Mainland China Securities Survey 2021 Financial services Introduction 01 Market overview Industry trends Business dynamics Conclusion 06 32 48 66 05 04 03 02 01 The strategic importance of capital market reforms in the first year of the 14th Five-Year Plan Data-driven digital transformation: Integrating fintech and business scenarios Continually enhancing compliance and risk management A new stage of comprehensive opening to the outside world ESG to support sustainable development ESG 3.1 3.2 3.3 3.4 3.5 Wealth management: Accelerating transformation Proprietary trading: Solid performance, especially in OTC derivatives Investment banking: Deepened reform of registration-based IPO system with first-tier players outperforming Credit business: Stock-pledge lending declines, while margin financing and securities lending bounce back to their peak Asset management: Pivoting toward publicly offered funds 4.1 4.2 4.3 4.4 4.5 ContentsAppendices 70 06 Appendix 1 Financial highlights Appendix 2 Sector ranking for 2020 Appendix 3 Overview of foreign invested securities company 3 Appendix 4 2021 rating of securities companies by the CSRC 4 2021 Appendix 5 Mainland Futures Companies 5 Appendix 6 Mainland Fund Management Companies 6 Appendix 7 Mainland Subsidiaries of Fund Management Companies 7 Appendix 8 Securities companies who have set up Hong Kong subsidiaries 8 Appendix 9 Foreign-funded enterprises that offer private fund management business 9 71 185 192 195 199 207 217 225 2291 IntroductionMainland China Securities Survey 2021 2 2021 KPMG Huazhen LLP and KPMG Advisory (China) Limited, are member firms of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. Printed in China. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. During the past extraordinary year, China was able to successfully combat COVID-19 and keep its economy afloat during the pandemic. Meanwhile, the countrys capital market showed strong resilience and vitality during this difficult time. As a key part of the capital market, the securities industry maintained an upward trend in 2020. With the formal implementation of the new Securities Law, the steady launch of the IPO registration system, the further opening up of foreign investment channels, and the acceleration and deepening of digital transformation, major securities companies are actively exploring the transformation of their market positioning, for the purpose of long-term development. According to the audited annual reports of 137 securities companies published by the Securities Association of China (SAC), the securities industry realised operating income of RMB 446.8 billion and net profit of RMB 154.9 billion (based on financial statements at the parent company level), representing year-on-year increases of 24 percent and 30 percent, respectively. As of 31 December 2020, the total assets of the above securities companies stood at RMB 8.9 trillion, representing a year-on-year increase of 22 percent. Their net assets amounted to RMB 2.3 trillion, a year-on-year increase of 14 percent. In terms of income composition, income from all segments grew in 2020. The proprietary trading segment generated income amounting to RMB 148.4 billion (including profits or losses arising from changes in fair values and investment income), up 5 percent from the RMB 141.8 billion recorded in 2019. This segment remained the biggest source of income for the securities industry, accounting for 33 percent of the industrys total operating income. Driven by the strong performance of the secondary market, net income from the brokerage segmentthe traditional source of income for the industrysurged by 54 percent year-on-year to RMB 129.6 billion. Meanwhile, with the steady promotion to the marketing of capital elements, the rapid implementation of the IPO registration system, and the continuous improvement of the Sci-Tech innovAtion boaRd (STAR market), the investment banking business generated net income of RMB 67.3 billion, an increase of 39 percent over the previous year. At the same time, efforts to enhance the active management capabilities of the asset management segment accelerated. In 2020, the asset under management (AUM) fell by 21 percent year-on-year to RMB 8.55 trillion as a result of the decrease in channel operation following the promulgation of the New Asset Management Regulations. Nevertheless, the asset management sector still recorded RMB 29.4 billion in net income, representing a year-on- year increase of 8 percent. IntroductionMainland China Securities Survey 2021 3 2021 KPMG Huazhen LLP and KPMG Advisory (China) Limited, are member firms of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. Printed in China. