Professional Documents
Culture Documents
March 2015
Credit
China Research
March 2015
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Summary: A time of
progress and problems
All the numbers pointed to strong growth in Chinas credit market last year. Issuance rose, the growth
rate was up and new products were launched. This primer provides investors with the latest information
about Chinas onshore and offshore bond markets at a time when Beijing is reforming its financial
system, the pace of RMB internationalisation is accelerating and RMB financial markets are growing fast.
Recent developments include:
Steps were taken to replace the debts of troubled local government financing vehicles (LGFVs) with
bonds issued directly by local governments.
The first default test of a publicly-issued bond was called off in order to ensure that the fundraising
process remained stable.
The offshore (CNH) bond market has become an increasingly important channel for Chinese
companies to source offshore financing.
Offshore yields have converged to onshore levels in early 2015 on the back of broadening channels
of cross-border flows and changing expectations on the RMB FX rate.
Although China is the third largest global issuer of bonds, when adjusted for GDP the domestic bond
market is still much smaller than in many developed countries. Many structural issues need to be
resolved, such as establishing a default mechanism, improving the rating system, rationalising the implicit
guarantee between corporates and the government, and diversifying the investor base. So, while great
progress has been made, the era of direct debt financing in China is still at an early stage.
The challenge now is how to achieve a balance between growth and risk. For example, repayment and
refinancing are becoming a concern as more bonds mature at a time when corporate earnings are
deteriorating. The number of corporate bond issuers that have recorded consecutive losses is increasing
rapidly. Despite this, there has yet to be a default for a publicly issued debt instrument. While bail-outs by
either regulators or third parties may protect investors in the short term, they are detrimental to the longterm development of Chinas bond market because:
Investors go for products that offer higher yields without doing sufficient due diligence on the issuer.
This disadvantages high quality issuers that deserve to be rewarded with lower yields.
Issuers tend to borrow excessively because they believe regulators will bail them out if they have
trouble making repayments. This makes it harder to reduce leverage.
THIS CONTENT MAY NOT BE DISTRIBUTED IN THE PEOPLE'S REPUBLIC OF CHINA (THE "PRC") (EXCLUDING SPECIAL
ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO).
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This brings us back to the broader issue of growth vs risk. Chinas debt levels have been climbing faster
than GDP for more than a decade, especially since 2009 when Beijing launched its economic stimulus
package to counter the effects of the global financial crisis. If we use total bank loans and bonds to
measure debt, it comes out at around 193% of GDP as of 2014, up from 130% in 2001.
As we argued in The easing dilemma: Volatility and leverage up, yield yet to fall (10 February 2015),
Chinas central bank faces a policy challenge. Easing, including two rate cuts and one reserve
requirement ratio (RRR) cut, has yet to significantly bring down borrowing costs in the real economy.
The disruption of fund flows due to potential lower onshore RMB yields and a weaker exchange rate
also reduces the effectiveness of policy easing.
This means the government has to weigh the effectiveness of injecting more liquidity as it tries to drive
down yields. Liquidity remains tight despite several rounds of monetary easing, as seen in the persistently
elevated 7-day interbank repo rate. Chinas Treasury curve now looks similar to the US in January 2008:
flat at c3-4% and inverted at the short end, reflecting the difficult financing outlook, especially for banks.
Moreover, default stress should remain an overhang as repayment pressure increases in a market that has
yet be tested by the default of a publicly-issued bond. Besides, it remains to be seen how cutting the ties
between struggling LGFVs and local governments will play out. Despite the challenges, we think the
pace of change will continue this year, with the focus on:
Simplifying rules as the regulators of different credit platforms compete for market share (although
there is a risk that this may intensify segmentation).
More savings will be channelled into the bond market via wealth management products, which will
help the bond market to expand.
The bond market is becoming a competitor to traditional lenders, which may force them to balance
their desire for growth by focusing on efficiency and profitability. This is evident by the rapid growth
in the issuance of asset-backed securities in 2014.
In summary, given that the economy is in need of more funding, we expect the onshore and offshore bond
market to continue to grow in size and sophistication.
This report is the fourth of a series being published for HSBCs RMB, Reform and Chinas Global
Future forum on 26 March 2015.
RMB bn
12,000
500
10,000
400
8,000
300
6,000
4,000
200
2,000
100
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Gross issuance
Source: Wind, HSBC
Net issuance
0
2007 2008
Bond
Source: Bloomberg, HSBC
2009 2010
CD
2011 2012
Net bond
2013 2014
Net CD
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Contents
Summary: A time of progress
and problems
Market dynamics
Trading platforms
20
Investors
21
Recent developments
24
Conclusion
25
26
28
Disclosure appendix
50
Disclaimer
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______________________________________
1 Compound annual growth rate (CAGR) between 2000 and 2014.
3.5
3.0
2.5
2.0
1.5
1.0
0.5
-
Netherlands
Spain
South Korea
Italy
Canada
France
United Kingdom
China
Germany
Japan
25,000
20,000
15,000
10,000
5,000
-
United States
USD bn
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35%
35,000
30%
RMBbn
30,000
25%
25,000
20%
20,000
15%
15,000
10%
10,000
5%
5,000
-
0%
2000
2001
Central gov
2002
2003
Local gov
2004
2005
2006
Quasi-gov
2007
2008
2009
Financial corp
2010
2011
2012
Non-financial corp
2013
2014
12,000
80%
10,000
60%
8,000
40%
6,000
20%
4,000
0%
2,000
-20%
RMB bn
14,000
-40%
2000
2001
2002
2003
2004
2005
Central gov
Financial institution
2006
2007
2008
2009
2010
Local gov
Non-financial corp
2011
2012
2013
2014
140%
6,000
120%
100%
RMB bn
5,000
80%
4,000
60%
3,000
40%
2,000
20%
0%
1,000
-20%
-40%
-60%
(1,000)
2000
2001
2002
Central gov
Financial institution
2003
2004
2005
2006
2007
2008
Local gov
Non-financial corp
2009
2010
2011
2012
2013
2014
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Quota
3,000
2,500
70%
2,000
RMBbn
1,500
60%
1,000
50%
500
-
40%
Equities
2013
Bonds
2014
Loans
Deposits
Growth
Market dynamics
The onshore bond market differs from the
offshore market in many areas, including product
classification, trading platforms, regulations and
rating schemes. Not much has been done in the
way of converging the two markets as
participation by foreign investors is still quite low.
But at the same time these differences also make
it more difficult for foreign investors to
participate. In this section, we address the key
dynamics one by one.
Products
There are mainly five types of issuers in the
onshore bond market: the central government, local
governments, quasi-government entities (including
the PBoC, Chinas central bank and policy banks),
financial institutions and non-financial corporates.
Back in 2000, the central government and quasigovernment entities accounted for 98% of bonds
outstanding (Fig 7). This declined to 55% in 2014
as more corporate issuers tapped the bond market
(Fig 8). We now take a more detailed look at the
main categories of bonds.
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Nonfinancial
corp
2%
Nonfinancial
corp
33%
Central gov
27%
Quasi-gov
37%
Local gov
3%
Central gov
61%
Financial
institution
9%
Quasi-gov
28%
Treasuries
20 yr
5%
1 yr
2%
2 yr
2%
3 yr
10%
5 yr
13%
15 yr
11%
10 yr
26%
7 yr
17%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2,000
RMBbn
50 yr
3%
30 yr
10%
<1 yr
1%
1,500
1,000
500
4.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
5.0%
3.0%
Gross issuance
2.0%
1.0%
Jan-2009
May-2009
Sep-2009
Jan-2010
May-2010
Sep-2010
Jan-2011
May-2011
Sep-2011
Jan-2012
May-2012
Sep-2012
Jan-2013
May-2013
Sep-2013
Jan-2014
May-2014
Sep-2014
Jan-2015
0.0%
1 yr
3 yr
10 yr
30 yr
5 yr
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450
400
350
300
250
200
150
100
50
-
Gross issuance
2014
2013
2012
2011
2010
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2009
RMBbn
Zhejiang
3.2%
Guangdong
3.4%
MoF
81.5%
Source: Wind, HSBC
Note: Data as of 31 December 2014.
