201503 － Hsbc－中国债券市场手册

Credit
March 2015
The RMB credit primer

An essential guide to Chinas bond markets
The onshore bond market will
continue to grow in size and
sophistication as the economy
is in need of funding
But many structural issues remain,
such as local government debt and
establishing a default mechanism
In the offshore market, yields have
converged to onshore levels on
broader cross-border flows and
changing expectations about the
RMB FX rate
By Zhi Ming Zhang, Helen Huang
and Crystal Zhao
Play interview with

Zhi Ming Zhang
Disclosures and Disclaimer

This report must be read with the disclosures and analyst certifications in the
Disclosure appendix, and with the Disclaimer, which forms part of it
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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).
1
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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
Gross and net supply of onshore bonds

14,000
Gross and net supply of CNH bonds and CDs

600 RMBbn
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
Onshore bond market: Bigger,

broader, but
Growth accelerates in 2014
Market dynamics
Trading platforms
20
Investors
21
Recent developments
24
Conclusion
25
Changing dynamics of offshore

RMB bonds
26
They will come back
28
Disclosure appendix
50
Disclaimer
52
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Onshore bond market:

Bigger, broader, but
Chinas onshore bond market is breaking new ground in terms of
size, issuance and the contribution it makes to fund raising

Its investor base and the range of products continue to expand
But structural challenges in the areas of default, ratings and
regulation need to be addressed
However, when adjusted for GDP, Chinas bond

market is still much smaller than those in developed
countries (Fig 1). The majority of financing still
comes from the banking system, whose share in
total social financing (TSF), a measure of total
funds raised by corporates in the financial system,
though in long-term decline, has stayed at around
60% in the past five years. So, while great progress
has been made, the era of direct debt financing in
China is still at an early stage.
______________________________________
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
China is now the third largest issuer of bonds in the

world, behind the US and Japan, as shown in Fig 1,
based on the total amount of bonds outstanding. This
is largely because of activity in the onshore market,
where growth of bonds outstanding has averaged
20% since 20011 (Fig 2) and around 93% of Chinas
bonds are issued. Fundraising on the domestic bond
market rose to a new level last year: gross issuance
reached RMB12trn, up 35%, and net issuance rose
to RMB6trn, up 60% (Figs 3 and 4).
1. China is now the third largest bond market in the world
USD bn
Growth accelerates in 2014
Total bonds outstanding

Total bonds outstanding / GDP (RHS)
Source: World Bank, Bloomberg, HSBC
Note: Total bonds outstanding refer to all bonds issued by the countrys government
and corporates in both domestic and offshore market. For China, domestic bonds
account for 93% of the total. Debt data is as of 28 Feb 2015. GDP is as of 2013
Zhi Ming Zhang

Head of China Research
The Hongkong and Shanghai
Banking Corporation Limited
+852 2822 4523
zhimingzhang@hsbc.com.hk
Helen Huang
Analyst
+852 2996 6585
helendhuang@hsbc.com.hk
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2. Bonds outstanding breakdown, 2000-2014

40,000
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
Growth rate YoY, RHS
Source: Wind, HSBC

Note: Certificate and deposit, collateral debt obligation and securities firm commercial paper are included in financial corp; asset-backed securities backed by non-credit underlying assets is
included in non-financial corp.
3. Gross issuance breakdown, 2000-2014

100%
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
Quasi-gov (PBoC, policy bank)

Source: Wind, HSBC

Note: Certificate and deposit, collateral debt obligation and securities firm commercial paper are included in financial corp; asset-backed securities backed by non-credit underlying assets is
included in non-financial corp.
4. Net issuance breakdown, 2000-2014

7,000
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
Quasi-gov (PBoC, policy bank)

Source: Wind, HSBC

Note: net issuance is calculated as gross issuance minus principal repayment. Certificate and deposit, collateral debt obligation and securities firm commercial paper are included in financial
corp; asset-backed securities backed by non-credit underlying assets is included in non-financial corp.
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Offshore investors have access to the onshore

bond market through several channels (Table 5).
Foreign investors bond holdings increased 68%
y-o-y in 2014, much greater than the rise in their
investments in equities, loans and deposits (Fig 6).
More doors may be open soon. In early February
2015, the South China Morning Post reported that
talks were taking place about a bond-connect
scheme that would mimic the Shanghai-Hong
Kong Stock Connect scheme launched in 2014.
Despite its rapid growth, the bond market is still
dominated by onshore investors. As of December
2014, foreign investors holdings totalled
RMB672bn, equivalent to only 1.9% of total
onshore bonds outstanding. This is due to
several factors:
Quota controls: Foreign investors need access
to one of the schemes listed in Table 5 and the
investment amount is subject to a quota.
Except for foreign central banks, few offshore
investors have much appetite for long-dated
onshore bonds.
Many offshore investors are still not familiar
with onshore dynamics.
5. Eligible offshore investors in interbank market
Investors
Quota
Qualified Foreign Institutional

