that the lender can avoid the potential misuse of funds.
n Outlook: In our view this is more of a hypothetical model that may be used at some
point, but would require the coordination of individual credit systems, among other
things, to avoid potential lending fraud.

17 November 2020 29
Goldman Sachs China Financial Services

Exhibit 33: Transformation of P2P lending using DC/EP

Source: PBOC, Goldman Sachs Global Investment Research, Gao Hua Securities Research
For the exclusive use of MEGAN.RILEY@GS.COM

Exhibit 34: P2P monthly lending balance has continued to fall since peaking in May 2018
P2P lending platform No. and outstanding balance

P2P lending balance No. of operating P2P lending platforms (RHS)

1,200 4,000

3,500
1,000
3,000
800
2,500
Rmb bn

600 2,000

1,500
400
1,000

a2810045d5314637bdba4864b34fcf51
200
500

0 0
Jan-14

Jan-15
Jul-14

Jul-15

Jan-16
Mar-16

Jul-16

Jan-17
Mar-17

Jul-17

Jan-18

Jul-18

Jan-19

Jul-19
Mar-14

Mar-15

Nov-17

Mar-18

Nov-18

Mar-19
Nov-14

Nov-15

Nov-16

Nov-19
Sep-15

Sep-16

May-18

May-19
May-14

Sep-14

May-15

May-16

May-17

Sep-17

Sep-18

Sep-19

Source: Wind

Long-term application: Counter-cyclical loan issuance


n Description: The PBOC has proposed a theoretical framework of central bank
lending based on a CBDC, which could help address inefficiencies in policy
transmission, difficulties in counter-cyclical control, flow of currency away from the
real economy to the virtual economy, and inadequate management of policy
expectations.

n How it would work:


o As shown in Exhibit 35, the PBOC would incorporate three contingents
related to loan issuance in the activation of CBDC lending to banks, including

17 November 2020 30
Goldman Sachs China Financial Services

time (what time period), sector (which sector) and loan rate (what price). The
economic state contingent (if the economy is overheated) would determine
the interest rate when banks return the lending to the PBOC.
o The first three contingents would realize real-time transmission of
monetary policy, enable the targeted supply of money and prevent currency
from circulating beyond the real economy. The economic state contingent
would thereby make it possible to exercise counter-cyclical control of
currencies.
n Outlook: We view counter-cyclical loan issuance as more of a theoretical discussion
at present given the uncertainties of such a policy outcome.

Exhibit 35: Counter-cyclical loan issuance based on programmed contingents


For the exclusive use of MEGAN.RILEY@GS.COM

Source: PBOC, Goldman Sachs Global Investment Research, Gao Hua Securities Research

a2810045d5314637bdba4864b34fcf51

17 November 2020 31
Goldman Sachs China Financial Services

China already on the path to becoming cashless

Use of cash at the point of sale and the M0 to M2 ratio in China is already among
the lowest globally. Even in a cashless environment, DC/EP will have attractive
features relative to current fintech offerings including anonymity, financial
inclusion, the ability to operate outside of wireless networks, and
interconnectivity among different payment methods. Successful adoption will
require promotion from the government, which has demonstrated the
wherewithal to drive a rapid uptake. As the second pillar of the DC/EP system,
commercial bank networks will likely be mobilized in this process.

In ten years we expect DC/EP to reach 1 billion addressable users, Rmb1.6tn


(US$240bn) in issuance, Rmb19tn (US$3tn) in annual Total Payment Value (TPV)
and Rmb162bn (US$24bn) in annual cost savings — although our forecasts could
differ from actual figures given limited details, including the timing of a public
launch. While direct cost savings to the financial system from replacing physical
cash with digital currency will likely be small relative to bank earnings and GDP,
For the exclusive use of MEGAN.RILEY@GS.COM

DC/EP will reduce the invisible cost of cash and have a significant impact on
China’s payment system.

China at forefront of becoming cashless


Several important demographic and technological features suggest China will be one of
the first countries globally to become cashless:

n The use of cash at point of sale in China is lower than most countries, according to
global surveys globally (Exhibit 36)
n China’s M0 to M2 ratio is among the lowest of major economies (Exhibit 37) and has
been steadily declining over the years, notwithstanding cash hoarding amid COVID

a2810045d5314637bdba4864b34fcf51
(Exhibit 38), which has been consistent with the experience of other countries
during the pandemic. Although Chinese society is steadily going cashless, demand
for cash still exists, especially during times of stress
n Mobile payments are mainly driven by digital wallets provided by fintech firms, while
growth in ATMs and bank card POS terminals has become negative in recent years
(Exhibit 39).
n Banking services are also going digital, with the proportion of services processed by
Chinese banks on electronic devices rising 96% amid COVID-19 (Exhibit 40). The
cost-to-income ratio of China banks declined from 2011 to 2015 thanks to the digital
transformation of the payments system (Exhibit 41).

17 November 2020 32
Goldman Sachs China Financial Services

Exhibit 36: The use of cash at the point of sale is much lower in Exhibit 37: China’s M0 to M2 ratio is among the lowest globally
China than other major economies

Surveyed share of cash transactions per country at points of sale M0/M2 ratio, select countries

Spain 87% Switzerland 67%


Argentina 59%
Italy 86% United States 26%
Russia 21%
Germany 80% Saudi Arabia 19%
Mexico 19%
France 68%
Canada 18%
UK 42% Brazil 12%
Indonesia 11%
Australia 37% Japan 10%
South Africa 9%
US 32% Netherlands 8%
Sweden 20% Singapore 7%
Norway 6%
China 14% South Korea 4%
China 4%
South Korea 14% United Kingdom 3%
% by number of transactions

Note: As of 2018. The surveys may vary in scope and researched population. As of Jun. 2020

Source: ECB, Federal Reserve, BOK, Payments UK, RBA, PwC Source: Tradeeconomics

Exhibit 38: China’s M0/M2 ratio has been declining, although there Exhibit 39: ATM and bank card POS machine growth has turned
was cash hoarding during COVID negative in recent years, likely as a result of increasing digital
For the exclusive use of MEGAN.RILEY@GS.COM

wallet payments
M0, M2 growth and M0/M2 ratio ATM and POS machine growth
M0/M2 (RHS) M2 yoy M0 yoy ATM growth yoy Bank card POS machine growth yoy
30% 10% 70%
60%
25% 9%
50%
8%
20% 40%
7% 30%
15%
6% 20%
10%
a 10%
5%
0%
5% 4%
-10%
0% 3% -20%
Feb-14

Feb-19
Sep-01

Sep-04

Sep-07

Sep-10

Sep-13

Sep-16

Sep-19

Aug-11

Sep-13

Aug-16

Sep-18
Jun-02

Jun-05

Jun-08

Jun-11

Jun-14

Jun-17

Jun-20

Mar-11

Mar-16
Jan-12
Jun-12

Jul-14

Jan-17
Jun-17

Jul-19
Dec-00

Mar-03
Dec-03

Mar-06
Dec-06

Mar-09

Mar-12

Mar-15
Dec-09

Dec-12

Dec-15

Mar-18
Dec-18

May-15

May-20
Nov-12

Dec-14

Oct-15

Nov-17

Dec-19
Apr-13

Apr-18

a2810045d5314637bdba4864b34fcf51
Source: Wind Source: PBOC

Exhibit 40: The % of services processed by Chinese banks on Exhibit 41: The cost-to-income ratio of China banks declined from
electronic devices rose to 96% amid COVID-19 2011 to 2015 thanks to the digital transformation of the payments
system

Banks off-counter business processing rate China banks cost-to-income ratio

96% 33.4%
33.1%
32.9%

90%
89% 31.6% 31.6% 31.7%
88%
31.1%
30.8%
84% 30.6%

2016 2017 2018 2019 Feb. 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: CBIRC Source: CBIRC

17 November 2020 33
Goldman Sachs China Financial Services

Why would DC/EP be necessary in an already cashless society?


Benefits of DC/EP vs. incumbent payment systems
While China is already close to becoming a cashless society, DC/EP would still provide
additional value to users—an essential factor for its public adoption. DC/EP wallets have
several notable advantages over their fintech counterparts (Exhibit 42):

n Anonymity: DC/EP users can remain anonymous when making small transactions
and do not need to open real-name bank accounts. However, fintech digital wallet
users must submit ID information before making payments.
n Offline payments: DC/EP can support “dual offline” payments (i.e., both parties can
transact while offline) using near-field communication technology. This is particularly
useful when there is no wireless signal or network, such as in rural areas,
mountainous regions or on an aircraft or subway. Fintech digital wallets do not
currently support this feature.
n Interconnectivity among different payment methods: Currently, fintech digital
wallets and bank accounts are separate from each other (Exhibit 43), and therefore
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users need to maintain positive balances in several accounts to continue


transacting. In contrast, DC/EP will be linked to various types of payments
platforms, meaning users would only need to keep money in one DC/EP account to
make daily payments.
n Programmability: DC/EP can support programmed smart contracts to achieve
special functions such as traceability, which can be used in distributing special
government subsidies. Currently, fintech digital wallets are account-based, and do
not offer such a function.
n Fees: Withdrawing cash funds from fintech digital wallets to banks incurs a 0.1%
fee. We expect DC/EP transfers to be free of charge since it will be regarded as a
public service provided by the government.

a2810045d5314637bdba4864b34fcf51
n Inclusion: To set up a fintech digital wallet, a customer must have a bank account.
However, users do not require a bank account to make DC/EP payments, arguably
making DC/EP wallets more inclusive and accessible than fintech digital wallets.
n Legal status: A fintech digital wallet is a claim on the company. Although the client
reserve is now 100% deposited at PBOC, there is still a risk of fund
misappropriation, which is why the PBOC aims to establish a deposit insurance fund
for payment institutions (Payment Industry Security Fund). In contrast, DC/EP is
legal tender backed by the PBOC with no default risk.

Increasing DC/EP penetration beyond a certain point may be challenging


As incumbents in China’s digital payment system, fintech digital wallets have several
advantages over DC/EP in other respects:

n First mover advantage: the user experience for DC/EP in a typical point-of-sale
payment will be similar to current fintech wallets (e.g. both using QR code
scanning). However, the penetration of fintech payment platforms is very high, and
they have established a strong presence in key channels such as offline point-of-sale

17 November 2020 34
Goldman Sachs China Financial Services

and e-commerce. As a latecomer to China’s digital payment system, DC/EP will


need to penetrate existing channels, and would likely rely on some degree of
government promotion.
n Diversified products and services: payments are embedded in other applications,
such as e-commerce, instant messaging, food delivery and local business reviews,
all of which increase user stickiness. DC/EP wallets will be initially limited to
payments, but can be installed in bank and fintech apps to access such services.

Exhibit 42: DC/EP wallets enjoy several key advantages over existing fintech digital wallets (more stars implies better capability)
Fintech digital
Fintech digital wallets
wallets DC/EP
DC
DC/EP
/ EP DC/EP
DC
DC/EP
/ EP b
better?
et t er ?
Anonymous for small amount
Anonymity
Anonymity Not anonymous √
transactions

Do not support "double offline


Of
Offline
f lin e p
payment
a ymen t Support "double offline payment" √
payment"

Interconnectivity
Interconnectivity Operate under different accounts Shared account among various apps √

Account based, cannot be May enable smart contract (e.g.


Programmability
Pr
Programmability
ogrammability √
programmed traceable subsidies)
For the exclusive use of MEGAN.RILEY@GS.COM

0.1% withdrawal fees from digital


Fees
Fees No fees charged √
wallet to bank account

Accessibility
Accessibility Need to bind with bank account Do not need a bank account √

Legal st
Legal status
a tu s Claim on the company Legal tender √

Established strong presence offline


Presence
Pr
Presence
esence Need to penetrate existing channels ×
point-of-sale and e-commerce.
Limited to payment primarily, but
Instant messaging, food delivery,
D
Di
Diversified
iversified
versified se
services
r v i c es can be installed in bank and fintech ×
local business review, etc.
apps
Requires ID info verification to set up Requires ID info verification when
Security
Security ×
account making large payment

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

a2810045d5314637bdba4864b34fcf51
Exhibit 43: DC/EP would increase interconnectivity among different payment methods, eliminating the need to maintain positive balances
in several accounts

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

Government has the wherewithal and track record to drive a rapid uptake of DC/EP
Ramping up DC/EP adoption will likely require some form of government promotion. To

17 November 2020 35
Goldman Sachs China Financial Services

that end, the government has had considerable success in promoting other payment
systems. The installation of Electronic Toll Collection units (ETC, see details in case study
below) surged seven-fold in one year and reached a penetration rate of 80% after the
government set installation targets for national banks, which then launched promotional
campaigns to fulfill them. With commercial banks the second pillar of the two-tier
issuance system, we can envisage a scenario where the government mobilizes their
nationwide branches to drive public adoption of DC/EP.

Case Study: ETC installations surge after government mobilizes banks


In China, ETC (Electronic Toll Collection) devices are installed in vehicles to pay highway tolls. Electronic
readers communicate with linked transponders in cars when they drive past, automatically charging the
vehicle, thereby saving time for drivers and the cost of operating toll stations. In 2019, the government
promoted the installation of ETC devices by mobilizing banks, which drove a seven-fold increase in
installations in one year to 116mn units. This is an important example of how the government has the
wherewithal to popularize a new payment system nationwide in a short period of time.
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Why did the government promote ETC?


To increase transport efficiency and reduce logistical costs. The role of ETC may shift towards a national
intelligent transport system for connected cars.

What was the government’s goal at the time?


Full ETC coverage within two years, per Premier Li Keqiang in the Government Work Report in March 2019.
In May 2019, the government set a target of raising the number of installations to over 180mn users by the
end of 2019, more than 80% of registered automobiles, and for more than 90% of vehicles on
expressways to be able to use the ETC system.

What role did the banks play?

a2810045d5314637bdba4864b34fcf51
The government set installation targets for national banks, which then launched promotional
campaigns to fulfill them. Banks also promoted their credit cards integrated with ETC cards. While ETC
installment is already fully subsidized by the government (~Rmb300 per unit), banks offered additional
promotional measures to attract users (typically Rmb 100-200 tolls). There were other discounts—ABC
introduced a service that saw customers get their cars washed for just one yuan ($0.14) if fees paid using
their ETC cards reached a certain amount, while BOC refunded part of its customers’ gasoline charges in
cash if they used the bank’s ETC card. In addition, individual tasks were allocated to local bank
branches, with one local branch staff member tasked with overseeing as many as 100-200 installations in
a few months. Internet service providers also supplied coupons primarily through online channels given
the lack of on-the-ground personnel.

What was the effect?


In December 2019, the Ministry of Transport announced that the government’s goal had been achieved.
192mn ETCs were installed in vehicles, exceeding the original 180mn target. Of that, 116mn were installed
in 2019 alone, a seven-fold increase over 2018.