Rules
Feb 2009
Oct 2010
Jun 2013
May 2014
Oct 2014
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Government project
debt
Corporate debt
RMBbn
1,500
1,000
500
-
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Source: HSBC
Government general
debt
Gross issuance
Repayment
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Agricultural
Development
Bank of
China
22%
China
Development
Bank
62%
6
Source: Wind, HSBC
4
3
2
1
Aug-10
Nov-10
Feb-11
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
3 yr
5 yr
7 yr
10 yr
10 yr
3%
3 yr
31%
5 yr
54%
Source: Wind, HSBC
Note: Data as of 31 December 2014. Maturity refers to issuance tenor.
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40%
35%
30%
25%
20%
15%
10%
5%
0%
RMBbn
2,000
1,500
1,000
500
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
PBoC bills
Gross issuance
70%
5,000
60%
4,000
RMBbn
50%
3,000
40%
2,000
30%
20%
1,000
6%
5%
10%
0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
4%
3%
Gross issuance
2%
1 yr
10 yr
3 yr
15 yr
Jul-2014
Jan-2015
Jul-2013
Jan-2014
Jul-2012
Jan-2013
Jan-2012
Jul-2011
Jul-2010
Jan-2011
Jul-2009
Jan-2010
Jan-2009
1%
5 yr
15 yr
2.0%
20 yr
2.9%
12 yr
0.1%
30 yr
1.8%
50 yr <1 yr
1.0% 0.3% 1 yr
4.2%
2 yr
2.1%
3 yr
13.6%
10 yr
22.1%
7 yr
23.2%
5 yr
26.7%
Financial bonds
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Insurance
company
bond
7%
Commercial
bank
subordinated
bond
50%
Securities
firm CP
20%
Commercial
bank bond
18%
Source: Wind, HSBC
Note: Data as of 31 December 2014.
Enterprise bonds
10 yr
36%
15 yr
61%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
800
700
600
500
400
300
200
100
-
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
20 yr
3%
RMBbn
Gross issuance
7
6
5
Jan-09
Jun-09
Nov-09
Apr-10
Sep-10
Feb-11
Jul-11
Dec-11
May-12
Oct-12
Mar-13
Aug-13
Jan-14
Jun-14
Nov-14
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Both corporate and enterprise bonds are for nonfinancial corporates. But they also differ in terms
of issuer, listing venue and regulation (Table 31).
31. Differences between corporate and enterprise bonds
Name
1,000
500
Enterprise bond
PPN
MTN
CP
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
Others
Listing venue
Regulator
CSRC
NDRC
Source: HSBC
Note: Listed commercial banks were allowed to issue corporate bonds after November 2013.
CSRC: China Securities Regulatory Commission. NDRC: National Development and Reform
Commission.
9.0
7.0
5.0
AA
Jan-15
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
A+
4 yr
0.05%
11 yr
0.07%
6 yr
7.64%
13 yr
0.03%
300
3.5%
250
3.0%
2.5%
RMBbn
200
10 yr
22.37%
8 yr
2.07%
5 yr
2.27%
7 yr
57.29%
2.0%
150
1.5%
100
1.0%
50
0.5%
0.0%
Gross issuance
2014
30 yr
0.10%
2013
20 yr
0.68%
2012
18 yr
0.00%
2011
15 yr
7.12%
2010
Jul-11
AA+
2009
AAA
Jan-12
Jan-11
Jul-10
Jul-09
Jan-10
Jan-09
3.0
2008
Issuer
2007
RMBbn
1,500
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1,000
10.0%
4.0%
200
2.0%
0.0%
2014
6.0%
400
2013
600
2012
8.0%
2011
800
Gross issuance
12.0%
2010
10
6
4
2
AAA
Jan-15
Jul-14
AA
Oct-14
Apr-14
Jan-14
Jul-13
AA+
Oct-13
Apr-13
Jan-13
Jul-12
Oct-12
Apr-12
Jan-12
AA-
1.5 yr
0.23%
2 yr
3 yr
0.97%
8.59%
4 yr
0.11%
10 yr
19.05%
8 yr
3.14%
7 yr
13.89%
5 yr
50.04%
6 yr
2.56%
14
1,200
2008
2009
RMBbn
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<3 month
3%
15%
>=3 month,
<6 months
6%
12%
9%
>=6 month,
<9 month
32%
6%
1yr
59%
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
3%
AAA
AAA-
AA+
AA
AA-
A+
A-
12 yr
0.1%
15 yr
0.8%
7 yr
10.9%
2,000
2 yr
0.2%
3 yr
18.9%
15%
1,500
10%
1,000
4 yr
1.2%
6 yr
1.2%
20%
2,500
RMBbn
8 yr
0.5%
5%
500
0%
5 yr
61.7%
Gross issuance
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
3M
6M
9M
Feb-15
Sep-14
Apr-14
Nov-13
Jun-13
Jan-13
Aug-12
Mar-12
Oct-11
May-11
Jul-10
8
7
6
5
4
3
2
1
-
Feb-10
Dec-10
1Yr
15
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6
4
2
2009
2009
2009
2010
2010
2010
2011
2011
2011
2012
2012
2012
2013
2013
2013
2014
2014
2014
2015
0
1 yr
3 yr
5 yr
10 yr
30 yr
5 yr
2.9%
7 yr
18.3%
20 yr
15.4%
15 yr
10.8%
10 yr
49.5%
Source: Wind, HSBC
Note: Data as of 31 December 2014. Maturity refers to issuance tenor.
Full name
CDO
Collateralised
Debt Obligation
Asset-backed
Securities
ABS
ABN
Total
Asset-backed
Notes
No. of bonds
outstanding
Underlying
assets
Listing Regulat
venue
or
241
251
83%
0.70%
Credit assets
Interbank
CBRC
120
33
11%
0.09%
50
17
6%
0.05%
411
301
100%
0.84%
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350
3.0%
300
2.5%
RMBbn
250
2.0%
200
1.5%
150
1.0%
100
2014
2013
2012
2011
2010
2009
2008
2007
0.0%
2006
0.5%
2005
50
Gross issuance
>=6 month,
<1yr
18%
>=2yr, <3yr
22%
>=1yr, <2yr
37%
Source: Wind, HSBC
Note: Data as of 31 December 2014. Maturity refers to issuance tenor.