Investors (QFII)
RMB-denominated QFII (RQFII)
Foreign central banks, monetary
authorities, SWFs and Supras
RMB clearing banks in Hong Kong
SAR and Macau SAR
Offshore RMB cross-border trade
settlement banks
Offshore insurance companies
USD66.9bn, all securities
Source: CEIC, HSBC. Data as of December 2014
RMB299.7bn, all securities

N/A
N/A
N/A
N/A
6. Offshore investors holdings in onshore financial assets

80%
3,000
2,500
70%
2,000
RMBbn
Opening up to the world
1,500
60%
1,000
50%
500
-
40%
Equities
2013
Bonds
2014
Loans
Deposits
Growth
Source: PBoC, HSBC
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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7. Breakdown of bonds outstanding by issuer, 2000
8. Breakdown of bonds outstanding by issuer, 2014
Nonfinancial
corp
2%
Nonfinancial
corp
33%
Central gov
27%
Quasi-gov
37%
Local gov
3%
Central gov
61%
Financial
institution
9%
Source: Wind, HSBC
Quasi-gov
28%
Source: Wind, HSBC
10. Breakdown of Treasuries outstanding by tenor
Treasuries
Treasuries, also referred to as onshore Chinese

government bonds (CGBs), are issued by the
Ministry of Finance (MoF). This was Chinas
largest bond class until 2014, when bonds issued
by policy banks took over.
20 yr
5%
9. Yield on Treasuries: a key indicator

6.0%
1 yr
2%
2 yr
2%
3 yr
10%
5 yr
13%
15 yr
11%
10 yr
26%
7 yr
17%
Source: Wind, HSBC

Note: Data as of 31 December 2014. Maturity refers to issuance tenor.
11. Treasury issuance and as % of total bond issuance

2,500
80%
70%
60%
50%
40%
30%
20%
10%
0%
2,000
RMBbn
Among Chinese bonds, Treasuries have the most

diversified tenors (Fig 10). They are also the most
important guide to the pricing of other bonds as
they have the best credit quality, strong issuance
volumes and ample liquidity. Back in 2000 they
represented 72% of total bond issuance. The
percentage declined in the next six years as more
corporates issued bonds and since 2008,
Treasuries accounted for 12-20% of total bond
issuance per year (Fig 11).
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%
As % of total bond issuance
Source: Wind, HSBC
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
Source: Wind, HSBC

Note: Data as of February 2015
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The slow growth is quite deliberate as Beijing wants

to keep tight control of the amount of bonds issued
in order to prevent local governments borrowing too
much. Strict quotas and eligibility criteria are in
place, even for local governments deemed to be on a
strong financial footing. But relaxation has been
gradually introduced. When the scheme started, the
MoF was in charge of issuing and repaying all munibonds on behalf of local governments. This has been
relaxed to allow all provincial governments and a
few selected cities to issue their own muni-bonds
(Table 13), but the MoF is still the dominant force in
this market (Fig 14).
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
Muni-bonds are issued by local governments. This

young market started in 2009 when the MoF issued
muni-bonds on behalf of local governments for the
first time. Growth has been quite slow as the
issuance quota is strictly controlled. As of 2014
muni-bonds outstanding totaled RMB1.16trn, only 3%
of total bonds outstanding in the onshore market. In
2014 muni-bonds accounted for 3% of total bond
issuance (Fig 12).
12. Muni-bond issuance and as % of total bond issuance
RMBbn
Local government bonds (muni-bonds)
Source: Wind, HSBC
14. Breakdown of muni-bonds outstanding by issuer, 2014

Shandong
2.1%
Jiangsu
2.8%
Shanghai
3.1%
Jiangxi Shenzhen Beijing Ningxia

1.2%
0.9% 0.5%
1.0%
Qingdao
0.2%
Zhejiang
3.2%
Guangdong
3.4%
MoF
81.5%
Source: Wind, HSBC
Note: Data as of 31 December 2014.
The muni-bond market is important because it is

seen as a way of solving the local government
debt problem. But, first, a bit of background.
Beijings huge stimulus package of 2008-09
encouraged local governments to build a wide
range of infrastructure projects. According to the
Budget Law at that time, local governments were
not allowed to borrow. To get the necessary
financing local governments created alternative
13. Major changes in regulation for muni-bonds since 2009