17 November 2020 36
Goldman Sachs China Financial Services

Source: Ministry of Transport, Xinhua, Caixin, China Daily, Nikkei Asia

Exhibit 44: ETC installments in 2019 surged 7X that of 2018 Exhibit 45: Government promotion and mobilization key to
rapid ETC installments
ETC installment in China
No. of annual ETC installments No. of vehicles with ETCs (RHS)

200 250
192
180 200
160 150
140 77
59 116 100
mn vehiciles

mn vehiciles
120 45
13 25 50
6
100
0
80
-50
60
40 -100
20 18
12 14 -150
20 7
1
0 -200
2013 2014 2015 2016 2017 2018 2019

Source: Ministry of Transport Source: Xinhua, Sina


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US$3tn annual TPV, US$240bn issuance, 1bn users in ten years


As the objective of DC/EP is to replace cash, our forecasts are anchored on the
replacement rate of cash demand over the next ten years as DC/EP steadily becomes
an integral part of the payment system. Direct cost savings may be small relative to
overall bank earnings but the impact of DC/EP to China’s payment system will be
far-reaching, which we discuss in the next section. We acknowledge the amount of
DC/EP to be issued, timeline, adoption rate and application scenarios are uncertain and
subject to regulatory discretion, and therefore the actual amounts may differ from our
forecasts.

a2810045d5314637bdba4864b34fcf51
In ten years we expect (Exhibit 46):

n 1 billion addressable users: We assume the pilot programs (in Shenzhen,


Chengdu, Suzhou, Xiong’an and the 2022 Winter Olympics) will be rolled out
nationwide in three years (2024), and DC/EP will reach a user base of ~1bn, or 70%
of the Chinese population, in ten years. As setting up a digital wallet will only require
a smartphone, our 70% penetration rate is referenced to mobile internet usage in
China (64% of the total population and 76% of urban residents in 2019, Exhibit 11).
n Rmb1.6tn (US$240bn) in issuance: Our baseline assumption is that DC/EP will
substitute 15% of China’s cash base (M0) by 2029, resulting in Rmb1.6tn
(US$240bn) in issuance. Based on the addressable population, this implies an
average DC/EP holding per user of ~Rmb700 in 2021, rising to ~Rmb1,600 by
2029E. Our assumptions are consistent with the initial objective of DC/EP to
facilitate small payments for consumables. By way of comparison, the average
balance per mobile payment user in China is around Rmb2,000, based on Rmb1.6tn
in customer reserves at payment institutions (PBOC) divided by 800mn users
(CNNIC).

17 November 2020 37
Goldman Sachs China Financial Services

n Rmb19tn (US$3tn) in annual Total Payment Value (TPV): We assume payments


with DC/EP will account for 15% of social consumption in ten years (from 7% in five
years). This is based on a 12x turnover rate on Rmb 1.6tn in DC/EP issuance, as we
expect people to leave an average balance of one month’s spending in their digital
wallets. This implies annual TPV of Rmb19tn (US$3tn) by 2029E.
n Rmb162bn (US$24bn) in annual cost savings: We estimate the social cost of
cash is ~Rmb400bn (~US$60bn), equivalent to ~0.4% of GDP (see case study in
the following pages). Of that, we assume banks bear ~40% of that cost, or
Rmb162bn (US$24bn), which equates to 3%/3% of 2019 earnings/expenses. This
implies cost savings for banks (on 15% cash substitution) of ~Rmb24bn per annum,
or ~0.5% of 2019 earnings. A certain portion of the cost associated with cash is
fixed, and we think this will also be the case for DC/EP as it could incur additional
expenses such as R&D.
Net, we think the direct cost savings from using DC/EP instead of cash will likely be
small relative to bank earnings and GDP. Nonetheless, DC/EP will reduce the
invisible cost of cash, such as theft, money laundering, tax evasion, counterfeiting,
and carbon emissions/pollution, not to mention having a significant impact on the
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efficiency of the payment system.

Exhibit 46: DC/EP in ten years: Rmb 1.6tn/US$240bn issuance (based on a 15% substitution rate of M0), Rmb19tn/US$3tn annual TPV (15% of
social consumption)
R&D Testing 4 cities1 Tier-1/2 cities All cities Nationwide
Expected progress
2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E
Basic assumption: cash substitution
Cash base for substitution2 Rmb bn 7,719 7,951 8,189 8,435 8,688 8,948 9,217 9,493 9,778 10,071 10,374
Growth yoy % - 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%
DC/EP substitution rate % - - 0.08% 0.8% 1.5% 3.0% 6.0% 9.0% 12.0% 13.5% 15.0%
DC/EP issuance amount vs. cash balance
DC/EP Rmb bn - - 6 63 130 268 553 854 1,173 1,360 1,556
Growth yoy % - - - 930% 106% 106% 106% 55% 37% 16% 14%
Est. cash balance Rmb bn - - 8,183 8,371 8,557 8,680 8,664 8,639 8,605 8,712 8,818
Growth yoy % - - - 2% 2% 1% 0% 0% 0% 1% 1%
User base

a2810045d5314637bdba4864b34fcf51
Addressable population3 mn - - 44 436 918 1,414 1,418 1,421 1,421 1,425 1,429
Penetration rate % - - 20% 20% 20% 25% 40% 50% 60% 65% 70%
End users mn - - 9 87 184 354 567 711 853 926 1,000
Total population penetration rate % - - 0.6% 6% 13% 25% 40% 50% 60% 65% 70%
Avg. DC/EP holding per user Rmb - - 702 726 709 759 975 1,202 1,376 1,468 1,556
Payment value
DC/EP turnover rate4 % - - 12x 12x 12x 12x 12x 12x 12x 12x 12x
DC/EP TPV Rmb bn - - 74 759 1,564 3,221 6,636 10,253 14,081 16,316 18,673
Avg. DC/EP TPV per user Rmb - - 8,425 8,709 8,514 9,110 11,700 14,426 16,510 17,615 18,673
Social consumption TPV5 Rmb bn 67,525 64,824 73,251 79,111 85,045 90,998 97,368 104,183 111,476 119,280 127,629
Growth yoy % -4% 13% 8% 8% 7% 7% 7% 7% 7% 7%
As % of consumption % - - 0.1% 1.0% 1.8% 3.5% 6.8% 9.8% 12.6% 13.7% 14.6%
Cost savings from DC/EP substitution
Total cash operating cost6 Rmb bn 406 418 430 443 456 470 484 499 514 529 545
Cost savings for PBOC and banks Rmb bn - - 0.3 3.3 6.8 14.1 29.1 44.9 61.6 71.4 81.7
Banks’ cash operating cost6 Rmb bn 162 167 172 177 183 188 194 199 205 212 218
Cost savings for banks Rmb bn - - 0.1 1.3 2.7 5.6 11.6 18.0 24.7 28.6 32.7

Note: 1) Pilot program in Shenzhen, Chengdu, Suzhou and Xiong’an. 2) Includes M0 and DC/EP. 3) Population growth based on our economists’ estimates. Winter Olympics could increase Beijing
population by ~1mn in 2022 per experience of Pyeongchang Olympics. 4) We expect the turnover rate (annual transaction value / average balance) to be 12x assuming the average balance is one
month’s spending. 5) Includes goods & services, assuming service spending is 50% of retail goods sales. Growth rate forecast based on our economists’ forecast of consumer spending. 6) GS estimates.

Source: PBOC, iResearch, National Bureau of Statistics of China, Caixin, Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020 38
Goldman Sachs China Financial Services

Exhibit 47: DC/EP issuance to reach Rmb1.6tn in 10 years (assuming Exhibit 48: DC/EP to penetrate 70% of China’s population in ten
a 15% substitution rate for M0) years

DC/EP issuance amount forecast DC/EP user base and penetration forecast
DC/EP issuance amount Substitution of cash (RHS) End users Total population penetration rate (RHS)
15% 70% 74%
2,000 16%
14% 1,400 65%
1,800 14% 60% 64%
12% 1,556
1,600 12% 1,200 50%
1,360 1,000 54%
1,400 9% 1,000 926
1,173 10% 40% 853 44%
1,200

mn users
Rmb bn

8% 800 711
1,000 6% 34%
854 25%
6% 567
800 600 24%
3% 553 4%
600 13% 354
2% 400 14%
1% 2% 6%
400 0.1% 268 184
0.6%
130 0% 200 87 4%
200 63
6 9
0 -2% 0 -6%
2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E

Pilot Nationwide Pilot Nationwide

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 49: DC/EP payments to account for 15% of total consumption Exhibit 50: The cost savings from not printing cash would increase
in ten years bank earnings by 0.5% in ten years
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DC/EP payment value forecast Cost of cash savings from DC/EP substitution
DC/EP TPV As % of consumption payment (RHS) Cost savings for banks Substitution of cash (RHS)
30 20% 40 15.0% 16%
13.5%
14.6% 35 12.0% 32.7 14%
25 13.7%
12.6% 15% 28.6 12%
30
19 9.0% 24.7 10%
20 9.8%
25
16 10%
Rmb bn

8%
Rmb tn

6.8% 14 6.0% 18.0


15 20
6%
3.5% 10 5% 15
1.8% 3.0% 11.6 4%
10 1.0%
0.1% 7 10 1.5%
0.8% 2%
0% 0.08% 5.6
5 3 5 2.7 0%
2 1.3
1 0.1
0
0 -2%
0 -5%
2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E
2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E

Pilot Nationwide Pilot Nationwide

Source: PBOC, iResearch, Goldman Sachs Global Investment Research, Gao Hua Securities Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research
Research

a2810045d5314637bdba4864b34fcf51
How much does it cost to print the Renminbi each year?
As there is limited disclosure from the PBOC on this issue, we undertake a comparison with the US. After
estimating Rmb12bn (US$2bn) in annual production costs, we estimate the total social cost of printing the
Renminbi for the central bank, commercial banks, households and retailers equates to Rmb400bn
(US$60bn), equal to 0.4% of GDP. Of that, we assume commercial banks bear 40%, or Rmb162bn
(US$24bn). These figures are based on:

1. The annual cost of printing the USD is USD$0.6bn (Exhibit 61), or a printing cost to M0 ratio for the
USD of 0.04% (Exhibit 60).
2. Due to foreign exchange rate differences, China’s M0 volume on the same value is ~7X that of US.
After adjusting for purchasing power differences and lower production costs (Exhibit 60), we estimate a
printing cost to M0 ratio for the Renminbi (as measured in USD) of ~0.16%.
3. By multiplying China’s M0 with the production cost/M0 ratio, we estimate the production cost of
China’s Renminbi is Rmb12bn (~US$2bn) per annum.

17 November 2020 39
Goldman Sachs China Financial Services

4. Based on research by several central banks, we estimate the production cost borne by the PBOC
amounts to 3% of the total social cost of cash. Therefore, we estimate the social cost of cash to be
Rmb400bn (US$60bn, Exhibit 62), or 0.4% of GDP.
5. Of that, we estimate commercial banks bear around 40% (Exhibit 62), equivalent to Rmb162bn
(US$24bn) per year, or 3%/3% of bank earnings/expenses.

Exhibit 51: The currency denomination systems of China and the US are similar
Comparison of US and China currency system
US China
2
Type Denomination Value % Amount % Production cost Denomination
$1 1% 28% 8¢
¥1
$2 0% 3% 8¢
$5 1% 7% 16¢ ¥5
Note $10 1% 5% 16¢ ¥10
$20 11% 21% 16¢ ¥20
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$50 5% 4% 16¢ ¥50


$100 81% 32% 20¢ ¥100
1¢ 2¢
5¢ 7¢ ¥0.1
10¢ 3¢
Coins N/A N/A
25¢ 8¢
50¢ 5¢ ¥0.5
$1 18¢
Note: The US no longer issues bills in larger denominations, such as $500, $1,000, $5,000, and $10,000, but they are still legal tender and may still be in circulation.

Source: Federal Reserve, PBOC, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 52: $100 and $1 notes together account for 60% of total Exhibit 53: ...while in Europe, denominations of >€100 account

a2810045d5314637bdba4864b34fcf51
currency in US circulation by volume for only 17% of total cash volume...

Volume of US cash in circulation by denomination Volume of Euros in circulation by denomination


€ 200, 1% € 500, 4%
€ 5, 10%
$100 note, 32% $1 note, 28%
€ 100, 12%

€ 10, 13%

$2 note, 3%
$50 note, 4%
€ 20, 18%
$5 note, 7% € 50, 42%

$20 note, 21% $10 note, 5%

As of 2019 As of 2014

Source: Federal Reserve Source: ECB

17 November 2020 40
Goldman Sachs China Financial Services

Exhibit 54: ...while in Japan, ¥10,000 notes account for 63% of Exhibit 55: Large denomination notes ($100 and above)
total cash volume represent over 80% of total US currency in circulation by
volume...

Volume of Japanese Yen in circulation by denomination Value of US cash in circulation by denomination


$5 note, 1%
$2 note, 0%
¥500, 2% $1 note, 1%
$10 note, 1%
$20 note, 11%

¥1,000, 30%
$50 note, 5%

¥10,000, 63%
¥2,000, 1%

¥5,000, 5% $100 note, 81%

As of 2014 As of 2019

Source: BOJ Source: Federal Reserve


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Exhibit 56: ...as is the case in the EU... Exhibit 57: ...and Japan

Value of Euros in circulation by denomination Value of Japanese Yen in circulation by denomination


€ 5, 1% ¥500, 0% ¥5,000, 3%
€ 10, 2% ¥1,000, 4%
Coins, 3% € 20, 6% Coins, 5%
¥2,000, 0%

€ 500, 30%

€ 50, 35%

€ 200, 4%

¥10,000, 87%
€ 100, 19%

As of 2014 As of 2014

a2810045d5314637bdba4864b34fcf51
Source: ECB Source: BOJ

Exhibit 58: China’s M0 value is around 65% that of the US... Exhibit 59: ...but due to foreign exchange differences, China’s
M0 volume may be more than four times that of the US...
M0 value M0 volume vs. M0 amount: China as % of US
China US M0 volume M0 amount
1.7
1.6
1.5 506% 500% 504%
1.4 485% 480% 472% 480%
463% 450% 451%
1.3
1.3
1.2 1.1
1.1 1.1
1.0 1.0 1.0 1.0
US$ tn

0.9 1.0
0.9
0.9
0.8
0.7

72% 78% 79% 81% 78% 76% 72% 69% 68% 65%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Federal Reserve, PBOC Source: Federal Reserve, PBOC

17 November 2020 41
Goldman Sachs China Financial Services

Exhibit 60: ...as such, China’s currency printing cost to M0 (in Exhibit 61: We estimate the annual production cost of the
US$) may be much higher, even after adjusting for purchasing Renminbi is Rmb12bn (US$2bn)
power differences
Estimated new currency production cost / M0 (in US$) Estimated new currency production cost
China US China US

0.24% 2.29
0.23% 0.23%
0.22% 0.21% 2.14
0.21% 2.04 2.08 2.02
0.20% 1.93
0.18% 0.18% 1.90
1.79 1.76
0.16%
1.43

