Enhance the Transparency

of Offshore RMB Bonds through Indexation

29 October 2015
Amy Cheng, Head of Index Business, Hang Seng Indexes Company Limited
Company Background
• Established in 1984 and is a wholly -owned
subsidiary of Hang Seng Bank

• A leading index complier covering Hong Kong and

mainland China markets

• Calculates and manages over 400 real-time and

daily indexes, including Hang Seng index

• Hang Seng Index serves as a benchmark of Hong

Kong stock market, with a strong reputation in the
World

• Index dissemination frequency stays ahead of the

other index compliers in the Greater China region
(Disseminated at every 2-second interval)

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 Hang Seng iBond Index Series
Hang Seng China AH Smart Index
- Trading of H-
shares Index Hang Seng China A
Hang Seng Index Futures HSCEI
Industry Top Index Smart Index
Established Hang Seng China - First H-shares Hang Seng Sector
Hang Seng Indexes Enterprises Index Index ETF Index Series
Company HSI Volatility Index
Hang Seng
1993 First HSI ETF China AH
(Tracker Fund) Index Series 2014
2010
1986 1995 2004 2006 2012

1994 2013
1969 2003 2009
1984 1999
Trading of HSI 2007 2011 2015
Options
VHSI
Trading of HSI Hang Seng China Futures Hang Seng Markit
Futures H-Financial Index iBoxx Offshore
First Index RMB Bond Index
Hang Seng
Fund on HSI Corporate family
Trading of H-shares Sustainability (“HSM iBoxx”)
Index Options Index Series Hang Seng Futures
HSI Dividend Index Series
Futures Hang Seng
Shanghai-Hong
Kong AH Smart
Index
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Hang Seng Family of Indexes

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The Collaboration

• The HSM iBoxx was launched on 20 October 2014.

• This cooperative effort combines Hang Seng Indexes’ strong

knowledge of Asian markets with Markit’s extensive global fixed income
expertise.

• This offshore RMB bond is growing rapidly in Hong Kong and the
collaboration marks an important milestone for Hang Seng Indexes in
the development of Bond indexes.

• The HSM iBoxx provides the marketplace with accurate and objective
benchmarks by which to assess the performance of Offshore RMB bond
markets and investments.

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Development & Characteristics of Offshore RMB Bond Market
Randolf Tantzscher, Director of Indices
Asia Pacific, Markit
Development of Offshore RMB Bond Market
• 2007 - China government allowed the five state-owned banks and policy banks issuing offshore RMB bonds in
Hong Kong. The 1st offshore RMB bond was issued in Hong Kong by the China Development Bank in July 2007.
Amount Issued (RMB Mn) Life (Year) Coupon (%)
5,000 2 3

• 2009, the China’s Ministry of Finance started issuing offshore RMB sovereign bonds.
Year 2009 2010 2011 2012 2013 2014
Amount Issued
6,000 8,000 20,000 23,000 23,000 28,000
(RMB Mn)

• July 2010 - Hopewell Highway Infrastructure issued the 1st offshore RMB Corporate Bond.

• November 2011 - Baosteel became the 1st mainland non-financial corporate issuing offshore RMB Bond.

• October 2014 - U.K. Government issued a 3-year offshore RMB Bond with 2.7% coupon.

• October 2015 - London is chosen to be the first foreign financial center to issue China Government Bond in
renminbi

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Major Types of Offshore RMB Bonds

Offshore RMB Bond Universe

Non-CD CD
(708; 557bn) (690; 181bn)

Coupon Type With Option Others

Fixed (665) Callable (44) Sinkable

Floating (28) Putable (9) Perpetual (2)

Zero (15) Convertible

( ) represents number of bond Data as of 30th Sep 2015

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 IssuanceIssuance Amount ($Bn)

124%
No. of CD 0 0 0 14 288 690 887 958 589
No. of Non-CD 5 5 8 23 129 200 272 540 312
Total no. of Bonds 5 5 8 37 417 890 1,159 1,498 901

*Data as at 30th Sep 2015

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 Growth in Outstanding Amount
Outstanding Amount ($Bn)

38%
32%
70%
No. of CD 0 0 0 14 257 497 770 869 690
No. of Non-CD 5 10 15 33 152 301 464 641 708
Total no. of bonds 5 10 15 47 409 798 1,234 1,510 1,398

*Data as at 30th Sep 2015 \ 11

 CDs Are Usually of Shorter Maturity

2 years or below > 75% 2 years or below < 20%

( ) represents number of bond Data as at 30th Sep 2015

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 CDs Are Usually of Smaller Size

( ) represents number of bond Data as at 30th Sep 2015

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 Features of the Universe: Issuer Classification