ABS, 1 yr
Jan-15
Sep-14
May-14
Jan-14
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
ABS, 2 yr
<6 months
3%
>=3yr
20%
Jan-11
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1,200
1,000
RMBbn
800
600
400
200
2011
2012
Gross issuance
2013
2014
7 yr
0.5%
Others
0.1%
<1 yr
1.3%
1 yr
9.1%
6 yr
0.3%
1.5 yr
0.2%
2 yr
7.0%
5 yr
26.2%
4 yr
0.3%
3 yr
54.7%
Others
PBOC Bills
RMB bn
80,000
Enterprise bond
60,000
MTN
40,000
CP
20,000
Treasuries
2010
2011
2012
2013
2014
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Muni-bonds
Policy bank
bonds
PBoC bills
Financial
bonds
Enterprise
bonds
Relaunched in
1981
2009
1994
2002
Mostly from
2004
1985
2007
9,591
1,162
9,708
422
2,352
2,912
108
345
13
1, 2, 3, 5, 7,
10, 15, 20,
30, 50
3, 5, 7, 10 1, 2, 3, 5, 7, 10,
15, 20, 30, 50
0.25, 0.5, 1, 3
5, 10, 15
Issuer
MoF
PBoC
Approval
authority
Launch time
Amount
outstanding
(RMBbn)
Turnover1
(RMBtrn/week,
interbank only)
Typical tenor
(years, at
issuance)
Bond rating
Listing venue
Settlement
agent6
PBoC
2008 Re-launched in
2005
1995
2005
666
3,377
1,761
1,018
301
84
NA
99
101
NA
6, 7, 10, 15
3, 5, 7, 10
7, 10, 15, 20
1-3
Mostly listed
companies5
Non-financial
companies
CSRC
NAFMII
NDRC
No rating
AAA 9%; no
rating 91%
No rating
No rating AAA 59%; AA+ AAA 37%; AA+ AAA 57%; AA+ AAA 65%; AA+
14%; AA 8%; 26%; AA 36%; 21%; AA 20%; 21%; AA 13%;
AA- 3%; A+
AA- 1%
AA- 1%
AA- 1%
1%; A-1 5%; No
rating 11%%
Interbank,
exchange,
OTC
Interbank,
exchange
Mostly in
interbank
Interbank
CCDC
Interbank
Interbank,
exchange
Exchange
Interbank
CSDC
CCDC, SCH7
A-1 60%; no
rating 40%
Interbank
Note:
1. Turnover refers to transaction volume (buy or sell) in interbank market. Data are calculated as average of weekly transaction volume in 2014. Source of data for policy bank bonds is CFET because Wind groups policy bank bonds
with financial bonds and a breakdown is not available. Data for other types of bonds are from Wind.
2. All provincial level government plus Shenzhen and Qingdao
3. Including China Development Bank, Agricultural Development Bank of China, The Export-Import Bank of China
4. A few listed companies also issue enterprise bonds but the majority are unlisted companies.
5. Eligible issuers were expanded to all companies with share-holding structure in 16 January 2015.
6. CCDC: China Central Depository & Clearing Co.; CSDC: China Securities Depository and Clearing Co.; SCH: Shanghai Clearing House. All are settlement agents onshore.
7. MTN issued after 17 June 2013 is under custodian of SCH.
8. Custodian agent of commercial paper was changed from CCDC to SCH from September 2011 onwards.
Source: Wind, CFET, HSBC. Data as of 31 December 2014.
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Interbank
Exchange
38.9
34.3
Institutions
China Foreign Exchange Trade System &
National Interbank Funding Center (CFET4)
CCDC and SCH
Private negotiation (majority), market making
1.4
2.6
Institutions and individuals
Shanghai and Shenzhen Stock Exchange
CSDC
Public auction (majority), private negotiation for block
trade
Trading platforms
Onshore bonds are traded on three platforms:
interbank, exchange (including Shanghai and
Shenzhen Stock Exchanges) and over-the-counter
(OTC), which is operated by commercial banks
retail counters. Institutional investors can
participate in the interbank and exchange markets.
The exchange market also allows individual
investors to participate. As shown in Table 51, the
interbank market is the dominant platform.
From non-financial issuers: MTN, CP, super-short-term CP, PPN, ABN, collective MTN, government-backed institutional
bond, enterprise bond, collective enterprise bond, international institution bond
From financial issuers: CD, commercial bank subordinated bond, commercial bank bond, securities firm bond, securities firm
CP, insurance company bond, other financial institution bond, CDO
Exchange
From government/quasi government issuers: Treasuries, policy bank bond, municipal bond, PBoC bill
From non-financial issuers: corporate bond, privately placed bond, CB, ABS, enterprise bond, collective enterprise bond,
government-backed institutional bond (very little amount)
From government/quasi government issuers: Treasuries, policy bank bond (very little amount), municipal bond,
53. Bonds that can be traded across markets, RMBbn, as of 31 December 2014
Bonds
Treasuries
Policy bank bonds
Municipal bond
Govt-backed institutional bonds
Enterprise bonds
Collective enterprise bond*
Amount
outstanding
9,591
9,708
1,162
1,018
2,912
12
0%
0.3%
0%
0%
0%
0%
11%
0%
0%
0%
0%
0%
54%
0%
0%
0%
1%
0%
14%
0%
100%
1%
72%
86%
20
2%
1%
0%
2%
1%
0%
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Interbank market
Non-financial
institution,
148 , 2%
Other
financial
institution, RQFII, 77 ,
169 , 2%
1%
Commercial
bank, 1,322
, 17%
Policy bank,
3 , 0.04%
Investment
institutions,
2,563 , 33%
QFII, 19 ,
0.2%
Insurance
Securities company,
company, 139 , 2%
118 , 2%
Investors
Many different types of institutional investors
have joined the bond market since 1998 when the
interbank market began to open to non-bank
institutional investors. Individual investors are
now the minority.
Domestic banks remain the dominant investors.
For the 78% of onshore bonds for which holding
information is available, national, city and rural
commercial banks collectively hold 60% (Fig 55).
Domestic banks are also the biggest trading
participants, contributing 54% of trading volume
in 2014 (Fig 56). The onshore branches of foreign
banks are becoming bigger players, representing
13% of trading volume in 2014. Other major
investors include securities firms, insurance
companies and investment funds. We now discuss
their different investment styles.
55. Commercial banks are the biggest holders of bonds
Exchange market
Fund
11%
Others
19%
National
commercial
bank
50%
Insurance
companies
7%
Securities
firm
1%
Rural
commercial
bank
4%
City
commercial
bank
7%
Foreign
bank
1%
21
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Credit
China Research
March 2015
Rural
commercial
banks
10%
Stateowned
national
commercial
banks
3% Joint-stock
commercial
banks
14%
Others
(mainly
securities
firms and
funds)
33%
Others
1%
City
commercial
banks
27%
CP
13%
Policy bank
bonds
10%
Enterprise
bonds
37%
Financial
bonds
1%
Source: Wind, HSBC
Note: Holing information is available for only 78% total bonds outstanding. Data as of
31 Dec 2014.
Insurance companies
Commercial banks
Others
0.3%
MTNs
8.6%
Securities firms
Treasuries
14.6%
Financial
bonds
27.6%
Policy bank
bonds
45.0%
Others
0.2%
MTNs
10.5%
Treasuries
34.4%
Enterprise
bonds
3.9%
22
Treasuries
7%
MTNs
31%
Financial
bonds
3.4%
Policy bank
bonds
29.9%
Enterprise
bonds
15.3%
Source: Wind, HSBC
Note: Holding information is available for only 78% total bonds outstanding. Data as of
31 December 2014.
Funds
abc
Credit
China Research
March 2015
Rating system
MTNs
27%
Policy bank
bonds
33%
Financial
bonds
16%
Enterprise
bonds
21%
Regulatory regime
Chinas bond market is overseen by several
regulators. Each has its own territory and rules that
artificially split the market and hurt liquidity. For
example, the interbank market is largely regulated
by the PBoC, NAFMII and CBRC while the
exchange market is the CSRCs territory (Table 61).
Competition between regulators is one of the
reasons why the consolidation of the two trading
platforms has been slow. Moreover, some areas
are regulated by more than one regulator, creating
extra administrative work for issuers and
investors. For example, both the CBRC and PBoC
have a say in banks issuance of financial bonds.