US$ bn
0.80
0.07% 0.72 0.72 0.71 0.69 0.66 0.67
0.06% 0.06% 0.06% 0.60 0.65 0.64
0.06% 0.05% 0.05% 0.04% 0.05%
0.04%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Note: We assume a lower production cost for the same volume of cash for China by Note: Production cost of currency is derived by multiplying the production cost/M0 ratio
adjusting the ratio with the purchasing power parity factor from the World Bank (~1.6x as by M0.
of 2019).
Source: Federal Reserve, National Bureau of Statistics of China, World Bank, Goldman
Source: Federal Reserve, World Bank, NBS, Goldman Sachs Global Investment Research, Sachs Global Investment Research, Gao Hua Securities Research
Gao Hua Securities Research
For the exclusive use of MEGAN.RILEY@GS.COM

Exhibit 62: The PBOC bears 3% of the total cost of cash with commercial banks bearing 40%
Share of cash costs by each sector
Countries Commercial % of GDP Source
Central bank Retailers Households
bank
Share of cash costs
Norway 3% 40% 27% 30% 0.1% Norges Bank (2014)

Sweden 3% 39% 34% 14% 0.4% Riksbank (2007)

Netherlands 2% 48% 50% 0.4% Netherlands Central Bank (2005)

Australia 54% 30% 16% 0.5% Reserve Bank of Australia (2007)

Belgium 2% 47% 51% 0.6% National Bank of Belgium (2006)

Uruguay 2% 13% 64% 21% 0.6% Bank of Uruguay (2019)


Estimated share of cash costs

a2810045d5314637bdba4864b34fcf51
China 3% 40% 57% 0.4% GS estimates
Estimated value of cash costs (Rmb bn)
China 12 162 231 406 GS estimates

Note: We calculate the PBOC’s share of cash cost using comparable data from the central banks of Norway and Sweden as both countries have a low portion of cash usage like China

Source: Norges Bank, Riksbank, Netherlands Central Bank, Reserve Bank of Australia (RBA), National Bank of Belgium, Bank of Uruguay, Goldman Sachs Global Investment Research, Gao
Hua Securities Research

17 November 2020 42
Goldman Sachs China Financial Services

Boost competition, level the playing field for banks

DC/EP will become the third pillar of China’s payments system alongside banks
and fintech, and in the process, increase competition. By 2029, we expect DC/EP
to account for 15% of total consumption payments (TPV of Rmb128tn) as fintech
market share tapers off (albeit still dominating the space) and usage of cash and
physical bank cards shrink.

Within the payment ecosystem, commercial banks will be clear beneficiaries as


they compete on a more level playing field, third-party payment digital wallet
issuers will face stiffer competition in the long term (but limited in the early
stages), third-party payment acquirers will benefit from higher volumes and
increased demand for mobile payments, and software/hardware vendors will
benefit from R&D outsourcing and hardware upgrades. We provide a list of
companies that have already participated in DC/EP development or may have
exposure to the DC/EP system once it rolls out.
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Centralization of deposits for client reserves, processing payments


Over the last few years, the PBOC has introduced several measures: (Exhibit 127):

n Licensing. The PBOC has not granted any Third Party Payment licenses since 2015,
and has canceled ~30 licenses since 2016 (Exhibit 63).
n Centralized deposits for client reserves: From 2017, Third Party Payment
institutions have been required to deposit the full client reserve (monetary capital
received in advance to handle the payment business on behalf of the client) with the
PBOC.
n Centralized processing of payments at NetsUnion: From June 30, 2018, all
non-bank payment institutions’ network payment business (involving bank accounts)

a2810045d5314637bdba4864b34fcf51
have been processed through NetsUnion, which acts like a clearing house.
n One QR code for all: According to the PBOC’s FinTech Development Plan
(2019-2021) published in September 2019, the interconnection of QR codes (one QR
code for all) will be completed by the end of 2021.

17 November 2020 43
Goldman Sachs China Financial Services

Exhibit 63: Since 2016, no new Third Party Payment licenses have Exhibit 64: Fintech players have achieved mutual recognition of
been issued and 32 have been canceled their QR codes with a few banks, however “One QR code for all”
will be completed by the end of 2021

No. of Third Party Payment licenses


New licenses Cancellations Existing licenses No. (RHS)

120 269 269 300


266
101 250 247
96 238 237 237
100 250
197
80 200

60 53 150
101
40 100

19 19
20 50
9
0 0 0 0 2 2 0 3 0 0 0 1 0 0
0 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: PBOC Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities
Research

Exhibit 65: Centralized deposits of client reserves increased to 100% in 2019; total client reserves were
For the exclusive use of MEGAN.RILEY@GS.COM

Rmb1.6tn as of Aug. 2020

Centralized client reserve of Third Party Payment institutions

Centralized client reserve % of centralized client reserve required by PBOC

2,500 120%

100%
2,000

Proportion of 80%
1,500 centralized deposit of
client reserve
Rmb bn

increased
60%

1,000
40%

a2810045d5314637bdba4864b34fcf51
PBOC required
500 centralized deposit of
client reserve 20%

0 0%
Jul-17

Nov-17
Dec-17

Jul-18

Nov-18
Dec-18

Jul-19

Nov-19
Dec-19
Mar-17

Jul-20
Jan-18

Mar-18

Jun-18

Jan-19

Mar-19

Jun-19

Mar-20

Jun-20
Jun-17

Jan-20
Feb-19

Feb-20
Aug-17
Sep-17

Feb-18
Oct-17

Apr-18

Aug-18
Sep-18

Apr-19

Aug-19
Sep-19

Apr-20

Aug-20
Apr-17
May-17

May-18

Oct-18

May-19

Oct-19

May-20

Source: PBOC

17 November 2020 44
Goldman Sachs China Financial Services

Exhibit 66: The government has introduced several measures over the last few years, including: (1) centralized deposits of client reserves;
and (2) centralized clearance of payments at NetsUnion
For the exclusive use of MEGAN.RILEY@GS.COM

Source: PBOC, iResearch, Goldman Sachs Global Investment Research, Gao Hua Securities Research

DC/EP will reduce costs, boost competition and improve connectivity


Once DC/EP is rolled out nationwide over the next few years, we expect it to bring
about several important changes to the payment industry:

n Reduce the cost of cash. We forecast a ~15% substitution rate for cash by DC/EP

a2810045d5314637bdba4864b34fcf51
in ten years, which will cut the processing cost of cash (printing, transport etc.) for
banks and the PBOC and reduce demand along the cash management industry
chain.
n Introduce competition. We expect DC/EP to become the third pillar of China’s
payments system alongside banks and fintech payments, introducing new
competition into the system. That said, initially at least we expect the DC/EP take
rate paid to banks and other service providers in offline consumption to be in line
with the current ecosystem (Exhibit 68), since DC/EP would need to leverage the
existing infrastructure and provide incentives to related parties.
n Increase interconnectivity of existing payment methods. In addition to the “one
code for all” policy that promotes the interconnection of QR codes, we expect
DC/EP to enhance the connectivity of existing payment methods because it will be a
DC/EP a widely-accepted digital legal tender that becomes a “bridge” for all parties.

17 November 2020 45
Goldman Sachs China Financial Services

Exhibit 67: DC/EP will become the third pillar of the payment industry value chain alongside bank cards and Third Party Payments
For the exclusive use of MEGAN.RILEY@GS.COM

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 68: Although there are no details about the fee structure of DC/EP, we expect it to be akin to app-based payments as the operating
framework is similar

a2810045d5314637bdba4864b34fcf51

Note: Our take rate forecasts are a rough estimate based on our channel checks and may vary due to merchant discounts and other factors.

Source: iResearch, PBOC, Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020 46
Goldman Sachs China Financial Services

Leveling the playing field in payments


Rise of fintech payments driven by mobile payment penetration
The surge in Fintech digital wallets in recent years has been driven by increased
penetration of mobile payments. As shown in Exhibit 69, the TPV of Third Party
Payment Institutions (fintech) grew 10-fold over 2015-2019 to reach Rmb250tn
(US$37tn), with growth slowing to 20% yoy in 2019 as penetration had already reached
a very high level. Of that, mobile payments increased from 43% (of third party
payments) in 2015 to 90% in 2019 (Exhibit 70). Among different types of payments,
54% of TPV is from transfers, 20% from consumption and 22% from finance (Exhibit
73). AliPay and Tenpay dominate the third party payment landscape, together
accounting for over 90% in terms of TPV (Exhibit 74).

Exhibit 69: Third Party Payment transaction value reached Exhibit 70: ...with mobile payments accounting for the vast majority
Rmb251tn in 2019...
Third
Th
Third
ird pa
party
rty pa
payment
yment vvalue
alue
3rd party payment transaction value Growth YoY (RHS) Third
Th
Third
ird pa
party
rty pa
payment
yment vvalue:
alue: m
mobile
obile vvs.
s. de
desktop
sktop
300 120% Mobile Desktop
100% 101% 250
For the exclusive use of MEGAN.RILEY@GS.COM

13% 10%
250 100% 19%
25%
208
200 80% 49%
57%
Rmb tn

143
150 60%
44% 45%
99 87% 90%
100 40% 81%
75%
49 20%
50 20% 51%
25 43%

0 0%
2014 2015 2016 2017 2018 2019
2014 2015 2016 2017 2018 2019

Third party desktop payment value: by transaction type


Third

Source: PBOC Source: PBOC, iResearch

Exhibit 71: Growth in Third Party Mobile Payment transaction value Exhibit 72: Growth in Third Party Desktop Payment transaction

a2810045d5314637bdba4864b34fcf51
has slowed in recent years, but was still a healthy 19% in 2019 value declined in 2019

Third
Th
Third
ird party
party mobile
mobile desktop
desktop payment
payment value
value
Third
Th
Third
ird pa
party
rty m
mobile
obile pa
payment
yment vvalue
alue
3rd party payment transaction value: desktop Growth YoY (RHS)
3rd party payment transaction value: mobile Growth YoY (RHS)
250 450% 35 80%
392% 226 68%
383% 70%
400% 29
30 28
200 191 60%
350% 50% 25
25 50%
300% 47% 40%
20
150 40%
20
b ttn
n

Rmb ttn
n

120 250%
Rmb
Rmb

Rmb

30%
Rm

200% 15
100 12 20%
105% 150% 4%
59 10 8 10%
103% 58% 100%
50 0%
19% 5 -14%
12 50% -10%
6
0 0% 0 -20%
2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019

Source: PBOC, iResearch Source: PBOC, iResearch

17 November 2020 47
Goldman Sachs China Financial Services

Exhibit 73: 54% of Third Party Payment transaction value is from Exhibit 74: Alipay and Tenpay together account for over 90% market
transfers, 20% from consumption and 22% from finance share in Third Party Payments (in terms of TPV)

Third
Th
Third
ird party
party payment
payment value:
value: by transaction
transaction type
type Third party mobile payment market share
Transfer Finance Consumption Others Alipay Tenpay Others

7% 10% 10% 5% 6% 6%
16% 12% 18% 11%
22%
31% 16%
34% 40% 39% 39%
19% 22% 38%
21%
20%

26% 32%
82%
74%
62% 61% 57% 54% 52% 55% 54% 54%

33% 32%

2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019

Source: iResearch Source: iResearch

Consumption payments to see banks and fintech aggressively compete


For the exclusive use of MEGAN.RILEY@GS.COM

Financial payments are categorized as: (1) consumption (online and offline); (2)
transfers; and (3) finance (e.g. wealth management and retail lending). Among these
categories, consumption is the major source of income for Third Party Payment (3PP)
providers given the higher take rate than transfers and finance; thus consumption
payments are regarded as “commercial payments” by payment institutions.

Consumption payments will be where banks and fintech providers compete most
aggressively as this is what consumers access most frequently, providing a gateway to
other retail finance businesses. Third Party Payment systems have overwhelmingly
become the platform of choice (Exhibit 77) — as of 2019, we estimate 68% of
consumption payments came from the digital wallets of Third Party Payment providers,
compared to only 12% for bank cards (excluding digital wallet binding payments, Exhibit

a2810045d5314637bdba4864b34fcf51
79). On the flipside, bank cards have dominated the transfer payment space relative to
fintech payment platforms (Exhibit 78).

Fintech platforms have several advantages over bank cards when users make
consumption payments:

n Their ecosystems (e-commerce, instant messaging, food delivery) drive significant


user stickiness;
n QR code payments at the point-of-sale are more convenient than physical credit
cards, with fintech platforms rapidly able to expand coverage of offline merchants
(by providing printed QR code cards at a low cost and offering subsidies) in recent
years.

17 November 2020 48
Goldman Sachs China Financial Services

Exhibit 75: Growth in bank card transactions value fell to only 3% Exhibit 76: The vast majority of bank card payment value comes
in 2019 from transfers

Bank card payment value Bank card payment value: by transaction type
1,000 Bank card transaction value Growth YoY (RHS) 60% Cash deposit Cash withdrawal Transfer
862 886 Property & wholesale Consumer goods & services
900 49%
50% 3% 2% 2% 2% 2% 2%
800 742 762 7% 6% 6% 7% 9% 11%
700 670
40%
600
b tn
tn

450 58%
Rmb
Rmb

500 30%
Rm

70% 73% 74%


400 75% 75%
20%
300 13%
11%
200 6% 10% 17%
100 3% 3%
11% 9% 9% 7%
0 0% 16% 6%
11% 10% 9% 7% 6%
2014 2015 2016 2017 2018 2019
2014 2015 2016 2017 2018 2019

Source: PBOC Source: PBOC

Exhibit 77: Third Party Payment providers have captured the lion’s Exhibit 78: Transfer payments, on the other hand, are dominated by
share of consumption payments (compared to bank cards) bank cards
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Consumption pa
Consumption payment:
yment: ban
bankk c
card
ard vvs.
s. tthird
hird pa
party
rty pa
payment
yment Transfer
Tr
Transfer
ansfer pa
payment:
yment: bank
bank card
card vvs.
s. tthird
hird party
party payment
payment
3rd party consumption payment 3rd party transfer+finance payment Bank card transfer payment
Bank card consumption payment (ex. property & wholesale) 700 650 665
60
55
600 543 560
50
500 471
39
40
400
Rmb ttn
n
Rmb ttn
n

Rmb
Rmb

30
300 262
19 20
20 18 17 188
14 15 200 171
12 13
123
10 8
5 100 63
8 15
0 0
2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019

a2810045d5314637bdba4864b34fcf51
Source: PBOC, iResearch Source: PBOC, iResearch

17 November 2020 49
Goldman Sachs China Financial Services

Exhibit 79: Consumption payments will see banks and fintech aggressively compete; Third Party Payment platforms account for 68% of
consumption payments vs. only 12% for bank cards (excluding digital wallet binding payments); Rmb
For the exclusive use of MEGAN.RILEY@GS.COM

Note: Transaction value in Rmb; data as of 2019. 1) Assumes 60% bank card transactions are via third party payments; 2) Calculated by subtracting bank card & third party payments from total offline
consumption; 3) Assumes services consumption is 50% of goods consumption value.

