china market access primer - hsbc · 2019. 2. 8. · 4 china market access primer chinese equity...

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China Market Access PrimerFebruary 2019

3

Chinese markets in the global contextChina has grown over the years to become the world’s second largest economy and it drives around a fifth of the world’s GDP growth today. China’s dominance in the global economic landscape is also reflected in the size of its capital markets: Chinese onshore bonds outstanding total USD12 trillion while Chinese onshore equities’ market capitalisation amounts to USD7.7 trillion.

This enormous onshore market has been gradually allowing foreign investors access through various channels as the Chinese government takes steady steps to liberalise its economy and markets and improve its financial system. Global index providers for both bonds and equities are now beginning to add Chinese onshore securities into their indices, thus prompting global investors to rethink asset allocation strategies

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Total bond outstanding, USDtn Total bond O/S as % GDP

0.7%

China Rest of the world

Bonds outstanding in USD trillion

Total bonds O/S as % of GDP

99.3%

Chinese bonds represent 10% of the global bond market …but account for less than 1% of BBG Barclays Global Aggregate (BGA) Index

Source: BIS, IMF, latest data as of June 2018 Source: Barclays Point, data as of September 2018

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1 1 1

Market capitalisation in USD trillion

1: From bottom to top: US = NYSE + NASDAQ; China = SSE + SZE + HKEx; India = BSE + NSE

4.48% 0.08%

95.44%

China China-A Rest of the world

Chinese equities represent about 15% of the global equity market

…but account for 5% of MSCI AC World Index

Source: World Federation of Exchanges, data as of June 2018 Source: MSCI, Bloomberg, data as of September 2018

Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any

failure to meet such forecasts, projections or targets. For illustrative purposes only.

4 China Market Access Primer

Chinese equity market structureMarket structure of onshore and offshore equity markets

Shenzhen A-shares (onshore)

~2,180 stocks (including SME & ChiNext)

USD3.2trn market cap (40% free float)

~900 stocks available via Shenzhen-HK Connect

1-year ADV: USD39bn 12.8x forward P/E TTM dividend yield: 1.35%

Shanghai A-shares (onshore)

~1,500 stocks USD4.5trn market cap (31% free float)

~570 stocks available via Shanghai-HK Connect

1-year ADV: USD27bn 9.5x forward P/E TTM dividend yield: 2.63%

Hong Kong Stock Exchange (offshore)

~1,900 stocks (including H-shares)

USD4.4trn market cap (68% free float)

1-year ADV: USD14.6bn 10.7x forward P/E TTM dividend yield: 3.94%

Source: HKEx, SSE, SZE, Bloomberg, HSBC Global Asset Management. Data as of November 2018. *ADV = average daily

trading volume

5

Investor profile The onshore A-share market is largely owned by retail investors, who often lack the necessary market knowledge and are easily swayed by sentiment. Therefore, A-shares tend to display greater volatility than offshore H-shares

Company size A greater proportion of large-cap companies gives the Hong Kong market a more mature profile. In comparison, there are a larger number of small and mid-cap stocks in the A-share market, which tend to be under-researched and often mispriced

17% 14%

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Shanghai A Shenzhen A H-share

Institutional Retail

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Small Cap (USD10bn)

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Shanghai A Shenzhen A Hong Kong

Others Financials Info Tech Con. Disc. Health Care

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100


Average Median 90th percentile 10th percentile1

Trailing P/Ex current distribution

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83% 86%

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Sector breakdown The Hong Kong market is dominated by financials, real estate and traditional industries, whereas the A-share market, esp. Shenzhen, offers more opportunities in new economy sectors such as technology, healthcare and e-commerce

Valuation dispersion The A-share market has greater valuation dispersion due to less mature investor profiles. Hence, stocks can sometimes trade significantly higher or lower than their fair value

17% 14%

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83% 86%

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19%48%

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17% 14%

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Small Cap (USD10bn)

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1 Removed top and bottom 1% outliers to calculate average.

Source: HKEx, SSE, SZE, Bloomberg, HSBC Global Asset Management, data as of November 2018

Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.