Date
Rules
Feb 2009
Oct 2010
MoF issued and repaid muni-bonds on behalf of local governments

Shanghai, Zhejiang, Guangdong and Shenzhen allowed to issue muni-bonds on their own, but issuance is subject to a quota and
the MoF still handled repayments
Jiangsu and Shandong were added to the test program
10 local governments permitted to issue and repay muni-bonds on their own, including the six local governments already in the test
programme, plus Beijing, Jiangxi, Ningxia and Qingdao, subject to quota
All provincial level governments permitted to issue and repay muni-bonds on their own, subject to a quota
Jun 2013
May 2014
Oct 2014
Source: MoF, State Council, HSBC
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channels called local government funding vehicles

(LGFVs). The LGFVs were technically stateowned enterprises (SOEs) and so could tap into
funding channels open to companies, neatly
sidestepping restrictions on local government
borrowing.
But there was a big problem. The LGFVs created
huge amounts of debt and local governments are
now faced with so many liabilities that Beijing is
taking steps to shut down this funding channel in
order to lower the chances of systemic risk.
Since October 2014, local governments have been
working to update the amount of their three types
of debts, as requested by Beijing:
Type 1: debts for which local governments
have repayment liability.
refinancing existing Type 1 debt, accounting for

53.8% of Type 1 debt coming due in 2015. These
recent developments should drive rapid growth in
the muni-bond market in 2015.
15. Local government debt classification requirements
Debt type
Government project
debt
Corporate debt
16. LGFV bond gross issuance and repayment amount, 20062019

2,000
As a result, the issuance of muni-bonds will

accelerate to meet the funding gap previously filled
by LGFVs, which issued as much as RMB1.8trn
onshore bond in 2014 and have about RMB640bn
due every year from 2015 to 2019 (Fig 16). In 2015,
local governments were given a RMB600bn munibond issuance quota (RMB500bn generalobligation muni-bonds and RMB100bn revenue
muni-bonds tied to specific projects). In addition,
Beijing granted a RMB1trn quota for repaying or
RMBbn
1,500
1,000
500
-
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
In future, Type 2 and Type 3 will no longer enjoy

explicit or implicit government guarantees. These
debtors will be required to make repayments or
refinance the debt using their own resources. Type
1 debt is further classified into government
general debt and government project debt tied to
specific projects (Table 15). They will be funded
by a combination of muni-bonds, project revenue
and government support.
Social welfare projects

General obligation
with no commercial
muni-bonds, fiscal
return
revenue
Social welfare projects Revenue muni-bonds
with commercial return
tied to specific
projects, government
fund revenue, project
revenue
Non social-welfare Corporate bonds and
projects
loans, corporate
revenue
Source: HSBC

have guarantee liability.
have contingent liability.
Underlying assets Repayment sources
Government general
debt
Gross issuance
Repayment
Source: Wind, HSBC

Note: Data include principal repayment only. Data as of 10 February 2015.
The hard work has just started. We think more

reforms are needed before the market, rather than
policy support, plays a decisive role in munibonds. For example:
Local governments should have to disclose
more detailed information about their
financial status and improve their risk
management capabilities. Otherwise investors
buying muni-bonds will continue to rely on
the implicit guarantee from the central
government, something that Beijing does not
want to bear. Unlike in the US, local
authorities in China do not yet have
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standalone balance sheets. If they are in

danger of defaulting, then the central
government would be forced to bail them out.
While muni-bonds will help, a stronger
mechanism than an issuance quota is needed
to prevent local governments from borrowing
excessively. Beijings implicit guarantee
gives local officials an incentive to borrow,
since they are unlikely to be allowed to go
bankrupt. They also have incentives to
borrow long term as the debt will fall due
after their term of government service comes
to an end.
17. Yield of muni-bonds
collectively the largest bond issuers in terms of

amount outstanding: RMB9.7trn, or 27% of total
bond outstanding onshore as of 2014. CDB is the
biggest contributor; accounting for 62% of policy
bank bonds outstanding (Fig 19).
19. Breakdown of policy bank bonds outstanding by issuer
ExportImport Bank
of China
16%
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
Source: Wind, HSBC