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. From a regulatory perspective, compliance and risk are still the main priorities, and are of great significance to further strengthen securities companies role as the “gatekeeper” of the capital market. Strengthening intermediaries responsibilities will pave the way for the ongoing launch of the market-wide registration system, and this strengthening of responsibilities represent a regulatory trend that will be the new normal going forward. Within this context, intermediaries in the capital markets need to balance their capabilities and responsibilities to enable the development of multi- level capital markets in China. In 2020, securities companies diversified their businesses amid the transformation of the wealth management industry. In recent years, as the demand for financial services has increased due to the appreciation of customers wealth, financial institutions have leveraged their own resources, deployed measures such as financial technology in an effort to transform the wealth management sector, in order to improve their service capabilities to gain an edge over their competitors. In addition, the deepening of the opening up of the financial industry has presented the securities industry with rare opportunities. Going forward, confronting all those opportunities and difficulties, securities companies should accelerate their business transformations, increase investments in talent and financial technology, and improve their internal governance structures and risk management capabilities in order to tackle the challenges arising from tightening regulation, mergers and acquisitions, and the entry of foreign companies into the market. This report is the 15th annual Mainland China Securities Survey published by KPMG China. It was prepared based on the 2020 annual reports of 137 securities companies in mainland China, which were released by SAC on its official website (402 Market overview 市场回顾Mainland China Securities Survey 2021 7 2021 KPMG Huazhen LLP and KPMG Advisory (China) Limited, are member firms of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. Printed in China. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. 26,711 53,599 54,563 42,165 31,467 46,873 74,391 255,054 127,384 112,463 90,296 127,416 206,825 12.6 11.7 9.5 8.1 7.8 8.2 7.0 4.8 4.0 3.9 3.1 2.9 2.6 - 50,000 100,000 150,000 200,000 250,000 300,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 Total stock turnover of SSE and SZSE (RMB billion) Average brokerage commission rates (per 10,000) In 2020, 137 securities companies in mainland China recorded total operating income of RMB 446.8 billion, representing a year-on-year increase of 24 percent; and net profit after tax of RMB 154.9 billion, an increase of 30 percent year-on-year (Chart 1). The rise in net profits was attributable to the booming securities market. In 2020, the A-share stock markets in Shanghai and Shenzhen recorded a combined turnover of RMB 207 trillion, representing a year-on-year increase of 62 percent (Chart 2). The average brokerage commission rate decreased further in 2020, though by a smaller percentage, to 0.0263 percent 1. A significant increase in trading volume and a slightly lower average commission rate resulted in remarkably higher net income for brokerage businesses, while net income from investment banking businesses increased significantly thanks to the launch of the STAR markets registration system. The New Asset Management Regulations also stimulated the growth of actively managed AUM and boosted the net income of the asset management business. Sources: Financial statements of securities companies and KPMG China analysis Sources: Shanghai Stock Exchange (SSE), Shenzhen Stock Exchange (SZSE), SAC, industry research reports and KPMG China analysis 6.5 (3.7) (9.4) (15.0) (11.4) 24.6 128.9 50.0 93.4 78.4 38.9 32.9 43.0 94.9 244.0 123.0 112.0 62.5 119.5 154.9 -50 0 50 100 150 200 250 300 Chart 2 Market turnover and average brokerage commission rates 1. Source: China Securities Journal Total net profit of securities companies in mainland China (RMB billion) Chart 18 26,711 53,599 54,563 42,165 31,467 46,873 74,391 255,054 127,384 112,463 90,296 127,416 206,825 12.6 11.7 9.5 8.1 7.8 8.2 7.0 4.8 4.0 3.9 3.1 2.9 2.6 - 50,000 100,000 150,000 200,000 250,000 300,000 ( ) 6.5 (3.7) (9.4) (15.0) (11.4) 24.6 128.9 50.0 93.4 78.4 38.9 32.9 43.0 94.9 244.0 123.0 112.0 62.5 119.5 154.9 -50 0 50 100 150 200 250 300Mainland China Securities Survey 2021 9 2021 KPMG Huazhen LLP and KPMG Advisory (China) Limited, are member firms of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. Printed in China. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Based on an analysis of core businesses contribution to the total operating income of domestic securities companies (Chart 3), the proportion of net income from the brokerage business rebounded 6 percentage points year-on-year to 29 percent in 2020, reversing a years- long downward trend. This growth was largely caused by the substantial increase in trading volume on both the Shanghai and Shenzhen stock exchanges. Although the proportion of income accounted for by proprietary trading slipped by 6 percentage points year-on-year to 33 percent, it remained the largest source of income amid the bull market. Meanwhile, asset management businesss proportion of total operating income eased 1 percentage point year-on-year to 7 percent in 2020. During the year, the transformation and upgrading of the domestic economy and the implementation of the registration system stimulated the growth of financing in the capital markets. As a result, the investment banking sector outperformed. Specifically, investment banking income accounted for 15 percent of total operating income, representing a year-on-year increase of 2 percentage points. Besides, interest income and other income accounted for 16 percent, which was in line with the previous year. Sources: Financial statements of securities companies and KPMG China analysis Chart 3 Income composition of domestic securities companies 9% 6% 13% 9% 10% 16% 16% 14% 12% 12% 14% 14% 15% 16% 16% 1% 1% 1% 1% 2% 2% 2% 4% 5% 5% 9% 10% 11% 8% 7% 36% 32% 8% 14% 19% 14% 26% 22% 29% 26% 22% 32% 35% 39% 33% 6% 3% 6% 5% 12% 15% 17% 11% 12% 9% 21% 16% 14% 13% 15% 48% 58% 72% 71% 57% 52% 39% 49% 42% 48% 34% 28% 26% 23% 29% 0% 20% 40% 60% 80% 100% Brokerage Investment banking Proprietary trading and other investments Asset management Others (including interest income from margin financing and securities lending10 9% 6% 13% 9% 10% 16% 16% 14% 12% 12% 14% 14% 15% 16% 16% 1% 1% 1% 1% 2% 2% 2% 4% 5% 5% 9% 10% 11% 8% 7% 36% 32% 8% 14% 19% 14% 26% 22% 29% 26% 22% 32% 35% 39% 33% 6% 3% 6% 5% 12% 15% 17% 11% 12% 9% 21% 16% 14% 13% 15% 48% 58% 72% 71% 57% 52% 39% 49% 42% 48% 34% 28% 26% 23% 29% 0% 20% 40% 60% 80% 100Mainland China Securities Survey 2021 11 2021 KPMG Huazhen LLP and KPMG Advisory (China) Limited, are member firms of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. Printed in China. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. From 2016 to 2020, the operating income of the top 10 securities companies as a proportion of the industrys total operating income increased from 40 percent in 2016 to 44 percent in 2018, before slightly decreasing to 42 percent in 2019 and then remaining at that level in 2020 (Chart 4). In other words, the industrys concentration level remained stable in 2020 after peaking in 2018 and decreasing in 2019. In the past 5 years, the top 10 securities companies operating income as a proportion of the industry total remained firmly above 40 percent, indicating the strength of large brokers. As capital market reforms continue to deepen and securities companies continue to transform and upgrade their businesses, the level of concentration on top securities companies will increase in the long run. Sources: Financial statements of securities companies and KPMG China analysis 40% 42% 44% 42% 42% 38% 39% 40% 41% 42% 43% 44% 45% 2016 2017 2018 2019 2020 Chart 4 Proportion of the top 10 securities companies operating income to the total operating income of the securities industry12 40% 42% 44% 42% 42% 38% 39% 40% 41% 42% 43% 44% 45% 2016 2017 2018 2019 2020Mainland China Securities Survey 2021 13 2021 KPMG Huazhen LLP and KPMG Advisory (China) Limited, are member firms of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. Printed in China. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. In 2020, the A-share stock markets in Shanghai and Shenzhen maintained an overall upward trend despite a correction in the first quarter due to the pandemic. The SSE Composite Index and the SZSE Component Index closed at 3,473 points and 14,471 points at year end, representing year- on-year increases of 14 percent and 39 percent, respectively. In 2020, the economy gradually recovered as the pandemic was brought under control, the capital markets were notably more active compared with the previous year. The combined turnover of SSE and SZSE stood at RMB 207 trillion in 2020,