Approval required
before issuance
Listing venue
Treasuries
Municipal bonds
Ministry of Finance
State Council,
Ministry of Finance
PBoC
PBoC, CBRC, CSRC
NDRC
CSRC
NAFMII
Interbank, exchange
Interbank, exchange
Interbank
Interbank
Interbank, exchange
Exchange
Interbank
Note: PBoC refers to Peoples Bank of China, Chinas central bank; NDRC refers to National
Development and Reform Commission, a regulator responsible for reforms and industrial
policies; CSRC refers to China Securities Regulatory Commission, regulator of Chinas
securities market and NAFMII refers to National Association of Financial Market Institutional
Investors, an association set up by PBoC to regulate issuance of several types of bonds
including MTNs and commercial papers.
Source: HSBC
23
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Credit
China Research
March 2015
Others
1%
3,000
AA1%
RMB bn
2,500
AAA
55%
AA+
17%
Source: Wind, HSBC
Note: Data as of 31 December 2014. A-1 is rating specifically for CP. Around 32% of
onshore bonds have a rating. Credit bonds refer to those issued by financial institutions
and non-financial corporates, i.e. exclude Treasuries, muni-bonds, policy bank bonds
and PBoC bills.
2,000
1,500
1,000
500
-
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
AA
16%
Gross issuance
Total repayment
Recent developments
No. of issuers
Amount of
bonds
outstanding
(RMBbn)
As % of total
credit bonds
outstanding
Default stress
As of 3Q 2014
As of 2013
As of 2012
54
28
14
405
155
73
2.8%
1.3%
0.8%
24
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Credit
China Research
March 2015
5
4
3
175%
40,000
20Y
15Y
8Y
China, 11 Mar 15
125%
20,000
10Y
6Y
150%
60,000
4Y
RMB bn
80,000
2Y
100,000
6M
120,000
1M
140,000
US, 14 Jan 08
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
100%
Debt: bond
Debt: loan
Tight liquidity
Rate cut
RRR cut
Rate cut
Conclusion
In 2014, the onshore bond market made great
progress in many areas such as issuance, new
product launches and the simplification of
regulations. We think the pace of change will
continue to increase this year, with the focus on:
Simplifying rules as the regulators of different
credit platforms compete for market share
(although there is a risk that this may
intensify segmentation).
More savings will be channelled into the bond
market through wealth management products,
which will help the bond market to expand.
5
4
3
3 Nov 14
10 Nov 14
17 Nov 14
24 Nov 14
1 Dec 14
8 Dec 14
15 Dec 14
22 Dec 14
29 Dec 14
5 Jan 15
12 Jan 15
19 Jan 15
26 Jan 15
2 Feb 15
9 Feb 15
16 Feb 15
23 Feb 15
2 Mar 15
9 Mar 15
16 Mar 15
25
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Credit
China Research
March 2015
Changing dynamics of
offshore RMB bonds
The CNH bond market has become an increasingly important
26
Crystal Zhao
Analyst
The Hongkong and Shanghai
Banking Corporation Limited
+852 2996 6514
crystalmzhao@hsbc.ocm.hk
Zhi Ming Zhang
Head of China Research
The Hongkong and Shanghai
Banking Corporation Limited
+852 2822 4523
zhimingzhang@hsbc.com.hk
Credit
China Research
March 2015
abc
27
abc
Credit
China Research
March 2015
28
Sep-14
Sep-13
Sep-12
Sep-11
Sep-10
Sep-09
0
Mar-09
Sep-08
Sep-07
Sep-06
Sep-05
Sep-04
Sep-03
Sep-01
Sep-00
Crystal Zhao
Analyst
The Hongkong and Shanghai
Banking Corporation Limited
+852 2996 6514
crystalmzhao@hsbc.ocm.hk
Zhi Ming Zhang
Head of China Research
The Hongkong and Shanghai
Banking Corporation Limited
+852 2822 4523
zhimingzhang@hsbc.com.hk
abc
Credit
China Research
March 2015
800
12%
400
6%
0%
0%
-5%
-10%
Expectation of CNY
appreciation against USD
Mar-08
Mar-07
-15%
Mar-06
Mar-15
18%
Mar-14
1200
Mar-13
24%
Mar-12
1600
Mar-11
30%
RMBbn
Mar-10
2000
Mar-09
Table 1. List of existing CNH bonds issued by LGFVs (excluding private placements; not exhaustive)
Issuer
Security name
Yield
(11/03/2015)
1000
5.15
5.8
600
5.6
850
4.25
4.7
500
5.2
1000
5.9
5.8
29
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Credit
China Research
March 2015
Fig.5 Both outbound and inbound RMB flows have rallied in 2014 from 2013
Southbound Stock Connect (RMB13bn in 2014)
RMB QDII (unknown in 2014)
RMB ODI (RMB187bn in 2014)
Retail conversion
Offshore
Bilaterial currency
swap
30
2014
abc
Credit
China Research
March 2015
Fig.8 CNH high grade corporates also yield higher than onshore
7 Yield (%)
6
5
0
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15
6
5
4
3
2
1
Gap
3M CNH HIBOR
Mar-15
0
-1
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
7Y
10Y
30Y
CNH 3/11/2014
CNY 3/11/2014
Nov-13
5Y
Sep-13
2Y
3Y
4Y
CNH 3/11/2015
CNY 3/11/2015
Jul-13
1Y
3M onshore SHIBOR
31
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China Research
March 2015
120
6.3
6.25
110
6.2
6.20
100
6.1
6.15
90
6.10
80
5.9
6.05
70
0
Jan-13Apr-13 Jul-13 Oct-13Jan-14Apr-14 Jul-14 Oct-14Jan-15
CNH bond average yield (HSBC Index)
USDCNY spot rate (RHS)
5.8
2
600
300
-2
Mar-11 Sep-11 Mar-12 Sep-12Mar-13 Sep-13Mar-14 Sep-14Mar-15
1-year
2-year
3-year
5-year
Source: Bloomberg, HSBC
900
-1
32
60
6.00
Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15
USDCNY spot
USD DXY Index (RHS)
0
1H2010
1H2011
1H2012
1H2013
1H2014
Inward remittances to Hong Kong (LHS)
Outward remittances to the Mainland (LHS)
Ratio of inward to outward remittances to the Mainland
abc
Credit
China Research
March 2015
600
20%
400
15%
10%
200
0
2012
2013
5%
10
0%
2014
RMB ODI
Total ODI
% of RMB ODI over total ODI (RHS)
0
2006 2007 2008 2009 2010 2011 2012 2013 2014
Outbound
Inbound
Source: State Administration of Foreign Exchange, HSBC
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China Research
March 2015
RMBbn
500
400
Chinese
corporate
17%
300
200
100
Chinese
financial
69%
0
2007 2008
Bond
2009 2010
CD
2011 2012
Net bond
2013 2014
Net CD
Yield (%)
BPLN 18
VW 19
AIFP 19
AIFP 18
SKGLCH
18
SKGLCH TOTAL 18 BPLNVW
18
16
TOTAL 18
16
VW 17
VW 17
CAT 15
2.00
100
80
1.50
60
40
1.00
20
VLVY 15
0.50
0
-20
China Foreign Greater Foreign
FIs
FIs
China Corp
Corp
Source: Bloomberg, HSBC
34
Sov
Supr
CD
0.00
VW 16
VW 16
VLVY 15
ALOFP 15
ALOFP 15
0.00
CAT 15
M_duration
1.00
2.00
3.00
CNH swapped to USD USD bond yield
4.00
abc
Credit
China Research
March 2015
RMB bn
Gross issuance (optimistic)
Gross issuance (base)
Amount issued
Outstanding (optimistic)
Outstanding (base)
400
300
200
100
0
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Bloomberg, HSBC estimates
4.0
7.0
3.6
5.1
3.0
4.0
3.0
7.3
4.0
5.0
3.0
3.5
6.3
3.0
3.0
8.0
3.0
6.0
2.0
5.0
5.0
5.0
3.0
3.0
3.7
3.0
3.0
2.5
4.6
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Credit
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March 2015
Table 3 The list of CNH bonds backed by SBLC or cross-border standby facility (spread and bid yield as of 13 March 2015)
Issuer/ Keepwell provider
CHINA CHENGTONG
DEVELOPMENT GROUP
HONG KONG HUAFA
INVESTMENT
RIZHAO PORT GROUP
AVIC INTERNATIONAL
LEASING
ZHUHAI DA HENG QIN CO
SICHUAN DEVELOPMENT
HOLDING
Maturity
Spread* (bp)
CHCHTO 4 05/09/17
ABC
4/30/2014
5/9/2017
4.7
600
14
ZHHFGR 4 1/4
06/18/17
RIZHAO 4 1/4
05/15/17
AVICIL 4 3/8 06/13/17
ABC
6/11/2014 6/18/2017
4.8
850
24
ABC
5/8/2014 5/15/2017
4.8
850
16
ABC
6/6/2014 6/13/2017
5.0
500
42
ZHUDHQ 4.75
SHANPU
12/11/17
SIDEVE 5.15 ICBC ( cross07/31/17 border standby)
12/4/2014 12/11/2017
5.0
1,500
44
7/21/2014 7/31/2017
5.8
1,000
123
0
2013
Foreign issuer
Source: Bloomberg, HSBC
36
2014
Chinese issuer
2015YTD
Taiwanese issuer
______________________________________
1 FINI- Foreign Institutional Investors registered with Taiwan Stock
Exchange
abc
Credit
China Research
March 2015
Fig.22 The structure of cross-border standby facility backed CNH bond from Sichuan Development Holding
Offshore
Yieldking Investment
Limited (The issuer)
Guarantee
Onshore
Sichuan SASAC*
Bank
Standby
Facility
ICBC Sichuan
branch
Yieldsun Investment
Limited (The guarantor)
37
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Credit
China Research
March 2015
EURCNY
spot
11
10
0
1Y
-1
2Y
3Y
4Y
5Y
7Y
6
1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: Bloomberg, HSBC
RMBbn
700
Fig.27 RMB lost against the USD the first time since the FX
reform in 2005
8 %
6
600
500
400
300
200
-2
100
-4
0
2007
38
2014
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Annual RMB appreciation against USD
Source: Bloomberg, HSBC
Note: Positive number means RMB appreciation against USD, vice versa.