18. Breakdown of muni-bonds outstanding by tenor

7 yr
12%
10 yr
3%
3 yr
31%
5 yr
54%
Source: Wind, HSBC
Policy bank bonds
The three policy banks China Development Bank

(CDB), Agricultural Development Bank of China
and Export-Import Bank of China are now
10
Policy banks rely heavily on the bond market for

funding. According to CDBs annual report, the
amount of bonds issued (RMB5.84trn) were
equivalent to 71% of total assets (RMB8.19trn) as
of 2013. This is because: 1) policy banks cannot
take deposits like commercial banks; and 2) they
provide funding for many projects that help the
economy such as public housing and
infrastructure in poor areas but do not generate
much return.
Beijing helps policy banks raise funds at a low
cost, for example setting the risk weight of policy
bank bonds at zero to attract purchases from
commercial banks, who are the biggest investors
in the onshore bond market. Policy bank bonds
are also exempt from rating requirements. Simply
put, policy banks enjoy sovereign credit status,
like CGBs and PBoC bills.
Thanks to this government support, policy bank
bonds have become the biggest bond class in
terms of amount outstanding as well as trading
volume. In 2014, these three banks issued
RMB2.3trn of bonds, accounting for 19% of total
bond issuance (Fig 20). Like Treasuries, policy
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bank bonds offer tenor diversification. A yield

spread of 89bp to 97bp (2014 average) over
Treasuries further enhances their attractiveness to
investors. The risk is that, should this policy
support ever be withdrawn, the benefits associated
with these bonds would be discounted.
20. Policy bank bonds issuance and as % of total bond
issuance
2,500
40%
35%
30%
25%
20%
15%
10%
5%
0%
RMBbn
2,000
1,500
1,000
500
PBoC bills are bonds issued by the central bank.

Between 2004 and 2010 this was the largest bond
class, accounting for up to 63% of total onshore
issuance per year (Fig 23) as the central bank tried to
offset the growth in the money supply created by
foreign exchange inflows. As the main purpose is to
offset capital inflows, maturity is quite short, with
tenors of 3 months, 6 months, 1 year and 3 years.
Issuance has slowed down significantly since 2011
as capital inflows have declined. As of 2014, only
RMB422bn of 3-year PBoC bills remain traded as
all the others have matured.
23. PBoC bill issuance and as % of total bond issuance
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
Source: Wind, HSBC
21. Yield of China Development Bank bonds
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%
Source: Wind, HSBC
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
Source: Wind, HSBC

22. Breakdown of policy bank bonds outstanding by tenor
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%
Source: Wind, HSBC

Financial bonds
Financial bonds refer to bonds issued by financial

institutions, mainly policy banks, commercial banks,
securities firms and insurance companies. We
exclude policy bank bonds (see above) because they
are quasi-government bonds supported by the central
government, while other types of financial bonds are
backed by the issuers credit quality.
Bonds are an important source of capital for
commercial banks. One reason for enlarging the
financial bond market in 2004 was to help
commercial banks to improve their capital
adequacy ratios before their IPOs. That is why
commercial banks subordinated bonds, which are
counted as tier-2 capital, have always been the
biggest component of financial bonds (Fig 24). As
11
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the main purpose of commercial banks

subordinated bonds is to support capital adequacy,
tenors are quite long: the breakdown as of 31
December 2014 was 10-year (36%), 15-year
(61%) and 20-year (3%), as shown in Fig 25.
24. Breakdown of financial bonds outstanding by bond type
Other
financial
institution
bond
5%
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
Enterprise bonds, introduced in 1985, were the

first bond class opened to non-financial
companies. In the first 20 years growth was rather
slow as a result of various administrative
restrictions put in place to control risks. For
example, issuers were required to get the bond
guaranteed by third parties and the approval
process was long and complicated. A lot of these
restrictions were relaxed in 2008 and the
enterprise bond market today is over eight times
bigger than it was in 2007, making it the second
largest bond class for credit issuers in terms of
amount outstanding. Since 2012, enterprise bonds
have accounted for 5-8% of onshore bond
issuance (Fig 27).
27. Enterprise bond issuance and as % of total bond
issuance
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
25. Breakdown of commercial banks subordinated bonds

outstanding by tenor
Gross issuance
Source: Wind, HSBC

Source: Wind, HSBC
26. Yield of commercial banks subordinated bonds

8
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
Subordinated bond, AAA, 15 yr