Chinese bond market structureMarket structure of onshore and offshore bond markets

China USD bonds (offshore)

~3,600 issues USD900bn outstanding Yield: 6.0%1

Duration: 3.8 years1

China CNY bonds (onshore)

~32,500 issues USD11trn outstanding Yield: 4.18%1


Average bid-ask spread: 2-7bps

China CNH bonds (offshore)

~1,300 issues USD76bn outstanding Yield: 4.34%1


Average bid-ask spread: CGB 5-10bps; Corps 15-25bps

Reference indices: CNY – ChinaBond New Composite Index; USD – JACI China Index; CNH – Markit iBoxx ALBI China Offshore Index

Source: ChinaBond, Markit, JPMorgan, Bloomberg, Wind, HSBC Global Research, HSBC Global Asset Management, data as of

October 2018

7

Years to maturity profile Chinese bond markets have relatively short duration compared to US, Euro and EM. The offshore CNH market has shorter duration as 20% of the market is composed of non-rated certificate of deposits (CDs). The offshore Chinese USD market is more liquid for long dated bonds

Credit profile Credit rating of Chinese onshore bonds show little differentiation as they are rated only by local rating agencies using a different rating scale. As deleveraging continues and insolvent companies start to fail, local rating agencies and investors will reassess their perception of the bond market, improving credit pricing in future

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CNY CNH USD

7Y

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CNY CNH USD

AAA AA A BBB BB B C NR

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CNY CNH USD

Sovereign Quasi-Sov FinancialsReal Estate Utilities EnergyMaterials Industrials Others

0.01.02.03.04.05.06.07.0

2011 2012 2013 2014 2015 2016 2017

CNY CNH USD

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CNY CNH USD

7Y

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CNY CNH USD


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CNY CNH USD


0.01.02.03.04.05.06.07.0

2011 2012 2013 2014 2015 2016 2017

CNY CNH USD

Sector breakdown Government, local government and policy bank bonds account for almost 70% of the onshore bond market, while the rest are made up of issues from local government financing vehicles and corporates

Gross issuance New CNH bond issuance dwindles as onshore bond market becomes more accessible and as liquidity is better in the USD market, but more favourable tax treatment over onshore bonds and attractive yield carry makes CNH bonds appealing

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2011 2012 2013 2014 2015 2016 2017

CNY CNH USD

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CNY CNH USD


0.01.02.03.04.05.06.07.0

2011 2012 2013 2014 2015 2016 2017

CNY CNH USD

Source: PBoC, ChinaBond, Markit, JPMorgan, Bloomberg, HSBC Jintrust, HSBC Global Asset Management, data as of October 2018

Unless specified otherwise, using Bloomberg for sector, years to maturity and rating breakdowns for CNH and USD bond markets

Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.


Equity market liberalisation

The Shanghai-Hong Kong Stock Connect, which was launched in 2014, and the Shenzhen-Hong Kong Stock Connect, which was launched in 2016, are effective, simple and straightforward channels for foreign investors to access onshore Chinese equities and have also served as the key trigger for the decision by MSCI to add Chinese A-shares into their indices. Access under the Stock Connect channels has also improved over time, as evidenced by the significant expansion of the daily quota allowed. The introduction of Chinese Depository Receipts (CDRs) is another step towards market liberalisation and one intended to encourage tech giants to seek onshore listing. As market liberalisation continues to speed up, so would the representation of Chinese markets within global indices and benchmark-tracking portfolios.

Growing presence in global indices MSCI launched a consultation in September 2018 to potentially bump up the inclusion factor for A-shares at its emerging market index from 5% at present to 20% in August 2019 and include mid-cap A-shares using a similar inclusion factor in May 2020

Separately, global index provider FTSE Russell said it will start including mainland Chinese shares in its major benchmarks from June next year

The decisions by FTSE and MSCI are a shot in the arm for Chinese regulators, who have attempted to drum up foreign interest in the past four years

Northbound flows have begun to catch up with southbound flows

Although China A-shares have come under pressure in 2018 amidst concerns over moderating growth and heightened trade tensions, northbound flows continue to be strong and hit historical highs in November 2018

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May-17

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Full China A

China China-A Asia ex China Non-Asia

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SouthboundUSD107bn

Fund flows USDbn since launch of SH-HK Stock Connect Foreign ownership as % total market cap