Source: PBOC, iResearch, NBS, Goldman Sachs Global Investment Research, Gao Hua Securities Research

DC/EP to capture 15% of consumption payments in ten years, 3PP share to taper and
stabilize
Based on our forecast that DC/EP will reach Rmb19tn (US$3tn) in annual TPV, a 42%
CAGR in 2025-2029 (Exhibit 46) and 15% of social consumption, we forecast (Exhibit
80-Exhibit 81):

n Slowing growth in fintech (Third Party Payments) to an 8% CAGR in 2020-2029,


a sharp decline from 57% in 2015-2019, given the already high penetration (68% in
2019, rising to 82% in five years). As DC/EP is fully rolled out and rises to 15% of

a2810045d5314637bdba4864b34fcf51
consumption payments, we expect the market share of fintech to taper off and
stabilize at ~80%.
n Wider declines in physical bank card payments (-6% CAGR in 2020-2029E vs.
-1% in 2015-2019); after adding back payments through fintech platforms, we expect
bank card payments to see a 7% CAGR in 2020-2029E. Excluding the binding of
digital wallets, we expect bank cards to comprise only 3% of consumption
payments in 2029, a sharp drop from 12% in 2019.
n Cash payments to decrease at a 7% CAGR in 2020-2029E (vs. -13% in 2015-2019)
as it is gradually replaced by DC/EP and other means of mobile payments. We
expect cash to account for only 5% of total consumption payments in 2029,
from ~20% in 2019, as China steadily heads towards a cashless society.

17 November 2020 50
Goldman Sachs China Financial Services

Exhibit 80: DC/EP will be the fastest growing means of payment within the consumption landscape (in
terms of TPV)

China consumption payment value: by means of payment

Cash DC/EP Bank card (ex. fintech overlap) Fintech


128 15-19 20-29E
CAGR CAGR*
119 6
Cash
111 6
CAGR: 7% 19
104 7 -13% -7%
16
97
8 4
91 14 DC/EP
9 4
85 10
4 N/A 42%
79 10 7 3
73 10 3 3
3 Bank card
68 10 2 (incl. fintech overlap)
CAGR: 11% 65 4
10 1
61 5
0 10% 7%
55 13 8 5
49 6
22 8 Bank card
44 98
93 (ex. fintech overlap)
87
83
31 79
7 75 -1% -6%
28 70
64
28 58
51
46 Fintech
7
8 32
For the exclusive use of MEGAN.RILEY@GS.COM

8 57% 8%
17
13
8
Unit: Rmb tn
Note: *25-29E for DC/EP
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E

Source: PBOC, iResearch, Wind, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 81: DC/EP to account for 15% of consumption TPV in ten years

China consumption payment value breakdown: by means of payment


Cash DC/EP Bank card (ex. fintech overlap) Fintech

6% 5% 5% 15-19 20-29E
9% 7% chg. chg.*
13% 13% 12% 12% 11%
20%
1% 2% 4% 7% 10% 13% 14% 15% Cash
6% 4% 3%

a2810045d5314637bdba4864b34fcf51
36% 9% 7% 3%
3%
3% 3% 3% -46ppt -18ppt
12%
58% 57%
DC/EP
64%
N/A +15ppt
12%
Bank card
(incl. fintech overlap)

-1ppt -1ppt
79% 81% 82% 82% 81% 80%
78% 78% 78% 77%
12% Bank card
16% 68% (ex. fintech overlap)

19% 52% -10ppt -9ppt

31% Fintech
26%
17% +56ppt +12ppt

Note: *25-29E for DC/EP


2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E

Source: PBOC, iResearch, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Impact across China’s payment system


The rising penetration of DC/EP will impact China’s payment system in a number of

17 November 2020 51
Goldman Sachs China Financial Services

ways:

n Commercial Banks: Commercial banks will be the only institutions permitted to


operate in DC/EP exchange as it is the digitalization of legal tender. This will
effectively level the playing field with fintech platforms, enabling banks to once
again compete head-to-head with them in consumption payments. Binding a
DC/EP wallet to a bank account may increase customer stickiness to bank mobile
apps, as well as promote other banking services such as wealth management and
retail lending, which we discuss in the next section. So far, the big four banks and
other banks have participated in DC/EP R&D and tested the DC/EP wallet in 2020.
n Third Party Payment providers (digital wallet issuers): Fintech platforms will
eventually face new competition from banks in the payment space, although this is
likely to be limited over the next few years as the adoption of DC/EP will only be
gradual. It is also possible that fintech firms will add DC/EP as a payment method in
their apps. In the long term, even if take rates face downward pressure from
intensified competition, leading Third Party Payment players could still supplement
lower commissions with higher payment volumes and value-add services such as
For the exclusive use of MEGAN.RILEY@GS.COM

marketing, fintech and SaaS (Exhibit 82).


n Third Party Payment providers (acquirers): The take rate paid to acquirers will
continue to be stable as DC/EP payments will still need to use existing offline
channels and infrastructure (such as QR code scanners). We think this will benefit
leading acquirers given higher payment volumes and increased demand by
merchants for mobile payments.
n Software/hardware vendors: Vendors should also benefit from the PBOC,
commercial banks and Third Party Payment institutions outsourcing DC/EP R&D, and
from hardware upgrades.

We summarize listed companies that have already participated in the DC/EP system or
will likely have exposure to it (Exhibit 85).

a2810045d5314637bdba4864b34fcf51
Exhibit 82: Third Party Payment ecosystem provides value-added service to merchants

Source: Yeahka, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020 52
Goldman Sachs China Financial Services

Exhibit 83: Traditional bank card payment take rates have declined Exhibit 84: Yeahka’s tech-enabled revenue contribution rose to 18%
while take rates for app-based payments have increased in 1H20
Yeahka payment take rate Yeahka tech-enabled business revenue contribution
Overall App-based payment Traditional payment Profit contribution Revenue contribution
20.8
24.3%
18.6
17.3
16.4
18.1% 17.8%
13.9 13.9
bps

12.9
12.4

8.4% 7.8%
9.5 9.5
8.8
8.1
4.0%
2.5%
1.7%

2017 2018 2019 1H20 2017 2018 2019 1H20

Source: Company data Source: Company data

Exhibit 85: Listed companies that have participated in DC/EP development, or in the case of third
Main areas Company name Details of engagement Info source
For the exclusive use of MEGAN.RILEY@GS.COM

Participated in the DC/EP R&D and tested the DC/EP wallet in


Industrial and Commercial Bank of China Limited 601398.SH/1398.HK
2020
Participated in the DC/EP R&D and tested the DC/EP wallet in
China Construction Bank Corporation 601939.SH/0939.HK
2020
PBOC
Participated in the DC/EP R&D and tested the DC/EP wallet in
China CITIC Bank Corporation Limited 601998.SH/3998.HK
2020
Participated in the DC/EP R&D and tested the DC/EP wallet in
Commercial Banks Agricultural Bank of China Limited 601288.SH/1288.HK
2020

Postal Savings Bank of China Co.,Ltd. 601658.SH/1658.HK Involved in the DC/EP project in 2020

Bank of Communications Co.,Ltd. 601328.SH/3328.HK Involved in the DC/EP project in 2020 Caixin

China CITIC Bank Corporation Limited 601998.SH/0998.HK Involved in the DC/EP project in 2020

Lakala Payment Co.,Ltd.* 300773.SZ Business includes providing payment service to merchants N/A

Third Party Payment


Yeahka Limited* 9923.HK Business includes providing payment service to merchants N/A
providers (acquirers)

Huifu Payment Limited* 1806.HK Business includes providing payment service to merchants N/A

a2810045d5314637bdba4864b34fcf51
Digital China Information Service Company Ltd.* 000555.SZ Participated in DC/EP R&D and testing of one commercial bank Company disclosure

Its subsidiary Weifutong has participated in DC/EP R&D and


Huafon Microfibre(Shanghai)Co., Ltd.* 300180.SZ Company disclosure
testing of one commercial bank

GRG Banking Equipment Co., Ltd.* 002152.SZ Did research in to DC/EP in 2019-2020 Company disclosure

Shenzhen Sunline Tech Co., Ltd.* 300348.SZ Did research in to DC/EP in 2019-2020 Company disclosure

Software/hardware
Feitian Technologies Co.,Ltd.* 300386.SZ Did research in to DC/EP in 2019-2020 Company disclosure
vendors

XGD INC.* 300130.SZ Did research in to DC/EP in 2019-2020 Company disclosure

Global Infotech Co.,Ltd.* 300465.SZ Did research in to DC/EP in 2019-2020 Company disclosure

Shenzhen Forms Syntron Information Co., Ltd.* 300468.SZ Did research in to DC/EP in 2019-2020 Company disclosure

Guangzhou Kingteller Technology Co.,Ltd.* 002177.SZ Did research in to DC/EP in 2019-2020 Company disclosure

Note: *Denotes Not Covered companies.

Source: PBOC, Caixin, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020 53
Goldman Sachs China Financial Services

Gateway to banks’ retail finance channels; CMB and PAB best placed to
capitalize

Incorporating digital currency wallets into bank apps will bring consumers back to
bank channels, expanding their customer base, MAUs and stickiness. A 10%
increase in the bank app users would lift revenues by 2%-5%. PAB and CMB are
best placed to commercialize returning app users given their leading retail
franchises, premium client bases, superior fintech capability and strategic focus on
retail finance. We reiterate our Buy ratings on CMB-H/A (A on the Conviction List)
and PAB.

DC/EP will bring customers back to bank apps, opening a gateway to


other products
Local branches were once the main channel through which banks acquired retail
customers. However, with digital wallets the dominant platform for consumption
payments (Exhibit 81), fintech firms have swelled their customer base by linking their
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payment services with frequently used applications such as e-commerce and instant
messaging. For the most part, bank apps have struggled to compete, with MAU
typically less than 1/10th that of the top fintech apps due to fewer apps/services and
less cutting edge design and functionality (Exhibit 86). CMB, on the other hand, has
enjoyed considerable success in migrating its retail banking products to online from
offline, with wealth management sales through its app rising to 78% of total sales in
1H20 from 43% in 2017 (Exhibit 87). We put this down to its strong retail franchise and
fintech capability.

DC/EP will level the playing field in retail banking. Banks will be the only institutions
permitted to operate DC/EP — even digital currency wallets held with fintech firms will
need to be linked with bank accounts to convert deposits and cash to DC/EP. With

a2810045d5314637bdba4864b34fcf51
DC/EP embedded into bank apps, we expect customers to return to bank channels,
increasing their customer base, MAUs and customer stickiness. Should DC/EP gain
traction, banks should be able to recapture lost market share and grow revenues across
payments, consumer lending (and deposits), wealth management, and insurance
(Exhibit 88).

17 November 2020 54
Goldman Sachs China Financial Services

Exhibit 86: MAUs for bank apps have been significantly lower than Exhibit 87: CMB’s app has become the main channel to sell its
fintech wealth management products
CMB’s wealth management sales value by channel
Mobile app MAU ranking On app Offline
MAU As of Aug. 2020 App MAU/ bank retail customers (RHS)
1,200 40%
33%
991 30% 35% 22%
29% 28%
1,000
30% 41%
25% 57%
800
20%
mn

600 11% 15%


6% 5% 10%
400 78%
5% 72%
59%
0%
200 43%
69 65 54 43 41 37 -5%
33 32
0 -10%
Wechat ICBC CCB ABC CMB CMB BOC PSBC PAB
credit 2017 2018 2019 1H20
card

Source: Analysys, Company data Source: Company data

Exhibit 88: DC/EP rollout would open a new gateway for banks to grow their retail banking businesses
For the exclusive use of MEGAN.RILEY@GS.COM

a2810045d5314637bdba4864b34fcf51
Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

A 10% increase in bank app users would boost revenues by 2-5%; PAB and
CMB the largest beneficiaries
To gauge the impact of DC/EP on bank revenues and earnings we look at the potential
increase in active app users for four banks that comprehensively disclose retail banking
metrics — two large banks (ICBC and PSBC) and two retail-focused joint-stock banks
(CMB and PAB):

n ICBC and PSBC have a high number of retail customers (650mn and 605mn,
respectively) but a low percentage using their mobile apps (56%/43% for
ICBC/PSBC, Exhibit 89). On the other hand, CMB and PAB have fewer customers
but their mobile app penetration rate is much higher (71%/92%) given their greater
emphasis on developing fintech applications across their businesses.

17 November 2020 55
Goldman Sachs China Financial Services

n PSBC, CMB and PAB derive a higher portion of revenue and profit from retail
banking than ICBC, whose strength is in corporate banking (Exhibit 90).
n CMB has the highest average retail revenue/profit per retail customer
(Rmb990/Rmb369) thanks to its premium client base, which has close to
Rmb40,000 AUM (excluding deposits) per user (Exhibit 91).
n A 10% increase in the number of bank app users would increase revenues by
2%-5% and earnings by 2%-8% (Exhibit 92), depending bank app penetration, focus
on retail banking and average income per user. PAB and CMB would be the biggest
beneficiaries of a DC/EP rollout (with earnings increasing 8% and 3%, respectively)
given their leading retail franchises.

Exhibit 89: ICBC and PSBC have a large number of retail customers, Exhibit 90: PSBC, CMB and PAB derive more revenue and profit
but the % of app users to total customers is low from retail than ICBC
App penetration rate of retail customers Banks’ retail revenue & profit as % of total
Retail customers App users App users/retail customers Retail revenue % Retail profit %
2,000 92% 100% 100%
89%
1,800 90% 90%
1,600 71% 80% 80%
For the exclusive use of MEGAN.RILEY@GS.COM

1,400 70% 70% 64% 64%


56% 58%
1,200 60% 60% 53%
43%
mn

1,000 50% 50% 45%


40% 39%
800 650 40% 40%
605
600 30% 30%
361
400 260 20%
20%
144 102 97
200 89 10%
10%
0 0%
0%
ICBC PSBC CMB PAB
ICBC PSBC CMB PAB

Source: Company data As of 2019

Source: Company data

Exhibit 91: CMB has the highest retail revenue and profit per user, Exhibit 92: PAB and CMB would benefit the most from an increase
thanks to high AUM in app users given their leading retail franchises

a2810045d5314637bdba4864b34fcf51
Average retail revenue, profit & AUM per retail customer Hypothetical boost of bank revenue & profit assuming
10% increase in app users
Retail revenue Retail profit AUM ex. Deposit
Impact on revenue Impact on profit
2,000 50,000
40,415 8%
1,800 40,000
1,600 30,000
1,400 14,412 20,000 5%
1,200 6,342
3,003 1,005 10,000
Rmb

Rmb

1,000
824 4%
0
800 3%
-10,000 3% 3%
600 525 2% 2%
461
400 292 -20,000
258
188
200 64 -30,000

0 -40,000
ICBC PSBC CMB PAB ICBC PSBC CMB PAB

As of 2019 Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities
Research
Source: Company data

Bank valuation in a DC/EP world: Retail banking vs. Fintech


Retail banking and fintech have comparable product offerings in payments, lending,
wealth management and insurance. With DC/EP to level the playing field between banks
and fintech, we recast our retail banking forecasts and derive and implied valuation for

17 November 2020 56
Goldman Sachs China Financial Services

CMB’s and PAB’s retail banking businesses using a SOTP. Our target P/PPOP multiples
for CMB and PAB (6.00x/3.00x) imply a 16x/13x P/E for their retail banking business,
which looks reasonable compared with global peers.

n We recast our retail banking forecasts by applying key growth drivers such as app
MAU, average AUM/TPV/loan balance per user and take rate (Exhibit 94), to our
retail banking forecasts (Exhibit 95-Exhibit 96). Our estimates for corporate banking
are unchanged.
n We value corporate banking by applying ICBC’s target P/B multiple (0.8x) to CMB
and PAB’s corporate book value, based on their corporate business assets and
assuming the same leverage ratio for retail banking.
n Deducting corporate banking valuation from overall valuation implies a valuation for
CMB and PAB’s retail banking business of 16x/13x 2021E P/E, around the
mid-range of global peers (Exhibit 98).
n We then deduct the valuation of their lending segments (based on average target
multiples for Capital One and American Express) from the above retail banking
valuation to derive a valuation for CMB and PAB’s non-lending retail business:
For the exclusive use of MEGAN.RILEY@GS.COM

17x/14x P/E.

