29 October 2015

Enhance the Transparency

of Offshore RMB Bonds through Indexation

Amy Cheng, Head of Index Business, Hang Seng Indexes Company Limited

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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 Index

1969 1994

Hang Seng China Enterprises Index

2010

Hang Seng Corporate Sustainability Index Series

HSI Dividend Futures

2011

HSI Volatility Index

1999

First HSI ETF (Tracker Fund)

2012

VHSI Futures

2003

- Trading of H-shares Index Futures

- First H-shares Index ETF

1995

First Index Fund on HSI

Trading of HSI Futures

1986 2004

Trading of H-shares Index Options

2006

Hang Seng China H-Financial Index

2009

Hang Seng China A Industry Top Index

Hang Seng China AH Index Series

2007

2013

Hang Seng iBond Index Series

Hang Seng China AH Smart Index

Established Hang Seng Indexes

Company

1984 Trading of HSI Options

1993

2014

Hang Seng Futures Index Series

Hang Seng Shanghai-Hong Kong AH Smart Index

2015

HSCEI Smart Index

Hang Seng Sector Index Series

Hang Seng Markit iBoxx Offshore RMB Bond Index family (“HSM iBoxx”)

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Hang Seng Family of Indexes

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• 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.

The Collaboration

Development & Characteristics of Offshore RMB Bond Market

Randolf Tantzscher, Director of Indices

Asia Pacific, Markit

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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.

• 2009, the China’s Ministry of Finance started issuing offshore RMB sovereign bonds.

• 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

Amount Issued (RMB Mn) Life (Year) Coupon (%)

5,000 2 3

Year 2009 2010 2011 2012 2013 2014

Amount Issued

(RMB Mn) 6,000 8,000 20,000 23,000 23,000 28,000

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Offshore RMB Bond Universe

Non-CD (708; 557bn)

Coupon Type

Fixed (665)

Floating (28)

Zero (15)

With Option

Callable (44)

Putable (9)

Convertible

Others

Sinkable

Perpetual (2)

CD (690; 181bn)

Major Types of Offshore RMB Bonds

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

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Issuance

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

12

4%

Issua

nce A

mou

nt

($B

n)

*Data as at 30th Sep 2015

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Growth in Outstanding Amount

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

38%

32%

70%

Outs

tan

din

g A

mou

nt

($B

n)

*Data as at 30th Sep 2015

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CDs Are Usually of Shorter Maturity

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

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

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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

Data as at 30th Sep 2015 Exclude Certificates of Deposit

( ) represents number of Bonds

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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?

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)

—U

SD

Bn

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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

Hang Seng Markit iBoxx Offshore RMB Bond Index family

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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.

Offshore RMB Instruments:

Eligible: Fixed coupon bonds

Excluded: Certificates of Deposit,

FRNs

Key features

Offshore RMB markets:

Covers all offshore RMB markets

except Taiwan

Minimum bond size: RMB 500m

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HSM iBoxx – Maturity profile

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

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ma

r-11

Ma

y-1

1

Ju

l-1

1

Se

p-1

1

No

v-1

1

Jan

-12

Ma

r-12

Ma

y-1

2

Ju

l-1

2

Se

p-1

2

No

v-1

2

Jan

-13

Ma

r-13

Ma

y-1

3

Ju

l-1

3

Se

p-1

3

No

v-1

3

Jan

-14

Ma

r-14

Ma

y-1

4

Ju

l-1

4

Se

p-1

4

No

v-1

4

Jan

-15

Ma

r-15

Ma

y-1

5

Ju

l-1

5

Se

p-1

5

5+

3-5

2-3

1-2

0-1

Data as of Sep 2015

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Unrated bonds are a common in the Dim

Sum market, especially amongst corporate

Chinese issuers

2/3 of unrated bonds trade at investment grade

spreads, predominately BBB

Treatment in the indices 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

Indices containing only rated bonds are calculated for

investors with rating requirements

HSM iBoxx – Ratings

40%

37%

9%

9% 5%

Rated AAA/AA Rated A/BBB

Implied IG Rated HY

Implied HY

Data as of Sep 2015

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HSM iBoxx – Sectors

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ma

r-11

Ju

n-1

1

Sep

-11

Dec-1

1

Ma

r-12

Ju

n-1

2

Sep

-12

Dec-1

2

Ma

r-13

Ju

n-1

3

Sep

-13

Dec-1

3

Ma

r-14

Ju

n-1

4

Sep

-14

Dec-1

4

Ma

r-15

Ju

n-1

5

Sep

-15

Other Financials

Real Estate

Banks

Non-Financials

Sub-sovereigns

CGB

Data as of Sep 2015

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HSM iBoxx contains more than 600

sub-indices

Sub-indices provide consistent

breakdowns of the offshore RMB

universe by sector, rating, maturity as

well as Chinese/non-Chinese issuers

The sub-indices are a crucial tool to

allow a detailed analysis, performance

attribution and risk management

HSM iBoxx – Sub-indices

Sector

Rating

Maturity

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HSM iBoxx – Statistics

Index Overall Corporates

Number of bonds (issuers) 282(165) 204(146)

Notional value (RMB bn) 365 222

Yield 5.02% 6.25%

Duration 2.09 1.57

Rating A BBB

Top 10 issuers Weight

China Government 23.75%

Bank of China 3.57%

Industrial & Commercial Bank of China 3.40%

Deutsche Bank 3.14%

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

0

20

40

60

80

100

120

140

160

12/2014 01/2015 02/2015 03/2015 04/2015

Kaisa 6.875% 2016 – Yield

20 April: Failure to pay

coupon on two

outstanding USD bonds 30 Jan: SUNAC

agrees to buy

49.3% stake

1 Jan: Kaisa

announces failure to

repay HSBC loan

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HSM iBoxx – Composition

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Corporates HighYield

CorporatesInvestment grade

CGB & Sub-sovereigns

Sovereigns & Sub-sovereigns

China Government

Non-Financials

Other Financials

Other Real Estate

Kaisa

Data as of January 2015

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Kaisa default – December 2014/January 2015

93

94

95

96

97

98

99

100

101

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

93

94

95

96

97

98

99

100

101

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

98

99

100

101

102

103

104

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.