( ) represents number of bond Data as of 30th Sep 2015

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Characteristics of CD
• Shorter Maturity (> 75% of new issuances with maturity less than 2 years)

• Small Size (85% of the outstanding CDs with notional < RMB 500M)

• CDs’ investors will normally hold to maturity

• Limited variety (only issued by banks)

• Liquidity of CD is relatively low

Hence, CD is

• Not investable from institutional investors perspective

• Not suitable for including in an investment benchmark

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Evolvement of Issuers

Exclude Certificates of Deposit *Data as at 30th Sep 2015

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Balanced Mix of Issuers

( ) represents number of Bonds

Data as at 30th Sep 2015

Exclude Certificates of Deposit

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Earn High Yield and Invest In RMB

Source: Markit

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 How Big Is the Offshore RMB Bond Market?
— USD Bn

Relative to Offshore
RMB (Times) 515 234 74 2.45 -
Sources:
U.S.: SIFMA Research (Q4 2014) HK: HKMA Research (2014)
Europe: European Central Bank Statistics (Q4 2014) Onshore RMB: The People’s Bank of China
Statistics (Q4 2014)
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Strong Market Potential but currently suffering from market uncertainty

• Market hesitation due to the concern over the possible deterioration of

China’s economy, and the surprise devaluation of the RMB in August

• Currently offshore interest rates are higher than onshore rates

• RMB asset still an attractive investment to the market

• Implementation of Shanghai-Hong Kong Stock Connect and lifting of the

RMB 20,000 daily conversion cap stimulate the RMB flow between
mainland China and Hong Kong

• Potential usage in the MPF market

• Government policy for developing debt market in HK – major market for

offshore RMB bond

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Hang Seng Markit iBoxx Offshore RMB Bond Index family
Markit iBoxx indices cover the global cash bond market.
Used by: Used for:
 investment banks  benchmarking
 asset managers  valuation and risk management
 insurance companies  ETFs, structured products and
 ETF sponsors derivatives

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HSM iBoxx – Overview
The indices are operated in compliance with the IOSCO Principles for Financial
Benchmarks

HSM iBoxx uses multi-source pricing via Markit’s bond pricing service. The pricing
service is based on a broad set of bond prices received throughout the trading day
from market participants.

Key features

 Offshore RMB markets:  Offshore RMB Instruments:

 Covers all offshore RMB markets  Eligible: Fixed coupon bonds

except Taiwan
 Excluded: Certificates of Deposit,
 Minimum bond size: RMB 500m FRNs

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HSM iBoxx – Maturity profile
100%
5+
90%
3-5
80%
2-3
70% 1-2
60% 0-1
50%
40%
30%
20%
10%
0%
May-11

May-12

May-13

May-14

May-15
Jan-12

Jan-13

Jan-14

Jan-15
Mar-11

Jul-11

Mar-12

Jul-12

Mar-13

Jul-13

Mar-14

Jul-14

Mar-15

Jul-15
Sep-11

Sep-12

Sep-13

Sep-14

Sep-15
Nov-11

Nov-12

Nov-13

Nov-14
 Dim Sum corporate bond market is short-dated – most new bond issues have maturity of
only 3 years
 The index includes bonds until maturity to reflect the issuance pattern
Data as of Sep 2015

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HSM iBoxx – Ratings

5% Unrated bonds are a common in the Dim

9% Sum market, especially amongst corporate
Chinese issuers
9% 40% 2/3 of unrated bonds trade at investment grade
spreads, predominately BBB

Treatment in the indices

37%  Unrated bonds are included at 50% of their outstanding
 Unrated bonds are assigned an implied rating based on
spreads to differentiate investment grade and high yield

Rated AAA/AA Rated A/BBB  Indices containing only rated bonds are calculated for
Implied IG Rated HY investors with rating requirements
Implied HY

Data as of Sep 2015

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HSM iBoxx – Sectors

100%
Other Financials
90%
Real Estate
80%
Banks
70%
Non-Financials
60%
Sub-sovereigns
50%
CGB
40%
30%
20%
10%
0%
Dec-11

Dec-12

Dec-13

Dec-14
Sep-11

Sep-12

Mar-13

Sep-13

Sep-14

Sep-15
Mar-11
Jun-11

Mar-12
Jun-12

Jun-13

Mar-14
Jun-14

Mar-15
Jun-15
Data as of Sep 2015

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HSM iBoxx – Sub-indices

HSM iBoxx contains more than 600

sub-indices
 Sub-indices provide consistent
Maturity breakdowns of the offshore RMB
universe by sector, rating, maturity as
well as Chinese/non-Chinese issuers