Exhibit 93: Retail banking offerings are similar to fintech

a2810045d5314637bdba4864b34fcf51

Note: As of 2019

Source: Company data

17 November 2020 57
Goldman Sachs China Financial Services

Exhibit 94: Reconsidering drivers for retail banking: Growing customer base key to driving banks’ revenues and earnings
For the exclusive use of MEGAN.RILEY@GS.COM

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

a2810045d5314637bdba4864b34fcf51

17 November 2020 58
Goldman Sachs China Financial Services

Exhibit 95: Recast financial model for CMB’s retail business: Mid-teens revenue growth in 2020-2025E
For the exclusive use of MEGAN.RILEY@GS.COM

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 96: Recast financial model for PAB’s retail business: Mid- to high-teens revenue growth through 2025E
PAB Retail business 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E
Retail revenue 47 62 80 90 101 115 131 151 178

a2810045d5314637bdba4864b34fcf51
Growth yoy 42% 33% 29% 12% 13% 14% 14% 15% 18%
I. Lending business 27 39 50 56 63 71 81 94 112
Growth yoy 33% 42% 30% 12% 12% 13% 13% 16% 20%
as % of total retail revenue 59% 63% 63% 63% 62% 62% 62% 62% 63%
NIM/take rate 3.2% 3.4% 3.7% 3.5% 3.4% 3.3% 3.3% 3.3% 3.6%
Loan balance 849 1,154 1,357 1,603 1,875 2,171 2,482 2,799 3,112
Growth yoy 57% 36% 18% 18% 17% 16% 14% 13% 11%
II. Non-lending business 19 23 30 34 38 44 50 58 66
Growth yoy 55% 19% 29% 13% 14% 14% 15% 15% 15%
as % of total retail revenue 41% 37% 37% 37% 38% 38% 38% 38% 37%
1. Payment/transaction fee 19 25 30 34 39 45 51 58 66
Growth yoy 49% 36% 20% 13% 14% 14% 14% 14% 14%
Take rate(bps) 4.5 4.2 4.8 4.7 4.7 4.6 4.6 4.5 4.5
TPV 41,593 59,566 63,114 72,753 83,885 96,745 111,606 128,788 148,660
Growth yoy 26% 43% 6% 15% 15% 15% 15% 15% 15%
2. Wealth management fee 3 3 5 5 6 8 9 11 13
Growth yoy 11% 9% 29% 18% 19% 20% 21% 21% 21%
Take rate(bps) 41 36 32 31 30 29 28 27 26
Non-deposit AUM 771 980 1,420 1,722 2,113 2,617 3,261 4,073 5,083
Growth yoy 39% 27% 45% 21% 23% 24% 25% 25% 25%
AUM 1,087 1,417 1,983 2,474 3,093 3,866 4,825 6,005 7,437
Growth yoy 36% 30% 40% 25% 25% 25% 25% 24% 24%
Private bank AUM 458 734 1,040 1,452 1,997 2,707 3,615 4,752
Non-Private bank AUM 959 1,249 1,435 1,641 1,868 2,118 2,390 2,685

Retail net profit 16 17 19 21 23 26 31 36 45


Growth yoy 68% 9% 14% 7% 11% 13% 17% 19% 23%

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020 59
Goldman Sachs China Financial Services

Exhibit 97: After decomposing valuation into retail and corporate, target P/PPOP multiples for CMB and PAB (6.00x/3.00x) imply 16x/13x P/E
for their retail banking business...
Net profit Book value
Valuation P/E 2021E P/B 2021E Note
2021E 2021E
CMB
Total 109 765 1,303 12.0x 1.7x Our target valuation is based on 6.0x P/PPOP
Retail business 65 273 997 15.5x 3.7x Backed-out from total target valuation minus corporate valuation
Lending business 32 - 426 13.5x - Based on average target P/E of COF and AXP
Non-lending business 33 - 571 17.4x - Backed-out from retail valuation minus lending business valuation
Corporate business 44 492 306 6.9x 0.6x Based on target P/E of ICBC
PAB
Total 35 369 382 11.0x 1.0x Our target valuation is based on 3.0x P/PPOP
Retail business 23 138 301 13.0x 2.2x Backed-out from total target valuation minus corporate valuation
Lending business 5 - 53 10.1x - Based on average target P/E of COF and AXP, then apply 25% discount
Non-lending business 18 - 248 13.9x - Backed-out from retail valuation minus lending business valuation
Corporate business 12 231 81 6.9x 0.4x Based on target P/E of ICBC
Comps
Capital One (COF) 9.3x 0.8x Target price implied valuation
American Express (AXP) 17.6x 4.3x Target price implied valuation
Paypal (PYPL) 86.7x 10.4x Target price implied valuation
Visa (V) 40.0x 14.8x Target price implied valuation
MasterCard (MA) 45.9x 83.8x Target price implied valuation
BlackRock (BLK) 21.3x 3.0x Target price implied valuation
Alliance Bernstein 11.7x 0.5x Target price implied valuation
ICBC 6.9x 0.8x Target price implied valuation
CMB (Retail) 15.5x 3.7x Calculated target valuation
PAB (Retail) 13.0x 2.2x Calculated target valuation
For the exclusive use of MEGAN.RILEY@GS.COM

In Rmb bn. As of Nov. 11, 2020

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 98: ...which looks reasonable compared with global peers

Target price implied P/E and P/B

P/E 2021E P/B 2021E


86.7 83.8

45.9
40.0

21.3

a2810045d5314637bdba4864b34fcf51
14.8 17.6 15.5
10.4 13.0 11.7 9.3 6.9
3.0 4.3 3.7 2.2 0.5 0.8 0.8

Paypal MasterCard Visa BlackRock American CMB PAB (Retail) Alliance Capital One ICBC
Express (Retail) Bernstein

The valuations are our target price implied multiples

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

CMB, PAB best placed to capitalize on DC/EP; reiterate Buy ratings


(CMB-A on the CL)
Among China banks, PAB and CMB are best placed to commercialize returning app
users from the roll out of DC/EP given their:

n leading retail franchises: PAB and CMB have the strongest retail franchises,
especially in wealth management.
n premium client bases: AUM (ex. deposits) of CMB and PAB are 6x/2x larger than
ICBC (Exhibit 91).

17 November 2020 60
Goldman Sachs China Financial Services

n advanced fintech capability: both banks enjoy higher mobile app penetration of
their retail customers (71%/92% for CMB/PAB, Exhibit 89) than peers.
n strategic focus on retail banking: CMB regards its retail business as the “main
body” of its overall business, while over the last few years PAB has made the digital
transition in retail banking one of its key corporate strategies.

As such, we expect both to steadily recapture or increase their market share across
most retail finance categories.

Exhibit 99: CMB to claw back market share in wealth management, Exhibit 100: PAB to steadily gain market share in payments and, to
and to a lesser extent, payments a lesser extent, wealth management
CMB: retail income market share in each segment PAB: retail income market share in each segment

Payment Lending Wealth mgmt. Insurance sales Payment Lending Wealth mgmt.
18%
17% 17%
17% 14%
16%
15% 16% 14%
15% 13%
14% 14%
14% 12%
11% 11%

11% 11% 11% 11%


10% 11% 9%
9%
10% 9% 10%
9% 9%
8% 7%
8% 8% 7% 7% 7%
7% 6% 6%
For the exclusive use of MEGAN.RILEY@GS.COM

7% 7% 6% 6% 6%
7% 6%
6% 5% 5% 7%
7% 7% 8% 7%
7% 7% 7% 6%
6% 6% 6%
6% 6% 5%
5% 5%
4% 4% 4%
2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

Note: revenue as % of all banks Note: revenue as % of all banks

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities
Research Research

As the leading retail banks in China that will benefit the most from the digital currency
rollout, we reiterate our Buy ratings on CMB H/A (A- on the Conviction List) and PAB.
Neither has participated in early testing of the DC/EP system (so far this has been
limited to the big four state owned banks), however, along with all other commercial
banks, we expect both will operate DC/EP in the official launch and benefit once uptake

a2810045d5314637bdba4864b34fcf51
increases over time.

With DC/EP still at the testing stage and timing for a full roll out yet to be determined,
we make no changes to our 2020-2022E earnings forecasts, CAMELOT-derived valuation
or ratings.

17 November 2020 61
Goldman Sachs China Financial Services

Exhibit 101: China banks valuation


Closing Target 21E P/E P/B EPS growth P/PPOP ROE Div yield
Company Ticker Currency TP Upside Rating
Price P/PPOP 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E
H-share
ICBC 1398.HK HK$ 4.68 6.69 43% 3.50x Buy 4.5x 4.5x 0.5x 0.5x 1% 2% 0.0x 0.0x 12% 11% 6.7% 6.9%
BOC 3988.HK HK$ 2.76 3.60 30% 2.50x Neutral 3.8x 3.8x 0.4x 0.4x 1% 1% 0.0x 0.0x 12% 11% 8.1% 8.2%
CCB 0939.HK HK$ 6.00 8.35 39% 3.50x Buy 4.6x 4.5x 0.6x 0.5x 4% 4% 0.0x 0.0x 13% 13% 6.7% 6.8%
ABC 1288.HK HK$ 2.88 3.90 35% 2.75x Neutral 4.0x 3.9x 0.4x 0.4x 7% 0% 0.0x 0.0x 12% 11% 8.1% 8.2%
BoCom 3328.HK HK$ 4.22 4.47 6% 2.00x Sell 3.4x 3.4x 0.4x 0.3x 0% 2% 0.0x 0.0x 11% 10% 8.8% 9.0%
PSBC 1658.HK HK$ 4.21 6.12 45% 3.25x Buy 4.8x 4.4x 0.5x 0.5x 3% 9% 0.0x 0.0x 11% 11% 6.7% 7.3%
CMB 3968.HK HK$ 49.30 56.34 14% 6.00x Buy 10.7x 9.8x 1.6x 1.4x 6% 9% 0.0x 0.0x 15% 15% 2.9% 3.2%
CEB 6818.HK HK$ 2.93 3.43 17% 1.50x Neutral 3.4x 3.4x 0.3x 0.3x 1% 0% 0.0x 0.0x 10% 9% 8.1% 8.1%
CQRCB 3618.HK HK$ 3.34 3.44 3% 1.75x Neutral 3.6x 3.5x 0.3x 0.3x -8% 1% 0.0x 0.0x 10% 9% 5.6% 5.7%
Median (H) 4.0x 3.9x 0.4x 0.4x 1% 2% 0.0x 0.0x 12% 11% 6.7% 7.3%

A-share
ICBC 601398.SS Rmb 5.00 6.14 23% 3.50x Buy 5.7x 5.6x 0.7x 0.6x 1% 2% 3.0x 2.9x 12% 11% 5.3% 5.4%
BOC 601988.SS Rmb 3.23 3.31 2% 2.50x Neutral 5.2x 5.2x 0.5x 0.5x 1% 1% 2.6x 2.4x 12% 11% 5.7% 5.8%
CCB 601939.SS Rmb 6.48 7.66 18% 3.50x Buy 5.9x 5.8x 0.7x 0.7x 4% 4% 3.1x 3.0x 13% 13% 5.2% 5.3%
ABC 601288.SS Rmb 3.19 3.57 12% 2.75x Neutral 5.2x 5.2x 0.6x 0.5x 7% 0% 2.6x 2.5x 12% 11% 6.1% 6.1%
BoCom 601328.SS Rmb 4.59 4.62 1% 2.25x Sell 4.4x 4.3x 0.5x 0.4x 0% 2% 2.4x 2.3x 11% 10% 6.9% 7.0%
PSBC 601658.SS Rmb 4.71 5.62 19% 3.25x Buy 6.3x 5.8x 0.7x 0.7x 3% 9% 3.1x 2.7x 11% 11% 4.8% 5.2%
CMB 600036.SS Rmb 43.84 51.68 18% 6.00x Buy* 11.2x 10.2x 1.6x 1.5x 6% 9% 5.8x 5.2x 15% 15% 2.8% 3.0%
CEB 601818.SS Rmb 4.05 4.19 3% 2.00x Neutral 5.6x 5.6x 0.5x 0.5x 1% 0% 2.2x 2.0x 10% 9% 4.9% 4.9%
Industrial 601166.SS Rmb 17.91 20.18 13% 2.50x Buy 5.6x 5.3x 0.7x 0.6x 1% 6% 2.5x 2.2x 13% 13% 4.1% 4.4%
PAB 000001.SZ Rmb 17.83 19.71 11% 3.00x Buy 11.2x 9.9x 1.2x 1.1x 9% 13% 3.2x 2.8x 11% 11% 1.4% 1.6%
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HuaXia 600015.SS Rmb 6.28 6.23 -1% 1.50x Sell 4.5x 4.6x 0.3x 0.3x -2% -2% 1.6x 1.5x 8% 7% 7.6% 7.4%
BONB 002142.SZ Rmb 34.58 30.51 -12% 6.00x Neutral 13.1x 11.8x 1.7x 1.5x 4% 11% 8.2x 7.1x 14% 14% 1.3% 1.8%
BONJ 601009.SS Rmb 8.07 9.29 15% 3.25x Buy 6.1x 5.8x 0.8x 0.7x -9% 5% 3.2x 2.8x 13% 12% 4.8% 5.2%
Median (A) 5.7x 5.6x 0.7x 0.6x 1% 4% 3.0x 2.7x 12% 11% 4.9% 5.2%

Note: *Denotes stock is on our Conviction List. Priced as of Nov. 17, 2020. TPs are on a 12-month time frame. Risks: slow roll-out and less adoption of DC/EP than expected, worse asset quality, margin
erosion and corporate governance issues.