ChinaToHK

HKToChina

NorthboundUSD94bn

-20.00

-40.00

0.00

20.00

40.00

EPFR ETF flows EPFR Active Funds

2.7%

26.3%30.1%

33.7%

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China Taiwan Japan South Korea

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Aug-19

May-20

Full China A


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100

120

11/14 5/15 11/15 5/16 11/16 5/17 11/17 5/18

SouthboundUSD107bn


ChinaToHK

HKToChina

NorthboundUSD94bn

-20.00

-40.00

0.00

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40.00


2.7%

26.3%30.1%

33.7%

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Nov

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May

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Source: MSCI’s forecast, data as of September 2018 For “Non-Asia”, Saudi Arabia to be included in June 2019 Source: Bloomberg, data as of 12th November, 2018

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0% 20% 40% 60% 80% 100%

May-17

Current

Aug-19

May-20

Full China A


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11/14 5/15 11/15 5/16 11/16 5/17 11/17 5/18

SouthboundUSD107bn


ChinaToHK

HKToChina

NorthboundUSD94bn

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-40.00

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40.00


2.7%

26.3%30.1%

33.7%

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Nov

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May

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Nov

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Nov

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May-17

Current

Aug-19

May-20

Full China A


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120

11/14 5/15 11/15 5/16 11/16 5/17 11/17 5/18

SouthboundUSD107bn


ChinaToHK

HKToChina

NorthboundUSD94bn

-20.00

-40.00

0.00

20.00

40.00


2.7%

26.3%30.1%

33.7%

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Nov

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Investors are increasing allocation to Chinese equities

Benchmark tracking investors have been adding to Chinese equities aggressively since 2016

In the longer term, increased flows and foreign ownership could encourage listed companies in China to improve their corporate governance standards and business models. This in turn will help attract more flows into the market

Foreign ownership still significantly lags those of other major markets

Foreign ownership of onshore equities has grown by 70% y-o-y to USD190 billion, but is a mere 2.7% of the total tradable market. While it took around 7-10 years for Korean and Taiwanese stocks to be fully included into MSCI indices, the pace of inclusion for A-shares will be driven by the pace of liberalisation

Source: EPFR, CICC, data as of September 2018

Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. The views expressed above were held at the time of preparation and are subject to change without notice.

Source: CEIC, Citi Research, data as of May 2018


Bond market liberalisationOnshore bonds will be included in the BGA index for the first time thanks to the launch of Bond Connect in 2017, which further opened up onshore bond markets to foreign investors. Unlike other channels available to access onshore bonds, Bond Connect does not require a domestic account and custody, and its offshore infrastructure enables foreign investors to trade onshore bonds whilst following international practices. This, along with the newly available onshore FX hedging provision and a more liberalised currency, allows foreign investors to manage positions and risk at lower cost and higher efficiency. In a move to drum up more interest from foreign investors, China recently revised rules to spur trading activity through the Bond Connect scheme. Real-time delivery-versus-payment and block trades have been permitted since late August, which effectively reduces settlement risk and allow sizeable trades. Significantly, foreign investors will be exempt from paying corporate income tax and value-added tax on interest gains from holding onshore Chinese bonds for three years.

As onshore bonds become better represented in key indices, it will be increasingly difficult for foreign investors to stay on the sidelines as Chinese bonds offers attractive yields and diversification benefits.

Impact of onshore bond inclusion into BBG Barclays Global Aggregate index

Starting in April 2019, the inclusion will take place over 20 months with 5% scale factor. The index will fully include onshore government and policy banks issues by November 2020, bringing around USD140bn into the market

Growing number of foreign institutions with access to onshore bond market

Significant ease of access and anticipation for further index inclusion, which may bring in a total of USD250bn-USD350bn flows to the onshore bond market, have led to unprecedented rise in number of registered institutional investors since 2017

0.60%

6.36% by Nov 2020 (Forecast)

0% 20% 40% 60% 80% 100%

Bef

ore

Aft

er

China US Eurozone Japan

UK Canada Supra-national Australia

Korea Others

51100

138211

308

407

617

0

100

200

300

400

500

600

700

2011 2012 2013 2014 2015 2016 2017

940

960

980

1,000

1,020

1,040

1,060

1/17

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3/17

4/17

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7/17

8/17

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189/

18

0.0%

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0

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3/14

6/14

9/14

12/1

4

3/15

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9/15

12/1

5

3/16

6/16

9/16

12/1

6

3/17

6/17

9/17

12/1

7

3/18

Foreign holding of onshore bond

as % onshore bond market (RHS)