In 2005, China announced to revaluate RMB and moved it to a managed peg system
against a basket of currencies from strictly pegging to USD previously
abc
Credit
China Research
March 2015
CD
4.0
Supr
Sov
3.5
Foreign corps
3.0
Foreign financials
Greater China corps
2.5
China financials
0%
10%
2013
20%
30%
40%
50%
2.0
Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15
2014
Tenor
(years)
2.00
1.50
1.00
0.50
2013
Including CD
2014
Excluding CD
39
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China Research
March 2015
10%
125
8%
6%
120
4%
115
2%
110
0%
105
-2%
100
-4%
Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15
RMB Real Effective Exchange Rate
Change (y-o-y) (RHS)
20
10
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
INR
CNY
KRW
SGD
IDR
Europe
North America
MENA
Asia
Total
UK
Switzerland
ECB
Luxembourg
Germany
France
Canada
Qatar
HK
Singapore
South Korea
Taiwan
Australia
200
150
350
Via ECB
Via ECB
Via ECB
200
35
400
300
360
na
200
2195
25.4
na
67
na
na
20
na
na
981
277
115
319
na
1804
80
50
na
na
80
80
50
30
270
50
80
na
50
820
Source: PBoC, HKMA, MAS, Central Bank of the Republic of China (Taiwan), City of London, CEIC, BIS, WFE, BOK, Bundesbank, Central Bank of Qatar, Central bank of Australia, Central Bank of Canada, HSBC
40
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Credit
China Research
March 2015
20%
3,000
1,200
2,000
10%
1,000
800
400
0%
2012
2013
2014
Source: HKMA, CBC, Bank of Korea, MAS, City of London, Bloomberg, Reuters, HSBC
Note: RMB deposits in Hong Kong, Korea in Jan 2015, Taiwan in Feb 2015, Singapore and
Macau in Dec 2014, Luxembourg in Jun 2014, Paris in Sep 2013 and London in Jun 2014
41
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Credit
China Research
March 2015
3
Mar-14
4
Mar-15
QDIE
QDLP
Northbound Stock Conenct
RQFII
CIBM
42
Offshore
abc
Credit
China Research
March 2015
43
abc
Credit
China Research
March 2015
Appendix I: List of benchmark CNH deals in the past 12 months by issuer type
Bloomberg ID
ISIN code
EK2466192
EK2845734
DE000A11QLF4
HK0000200664
EK3719995
EK4801248
EK4999158
HK0000207057
MYBUG1401358
HK0000216777
EK4928397
EK5710232
XS1122061242
XS1132718765
EK5756276
XS1133585056
EK6018460
XS1140427904
EK6121306
XS1143563440
EK7198907
FR0012498350
EK1674226
EK1817833
HK0000196235
HK0000196698
EK2563832
HK0000199361
EK3140473
HK0000202736
EK3234730
HK0000203353
EK3459394
HK0000203254
EK3775690
XS1084926432
EK3720175
EK4652203
EK4852092
HK0000206091
HK0000214392
XS1110633036
EK4932753
HK0000217817
EK5406138
HK0000219730
EK5991436
HK0000223831
EK5992996
HK0000224722
EK6519558
XS1155274795
EK5783403
HK0000223849
EK6256367
XS1142397550
EK7007348
XS1174138708
EK7840284
XS1199956712
44
Security
Foreign issuer
KFW 1 3/8 05/12/16
KFW
1000
MUFG 3.05 05/26/17 BK TOKYO-MITSUBISHI
1000
UFJ
ILFSIN 8 07/17/17
ITNL INTL PTE LTD
575
CAGA 3.7 09/22/17
CAGAMAS GLOBAL
1500
HUAWEI 4.55 09/25/17 HUAWEI INVESTMENT&
1600
HOLDING
UKIN 2.7 10/21/17
UNITED KINGDOM
3000
BRCOL 2.85 11/13/16 PROVINCE OF BRITISH
3000
COLUMBIA
ASIA 3.2 11/10/19 ASIAN DEVELOPMENT
1250
BANK
ICICI 4 11/24/17
ICICI BANK
600
LTD/BAHRAIN
NSWTC 2 3/4 12/01/15 STATE OF NEW SOUTH
1000
WALES AUSTRALIA
CADES 3.8 02/06/17
CAISSE D'AMORT
3000
DETTE SOCIALE
China corporate issuer
CNUCOM 4 04/16/17 CHINA UNICOM HK LTD
4000
GUOSEN 6.4 04/24/17
GUOSEN SECU
1200
OVERSEAS
CHPWCN 4.2 05/15/17
CHINA POWER
1500
CONSTR
SINOTR 4 1/2 06/10/17 SINOTRANS SAILING
1000
LTD
MINMET 4 1/4 06/16/17
CHINA MINMETALS
2000
CORP
CHICIT 5.35 07/03/17
CHINA CITY
2500
CONSTRUCT INTL
TPHL 10 3/8 07/16/17
TIMES PROPERTY
1500
HLDG LTD
JINCHU 4 3/4 07/17/17
JINCHUAN GROUP
1500
QLSECU 6 1/4 09/10/17 QILU INTL HOLDING LTD
1500
PWRLNG 10 3/4
POWERLONG REAL
1500
09/18/17
ESTATE HL
DATATE 5 1/2 09/29/17 DATANG TELECOM HK
1000
HLDG
BHAIST 6.4 10/16/17
BOHAI GENERAL
1500
CAPITAL
WANHUA 4 1/2 11/19/17 WANHUA CHEMICAL
1000
INT HOLD
ORSECH 6 1/2 11/26/17
ORIENT FINANCE
900
HOLDINGS HK LTD
BJASST 4.3 12/23/17
BEIJING JINGNENG
1000
CLEAN ENERGY HK LTD
Basel III compliant tier 2 and additional tier 1
CCB 4.9 11/12/24 CHINA CONSTRUCTION
2000
BANK
ICBCAS 6 12/29/49
IND & COMM BK OF
12000
CHINA
ANZ 4 3/4 01/30/25 AUST & NZ BANKING
2500
GROUP
BNP 5 03/17/25
BNP PARIBAS
1500
Maturity
Moody's
rating
S&P rating
4/29/2014
5/19/2014
5/12/2016
5/26/2017
Aaa
NA
AAA
A+
7/10/2014
9/12/2014
9/17/2014
7/17/2017
9/22/2017
9/25/2017
NA
A3
NA
NA
NA
NA
10/14/2014
10/28/2014
10/21/2017
11/13/2016
Aa1
NA
NA
AAA
10/29/2014
11/10/2019
Aaa
AAA
11/13/2014
11/24/2017
Baa2
BBB-
11/19/2014
12/1/2015
Aaa
AAA
1/26/2015
2/6/2017
Aa1
NA
4/10/2014
4/15/2014
4/16/2017
4/24/2017
NA
NA
NA
NA
5/8/2014
5/15/2017
NA
NA
6/3/2014
6/10/2017
NA
NA
6/9/2014
6/16/2017
NA
NA
6/25/2014
7/3/2017
NA
NA
7/9/2014
7/16/2017
B2
7/10/2014
8/29/2014
9/10/2014
7/17/2017
9/10/2017
9/18/2017
NA
NA
B3
NA
NA
B-
9/22/2014
9/29/2017
NA
NA
10/9/2014
10/16/2017
NA
NA
11/12/2014
11/19/2017
Baa3
BBB-
11/19/2014
11/26/2017
NA
NA
12/16/2014
12/23/2017
NA
NA
NA
BBB+
Ba2
BB
A3
BBB+
Baa2
BBB
Credit
China Research
March 2015
abc
1) Direct trading between RMB and NZD was launched on the inter-bank foreign exchange market from 19 March 2014.