Subordinated bond, AA+, 15 yr
Source: Wind, HSBC
Note: Data as of February 2015.
12
LGFVs are key contributors to the growth of

enterprise bonds. Around half of LGFV bonds
issued between 2005 and 2012 were through
enterprise bonds, although the percentage fell to
39% in 2013 and 35% in 2014 (Fig 28) as Beijing
started to tighten its control over local government
borrowing that forced LGFVs to tap into more
diversified borrowing sources.
Policy tightening intensified in December 2014,
when the China Securities Depository and
Clearing Corp (CSDC), the clearing agency for
exchanges, disqualified bonds issued by higher
risk corporates from being used as collateral for
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repo transactions. The aim is mainly to stop

LGFV bonds being used in leveraged borrowing.
28. Breakdown of LGFV bond issuance
2,000
Corporate and enterprise bonds
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
Source: Wind, HSBC
29. Yield of 7-year enterprise bonds

11.0
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+
Source: Wind, HSBC

30. Breakdown of enterprise bonds outstanding by tenor

3 yr
0.30%
4 yr
0.05%
11 yr
0.07%
32. Corporate bond issuance and as % of total bond

issuance
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%
Source: Wind, HSBC

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
Corporate bonds were introduced in 2007, around

the same time as some other types of credit
instruments began to take off, such as mid-term
notes (MTNs), enterprise bonds and commercial
paper. But corporate bonds have been left behind,
accounting for only 2% of Chinas bonds
outstanding as of 31 December 2014, compared
with 8% for enterprise bonds, 9% for MTNs and 5%
for commercial paper.
2008
Issuer
Corporate Originally opened to

Exchange only
bond
listed non-financial
companies only.
Expanded to all
companies with
shareholding structure
(excl. LGFVs) from 16
January 2015.
Enterprise Mostly non-listed non- 72% were dualbond
financial companies. A traded in interbank
few listed companies
and exchange;
also issue enterprises 28% were traded
bonds.
in interbank only
as of 2014
2007
RMBbn
1,500
Source: Wind, HSBC
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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
Source: Wind, HSBC
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-
Source: Wind, HSBC

34. Breakdown of corporate bonds outstanding by tenor

15 yr
1.43%
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%
Source: Wind, HSBC

Mid-term notes (MTNs)
MTNs are issued by non-financial corporations in

the interbank bond market under the regulation of
14
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2008
33. Yield of 5-year corporate bonds
35. MTN issuance and as % of total bond issuance
2009
To promote the growth of corporate bonds, CSRC,

the securities regulator, has relaxed restrictions on
eligible issuers and simplified the approval
process. From 16 January 2015 all companies that
have a shareholding structure, listed or not, can
issue corporate bonds in the exchange market,
with the exception of LGFVs. While this will help,
the key issue remains unresolved: corporate bonds
can only be traded in the exchange market.
the National Association of Financial Market

Institutional Investors (NAFMII). Six years after
being launched in 2008, they have become the
biggest credit bond class in terms of the amount
outstanding. From 2009 onwards, around 8% of
onshore bond issuance was from MTNs (Fig 35).
RMBbn
A key problem for corporate bonds is that they

can only be listed and traded on the exchange
market, while the dominant platform for bonds is
the interbank market.
The main attraction of MTNs is the simpler

approval process. For enterprise and corporate
bonds, regulators check that the information
disclosed during the issuance process is correct
for each bond. NAFMII does not do that. It only
ensures that sufficient information is disclosed,
leaving it up to the market and financial
intermediaries to judge whether the information is
correct1. Issuers can also issue MTNs multiple
times for two years after registering with the
regulator, while issuers of enterprise and
corporate bonds need approval for each issuance.
The rapid development of MTNs is forcing other
regulators to simplify their approval processes in
order to stop losing market share. In November
2014, the CBRC and CSRC both announced that
they would follow NAFMIIs methodology when
reviewing applications for the issuance of assetbacked securities (ABS). In January 2015, the
______________________________________
1 It is still quite difficult for small and micro companies to issue MTNs.
Instead, they can issue mid-to-small companies collective notes that
also come under NAFMIIs regulation. This bond type allows two or
more companies to collectively issue one bond in order to enlarge
issuance size and improve liquidity. Similar arrangements are available
for enterprise bonds.
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CSRC simplified the approval process for

corporate bond issuance (although it still insists
on checking the information disclosed by issuers).
accounted for 18% of annual bond issuance

between 2012 and 2014 (Fig 39).
38. Breakdown of CP outstanding by tenor
36. Yield of 5-year MTNs
<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-
Source: Wind, HSBC