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

a2810045d5314637bdba4864b34fcf51

17 November 2020 62
Goldman Sachs China Financial Services

Rmb 3tn revenue pool for retail finance by 2025, 9% CAGR

We forecast a Rmb3tn revenue pool for retail finance by 2025 (excluding


mortgages) as growth in payments and retail lending slows but wealth
management and insurance agency remain brisk. Over the next five years, we
expect Fintech to grow revenues at almost double the rate of banks as they
continue to capture incremental market share across the retail finance ecosystem.
The DC/EP roll-out will likely slow the rate that banks cede ground to fintech, and
even reverse over the long-term, albeit in a more competitive environment.

Retail finance revenue CAGR over the next five years (2020-25) by segment:
n 9% in total, well below 23% annual growth in 2015-2019, as government policies to
curb household leverage significantly impact retail lending (2020-25E CAGR of 9%
vs. 2015-19 CAGR of 30%).
n 8% for payments (almost half that in 2015-19 of 18%) as peak penetration of mobile
payments caps growth from new users.
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n 9% for lending, much lower than 30% in 2015-19 given aforementioned government
measure to curb household debt.
n Mid-teens (12%/14%) for wealth management and insurance sales income (CAGR in
2020-25) given robust and sustainable asset allocation demand from the household
sector.

Below, we discuss our assumptions for each segment as well as our methodology.

a2810045d5314637bdba4864b34fcf51

17 November 2020 63
Goldman Sachs China Financial Services

Exhibit 102: China retail finance TAM: Rmb 3tn revenue pool by 2025 (excluding mortgages), 9% CAGR
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 15-19 20-25E
Total retail
Total retail finance
finance revenue
revenue (banks,
(banks, fintech
fintech & others)
others)
R ev en u e
Revenue CAGR CAGR
Lending Rmb bn 366 496 821 936 1,031 1,099 1,207 1,339 1,470 1,605 1,750 30% 9%
Non-lending Rmb bn 386 403 523 585 661 700 779 856 943 1,042 1,151 14% 10%
Payment Rmb bn 226 233 325 390 440 443 495 537 583 636 688 18% 8%
Wealth mgmt. agency Rmb bn 106 95 114 126 137 161 172 192 215 243 276 13% 12%
Insurance sales Rmb bn 53 75 84 69 85 97 112 127 144 164 187 12% 14%
Total Rmb bn 752 899 1,344 1,521 1,693 1,800 1,986 2,194 2,413 2,647 2,900 23% 9%
Banks
B a n ks
Revenue
Revenue CAGR CAGR
Lending Rmb bn 261 317 530 662 766 816 905 984 1,083 1,195 1,321 31% 10%
Non-lending Rmb bn 341 325 400 431 477 493 542 589 642 702 770 9% 8%
Payment Rmb bn 214 192 248 282 323 314 346 370 397 427 459 11% 6%
Wealth mgmt. agency Rmb bn 87 76 89 99 99 113 119 134 150 168 191 9% 12%
Insurance sales Rmb bn 40 57 64 49 56 66 76 85 95 107 120 9% 14%
Total Rmb bn 602 642 930 1,092 1,243 1,308 1,447 1,573 1,725 1,897 2,090 20% 9%
Market
Market
Ma rket share
share Change Change
Lending % 71% 64% 64% 71% 74% 74% 75% 74% 74% 74% 75% 3 ppt 1 ppt
Non-lending % 88% 81% 77% 74% 72% 70% 70% 69% 68% 67% 67% -16 ppt -5 ppt
Payment % 94% 82% 76% 72% 73% 71% 70% 69% 68% 67% 67% -21 ppt -7 ppt
Wealth mgmt. agency % 82% 79% 78% 79% 72% 70% 69% 70% 69% 69% 69% -10 ppt -3 ppt
Insurance sales % 75% 77% 76% 71% 66% 68% 68% 67% 66% 65% 64% -9 ppt -2 ppt
Total % 80% 71% 69% 72% 73% 73% 73% 72% 71% 72% 72% -7 ppt -1 ppt
Fintech
F i n t ec h
Revenue
Revenue CAGR CAGR
Lending Rmb bn 3 11 22 41 62 83 104 125 150 173 187 113% 20%
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Non-lending Rmb bn 34 69 114 145 173 195 224 253 285 322 361 50% 13%
Payment Rmb bn 13 41 78 107 117 129 148 166 186 209 229 75% 12%
Wealth mgmt. agency Rmb bn 8 11 16 18 26 35 39 45 50 57 65 36% 16%
Insurance sales Rmb bn 13 17 20 20 29 31 36 42 49 57 67 21% 15%
Total Rmb bn 37 80 136 186 235 278 329 378 435 495 548 58% 15%
Market
Market
Ma rket share
share Change Change
Lending % 1% 2% 3% 4% 6% 8% 9% 9% 10% 11% 11% 5 ppt 5 ppt
Non-lending % 9% 17% 22% 25% 26% 28% 29% 30% 30% 31% 31% 17 ppt 5 ppt
Payment % 6% 18% 24% 28% 27% 29% 30% 31% 32% 33% 33% 21 ppt 7 ppt
Wealth mgmt. agency % 8% 11% 14% 14% 19% 22% 23% 23% 23% 23% 23% 11 ppt 4 ppt
Insurance sales % 25% 23% 24% 29% 34% 32% 32% 33% 34% 35% 36% 9 ppt 2 ppt
Total % 5% 9% 10% 12% 14% 15% 17% 17% 18% 19% 19% 9 ppt 5 ppt

Note: 2015-19 CAGR for wealth management is 2016-19 due to the high base in 2015; retail lending does not include mortgages; insurance’s bank sales only includes life bancassurance while fintech
sales includes both life and P&C

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 103: Banks to grow retail finance revenues at a 9% CAGR in Exhibit 104: Fintech to grow revenues at almost double that of
2020-2025 banks as they capture incremental market share across the retail

a2810045d5314637bdba4864b34fcf51
finance ecosystem
China banks retail finance revenue pool China fintech firms retail finance revenue pool
Insurance sales Wealth mgmt. agency Lending Payment Insurance sales Wealth mgmt. agency Lending Payment
15-19 20-25E 15-19 20-25E
CAGR CAGR CAGR CAGR
548
CAGR: 9% Insurance sales Insurance sales
2,090 CAGR: 15% 495
1,897 67
120 9% 14% 435 21% 15%
1,725 57
107 191 65
1,573 168 378 49 57
1,447 95 Wealth mgmt. Wealth mgmt.
CAGR: 20% 85 150 329 50
1,243 1,308 134
42
119 12% 278 36 45 187 16%
1,092 9% CAGR: 58% 173 36%
930 99 113 235 39
1,321 31 150
99 1,195 Lending 186 Lending
1,083 29 35 125
602 642 89 905 984 104
766 816 136 83
662 31% 10% 62 113% 20%
87 76 530 80 41
209 229
261 317 Payment 37 22 166 186 Payment
117 129 148
346 370 397 427 459 107
214 248 282 323 314 78
192 41
11% 6% 75% 12%
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2015 2016 2017 2018 2019 2020E2021E2022E2023E2024E2025E
Unit: Rmb bn Unit: Rmb bn

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

Payments: Rmb 688bn revenues by 2025, 8% CAGR


n TAM: Rmb 1.8tn TPV by 2025, including consumption payments (the main source of
income), transfers and other types of low-fee payments. For banks, only the TPV of
bank cards have been included in this calculation.

17 November 2020 64
Goldman Sachs China Financial Services

n TAM growth: 8% CAGR in 2020-25 (6% for banks, 12% for fintech), down from a
13% CAGR in 2015-19 given the high penetration rate of mobile payments.
n Take rate: Flat by 2025 as DC/EP unlikely to pressure fee rates, at least initially.
n Revenue: Rmb 688bn revenues by 2025 on an 8% CAGR, calculated by multiplying
TPV by the take rate.
n Market structure: Banks to account for the lion’s share (73% TPV, 67% revenues),
although fintech to incrementally capture market share (28% of TPV in 2025 from
22% in 2019, and 33% of revenues in 2025 from 27% in 2019).
n Impact of DC/EP: Minimal direct impact to the revenue pool in 2025 as the fee
structure for banks and fintech is unlikely to change in the near-term. At the very
least, the pace at which banks cede market share should slow. Over the long-term
however, competitive pressure could intensify if DC/EP gains in popularity and
usage increases.

Exhibit 105: Retail payments TAM: Rmb 688bn revenues by 2025, 8% TPV CAGR
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 15-19 CAGR 20-25E CAGR
For the exclusive use of MEGAN.RILEY@GS.COM

Retail payment
Retail payment
TPV
TP
TPVV
Banks Rmb tn 670 742 762 862 886 860 946 1,021 1,106 1,201 1,305 7% 7%
Fintech Rmb tn 24 79 148 220 251 276 318 356 398 446 491 80% 12%
Total Rmb tn 694 821 910 1,082 1,137 1,136 1,263 1,377 1,505 1,648 1,796 13% 8%
Consumption TPV
Consumption TPV
Banks Rmb tn 14 15 17 19 20 20 22 23 25 27 30 10% 7%
Fintech Rmb tn 8 13 17 32 46 51 58 64 70 75 79 57% 9%
DC/EP Rmb tn - - - - - - 0 1 2 3 7 N/A N/A
Total Rmb tn 21 28 34 51 66 70 80 87 95 102 109 33% 9%
Overall take
Overall take rrate
at e
Banks bps 3.2 2.6 3.3 3.3 3.6 3.6 3.7 3.6 3.6 3.6 3.5 N/A N/A
Fintech bps 5.2 5.2 5.2 4.9 4.7 4.7 4.7 4.7 4.7 4.7 4.7 N/A N/A
Total bps 3.3 2.8 3.6 3.6 3.9 3.9 3.9 3.9 3.9 3.9 3.8 N/A N/A
Revenue
Revenue
Banks Rmb bn 214 192 248 282 323 314 346 370 397 427 459 11% 6%
Fintech Rmb bn 13 41 78 107 117 129 148 166 186 209 229 75% 12%
Total Rmb bn 226 233 325 390 440 443 495 537 583 636 688 18% 8%

Note: red numbers are GS assumptions.

a2810045d5314637bdba4864b34fcf51
Source: Wind, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 106: Retail payment value to grow 8% annually through 2025 Exhibit 107: Fintech to account for almost 30% of TPV by 2025

China retail payment fee income China retail payment value breakdown
Fintech Banks Fintech Banks
15-19 20-25E 15-19 20-25E
CAGR CAGR chg. chg.
CAGR: 8% 7% 12% 16%
688 19% 22% 25% 26% 27% 28% 28% 28%
636 Fintech
583 Fintech
537 +19ppt +3ppt
495 229
CAGR: 18% 209 75% 12%
440 443 186
390 166
148
325 117 129 93% 88% 84% Banks
107 81% 78%
226 233 Banks 75% 74% 73% 72% 72% 72%
78
13 459 -19ppt +3ppt
41 397 427
346 370 11% 6%
282 323 314
214 248
192

Unit: Rmb bn
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

Source: PBOC, iResearch, Company data, Goldman Sachs Global Investment Research, Gao Hua Source: PBOC, iResearch, Company data, Goldman Sachs Global Investment Research, Gao Hua
Securities Research Securities Research

17 November 2020 65
Goldman Sachs China Financial Services

Exhibit 108: Payment fee income to grow at the same rate as Exhibit 109: Fintech to account for a third of payment fee income by
payment value through 2025 2025

China retail payment fee income China retail payment fee income breakdown
Fintech Banks Fintech Banks
15-19 20-25E 15-19 20-25E
CAGR CAGR chg. chg.
CAGR: 8% 6%
688 18%
24% 28% 27% 29%
636 30% 31% 32% 33% 33% Fintech
583 Fintech
537 +21ppt +3ppt
495 229
CAGR: 18% 209 75% 12%
440 443 186
390 166
148
325 117 129 94%
107 82% Banks
233 Banks 76% 72% 73% 71%
226 78 70% 69% 68% 67% 67%
13 459 -21ppt +3ppt
41 397 427
346 370 11% 6%
282 323 314
214 248
192

Unit: Rmb bn
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

Source: PBOC, iResearch, Company data, Goldman Sachs Global Investment Research, Gao Hua Source: PBOC, iResearch, Company data, Goldman Sachs Global Investment Research, Gao Hua
Securities Research Securities Research

Retail Lending: Rmb 1.8tn revenues by 2025, 9% CAGR


n TAM: Rmb 28tn balance by 2025, which excludes mortgages.
For the exclusive use of MEGAN.RILEY@GS.COM

n TAM growth: 11% balance CAGR in 20-25E, down from 30% in 15-19 (9% for
banks, 20% for fintech) as the government targets household leverage.
n Take rate: Interest rate to remain stable in the coming years, though visibility is low
as this depends on changes in monetary policy. Take rate for fintech (in loan
facilitation) to remain steady at ~3%.
n Revenue: Rmb 1.8tn by 2025 on an 9% CAGR (10% for banks, 20% for fintech
ex.P2P, 3% for others including P2P), calculated by multiplying lending balance by
the interest rate (or take rate).
n Market structure: Banks to continue dominating (66% lending balance by 2025,
75% income), with fintech to double its market share off a very low base (24% of

a2810045d5314637bdba4864b34fcf51
lending balance in 2025 from only 15% in 2019; and 11% of income in 2025 from
6% in 2019) as the share from other financial institutions (FIs) including P2P shrinks
as they are less competitive in acquiring customers.
n Impact of DC/EP: Minimal direct impact in the near-term as retail lending is
determined by a variety of factors such as growth in consumption and housing,
lending appetite and government policies. Over the long-term however, the DC/EP
rollout may help banks recapture some lost market share as customers increasingly
use bank apps embedded with DC/EP (increasing their customer base, MAU, and
stickiness).

17 November 2020 66
Goldman Sachs China Financial Services

Exhibit 110: Lending TAM: Rmb 1.8tn revenues by 2025 (excluding mortgages), 11% balance CAGR
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 15-19 CAGR 20-25E CAGR
Retail lending
Retail lending
Lending
Le
Lending
nding balance
balance
Banks Rmb tn 4 5 8 10 11 12 13 14 15 17 18 26% 9%
Fintech (ex. P2P) Rmb tn 0 0 1 1 2 3 4 4 5 6 7 113% 20%
Others Rmb tn 1 1 2 2 2 2 2 3 3 3 3 22% 6%
Total Rmb tn 5 7 11 13 15 17 19 21 23 26 28 30% 11%
Take
Ta
Take
ke rate
r at e
Banks % 6% 6% 7% 7% 7% 7% 7% 7% 7% 7% 7% N/A N/A
Fintech (ex. P2P) % 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% N/A N/A
Others % 12% 12% 12% 11% 11% 10% 9% 9% 9% 9% 9% N/A N/A
Total % 7% 7% 7% 7% 7% 7% 7% 6% 6% 6% 6% N/A N/A
Revenue
Revenue
Banks Rmb bn 261 317 530 662 766 816 905 984 1,083 1,195 1,321 31% 10%
Fintech (ex. P2P) Rmb bn 3 11 22 41 62 83 104 125 150 173 187 113% 20%
Others Rmb bn 102 168 269 234 204 201 198 229 238 237 242 19% 3%
Total Rmb bn 366 496 821 936 1,031 1,099 1,207 1,339 1,470 1,605 1,750 30% 9%

Red numbers are GS assumptions; does not include mortgages.