Foreign holdings of onshore bonds(USD billion)

% of onshore bond market

CNH deposits billion

0.60%


0% 20% 40% 60% 80% 100%

Bef

ore

Aft

er



Korea Others

51100

138211

308

407

617

0

100

200

300

400

500

600

700

2011 2012 2013 2014 2015 2016 2017

940

960

980

1,000

1,020

1,040

1,060

1/17

2/17

3/17

4/17

5/17

6/17

7/17

8/17

9/17

10/1

711

/17

12/1

71/

182/

183/

184/

185/

186/

187/

188/

189/

18

0.0%

0.5%

1.0%

1.5%

2.0%

0

100

200

300

3/14

6/14

9/14

12/1

4

3/15

6/15

9/15

12/1

5

3/16

6/16

9/16

12/1

6

3/17

6/17

9/17

12/1

7

3/18






Source: Barclays Point, data as of October 2018 Source: PBoC, annual data as of June 2018

11

CNH deposits on the rise Improved access to the onshore market will increase demand for offshore RMB and lead to more CNH deposits, which in turn also benefits liquidity of the offshore bond market. However, strength in USD is a factor to watch out for

Large potential for foreign participation To many foreign investors, onshore Chinese bonds offer good yield carry with relatively short duration

With low foreign ownership and a less correlated monetary policy compared to other major markets, these bonds provide good diversification within global portfolios

0.60%


0% 20% 40% 60% 80% 100%

Bef

ore

Aft

er



Korea Others

51100

138211

308

407

617

0

100

200

300

400

500

600

700

2011 2012 2013 2014 2015 2016 2017

940

960

980

1,000

1,020

1,040

1,060

1/17

2/17

3/17

4/17

5/17

6/17

7/17

8/17

9/17

10/1

711

/17

12/1

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188/

189/

18

0.0%

0.5%

1.0%

1.5%

2.0%

0

100

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300

3/14

6/14

9/14

12/1

4

3/15

6/15

9/15

12/1

5

3/16

6/16

9/16

12/1

6

3/17

6/17

9/17

12/1

7

3/18






0.60%


0% 20% 40% 60% 80% 100%

Bef

ore

Aft

er



Korea Others

51100

138211

308

407

617

0

100

200

300

400

500

600

700

2011 2012 2013 2014 2015 2016 2017

940

960

980

1,000

1,020

1,040

1,060

1/17

2/17

3/17

4/17

5/17

6/17

7/17

8/17

9/17

10/1

711

/17

12/1

71/

182/

183/

184/

185/

186/

187/

188/

189/

18

0.0%

0.5%

1.0%

1.5%

2.0%

0

100

200

300

3/14

6/14

9/14

12/1

4

3/15

6/15

9/15

12/1

5

3/16

6/16

9/16

12/1

6

3/17

6/17

9/17

12/1

7

3/18






Source: Bloomberg, data as of September 2018

Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. The views expressed above were held at the time of preparation and are subject to change without notice.

Source: BIS, PBoC, Bloomberg, data as of September 2018


Canada

JerseyUK

Switzerland

Hong Kong

Singapore

Australia

Saudi Arabia

Turkey

Sweden

Taiwan

Japan

India

UAE

USA

Argentina

Mexico

Bermuda

Germany

China1

France

SpainItalyAustria

Malta

Luxembourg

Why HSBC Global Asset Management?Investing in China’s rapidly-changing economy and markets, requires not only high quality research, but also local insights and knowledge of various atypical market rules and practices. Investors also need to understand the different access channels that are available to them and the suitability of these channels for fulfilling their investment objectives.

HSBC Global Asset Management is a pioneer in Chinese investments, with deep experience in investing in both offshore and onshore Chinese securities. Our large team of investment professionals located in Hong Kong and Shanghai help investors understand the changing dynamics within Chinese markets, interpret their implications in the right way and take appropriate investment decisions.