Source: Wind, HSBC

39. CP issuance and as % of total bond issuance

37. Breakdown of MTN outstanding by tenor
10 yr
4.6%
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
Source: Wind, HSBC
40. Yield of AAA-rated CP
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
CP is the biggest bond class at the short end, with

typical tenors of 3 months, 6 months, 9 months
and 1 year (Fig 38). The approval process is the
same as for MTNs, which gives issuers more
flexibility than enterprise bonds and corporate
bonds. This instrument is specifically designed to
meet non-financial corporates short-term funding
needs2. Issuance as a percentage of the total
onshore bond market keeps increasing; CP
Commercial paper (CP)
Dec-10
Source: Wind, HSBC

1Yr
Source: Wind, HSBC

Note: Data of February 2015.
Government-backed institutional bonds

______________________________________
2 Securities firms can also issue CP, but it is not under regulation of
NAFMII. We classify securities firms commercial paper as financial
bonds in this report.
There are only two issuers of this bond class

China Railway Corp (CRC) and Central Huijin
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Investment (Huijin), a state-owned investment

company that holds shares of state-owned
financial institutions. CRC bonds were used to
finance Chinas massive railway infrastructure
construction and the Huijin bonds were issued in
2010 for subscribing to the ICBC, BOC and
CCBs rights issues and injecting capital into the
Export-Import Bank of China and China Export &
Credit Insurance Corp.
These two issuers are not purely commerciallydriven companies. They have significant public
welfare and state asset management responsibilities
and the government provides explicit support to help
them reduce funding costs.
41. Yield of China Railway Corp bonds
8
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
Source: Wind, HSBC

42. Breakdown of government-backed institutional bonds

outstanding by tenor
30 yr
2.8%
18 yr
0.3%
5 yr
2.9%
7 yr
18.3%
20 yr
15.4%
15 yr
10.8%
10 yr
49.5%
Source: Wind, HSBC
Asset-backed securities (ABS)
ABS are bonds backed by a pool of assets,

converted in shares which are sold to investors.
Table 43 shows the three types of ABS in China.
Of these three, Collateralised Debt Obligations
(CDO), which are backed by credit assets such as
corporate loans and mortgage, are the largest.
ABS were launched in 2005 but growth was very
slow until 2014 (the market was shut down over
2009-2011 following the global financial crisis).
As we argued in Our multi-asset view of the third
plenum Chinas turning point? (15 October 2013),
the key challenges were: 1) banks were reluctant
to sell high quality assets; 2) ABS were much
more complex than a cash bond, increasing
transaction costs; and 3) ABS offered limited
yield spread for investors to compensate for low
liquidity and the due diligence cost.
43. Breakdown of ABS by products

Products
Full name
CDO
Collateralised
Debt Obligation
Asset-backed
Securities
ABS
ABN
Total
Asset-backed
Notes
No. of bonds
outstanding
Amount As % of all ABS As % of all bonds

outstanding
outstanding
outstanding
(RMBbn)
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%
Non-financial Exchange CSRC

corporate
assets
Non-financial Interbank NAFMII
corporate
assets
411
301
100%
0.84%
Source: Wind, HSBC

Note: Data as of 31 December 2014. CBRC: China Banking Regulatory Commission; CSRC: China Securities Regulatory Commission; NAFMII: National Association of Financial Market
Institutional Investors.
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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
46. Yield of ABS

8
6
4
2
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
Source: Wind, HSBC

Privately placed notes (PPNs)
44. ABS issuance accelerated in 2014
Source: Wind, HSBC
<6 months
3%
>=3yr
20%
Jan-11
As a result, there was a big jump in ABS issuance

in 2014. Gross issuance reached RMB331bn, 11
times more than in 2013, and accounting for 3%
of total bond issuance in 2014 (Fig 44). There are
still issues that need to be addressed, such as tenor
diversification (now the issuance tenor is quite
short some 80% are below 3 years, Fig 45) and
liquidity improvement (a lot of investors still buy
and hold until maturity).
45. Majority of ABS have tenors of less than three years
These concerns eased in 2014 because: 1) the

increasing number of financial products available
to savers (e.g. wealth management products,
popular savings schemes that pay higher rates of
interest than bank deposits, and money market
funds) have made it more difficult for banks to get
new deposits; in order not to breach the loan-todeposit ratio, they have to sell existing loans to
release quotas for new loans; 2) as LGFV bonds
start to wind down, investors are searching for
alternative high yield bonds, which helps support
demand; 3) increased new issuance is improving
liquidity; and 4) regulators are helping too: in
November 2014 the CBRC and CSRC announced
simplified approval processes for ABS.
PPNs allow unlisted non-financial companies to