Source: Wind, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 111: Lending balance to grow 11% annually through 2025 Exhibit 112: Fintech to account for almost a quarter of lending
(down from 30% in 2015-19) balance (excluding mortgages) by 2025, up from only 15% in 2019
For the exclusive use of MEGAN.RILEY@GS.COM

China retail lending balance


China retail lending balance breakdown
Other FIs Fintech (ex. P2P) Bank
15
1 5--19
19 20
2 0--25E Other FIs Fintech (ex. P2P) Bank 16
1 6--19
19 20
2 0--25E
CAGR
CAGR CAGR
CAGR chg.
chg. chg.
chg.
28 10% 10%
CAGR: 11% 16% 13% 13% 11% 12% 11%
26 Others 17% 21% 21%
3
23 Others
3 11% 15% 18% 20% 24%
21 22% 6% 6% 7% 22% 23% 24%
3 7 -4ppt -3ppt
19
CAGR: 30% 3 6 Fintech ex. P2P
17
15 2 5
Fintech
13 2 4 113% 20%
2 4
11 3 +13ppt +9ppt
2 2 81%
Banks 73% 72% 73% 72% 69% 68%
2 1 66% 65% 65% 66%
7 18 Banks
5 15 17
13 14 26% 9%
11 12
10 -9ppt -6ppt
8
4 5

Unit: Rmb bn
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

a2810045d5314637bdba4864b34fcf51
Source: Wind, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Source: Wind, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities
Research Research

17 November 2020 67
Goldman Sachs China Financial Services

Exhibit 113: Growth in retail lending income to slow to 9% annually Exhibit 114: Fintech to increase market share at the expense of
through 2025 as government measures to curb household leverage other financial institutions; banks to account for the lion’s share
take hold

China retail lending income


China retail lending income breakdown
Other FIs Fintech (ex. P2P) Bank
15--19
15 19 20
2 0--25
25E
E Other FIs Fintech (ex. P2P) Bank 16
1 6--19
19 20
2 0--25E
CAGR
CAGR CAGR
CAGR chg.
chg. chg.
chg.

1,750 18% 16% 17% 16% 15% 14%


CAGR: 9% Others 20%
1,605 28% 25%
34% 33% Others
1,470 242 9% 10% 11% 11%
19% 3% 6% 8% 9%
1,339 237 4%
187 -8ppt -6ppt
CAGR: 30% 1,207 238 Fintech ex. P2P 3%
1,099 173
1,031 229
198 150 Fintech
936 125
821 201 113% 20%
204 104
83 +5ppt +5ppt
234 62 75% 75%
Banks 71% 71% 74% 74% 74% 74% 74%
496 269 1,321 64% 64%
1,195 Banks
366 984 1,083
168 816 905 31% 10%
662 766
102 530 +3ppt +1ppt
261 317

Unit: Rmb bn
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

Source: Wind, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Source: Wind, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities
Research Research
For the exclusive use of MEGAN.RILEY@GS.COM

Wealth Management: Rmb 276bn revenues by 2025, 12% CAGR


n TAM: Rmb 130tn AUM by 2025, including bank WMPs, mutual funds, private funds
etc. We exclude trust channels and brokers in this calculation.
n TAM growth: Mid to low teens in TPV (12% through 2025E from 14% CAGR in
2016-19) thanks to robust asset allocation demand from households.
n Take rate: Stable management fee (for asset management products) and agency
fee. Notably, the blended take rate on agency AUM (AUM multiplied by agent share
in each channel) is impacted by new volume sold each year.
n Revenue: Rmb 276bn revenues by 2025 on an 12% AUM CAGR, calculated by
multiplying AUM by channel share and take rate.

a2810045d5314637bdba4864b34fcf51
n Market structure: In terms of agency income, fintech to steadily take market share
from banks and brokers (23% by 2025 from 19% in 2019) as higher app usage and
better connectivity increase customer penetration and stickiness, benefiting fintech
firms in particular as wealth management continues to shift online. In terms of
AUM, bank WMPs, mutual funds and private funds will continue to expand their
market share, accounting for ~80% of the space by 2025. Fintech firms do not have
assets under management.
n Impact of DC/EP: Minimal direct impact in the near-term as most fintech firms have
an edge over most banks in terms of their app connectivity, functionality and design.
Over the long-term however, DC/EP may help banks recapture market share as
customers migrate back to traditional bank channels as they increasingly use bank
apps embedded with DC/EP.

17 November 2020 68
Goldman Sachs China Financial Services

Exhibit 115: Wealth Management TAM: Rmb 276bn revenues by 2025, 11% AUM CAGR
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 16-19 CAGR 20-25E CAGR
Wealth mg
Wealth mgmt.
mt.
Wealth
Wealth mg
mgmt.
mt. AU
AUMM
Bank WMP Rmb tn 17 23 22 22 23 26 29 32 36 41 47 8% 12%
Mutual fund Rmb tn 8 9 12 13 15 18 20 22 25 28 31 15% 13%
Private funds Rmb tn 5 8 11 13 14 16 18 21 24 28 32 28% 14%
Brokers Rmb tn 2 2 2 2 2 2 2 2 2 3 3 6% 6%
Trust Rmb tn 7 10 14 13 14 14 15 15 16 17 17 18% 4%
Total Rmb tn 40 52 61 63 68 75 84 93 104 116 130 14% 11%
Mgmt.
Mgmt. fee
fee rate
r at e
Bank WMP % 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% N/A N/A
Mutual fund % 1.6% 1.3% 1.2% 1.2% 1.2% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% N/A N/A
Private funds % 2.7% 2.1% 2.0% 2.0% 2.0% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% N/A N/A
Brokers % 1.0% 1.0% 1.0% 1.0% 1.0% 1.1% 1.0% 1.0% 1.0% 1.0% 1.0% N/A N/A
Trust % 2.7% 2.1% 2.0% 2.0% 2.0% 1.8% 1.6% 1.6% 1.6% 1.6% 1.6% N/A N/A
Age
A
Agency
gency
ncy AUM
AUM
Banks Rmb tn 27 34 37 37 38 42 47 52 59 66 75 9% 12%
Fintech Rmb tn 2 3 4 5 7 9 10 11 13 14 16 44% 14%
Brokers & others Rmb tn 2 2 2 2 3 3 3 3 4 4 5 13% 11%
Total Rmb tn 30 39 43 44 48 54 60 67 75 85 96 12% 12%
Blended
Blended take
take rate
r at e
Banks bps 32 22 24 27 26 27 25 25 25 25 26 N/A N/A
Fintech bps 49 38 36 36 36 40 40 40 40 40 40 N/A N/A
Brokers & others bps 66 48 41 42 44 44 41 41 41 41 41 N/A N/A
Total bps 35 24 26 29 29 30 29 29 29 29 29 N/A N/A
Agency
Agency
Age ncy fee
fee income
income
For the exclusive use of MEGAN.RILEY@GS.COM

Banks Rmb bn 87 76 89 99 99 113 119 134 150 168 191 7% 12%


Fintech Rmb bn 8 11 16 18 26 35 39 45 50 57 65 26% 16%
Brokers & others Rmb bn 11 9 9 9 12 13 13 14 16 18 20 6% 9%
Total Rmb bn 106 95 114 126 137 161 172 192 215 243 276 9% 12%

Note: Red numbers are GS assumptions. For the 2015-19 CAGR calculation we use 2016-19 due to the high base in 2015

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 116: Growth in AUM to expand to 12% through 2025 thanks Exhibit 117: Market share for Bank WMPs, mutual funds and
to robust asset allocation by households private funds to continue rising over the next five years

China
Chi
China
na wealth
wealth mgmt.
mgmt. product
product AUM Chi
China
China
na wealth
wealth mgmt.
mgmt. product
product AUM
AUM breakdown
breakdown 16
1 6--19
19 20
2 0--25E
25E
Trust Brokers Private funds Mutual fund Bank WMP 16--19
16 19 20
2 0--25E chg.
chg. chg.
chg.
CAGR
CAGR CAGR
CAGR Trust Brokers Private funds Mutual fund Bank WMP
Trust
130 Trust
18% 18% 16% 15% 14% 13% +1ppt -7ppt
CAGR: 12% 10% 4% 19% 23% 21% 20% 19%
116
17
104 Brokers
Brokers

a2810045d5314637bdba4864b34fcf51
93 17 13% 24% 24%
15% 21% 22% 22% 23%
84 16 32 -4% 6% 18% 20% 21% -1ppt -1ppt
CAGR: 9% 75 15
68 28 21%
63 15 Private funds 17% Private funds
61 24 24% 24%
14 21 19% 21% 22% 23% 24% 24% 24%
52 14 31 21% 14% +4ppt
13 18 +6ppt
14 28
40 16 25
10 14
13 22 Mutual fund Mutual fund
7 8 11 20
15 18 44% 44%
5 9 12 13 17% 13% 36% 35% 35% 34% 34% 35% 35% 36% 36% +4ppt +2ppt
8 41 47
29 32 36
23 22 22 23 26 Bank WMP
17
Bank WMP
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 0% 12% 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E -10ppt +2ppt
Unit: Rmb tn

Source: PBOC, SAC, CBIRC, Company data, Goldman Sachs Global Investment Research, Gao Source: PBOC, SAC, CBIRC, Company data, Goldman Sachs Global Investment Research, Gao
Hua Securities Research Hua Securities Research

17 November 2020 69
Goldman Sachs China Financial Services

Exhibit 118: Agency income to grow 12% annually through 2025, Exhibit 119: Fintech to capture almost a quarter of agency income
consistent with AUM growth by 2025

China wealth mgmt. product agency income China wealth mgmt. product agency income breakdown
Brokers & others Fintech Banks
16
1 6--19
19 20
2 0--25E
25E Brokers & others Fintech Banks 16
1 6--19
19 20
2 0--25E
C
CAGR
AGR CAGR
CAGR chg.
chg. chg.
chg.
276 10% 10% 8% 7% 8% 8% 8% 7% 7% 7% 7%
CAGR: 12% Brokers & others
243 20 8% 11% 14% 14%
19% 22% 23% 23% 23% 23% 23% Brokers & others
215 18 8% 9%
192 65 -1ppt
16 -1ppt
172 57 Fintech
CAGR: 13% 161 14
50 Fintech
137 13
126 13 45 36% 16%
114 39 +8ppt +4ppt
106 12 35 82% 79% 79%
95 9 78%
9 18 26 Banks 72% 70% 69% 70% 69% 69% 69%
11 16 191
8 9 168 Banks
11 150
119 134 9% 12%
99 99 113
87 89 -7ppt -3ppt
76

Unit: Rmb bn 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

Source: PBOC, SAC, CBIRC, Company data, Goldman Sachs Global Investment Research, Gao Source: PBOC, SAC, CBIRC, Company data, Goldman Sachs Global Investment Research, Gao
Hua Securities Research Hua Securities Research

Insurance sales: Rmb 187bn revenues by 2025, 14% CAGR


For the exclusive use of MEGAN.RILEY@GS.COM

n TAM: Rmb 2.4tn insurance sales by 2025, which excludes tied-agents, independent
brokers, and direct sales. Of note, bank sales data here only includes life
bancassurance while fintech sales includes both life and P&C.
n TAM growth: addressable Insurance sales CAGR to accelerate to 14% in 2020-25E
(from 10% in 2015-19) as fintech (15% CAGR) and banks (14%) capture market share
from agents and direct sales etc. However, total insurance sales volume including
agents etc. to slow (9% in 2020-25E from 15% in 2015-19) following tightened
regulations for high-yield products.
n Take rate: we expect the take rate of life bancassurance to be stable at ~6% while
the take rate of fintech to slightly trend up due to change in sales mix (fintech has
higher take rate as it mainly sells P&C products).

a2810045d5314637bdba4864b34fcf51
n Revenue: Rmb 187bn revenues by 2025 on a 14% sales CAGR, calculated by
multiplying insurance premiums by channel share and take rate.
n Market structure: In terms of sales volume, banks and fintech to capture market
share from agents and others (28% and 7%, respectively by 2025 from 21% and
5% in 2019), driven by stronger sales of savings products and non-auto P&C
insurance.
n Impact of DC/EP: Minimal direct impact in the near-term as this does not impact
consumers’ purchasing behaviors. Over the long-term, DC/EP may help banks to
compete on savings product sales if customers return to bank channels and MAUs
increase.

17 November 2020 70
Goldman Sachs China Financial Services

Exhibit 120: Insurance sales TAM: Rmb 187bn revenues, 14% sales CAGR through 2025
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 15-19 CAGR 20-25E CAGR
Insurance
Insurance
Insurance s
Insurance sales
al e s
Banks Rmb bn 665 958 1,058 803 898 1,077 1,239 1,387 1,554 1,740 1,949 8% 14%
Fintech Rmb bn 92 117 139 123 200 224 258 296 342 396 460 21% 15%
Total Rmb bn 757 1,075 1,197 926 1,098 1,301 1,497 1,684 1,896 2,136 2,409 10% 14%
Take
Ta
Take
ke rate
r at e
Banks % 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% N/A N/A
Fintech % 15% 15% 15% 16% 15% 14% 14% 14% 14% 14% 15% N/A N/A
Total % 7% 7% 7% 7% 8% 7% 8% 8% 8% 8% 8% N/A N/A
Revenue
Revenue
Banks Rmb bn 40 57 64 49 56 66 76 85 95 107 120 9% 14%
Fintech Rmb bn 13 17 20 20 29 31 36 42 49 57 67 21% 15%
Total Rmb bn 53 75 84 69 85 97 112 127 144 164 187 12% 14%

Note: Red numbers are GS assumptions. Bank agency only includes life bancassurance while fintech agency includes both life and P&C

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 121: Insurance sales volume to grow 9% annually through Exhibit 122: Agents to steadily give up incremental market share to
2025, at a slower pace than in 2015-19 fintech and banks over the next five years
China insurance sales volume China insurance sales volume breakdown
Agents & others Fintech Banks Agents & others Fintech Banks
15--19
15 19 20
2 0--25E 15
1 5--19
19 20
2 0--25E
CAGR
CAGR CAGR
CAGR chg.
chg. chg.
chg.
For the exclusive use of MEGAN.RILEY@GS.COM

CAGR: 9%
7,030
6,418 Agents & others Agents & others
5,864
5,362 17% 7% +5ppt -9ppt
4,889 69% 65% 67% 69% 69% 68% 67% 66%
CAGR: 15% 76% 74% 71%
4,516
4,264 4,621
3,658 3,802 4,281 Fintech
3,968 Fintech
3,096 3,678
2,428 3,392 21% 15% +1ppt +2ppt
3,215 4%
3,166 4% 6% 7%
2,461 2,876 4% 5% 6% 6%
2,021 460 5%
396 3% 5%
1,671 296 342
258 Banks 31% Banks
117 139 200 224 27% 29% 24% 25% 26% 26% 27% 28%
92 123 1,554 1,740 1,949 21% 21%
665 958 1,058 803 898 1,077 1,239 1,387 8% 14% -6ppt +7ppt