2) The value of Australias RMB payments increased by 248% between February 2013 and February 2014. In February 2014, 14.2%
of payments between Australia and China/Hong Kong were in RMB. With the announcement that ASX and Bank of China were
establishing a RMB settlement service in July 2014, Australian companies trading with China will be able to pay and receive RMB for
cross-border transactions just as they do with the Australian dollar.
3) The Reserve Bank of Australia and the People's Bank of China signed an MoU to establish official RMB clearing arrangements in
Australia on 17 November, according to a central bank statement. The Chinese authorities have also announced that Australia will be
granted access to the RQFII program, with an initial aggregate quota of RMB50bn.
4) China's central bank appointed the Sydney branch of Bank of China to clear RMB transactions.
Cambodia
The ICBC has been approved by the National Bank of Cambodia as a clearing bank for RMB in the country.
Canada
1) The central banks of China and Canada have agreed to a currency swap worth RMB200bn or CAD30bn, according to a Canadian
government statement issued on 8 November 2014. China's central bank will also appoint a clearing bank in Canada for RMB in
Toronto. China will also give Canadian investors the right to invest up to RMB50bn initially in China's capital markets under the RQFII
programme.
2) China's central bank appointed the Canadian branch of ICBC as the RMB clearing bank in Toronto.
France
1) The French central bank said on 29 June 2014 that it had signed a memorandum of understanding (MOU) with its Chinese
counterpart to set up a RMB payment system in Paris. A RMB clearing bank will be designated by Chinas central bank later, according
to Reuters. Also, a total of RMB80bn quota was granted to France-based investors under the RQFII scheme.
2) BOC Paris has been appointed as the clearing bank for RMB in Paris.
3) Banque de France and the Hong Kong Monetary Authority signed an MoU on 28 October 2014 with respect to strengthening
cooperation on RMB business in Hong Kong and Paris.
Germany
1) The central bank of Germany and China signed agreements to allow companies to clear payments made in RMB in Frankfurt,
according to statement from China's central bank. Separately, Deutsche Brse said it had signed a strategic partnership with the Bank of
China to allow Chinese issuers and Asian investors to directly access German and European capital markets.
2) Bank of China was appointed by the Chinas central bank as the RMB clearing bank in Frankfurt.
3) A total of RMB80bn quota was granted to German investors under the RQFII scheme, according to Reuters.
Hong Kong
1) HKEx unveiled plans to list coal and industrial metals futures on its trading platform. It also expects to offer RMB-denominated futures
for zinc, copper and nickel, and a US dollar contract for thermal coal by the end of this year.
2) HKs RMB clearing bank extended service hours for RMB clearing services from 1 October 2014. The new service runs 20.5 hours
per day, Monday to Friday, from 8:30am to 5am of the next day to cover the European and American trading hours with same-day value.
3) RMB outstanding loans by Hong Kong banks grew 30% to RMB152.2bn at the end of August 2014 from the end of 2013, according
to the HKMA. The growth of Hong Kong banks' RMB loan book includes companies borrowing in the Shanghai Free Trade Zone and
Shenzhen's Qianhai special economic zone, according to South China Morning Post. Companies registered in Qianhai had recorded a
combined demand of RMB44bn of cross-border RMB loans with the HKMA as of August 2014.
4) The HKMA will provide intra-day funds up to RMB10bn to authorised institutions (AIs) to better manage liquidity starting 10 November
2014. The list of securities that can be used to obtain repos will be expanded to include China policy banks' CNH bonds. Separately, the
HKMA will offer a dedicated repo facility at RMB2bn to each of the seven Primary Liquidity Providers (PLPs) to promote CNH market
development.
5) The RMB20,000 daily conversion limit for Hong Kong residents was removed from 17 November 2014, but the daily limit of
RMB80,000 for cross-border remittances remains in place.
6) China and Hong Kong renewed the currency swap agreement for a term of three years ,with the size remaining the same as
RMB400bn.
7) On February 2015, the Hong Kong Monetary Authority announced adjustments to the calculations of interest rates on RMB intraday
and overnight funds provided under the RMB Liquidity Facility to authorised institutions participating in RMB business in Hong Kong.
Instead of referencing the CNH HIBOR fixing on a single day, the new calculations would be based on 3-day moving averages of the
fixing. The objective is to reduce the volatility of the applicable repo rates. The charging arrangements for intraday repo converted into
overnight repo have also been adjusted. Specifically, the following refinements were implemented effective from 2 March 2015:
a. The repo rates to be applied on the overnight repo will be changed to the average of the most recent 3 TMA overnight CNH HIBOR
fixings (inclusive of the fixing on the same day) plus 50 basis points.
b. The repo rates to be applied on the intraday repo will be changed to the average of the most recent 3 TMA overnight CNH HIBOR
fixings (inclusive of the fixing on the same day).
c. Any intraday repo not repaid before 11:30pm each day will be automatically converted into an overnight repo. The overnight repo will
be subject to a full overnight interest charge, based on the formula for overnight repo above, while interest charge on the relevant
intraday repo will be waived.
Ireland
Bank of Ireland has become the first Irish bank to allow business customers make payments in RMB.