issue bonds privately to selected investors in the
interbank market. Similar to MTNs and CP, PPNs
are open to non-financial companies, the custody
agent is the Shanghai Clearing House (SCH) and
the regulator is NAFMII. Introduced in 2011, PPNs
have grown into a major bond class, raising nearly
RMB1trn in 2014, accounting for 8% of total bond
issuance (Fig 47), even more than MTNs.
As these bonds are privately placed, regulators
impose fewer restrictions, an approach welcomed by
issuers and investors. At the same time, PPNs may
carry a higher risk than publicly listed bonds and
liquidity is tighter. Maturity is also quite short
55% has a tenor of 3 years (Fig 47).
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47. PPNs: Rapid growth since being launched in 2012

9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1,200
1,000
RMBbn
800
600
400
200
2011
2012
Gross issuance
2013
2014
Source: Wind, HSBC
48. Breakdown of PPN outstanding by tenor

10 yr
0.3%
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%
Source: Wind, HSBC

Among so many bond types, trading is

concentrated on five, namely Treasuries, policy
bank bonds, MTN, CP and enterprise bonds (Fig
49). We list the features of these key bond classes
in Table 50.
49. Trading volume is dominated by selected bond classes
100,000
Others
PBOC Bills
RMB bn
80,000
Enterprise bond
60,000
MTN
40,000
CP
20,000
Treasuries
2010
2011
2012
2013
2014
Financial bonds (mainly

policy bank bonds)
Source: Wind, HSBC

Note: Trading volume refers to transaction amount (buy or sell) per year.
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50. China bond market overview

Treasuries
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
Local 3 policy banks3

governments2
PBoC
Approval
authority
MoF State Council,

MoF
Launch time
Amount
outstanding
(RMBbn)
Turnover1
(RMBtrn/week,
interbank only)
Typical tenor
(years, at
issuance)
Bond rating
Listing venue
Settlement
agent6
PBoC
Corporate Mid-term notes

bonds
(MTN)
Commercial Government- Asset-backed

paper (CP)
backed
securities
institutional
(ABS)
bonds
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
3, 5, 7, 10 0.25, 0.5, 0.75,

1
7, 10, 15, 20
1-3
Financial Mostly unlisted

institutions non-financial
companies4
Mostly listed
companies5
Non-financial
companies
Non-financial China Railway Banks for CDO,

companies
Corporation, non-financial
Central Huijin companies for
Investment ABS and ABN
CSRC
NAFMII
NAFMII NDRC for CRC, CBRC for CDO,

State Council CSRC for ABS,
for Huijin NAFMII for ABN
PBoC PBoC, CBRC,

CSRC
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, CCDC, CSDC Mostly in CCDC

CSDC
CCDC
Interbank
Interbank,
exchange
Exchange
Interbank
CCDC CCDC, CSDC
CSDC
CCDC, SCH7
A-1 60%; no
rating 40%
AAA for CRC AAA 73%; AA+

bond 89%; no
4%; AA 2%;
rating for Huijin AA- 2%; A+ 2%;
bond 11% A 1%; no rating
16%
Interbank
Mostly in CDO and ABN

interbank, some
in interbank,
in exchange
ABS in
and OTC
exchange
SCH8 Mostly in CCDC CDO and ABN

in CCDC, ABS
in exchange
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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51. Interbank vs. exchange bond markets1
Trading volume (RMBtrn, 2014)

Amount outstanding3 (RMBtrn, 2014)
Investors
Trading venue
2
Custodian and settlement agent5

Trading mechanism
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
Source: Wind, HSBC. Data as of 2014