Strong track record managing Chinese assets since 1992

Significant local resources and presence in China

A well resourced, stable and award winning team

A robust investment process built on solid proprietary research

A network of opportunities

13

Canada

JerseyUK

Switzerland

Hong Kong

Singapore

Australia

Saudi Arabia

Turkey

Sweden

Taiwan

Japan

India

UAE

USA

Argentina

Mexico

Bermuda

Germany

China1

France

SpainItalyAustria

Malta

Luxembourg

1. Asia-Pacific includes employees and assets of Hang Seng Bank, in which HSBC has a majority holding. Source: HSBC Global Asset Management as at 30 September 2018. Any differences are due to rounding. For illustrative purposes only

Presence in countries and 26 territories

$USD 460.7bn

under management

Around

investment professionals

60084

160348

Americas

EMEA

Asia-pacific2


HSBC Global Asset Management’s “All China” investment solutionsHSBC Global Asset Management offers fulfilment options through our comprehensive fund range or, if preferred, segregated mandates, encompassing Chinese equities, fixed income, multi-asset and liquidity assets to our institutional and wholesale investors. While our key active Chinese equity, bond and multi-asset strategies can invest in the Chinese onshore and offshore markets to capture investment opportunities across the board, our passive solutions provide clients a cost-efficient way to stay on top of the ongoing inclusion of Chinese assets into global indices.

Key strategies Chinese equity RMB fixed income China multi-asset Passive China-A

Key propositions High-conviction and diversified portfolio focusing on stocks with below average valuation for a given level of profitability

Focusing actively on term structure, duration, sector allocation, product selection and credit rating

Mixed asset with income tilt. Flexible allocation across onshore/offshore equities and bonds within a risk budget

Passive strategy tracking the progressive inclusion of China-A shares into the MSCI EM index

Investment universe H-shares Red chips A-and B-shares

Onshore RMB and offshore RMB/non-RMB denominated fixed income/debt securities

A/B/H-shares, red chips and ADRs Onshore/offshore fixed income in RMB and other currencies

Stocks included in the MSCI A-share Inclusion Index

Segregated mandate considerations The market access options, and their pros and cons are detailed below:

QFII/RQFII (equity and bond)

+ Broader range of products available

+ Primary market participation (e.g. IPO)

- Licensing from CSRC; quota approval from SAFE; account opening with onshore custodian

- Pre-funding required

- Cannot be borrowed or transferred. Clients must apply themselves

CIBM Direct (bond)

+ Easy access to interbank bond market without quota

+ Hedging tools available

- Onshore account opening and regulatory filing

- Pre-funding required

Stock Connect (equity)

+ Not subject to individual quota

+ Easier registration process

+ Delivery versus payment available

- Less coverage than QFII/RQFII

- No primary market activity

Bond Connect (bond)

+ Simplest access without onshore custodian and account opening without quota

+ Use of international practices and offshore infrastructure

+ No pre-funding requirement

- Lack of trading platform option

- Limited hedging tools

Source: HSBC Global Asset Management as at 30 June 2018. For illustrative purpose only.

Please refer to appendix for more information on each access channel

15

Appendix I: Accessing onshore equity and bond markets

Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII) schemesQFII and RQFII schemes are the earliest routes created for foreign investors to access the onshore markets. However, foreign ownership of the onshore markets did not see explosive growth in part due to complex application process, capital control and lack of currency hedging tools. As part of its effort to open up Chinese capital markets in the recent years, the government has not only further increased the approved quota, but also starting in June 2018, removed the 3-month lock-up period and 20% monthly repatriation limit and allowed onshore FX hedging.

QFII Scheme RQFII SchemeLaunch 2002 2011

Approved/available quota1 USD99bn/ USD51bn RMB616bn/ RMB1,324bn

Available instruments Exchange traded securities (including IPOs), equity index futures and funds Fixed income products traded in inter-bank bond market (CIBM) Other instruments approved by CSRC and FX derivatives (for hedging purpose)

Eligibility Approved institutional investors Approved institutional investors

No. of approved investors 308 221

Currency Onshore RMB Offshore RMB

Price limits +/- 10% (and 5% for stocks under special treatment)

Foreign ownership limits Individual investor: 10% of a company’s total issued shares Aggregate: 30% of a company’s total issued shares

Settlement cycle Stocks on T; cash on T+1 (fail trade not allowed)

