Introduction Profits in the Chinese banking industry were considerable in 2011 The industry performed well despite the performance of the Chinese economy overall, which is mired in a downturn. The China Banking Regulatory Commission( CBRC) reported that banking industry assets reached 113. 28 trillion yuan by year-end 2011, a 19 percent increase compared to the prior year. In 2011, annual net profits for Chinese commercial banks were 1,041.20 billion yuan, a 36 percent increase compared to 2010. Net interest income for 2011 was 2. 15 trillion yuan, up 29 percent compared to the same period the previous year Although bank profits are high, the capital market performance of Chinese commercial banks has suffered. Share prices and valuations have been low for some time, reflecting global uncertainty with the continued deterioration of the European debt crisis as well as the pressure brought on the quality of bank assets associated with local financing platforms and real estate loans. unstable Risk in the European banking system may further shrink deposits and curtail lending in the regon y Looking forward to 2012, the domestic and overseas macroeconomic and financial environments remain highly International rating agencies have already downgraded the ratings of many European banks, and the banking industry in Europe is in a recession. In the United States, a sustained loss of investor confidence in the banking system following the onset of the 2008 financial crisis has led to financing difficulties At the national working conference in January 2012, the CBRC reported that banks in China are"still at an important stage of strategic opportunity"for reform and development. The complicated operating environment and intense competition will continue, forcing the industry to shore up key controls and mitigate credit, liquidity and other risks Close to two trillion yuan of local debt will mature in 2012. With real estate regulation and control policies in place banks will need to understand the risks this debt retirement will have on the industry. In addition, multiple factors will threaten the quality of bank assets, such as the impact of tightened monetary policy on liquidity and operating risk from private loans and shadow banking. Local government financing platform loans further affect risks that must be anaged effectively to support ongoing growth In this research report, Deloitte China financial services industry and banking industry experts discuss the top 10 most influential topics facing the Chinese banking system in the next two to three years. The report discusses the risk of local government financing platforms; real estate credit risk; commercial bank financing for small and medium enterprises; rural financial system reform; the globalization of Chinese banks: mobile banking and mobile financial services; emerging private banking businesses; competition and cooperation with foreign banks; shadow banking and private loans; and the influence of Basel ll and the International Financial Reporting Standard 9-Financial Instruments on the banking industry In this analysis of the Chinese banking industry, we have collected and processed large volumes of data and refer to the opinions of relevant experts. At the same time, we provide an outlook of developmental trends in the banking ndustry. We hope this report will serve as the starting point for further dialogue both within and outside the banking dustry, and among all who must work together to respond to the challenges and risks in the financial markets and overall economic environment 2012 China Banking Industry Top Ten Trends and Outlook--Enhancing Capital Management, Meeting New Challenges 12012 China Banking Industry Top Ten Trends and Outlook—Enhancing Capital Management, Meeting New Challenges 1 Profits in the Chinese banking industry were considerable in 2011. The industry performed well despite the performance of the Chinese economy overall, which is mired in a downturn. The China Banking Regulatory Commission (CBRC) reported that banking industry assets reached 113.28 trillion yuan by year-end 2011, a 19 percent increase compared to the prior year. In 2011, annual net profits for Chinese commercial banks were 1,041.20 billion yuan, a 36 percent increase compared to 2010. Net interest income for 2011 was 2.15 trillion yuan, up 29 percent compared to the same period the previous year. Although bank profits are high, the capital market performance of Chinese commercial banks has suffered. Share prices and valuations have been low for some time, reflecting global uncertainty with the continued deterioration of the European debt crisis as well as the pressure brought on the quality of bank assets associated with local financing platforms and real estate loans. Looking forward to 2012, the domestic and overseas macroeconomic and financial environments remain highly unstable. Risk in the European banking system may further shrink deposits and curtail lending in the region. International rating agencies have already downgraded the ratings of many European banks, and the banking industry in Europe is in a recession. In the United States, a sustained loss of investor confidence in the banking system following the onset of the 2008 financial crisis has led to financing difficulties. At the national working conference in January 2012, the CBRC reported that banks in China are “still at an important stage of strategic opportunity” for reform and development. The complicated operating environment and intense competition will continue, forcing the industry to shore up key controls and mitigate credit, liquidity and other risks. Close to two trillion yuan of local debt will mature in 2012. With real estate regulation and control policies in place, banks will need to understand the risks this debt retirement will have on the industry. In addition, multiple factors will threaten the quality of bank assets, such as the impact of tightened monetary policy on liquidity and operating risk from private loans and shadow banking. Local government financing platform loans further affect risks that must be managed effectively to support ongoing growth. In this research report, Deloitte China financial services industry and banking industry experts discuss the top 10 most influential topics facing the Chinese banking system in the next two to three years. The report discusses the risk of local government financing platforms; real estate credit risk; commercial bank financing for small and medium enterprises; rural financial system reform; the globalization of Chinese banks; mobile banking and mobile financial services; emerging private banking businesses; competition and cooperation with foreign banks; shadow banking and private loans; and the influence of Basel III and the International Financial Reporting Standard 9 – Financial Instruments on the banking industry. In this analysis of the Chinese banking industry, we have collected and processed large volumes of data and refer to the opinions of relevant experts. At the same time, we provide an outlook of developmental trends in the banking industry. We hope this report will serve as the starting point for further dialogue both within and outside the banking industry, and among all who must work together to respond to the challenges and risks in the financial markets and overall economic environment. Introduction