Source: Reuters, Bloomberg, Peoples Bank of China, CBC, Bank of Korea, Monetary of Singapore, South China Morning Post, Chinamoney, HKMA, UNA, Financial Times, HSBC
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Appendix II: Summary of CNH market developments in the past year (continued)
Korea
1) The PBOC lent KRW400m (RMB2.4m) to support trade settlement financing for Chinese importers of goods from Korea, marking its
first use of foreign currency under currency swap agreements, according to Shanghai Daily. Beijing and Seoul extended their currency
swap agreement for another three years in October 2011, doubling the value of the deal to RMB360bn. The PBoC and the BOK agreed
in December 2012 to use the swap line to support trade settlement in each country's respective currencies for domestic companies.
2) On 3 July 2014 China and South Korea agreed on a series of steps aimed at spurring offshore use of the yuan and investment in
Chinese capital markets, according to Seoul's finance ministry and central bank. 1) Bank of Communications will be the RMB clearing
bank in Seoul; 2) RMB80bn quota will be granted to Korea investors under the RQFII programme; 3) direct trading of RMB-KRW pair will
be launched.
3) The Bank of Korea and the Peoples Bank of China renewed the Korean won-Chinese yuan Bilateral Currency Swap Arrangement
and kept its size at KRW64trn/RMB360bn. The effective period will be 3 years from 11 October 2014 to 10 October 2017 and could be
extended by agreement between the two sides.
4) Shinhan BNP Paribas Asset Management became the first Korean institutional investor to receive a licence to access Chinas
onshore capital markets via the RQFII scheme.
5) Korea appointed about 10 market makers in December to offer liquidity in won-yuan direct trade. Separately, Korea is planning to
issue CNH bonds.
6) South Korea plans to launch yuan-won futures contracts as early as June 2015 to boost activity in Seoul's new yuan-won market.
Kuwait
Kuwait Investment Authority (KIA) has become the biggest foreign investor in China's RMB public market with a total USD2.5bn
(USD1.5bn is under QFII and USD1.0bn is under the China Interbank Bond Market Scheme) investment quota, according to KUNA.
Luxembourg
1) In Luxembourg, RMB deposits increased by 24% to RMB79.4bn in 1Q 2014 compared to end 2013. During the same period, RMB
loan portfolios reached RMB73.0bn, up 36% and recovering from a slight decline in Q4 2013. Trade finance figures remained stable at
RMB33.9bn. In the area of investment funds, RMB business grew to RMB261.8bn.
2) The central bank of China and Luxembourg signed a memorandum of understanding.
3) ICBC Luxembourg has been appointed as the clearing bank for RMB in Luxembourg.
Malaysia
Bank Negara Malaysia announced the signing of an MoU with the People's Bank of China (PBC) on the RMB clearing arrangements in
Malaysia on 10 November 2014.
New Zealand
The Reserve Bank of New Zealand announced on 22 May the renewal of a reciprocal currency arrangement to support the settlement of
cross border transactions between New Zealand and Chinese businesses. The size of the swap facility is RMB25bn (NZD5bn) and it
has a three-year maturity which may be extended if both parties agree.
Nigeria
Nigeria's central bank plans to invest more of its USD43bn of reserves into yuan from dollars, according to Bloomberg, citing the deputy
governor. The bank will increase the renminbi's share of reserves to as much as 7% from 2% now, without specifying a timeframe.
Qatar
China signed an RMB35bn currency swap with Qatar. Qatari investment institutions will also get the right to invest up to RMB30bn in
mainland Chinese securities under the RQFII program. Also, ICBC Doha branch was assigned as RMB cleaning bank for Qatar.
Russia
China signed an RMB150bn currency swap agreement with Russia with a tenor of 3-years, according to a central bank statement.
Singapore
1) OCBC Bank has launched a SGD127m private equity fund under the Shanghai Qualified Foreign Limited Partner (QFLP) Pilot
Programme. The OCBC Capital (Shanghai) Equity Investment Fund will enable OCBC Bank to convert up to SGD127m worth of foreign
denominated capital into RMB and invest in domestic Chinese companies
2) Singapore Exchange is adding new Asian FX futures contracts on Chinese RMB, Japanese yen and Thai baht. The new Asian FX
contracts were available for trading from 20 October 2014.
3) Direct trading between RMB and SGD was launched on the interbank foreign exchange market from 28 October 2014.
4) The Monetary Authority of Singapore started to offer up to RMB5bn overnight funds on any given day to complement the existing
RMB facility that allows banks to borrow RMB funds on a term basis for trade, direct investment and market stability purposes. In
addition, the directive issued by the PBoC Nanjing Branch will allow: a) banks in Singapore can conduct cross-border RMB lending to
corporates in the Suzhou Industrial Park (SIP); b) corporates in SIP can issue RMB bonds in Singapore; c) equity investment funds in
SIP can conduct direct investment in corporates in Singapore; d) individuals in SIP can conduct RMB remittance between China and
Singapore for the settlement of current account transactions and direct investment in corporates in Singapore.
Taiwan
1) Taiwan's Gre Tai Securities Market signed a deal with the Eurex Exchange to provide cross-border exchange services in RMBdenominated bonds by year-end. The deal will allow European and Taiwan firms to offer bonds denominated in RMB in the other
territory and trade such financial products between the two regions.
2) Taiwan allows local brokerages to buy and sell dim sum bonds to institutional investors.
3) Taiwan's central bank (CBC) launched reference rates for Taiwan's offshore RMB spot rate and short-term interbank borrowing rate
(CNT Taibor) from 1 September 2014. The reference rates are published by Thomson Reuters (CNTFIX) for spot and for interest rates
(CNTTAIBORFIX) at 11.15am local time every trading day in Taiwan.
4) The cap for Formosa bond issuance from Mainland issuers was raised to RMB25bn from RMB10bn for 2014.
5) From June 2014, Formosa bonds were no longer subject to the maximum 45% foreign investment cap applicable to insurers.
6) The cap on Chinese banks' Formosa bond sales was raised to RMB45bn from the RMB25bn set in July 2014.
Source: Reuters, Bloomberg, Peoples Bank of China, CBC, Bank of Korea, Monetary of Singapore, South China Morning Post, Chinamoney, HKMA, UNA, Financial Times, HSBC
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Appendix II: Summary of CNH market developments in the past year (continued)
Sri Lanka
1) The Central Bank of Sri Lanka is granted access to enter Chinas capital market by Chinas central bank.
2) The Central Bank of Sri Lanka and the PBoC entered a bilateral currency swap agreement on 16 September 2014 which provides an
opportunity to exchange Sri Lankas LKR with RMB for trade-related activities and other purposes agreed upon by both parties. The
swap agreement facilitates the exchange of a maximum of LKR225bn and RMB10bn for a tenor of three years.
Thailand
The PBOC announced it was authorising ICBC (Thailand) as the RMB clearing bank in Bangkok. It also appointed Bank of China
(Malaysia) as the RMB clearing bank in Kuala Lumpur.
Switzerland
Switzerland's central bank said on 21 January 2015 that it had agreed with the PBoC to establish clearing arrangements in Switzerland
for RMB trading. Meanwhile, the PBOC will extend the pilot RQFII scheme to Swiss investors with a quota of up to RMB50bn.
UK
1) China Construction Bank was appointed by Chinas central bank as the RMB clearing bank in London. Also, the pound became one
of only five currencies that can be directly exchanged with the yuan on the China Foreign Exchange Trade System (CFETS), joining the
New Zealand and Australian dollars, the Japanese yen and the US dollar.
2) UK government issued first foreign sovereign CNH bond
3) The Bank of England and the PBoC signed an MoU on RMB clearing and settlement in London.
4) Ashmore launched the first European-domiciled actively managed funds investing in the Mainland China market under its RMB3bn
RQFII quota received in January.
US
Citadel LLC became the first international hedge fund to complete RMB fundraising from Chinese wealthy individuals and companies
through a local unit. Citadel (Shanghai) Foreign Investment won regulatory approval for currency exchange on 26 March, marking the
first qualified domestic limited partner, or QDLP, to have successfully completed fundraising in China, according to a statement from the
Shanghai governments information office.