2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E
Unit: Rmb bn

Note: bank sales only includes life bancassurance while fintech sales includes both life and P&C Note: bank sales only includes life bancassurance while fintech sales includes both life and P&C

Source: CBIRC, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Source: CBIRC, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities
Research Research

a2810045d5314637bdba4864b34fcf51
Exhibit 123: Insurance agency fees to grow 14% annually for banks Exhibit 124: Banks to still comprise 64% of institutional agency
and 15% for fintech through 2025 fees by 2025
China insurance institutional agency fees China insurance institutional agency fees breakdown
Fintech Banks Fintech Banks
15--19
15 19 20
2 0--25E 15
1 5--19
19 20
2 0--25E
CAGR
CAGR CAGR
CAGR chg.
chg. chg.
chg.
CAGR: 14% 187

164 25% 23% 24% 29% 32% 32% 33% 34% Fintech
34% 35% 36%
144 Fintech
67
127 +9ppt +2ppt
CAGR: 12% 57 21% 15%
112
49
97
42
84 85
75 36
69 Banks
31 75% 77% 76%
20 29 Banks 71% 68% 68% 67%
53 17 66% 66% 65% 64%
20 120 -9ppt -2ppt
107
13 85 95 9% 14%
66 76
57 64 56
40 49

Unit: Rmb bn
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

Note: bank sales only includes life bancassurance while fintech sales includes both life and P&C Note: bank sales only includes life bancassurance while fintech sales includes both life and P&C

Source: CBIRC, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Source: CBIRC, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities
Research Research

17 November 2020 71
Goldman Sachs China Financial Services

Exhibit 125: Total Addressable Market (TAM) methodology and assumptions


Business segment
Business segment Revenue
Revenue Market
Ma
Market
rket size
s i ze Market
Ma
Market
rket share
share Take rrate
Take at e

~4/5 bps Take Rate for Bank


Bank Card/Fintech TPV: Card/Fintech TPV based on
Payments
Pa
Payments
yments TPV x Take Rate Based on growth projections
~7%/12% CAGR 20-25E company disclosures; expect
take rate to be flat in 20-25E

7% Interest Rate for Bank


Bank Retail Loans: ~10% CAGR
Loan Balance x Interest Rate Consumer Loans;
Retail Lending
Retail Lending 20-25E; Fintech Retail Loans: Based on growth projections
(banks)/Take Rate (fintech) 3% Facilitation rate for Fintech
~13% CAGR 20-25E
Loans

Share of Bank/Fintech/Broker &


Bank WMP/Mutual Take Rate = Average
other channels based on market
AUM x Channel Market Share x Funds/Private Funds/Brokers Management Fee Rate x
Wealth
Wea
Wealth
lth Management
Management share of leading institutions; we
Take Rate Trust: ~12%/13%/14%/6%/4% estimated share paid to sales
expect fintech to steadily gain share
CAGR 20-25E channels
from banks and brokers

Share of Bank/Fintech and Agency


~6%/20% Take Rate for
channels based on CBIRC data and
Premium Sales x Channel Insurance Premium: ~9% CAGR banks/fintech based on
Insurance Sales
Insurance Sales our channel checks; we expect
Market Share x Take Rate 20-25E company disclosures and our
fintech and banks to capture share
estimates
from agents

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research
For the exclusive use of MEGAN.RILEY@GS.COM

a2810045d5314637bdba4864b34fcf51

17 November 2020 72
Goldman Sachs China Financial Services

Appendix
Exhibit 126: Key events in China’s payment industry
For the exclusive use of MEGAN.RILEY@GS.COM

a2810045d5314637bdba4864b34fcf51
Source: PBOC, Caixin, Sina, Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020 73
Goldman Sachs China Financial Services

Exhibit 127: Key regulations for China’s payment industry


Main
Ma
Main
in areas
a r ea s Payment
Pa
Payment
yment industry
industry regulations
regulations Time
Time Key p
Key points
oints

The Administrative Measures on Network Payments by Non- A real-name management system shall apply when the payment institutions provide the
Dec-15
bank Payment Institutions network payment services

Notice on the Transfer of the Network Payment Business of


Network
Ne
Network
twork Starting from June 30, 2018, all the non-bank payment institutions’ network payment
Non-bank Payment Institutions from the Direct-Connection Jun-18
payment
payment business involving bank accounts shall be processed through the NetsUnion
Mode to the NetsUnion Platform
The PBOC would impose greater penalties to the unlicensed entities engaging in the
Notice on Further Strengthening the Rectification of
Nov-17 payment business, and would cut off the payment business channels used by such
Unlicensed Operation of Payment Business
unlicensed entities
Payment institutions shall deposit the full monetary capital (client Reserve) received in
The Administrative Measures on Depository of Client Reserve
Jun-13 advance to handle the payment business on behalf of the client to the special deposit
of Payment Institutions
account opened by payment institutions with the depository bank
Payment institutions shall deposit the client Reserve with a certain proportion to the
The Notice on the Implementation of Centralized Deposit of
Jan-17 special deposit account of the appointed authority; interest shall not be paid on the
Client Reserve of the Payment Institution
client Reserve

Guidelines for Deposit of Part of the Client Reserve in the The branch of the PBOC at the place of the depository bank shall open a special savings
Mar-17
PBOC by Payment Institutions account to handle the deposit of client Reserve.

Management
Ma
Management
nagement of Notice on Adjustment of Centralized Deposit Proportion of The centralized deposit proportion shall be increased from 0% to ~40% from February
Dec-17
client rreserve
client eserve Client Reserve by Payment Institution to April 2018

Notice on 100% Centralized Deposit of Client Reserve by


Jun-18 The centralized deposit proportion shall be increased to 100% by Jan. 2019
Payment Institution

Media reports (Caixin etc.) Dec-19 PBOC started paying annual interest rate of 0.35% on client reserve
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The Administrative Measures on Depository of Client Reserve


Apr-20 An update of the 2013 regulation based on centralized deposit of client reserve
of Payment Institutions (draft)

The Administrative Measures on Payment Insitution Industry 9.5%-12% of interest paid to payment institutions by PBOC will be deposited in the
Oct-20
Security Fund(draft) Industry Security Fund (Rmb 1bn maximum)

The original rules that the acquiring processing fees were shared among issuing banks,
bankcard acquirers and UnionPay in the proportion of approximately 70%, 20% and 10%
respectively were cancelled;
Bank card
Bank ca rd Issuing bank’s service fees, the rate level of which shall be no more than 0.35% of the
Notice on the Improvement of Pricing Mechanism of
transaction
transaction Mar-16 transaction amount by debit cards and no more than 0.45% of the transaction amount
Bankcard Transaction Fee
pricing
pricing by credit cards;
The interchange fee rates charged by bankcard clearing institutions to bankcard
acquirers shall not be higher than 0.0325% (not more than RMB3.25 for a single charge
amount)

The verification of merchant qualification, execution of acceptance agreement,


Notice on the Management of Bankcard Acquiring transaction processing of acquiring services, fund settlement, risk monitoring, the
Jun-15
Outsourcing acceptance of generation and management of terminal secret keys, and error and
Bank card
Bank ca rd disputes settlement, shall not be outsourced
acquiring
acquiring
Relevant business compliance requirements for non-bank payment institutions to
The Administrative Measures on Bankcard Acquiring
Jul-13 engage in bankcard acquiring business, including setting up and sending acquiring
Services
transaction information according to the regulations

a2810045d5314637bdba4864b34fcf51
The Implementation Measures of the PBOC for Protecting
Consumers
Consumers Non-bank payment institutions must protect the personal financial information of
Rights and Interests of Financial Dec-16
protection
protection consumers
Consumers
A non-bank payment institution which conducts QR payment business shall obtain the
Rules for the QR Payment Business Standard Dec-17
relevant license as required and conduct the business in a standard manner
QR p
payment
a ymen t
FinTech Development Plan (2019-2021) Sep-19 QR Code Interconnection is promoted in 2019-2021

Payment institutions which have obtained the Payment License shall carry out the
The Measures for Anti-Money Laundering and Anti-Terrorism
Mar-12 obligations of anti-money laundering and anti-terrorism financing in accordance with
Financing of Payment Institutions
Anti-money
Anti-money the law
laundering a
laundering and
nd
anti-terrorism
anti-terrorism Payment institutions shall fulfill their obligations of reporting large transactions and
financing
financing Management Measure on Large and Suspicious suspicious transactions and formulate internal management systems and operational
Dec-16
Transactions Reporting for Financial Institutions regulations and procedures for reporting large transactions and suspicious
transactions

Source: PBOC, Xinhua, Caixin

17 November 2020 74
Goldman Sachs China Financial Services

Acronyms

AML: Anti Money Laundering

BIS: Bank of International Settlements

CBDC: Central Bank Digital Currency

CFT: Counter Financing of Terrorism

DC/EP: Digital Currency/Electronic Payment

ETC: Electronic Toll Collection

IMF: International Monetary Fund

KYC: Know Your Customer

NBS: National Bureau of Statistics


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NDRC: National Development and Reform Commission

NetsUnion: China Nets Union Clearing Corporation

NFC: Near Field Communication

P2P: Peer-To-Peer

PBOC: People’s Bank of China

QR Code: Quick Response Code

TPV: Total Payment Value

WMP: Wealth Management Product

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17 November 2020 75
Goldman Sachs China Financial Services

References

1. Zhou Xiaochuan, Talk on Central Bank Digital Currency in Caixin Summit (in Chinese),
October 2019.
2. Fan Yifei, Policy implication of digital Renminbi’s positioning as M0 (in Chinese),
September 2020.
3. Fan Yifei, Theoretical foundation and framework choice of China’s Central Bank
Digital Currency (in Chinese), September 2020.
4. Yao Qian, Study on the application of digital fiat currency in peer-to-peer investment
and lending (in Chinese), 2018.
5. Yao Qian, Central bank digital currency prototype system experiment (in Chinese),
2018.
6. Yao Qian, Digital Currency and Bank Accounts (in Chinese), April 2017.
7. Yao Qian, Blockchain and Central Bank Digital Currency (in Chinese), April 2018.
For the exclusive use of MEGAN.RILEY@GS.COM

8. Yao Qian, Optimization of monetary policy based on Central Bank Digital Currency
(in Chinese), April 2020.
9. Mu Changchun, Digital Currency and Libra (online course, in Chinese), September
2019.
10. Mu Changchun, Talk on DC/EP in CF40 Forum in Yichun (in Chinese), August 2019.
11. BIS, Impending arrival – a sequel to the survey on central bank digital currency,
January 2020.
12. Bank of England, Central bank digital currency: opportunities, challenges and design,
March 2020.
13. Kenneth Rogoff, Costs and benefits to phasing out paper currency, May 2014.

a2810045d5314637bdba4864b34fcf51
14. Federal Reserve, Comparing Means of Payment: What Role for a Central Bank
Digital Currency?, August 2020.
15. IMF, The Rise of Digital Money, July 2019.
16. BIS, Central bank digital currencies, March 2008.
17. FSB, Enhancing Cross-border Payments, April 2020.
18. BIS, World Bank, Payment aspects of financial inclusion in the fintech era, April
2020.

17 November 2020 76
Goldman Sachs China Financial Services

Disclaimer for company logos

Third party brands used in this report are the property of their respective owners, and
are used here for informational purposes only. The use of such brands should not be
viewed as an endorsement, affiliation or sponsorship by or for Goldman Sachs or any of
its products/services.
For the exclusive use of MEGAN.RILEY@GS.COM

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17 November 2020 77
Goldman Sachs China Financial Services

Disclosure Appendix
Reg AC
We, Shuo Yang, Ph.D., Yingqi Lin and Derek Su, hereby certify that all of the views expressed in this report accurately reflect our personal views about
the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly,
related to the specific recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.

GS Factor Profile
The Goldman Sachs Factor Profile provides investment context for a stock by comparing key attributes to the market (i.e. our coverage universe) and its
sector peers. The four key attributes depicted are: Growth, Financial Returns, Multiple (e.g. valuation) and Integrated (a composite of Growth, Financial
Returns and Multiple). Growth, Financial Returns and Multiple are calculated by using normalized ranks for specific metrics for each stock. The
normalized ranks for the metrics are then averaged and converted into percentiles for the relevant attribute. The precise calculation of each metric may
vary depending on the fiscal year, industry and region, but the standard approach is as follows:
Growth is based on a stock’s forward-looking sales growth, EBITDA growth and EPS growth (for financial stocks, only EPS and sales growth), with a
higher percentile indicating a higher growth company. Financial Returns is based on a stock’s forward-looking ROE, ROCE and CROCI (for financial
stocks, only ROE), with a higher percentile indicating a company with higher financial returns. Multiple is based on a stock’s forward-looking P/E, P/B,
price/dividend (P/D), EV/EBITDA, EV/FCF and EV/Debt Adjusted Cash Flow (DACF) (for financial stocks, only P/E, P/B and P/D), with a higher percentile
indicating a stock trading at a higher multiple. The Integrated percentile is calculated as the average of the Growth percentile, Financial Returns
percentile and (100% - Multiple percentile).
Financial Returns and Multiple use the Goldman Sachs analyst forecasts at the fiscal year-end at least three quarters in the future. Growth uses inputs
for the fiscal year at least seven quarters in the future compared with the year at least three quarters in the future (on a per-share basis for all metrics).
For a more detailed description of how we calculate the GS Factor Profile, please contact your GS representative.
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M&A Rank
Across our global coverage, we examine stocks using an M&A framework, considering both qualitative factors and quantitative factors (which may vary
across sectors and regions) to incorporate the potential that certain companies could be acquired. We then assign a M&A rank as a means of scoring
companies under our rated coverage from 1 to 3, with 1 representing high (30%-50%) probability of the company becoming an acquisition target, 2
representing medium (15%-30%) probability and 3 representing low (0%-15%) probability. For companies ranked 1 or 2, in line with our standard
departmental guidelines we incorporate an M&A component into our target price. M&A rank of 3 is considered immaterial and therefore does not
factor into our price target, and may or may not be discussed in research.

Quantum
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in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.

Disclosures
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global Equity coverage universe

Rating Distribution Investment Banking Relationships

a2810045d5314637bdba4864b34fcf51
Buy Hold Sell Buy Hold Sell
Global 49% 35% 16% 64% 57% 54%

As of October 1, 2020, Goldman Sachs Global Investment Research had investment ratings on 3,122 equity securities. Goldman Sachs assigns stocks
as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for
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investment banking services within the previous twelve months.

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Goldman Sachs China Financial Services

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a2810045d5314637bdba4864b34fcf51
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a2810045d5314637bdba4864b34fcf51
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