Lock-up period No

Repatriation limit No. Daily limit for open-end funds

Tax treatment 10% withholding tax on coupon and dividend. Exempt for government bonds Capital gains tax only temporarily waived for QFII and RQFII from 17 Nov 2014 No value added tax (VAT) for deposit interest, dividend and trading income Capital gain is temporarily exempt from VAT Coupon income from non-government bonds is subject to 6% VAT

Market entry timeframe (indicative only) and process

5-7 months time for full China access CSRC: application for QFII/RQFII license SAFE: quota filing (within basic quota), or approval (exceeding basic quota) PBOC Shanghai: filing within SAFE quota for CIBM investment

Advantages over other Participation in primary market, including IPO, rights and warrants issuance Broader access to instruments such as investment funds Invest in stocks that are not included in Stock Connect

Note: Available quota = Total quota (QFII = USD150bn; RQFII = RMB1,940bn) – Approved quota Source: HSBC Securities Services, HSBC Global Asset Management, data as of June 2018 Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.


Appendix I: Accessing onshore equity marketShanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programmes

Shanghai-Hong Kong (Northbound) Shenzhen-Hong Kong (Northbound)Launch 2014 2016

Daily quota1 (no aggregate quota)

RMB52 billion RMB42 billion

Available instruments All constituent stocks on SSE 180 Index and SSE 380 Index All constituent stocks on SZSE Component Index, SZSE Small/Mid Cap Innovation Index with market cap > RMB6bn

Stocks with A/H dual-listing

Eligibility for northbound All investors, except ChiNext is open to institutional investors only

No. of stocks available ~570 ~900

Currency Offshore RMB

Settlement cycle Stock on T and cash on T+1

Lock-up period No. Unless 1) the securities cease to be constituent stock of relevant indices; 2) placed under risk alert, or delisted from SEHK

Repatriation limit No

Trading No block trade, day trading and naked short selling Subject to conditions, margin trading and covered short selling are allowed

Latest developments Quadruple expansion of daily quota

Potential changes in future Shanghai-London Stock Connect in 2H18 ETF Connect for southbound investors Primary/IPO Connect

Stock Connect trade flow illustrationHong Kong Mainland

HK

Inve

stor

s

SEHK Participants

SEHK Subsidery (Shanghai)

SSEM

ainl

and

Inve

stor

sSEHK Subsidery (Shenzhen)

SZSE

SEHK

SSE Subsidery (HK)

SSE Members

SSE Subsidery (HK)

SSE Members

Northbound SouthboundNote: Daily Quota Balance = Daily Quota – Buy + Sell + Adjustment Source: HKEx, HSBC Securities Services, HSBC Global Asset Management, data as of June 2018 Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.

17

Appendix I: Accessing onshore bond marketChina Interbank Bond Market (CIBM) Direct and Bond Connect

CIBM Direct Bond Connect (Northbound)Launch 2016 2017

Quota No. Pre-file amount to invest No. Also no pre-filing with PBoC

Available instruments Interbank market cash bonds, repo and FX, interest rate and bond derivatives

Interbank market cash bonds and FX derivatives

Eligibility Sovereign entities, financial institutions and their products, and other eligible mid/long term investors

All institutional and retail investors

No. of stocks available 1,010 foreign investors and products 356

Currency Offshore RMB or other currencies Offshore RMB or other currencies

Settlement cycle T+0, T+1 or T+2 T+0, T+1 or T+2

Lock-up period No No

Repatriation limit No No

Market entry timeframe(indicative only) and process

6-11 weeks for non-sovereign entities 7-15 weeks for sovereign entities Assessment by settlement agent Registration with PBoC Account opening with intermediaries

Abide to international laws and trading practices

Use of offshore infrastructure from Hong Kong to access onshore bonds

No onshore filing and account opening with onshore custodian

Potential changes in future ISIN codes to be assigned to all bonds Access to repo and derivatives markets Discounts of up to 50 per cent in Bond Connect transaction fee

Latest development Nil Block trade is allowed Implementation of real-time delivery versus payment

Bond Connect trade flow illustrationGlobal Market Hong Kong Mainland China

Trading

HKEXCFETS

International Investors

Global Access

Platforms

BCCL

Trading LinkCFETS Bond

Training System

Main Dealers

Settlement

Global custodians

HKMA- CMU

Members

HKMA-CMU

Nominee Structure

Settlement Link

CCDC + Shanghai Clearing House

Source: HKEx, BCCL, HSBC Securities Services, HSBC Global Asset Management, data as of June 2018 Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.