Free trade zones 1) The State Council released guidelines on 29 January 2015 on expanding the preferential policies piloted in the Shanghai Pilot FreeTrade Zone (FTZ) to the rest of mainland China. Among the 35 polices that are to be expanded, 29 are assigned to relevant
departments of the State Council and six to provincial governments. Respective parties are also required to establish a work plan,
including detailed assignments, timeline and reports that demonstrate genuine progress. The Ministry of Commerce is in charge of
collecting the work plans by 31 January 2015.The pilot policies to be expanded mainly cover the following areas:
- Investment and corporate administrative
- Trade facilitation
- Financial area
- Opening up of the service industry
- In-process and after-event supervision measures
- Customs regulatory system innovations
- System innovations for entry-exit inspection and quarantine
2) The PBoC Shanghai issued "Free Trade Unit ("FTU") Overseas Financing and Cross-border Flows Macro-prudent Management
Measures (pilot)" Yin Zong Bu Fa [2015] No. 8. It expands the overseas financing channels with increased scale both in RMB and
foreign currencies by adopting a prudent financing risk management system at a macro level. The policy applies to corporates, banks
and non-bank financial institutions in the FTU system. There are two types of eligible financing activities under this rule: overseas
financing via free trade unit (FTU) by financial institutions in Shanghai and offshore borrowing via FTA by corporate and non-bank
Financial Institutions (NBFI) in the SFTZ. The overseas financing limit is calculated based on the entity's capital, overseas financing
leverage ratio and a macro adjustment factor. Overseas financing limit = Capital* Overseas financing leverage ratio* Macro adjustment
factor and Macro adjustment factor = 1 at current stage, according to the central bank statement.
CNH issuance
1) China will lift the geographic restrictions on the sale of offshore RMB bonds by local companies and commercial banks as the
government seeks to expand financing channels for local enterprises. The State Council said in a statement that increasing financial
support for the overseas development of domestic companies was key to growth. A timeframe for removing the restrictions wasn't
provided in the statement, issued after a meeting at which Premier Li Keqiang presided, according to Bloomberg.
2) Overseas or cross-border projects for New Silk Road plan could lead to the issuance of offshore bonds, according to China Securities
Journal.
3) China's central bank is considering giving more flexibility to domestic SOEs to issue offshore RMB bonds in any offshore market,
according to the Securities Times, citing Guo Jianwei, deputy director of the Monetary Policy Department II at the central bank. Within
the framework, financial institutions may only need to register such offshore issuance with the regulator instead of going through the
current approval mechanism. Meanwhile, the NDRC also announced it would support domestic companies seeking cheaper offshore
funding. Any relaxation regarding offshore proceeds repatriation is still under discussion.
Cross-border
1) The State Administration of Foreign Exchange announced the expansion of a pilot scheme set up in 2012 to allow multinationals to
better manage their FX exposure across the border. Effective from 1 June 2014, companies with FX income of more than USD100m will
be able to transfer FX more easily between their onshore and offshore centralised accounts and between their offshore subsidiaries.
Meanwhile, cross-border FX lending and borrowing will remain under existing respective quotas.
2) The Shenzhen Stock Exchange is studying a plan for a connection with its HK counterpart, similar to Shanghai-Hong Kong Stock
Connect.
Source: Reuters, Bloomberg, Peoples Bank of China, CBC, Bank of Korea, Monetary of Singapore, South China Morning Post, China Securities Journal, HKMA, UNA, Financial Times, HSBC
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Appendix II: Summary of CNH market developments in the past year (continued)
ODI
1) China's Ministry of Commerce (MOFCOM) has simplified rules on making outbound investment by Chinese corporates. The new
measures, which took effect on 6 October 2014 are: a) approval from the MOFCOM is no longer needed for most outbound investment,
except for those investing in "sensitive countries and industries", which include countries with no diplomatic relationships with China, or
under UN sanctions, and industries that are banned from importing from China; b) other outbound investment only has to be filed with
MOFCOM. The filing process takes just 3 working days to complete if documentation is in order; c) for outbound investment that still has
to be approved, the lead time has been shortened to 20 working days if the firm is owned by the central government, and 30 working
days for the rest.
2) China relaxed some restrictions for domestic companies and individuals to set up special purpose vehicles (SPVs) overseas,
according to the State Administration of Foreign Exchange (SAFE). Under the revised rules, domestic investors in SPVs are allowed to
keep profits and dividends made from such entities overseas. Previously, they had to repatriate such funds within 180 days. It also lifted
a ban on loans made by domestic firms to their overseas SPVs up to a limit and simplified rules on the establishment of such entities.
The regulator will monitor investment in SPVs and fund repatriation to crack down on fake transactions.
QFII/RQFII
1) Shanghai Stock Exchange raised the shareholding limit by QFII and RQFII in a single company to 30% from 20%.
2) Officials from the Asset Management Association of China and the State Administration of Taxation told industry executives on 26
February 2015 that Chinese regulators are planning to levy a 10% capital gains tax on stock investments under the QFII and RQFII
schemes between 17 Nov 2009 and 16 Nov 2014. Profits made before 17 Nov 2009 in the QFII programme wont be subject to the
capital gains tax, according to the authorities. Once the new tax is in place, QFIIs may have to claw back USD1.2bn from investors to
pay taxes, according to Z-Ben Advisors.
RQDII
China's central bank recently issued a notice on RMB Qualified Domestic Institutional Investors (RQDII) business, in order to allow
domestic investors to use RMB to invest in overseas markets.
QDIE
On 8 December 2014, the General Office of Shenzhens Municipal Government issued the Circular Forwarding Provisional Measures
Relating to the Shenzhen Pilot Scheme for Overseas Investment by Qualified Domestic Investors (Shen Fu Ban Han [2014] No. 161),
according to Lexology. This circular announced that the provisional measures had been approved by the Shenzhen Municipal
Government, and instructed local governments and their affiliate institutions to implement the measures. Domestic or foreign investment
management enterprises in Shenzhen may apply to the Shenzhen QDIE Pilot Program Joint Committee (the Joint Committee) to be
qualified as an overseas investment fund management enterprise.
Source: Reuters, Bloomberg, PBOC, CBC, Bank of Korea, Monetary of Singapore, South China Morning Post, China Securities Journal, HKMA, UNA, Financial Times, Lexology, HSBC
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Notes
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Disclosure appendix
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personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Zhi Ming Zhang, Helen Huang and Crystal Zhao
Important disclosures
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Dilip Shahani
Head of Global Research, Asia-Pacific
+852 2822 4520
dilipshahani@hsbc.com.hk
aaron.t.gifford@us.hsbc.com
Americas
Sarah R Leshner
Head of LatAm Corporate Credit Research
+1 212 525 3231
sarah.r.leshner@us.hsbc.com
Andrew Muench
+1 212 525 4866
andrew.x.muench@us.hsbc.com
Helen Huang
Analyst, Fixed Income
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6585
helendhuang@hsbc.com.hk
Helen Huang joined HSBC in May 2013 as a credit research analyst, focusing on China thematic research and Chinas onshore bond
markets. Previously, she was an associate in HSBCs investment banking division, with experience spanning equity, debt, M&A and
strategic advisory. Helen holds a bachelor of finance degree from Guanghua School of Management, Peking University.
Crystal Zhao
Analyst, Fixed Income
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6514
crystalmzhao@hsbc.com.hk
Crystal Zhao joined the HSBC credit research team in July 2011 and focuses on Chinas capital markets, especially CNH bonds. Prior
to joining HSBC, she worked as a commodity trader for two years in London. Crystal has earned an MSc in risk and stochastics from
the London School of Economics.