Rating  The sub-indices are a crucial tool to

allow a detailed analysis, performance
Sector attribution and risk management

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HSM iBoxx – Statistics

Index Overall Corporates Top 10 issuers Weight

Number of bonds (issuers) 282(165) 204(146) China Government 23.75%
Notional value (RMB bn) 365 222 Bank of China 3.57%
Yield 5.02% 6.25% Industrial & Commercial Bank of China 3.40%
Duration 2.09 1.57 Deutsche Bank 3.14%
Rating A BBB China Construction Bank 3.04%
China Development Bank 2.77%
Export-Import Bank China 2.48%
International Finance Corporation 1.57%
Agricultural Development Bank of China 1.52%
Central Plaza Development Ltd 1.38%

Data as of Sep 2015

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Kaisa default – case study – event timeline
Kaisa 6.875% 2016 – Yield
160
20 April: Failure to pay
140
coupon on two
1 Jan: Kaisa
120 30 Jan: SUNAC outstanding USD bonds
announces failure to
agrees to buy
100 repay HSBC loan
49.3% stake
80
60
40
20
0
12/2014 01/2015 02/2015 03/2015 04/2015

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HSM iBoxx – Composition
50%
45%
Sovereigns & Sub-
40% sovereigns
35% China Government
30%
Non-Financials
25%
20% Other Financials
15%
10% Other Real Estate

5%
Kaisa
0%
Corporates High Corporates CGB & Sub-
Yield Investment grade sovereigns

Data as of January 2015

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Kaisa default – December 2014/January 2015
101
100
99
98
97
96
95
94
93
12/15/2014 12/22/2014 12/29/2014 1/5/2015 1/12/2015 1/19/2015 1/26/2015
Hang Seng Markit iBoxx Offshore RMB China Government Bond Index
Hang Seng Markit iBoxx Offshore RMB Corporates Bond Index
Hang Seng Markit iBoxx Offshore RMB Real Estate Bond Index

Indices re-based to 15 December 2014 for comparison

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Kaisa default – December 2014/January 2015
101
100
99
98
97
96
95
94
93
12/15/2014 12/22/2014 12/29/2014 1/5/2015 1/12/2015 1/19/2015 1/26/2015
Hang Seng Markit iBoxx Offshore RMB Non-Financials High Yield Bond Index
Hang Seng Markit iBoxx Offshore RMB Real Estate ex-Kaisa High Yield Bond Index
Hang Seng Markit iBoxx Offshore RMB Real Estate High Yield Bond Index

Indices re-based to 15 December 2014 for comparison

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Kaisa default – no impact on April index returns
104

103

102

101

100

99

98
3/31/2015 4/7/2015 4/14/2015 4/21/2015 4/28/2015
Hang Seng Markit iBoxx Offshore RMB China Government Bond Index
Hang Seng Markit iBoxx Offshore RMB Corporates Bond Index
Hang Seng Markit iBoxx Offshore RMB Corporates High Yield Bond Index
Hang Seng Markit iBoxx Offshore RMB Real Estate High Yield Bond Index

Indices re-based to 31 March 2015 for comparison

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HSM iBoxx – Summary

The Hang Seng Markit iBoxx Offshore RMB Bond Index family…

 Provides a comprehensive set of more than 600 indices on the offshore

RMB bond market, including standard breakdowns by sector, rating and
maturity
 Transparent methodology with a broad coverage of over RMB 300 bn of
offshore RMB debt
 Independently managed multi-source pricing including quotes from market
makers and end of day book of records
 Clients can customize the index composition and calculation methodology

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Disclaimer

The Hang Seng Markit iBoxx Offshore RMB Bond index family (“Index”) is calculated and owned by Markit Indices
Limited (“Markit Indices”). “Hang Seng” is the service mark of Hang Seng Data Services Limited, “Markit” the service
mark of Markit Group Limited and “iBoxx” the service mark of Markit Indices; all such marks are used under license or
with permission.

All information herein is provided strictly for private general reference only and all Index information may be revised at
any time by Markit after first publication. None of such information constitutes any express or implied advice or
recommendation by Hang Seng Indexes Company Limited, Markit Indices and/or their affiliates for any investments.
Neither Markit Indices nor its affiliates (and the same with Hang Seng Indexes Company Limited and its affiliates)
makes any representation or warranty as to the accuracy, completeness or reliability of any Index information at any
particular time or accepts any liability whatsoever (whether in tort, contract or otherwise) for any damage or loss
arising directly or indirectly from use of such information.

Investment involves risks. Prospective investors should seek independent investment advice to ensure that any of
their decisions is made with regard to their own investment objectives, financial circumstances and other particular
needs.

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