Existing interface

Existing interface

Key risksThe value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested.

• Exchange rate risk: Investing in assets denominated in a currency other than that of the investor’s own currency perspective exposes the value of the investment to exchange rate fluctuations

• Liquidity risk: Liquidity is a measure of how easily an investment can be converted to cash without a loss of capital and/or income in the process. The value of assets may be significantly impacted by liquidity risk during adverse market conditions

• Emerging market risk: Emerging economies typically exhibit higher levels of investment risk. Markets are not always well regulated or efficient and investments can be affected by reduced liquidity

• Derivative risk: The use of derivatives instruments can involve risks different from, and in certain cases greater than, the risks associated with more traditional assets. The value of derivative contracts is dependent upon the performance of underlying assets. A small movement in the value of the underlying assets can cause a large movement in the exposure and value of derivatives. Unlike exchange traded derivatives, over-the-counter (OTC) derivatives have credit and legal risk associated with the counterparty or the institution that facilitates the trade

• Operational risk: The main risks are related to systems and process failures. Investment processes are overseen by independent risk functions which are subject to independent audit and supervised by regulators

• Concentration risk: Funds with a narrow or concentrated investment strategy may experience higher risk and return fluctuations and lower liquidity than funds with a broader portfolio

• Interest rate risk: As interest rates rise debt securities will fall in value. The value of debt securities is inversely proportional to interest rate movements

• Derivative risk (leverage): The value of derivative contracts depends on the performance of an underlying asset. A small movement in the value of the underlying can cause a large movement in the value of the derivative. Over-the-counter (OTC) derivatives have credit risk associated with the counterparty or institution facilitating the trade. Investing in derivatives involves leverage (sometimes known as gearing). High degrees of leverage can present risks to sub-funds by magnifying the impact of asset price or rate movements

• Emerging market fixed income risk: Emerging economies typically exhibit higher levels of investment risk. Markets are not always well regulated or efficient and investments can be affected by reduced liquidity, a measure of how easily an investment can be converted to cash without a loss of capital, and a higher risk of debt securities failing to meet their repayment obligations, known as default

• High yield risk: Higher yielding debt securities characteristically bear greater credit risk than investment grade and/or government securities

• Contingent Convertible Security (CoCo) risk: Hybrid capital securities that absorb losses when the capital of the issuer falls below a certain level. Under certain circumstances CoCos can be converted into shares of the issuing company, potentially at a discounted price, or the principal amount invested may be lost

Important information For Professional Clients and intermediaries within countries set out below; and for Institutional Investors and Financial Advisors in Canada and the US. This document should not be distributed to or relied upon by Retail clients/investors.

The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in Emerging Markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade. Mutual fund investments are subject to market risks, read all scheme related documents carefully.

The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained in this document is for general information purposes only and does not constitute advice or a recommendation to buy or sell investments. Some of the statements contained in this document may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. We do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed herein are those of HSBC Global Asset Management Global Investment Strategy Unit at the time of preparation, and are subject to change at any time. These views may not necessarily indicate current portfolios’ composition. Individual portfolios managed by HSBC Global Asset Management primarily reflect individual clients’ objectives, risk preferences, time horizon, and market liquidity.

We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified. HSBC Global Asset Management is a group of companies in many countries and territories throughout the world that are engaged in investment advisory and fund management activities, which are ultimately owned by HSBC Holdings Plc. HSBC Global Asset Management is the brand name for the asset management business of HSBC Group. The above communication is distributed by the following entities: in the UK by HSBC Global Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority; in France by HSBC Global Asset Management (France), a Portfolio Management Company authorised by the French regulatory authority AMF (no. GP99026); in Germany by HSBC Global Asset Management (Deutschland) GmbH which is regulated by BaFin; in Austria by HSBC Global Asset Management (Österreich) GmbH which is regulated by the Financial Market Supervision in Austria (FMA); in Switzerland by HSBC Global Asset Management (Switzerland) AG whose activities are regulated in Switzerland and which activities are, where applicable, duly authorised by the Swiss Financial Market Supervisory Authority. Intended exclusively towards qualified investors in the meaning of Art. 10 para 3, 3bis and 3ter of the Federal Collective Investment Schemes Act (CISA); in Hong Kong by HSBC Global Asset Management (Hong Kong) Limited, which is regulated by the Securities and Futures Commission; in Canada by HSBC Global Asset Management (Canada) Limited which is registered in all provinces of Canada except Prince Edward Island; in Israel, this document is only directed to qualified investors (under the Investment advice, Investment marketing and Investment portfolio management law-1995) of the Israeli Branch of HBEU for their own use only and is not intended for distribution; in

Bermuda by HSBC Global Asset Management (Bermuda) Limited, of 37 Front Street, Hamilton, Bermuda which is licensed to conduct investment business by the Bermuda Monetary Authority; in India by HSBC Asset Management (India) Pvt Ltd. which is regulated by the Securities and Exchange Board of India; in Australia, this document is issued by HSBC Global Asset Management (Australia), the sales and distribution arm of HSBC global funds for Australian investors and a division of HSBC Bank Australia Limited ABN 48 006 434 162, AFSL 232595; In the United Arab Emirates, Qatar, Bahrain & Kuwait by HSBC Bank Middle East Limited which are regulated by relevant local Central Banks for the purpose of this promotion and lead regulated by the Dubai Financial Services Authority. In Oman by HSBC Bank Oman S.A.O.G regulated by Central Bank of Oman and Capital Market Authority of Oman; in Taiwan by HSBC Global Asset Management (Taiwan) Limited which is regulated by the Financial Supervisory Commission R.O.C. (Taiwan); in Singapore by HSBC Global Asset Management (Singapore) Limited, which is regulated by the Monetary Authority of Singapore. HSBC Global Asset Management (Singapore) Limited is also an Exempt Financial Adviser and has been granted specific exemption under Regulation 36 of the Financial Advisers Regulation from complying with Sections 25 to 29, 32, 34 and 36 of the Financial Advisers Act, Chapter 110 of Singapore; and in the US by HSBC Global Asset Management (USA) Inc. which is an investment advisor registered with the US Securities and Exchange Commission. Unless and until HSBC Global Asset Management (USA) Inc. and you have entered into an investment management agreement, HSBC Global Asset Management (USA) Inc. is not undertaking to provide impartial investment advice, or to give advice in a fiduciary capacity, to you, or to any retirement account(s) for which you act as a fiduciary. In Chile, operations by HSBC’s headquarters or other offices of this bank located abroad are not subject to Chilean inspections or regulations and are not covered by warranty of the Chilean state. Further information may be obtained about the state guarantee to deposits at your bank or on www.sbif.cl In Colombia, HSBC Bank USA NA has an authorized representative by the Superintendencia Financiera de Colombia (SFC) whereby its activities conform to the General Legal Financial System. SFC has not reviewed the information provided to the investor. This presentation is only for the exclusive use of institutional investors in Colombia and is not for public distribution. In Peru, HSBC Bank USA NA has an authorised representative by the Superintendencia de Banca y Seguros in Perú whereby its activities conform to the General Legal Financial System – Law No. 26702. Funds have not been registered before the Superintendencia del Mercado de Valores (SMV) and are being placed by means of a private offer. SMV has not reviewed the information provided to the investor. This presentation is only for the exclusive use of institutional investors in Perú and is not for public distribution.

Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided as an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively ‘the MSCI Parties’) expressly disclaims all warranties (including, without limitation, all warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com)

INVESTMENT PRODUCTS:

Are not a deposit or other obligation of the bank or any of its affiliates;

Not FDIC insured or insured by any federal government agency of the United States;

Not guaranteed by the bank or any of its affiliates; and Are subject to investment risk, including possible loss of principal invested.

Copyright © HSBC Global Asset Management (Hong Kong) Limited 2019. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Global Asset Management (Hong Kong) Limited.

This publication is intended for Professional Clients and intermediaries’ internal use only and should not be distributed to or relied upon by Retail Clients. The information contained in this publication is not intended as investment advice or recommendation. Non contractual document. This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. Non contractual document. Not for further distribution. 18-GLOBAL-00509 E0727 Expire 30.06.2019

china market access primer - hsbc · 2019. 2. 8. · 4 china market access primer chinese equity...

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