Note:
1. The table does not include OTC market because it is very small compared with interbank and exchange markets and is purely for individual investors.
2. Data refer to one-side trading volume, i.e. buy side or sell side
3. Interbank bond market size is calculated as sum of amount outstanding under custodian of CCDC and CSDC. Some bonds are traded in both interbank and exchange markets. So sum of
amount outstanding in interbank and exchange markets is larger than total bond outstanding as there is double counting.
4. Other than bonds, CFET has many other fixed income products, including bond derivatives, FX spot and derivatives, interbank lending, repo and interest rate swaps
5. CCDC: China Central Depository & Clearing Co; CSDC: China Securities Depository and Clearing Co; SCH: Shanghai Clearing House.
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.
The interbank market offers a much wider range of

products, as shown in Table 52. Most bonds can
only be traded on one of the three platforms. Of the
28 types of bond in the onshore bond market, only 6
can be traded on more than one platform (Table 53).
There are three custodian agents. China Securities
Depository and Clearing Co (CSDC) for bonds
traded in the exchange market, while China
Central Depository & Clearing Co (CCDC) and
Shanghai Clearing House (SCH) cover bonds in
the interbank market.
52. Product offerings in the interbank and exchange bond markets

Interbank
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,
Source: Wind, HSBC
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
______________________________ Amount that can be traded in _______________________________

Interbank+
Interbank+
Interbank only Exchange only
OTC only
Interbank+OTC
Exchange+OTC
Exchange
19%
99%
0%
97%
26%
14%
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%
Source: Wind, HSBC

* Collective enterprise bond is a product for more than one borrower to collectively issue one bond. This type of bond was introduced to help small companies to issue bond. Besides collective
enterprise bond, there is also collective MTN that has similar structure.
20
2%
1%
0%
2%
1%
0%
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March 2015
Interbank market
The interbank market was originally set up in

1994 for commercial banks to trade currencies.
From 1996, banks were required to conduct all
interbank lending in this market and the range of
products offered has since been expanded to
include bonds, repurchase agreements (repos),
interest rate swaps and derivatives. It is also a
much broader market in terms of who can trade
participants now include a wide range of
institutions, financial and non-financial.
This market has gradually opened up to foreign
investors. As of 13 March 2015, of the 7,680
institutions allowed to invest in RMB products such
as bonds and repos on the interbank market, there
were 98 foreign banks (offshore), 88 foreign-owned
onshore banks, 11 foreign insurance companies, 77
R-QFIIs and 19 QFIIs (Fig 54).
54. Number of onshore RMB product participants
Non-legal
entities, such
as pension,
WMP,
investment
product,
3,122 , 41%
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%
trade bonds there; in November 2013, listed

commercial banks were allowed to issue bonds; in
December 2013 wealth management products
(WMPs) were permitted to invest in fixed income
products. However, the interbank market has now
achieved such dominance that it will be difficult
for the exchange market to catch up.
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
Source: CFET, HSBC

Note: data as of 13 March 2015
Exchange market
Until 1997 the exchange market was the dominant

trading platform for bonds and stocks. But bond
trading significantly shrank after banks exited this
market in 1997 and has remained lukewarm ever
since because banks are the biggest investors in
the bond market in China.
The CSRC has been trying to ease the ban on
commercial banks trading in the exchange
market: in 2009, listed banks were allowed to
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%
Source: Chinabond, Shanghai Clearing House, HSBC

Note: data above include RMB28trn domestic bonds that account for 78% of total bond
outstanding as of Dec 2014. Investor holding information for the rest of the bonds is not
available. Others including mainly credit unit, policy banks and stock exchange (as a
trading agent for investors). Data as of December 2014.
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March 2015
56. Commercial banks, especially the smaller ones, are the

main contributors to bond trading volumes
Foreign
institutions
(incl.
domestic
branch)
13%
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%
Banks are the most conservative investors. Around

80% of their holdings are Treasuries and policy bank
bonds that do not have default risk (Fig 57).
57. Bond holdings of commercial banks
CP
4.3%
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%
Similar to commercial banks, insurance companies

are also very conservative. They prefer Treasuries,
policy bank bonds and financial bonds. They are the
second largest investors in financial bonds as they
have an appetite for long-term products (Fig 59).
59. Bond holdings of insurance companies
CP
1.8%
MTNs
8.6%
Securities firms
Securities firms are the most aggressive investors.

The majority of their holdings are in enterprise
bonds, MTNs and CPs (Fig 58), with less than
20% in products such as Treasuries and policy
bank bonds. This is because funding costs for
securities firms are comparatively high, so they
have to chase higher yields from credit bonds in
order to gain a decent spread.
Treasuries
14.6%
Financial
bonds
27.6%
Policy bank
bonds
45.0%
Source: Chinabond, Shanghai Clearing House, HSBC

Note: Holing information is available for only 78% total bonds outstanding. Data as of
31 December 2014.
Others
0.2%
MTNs
10.5%
Treasuries
34.4%
Enterprise
bonds
3.9%
22
Treasuries
7%
MTNs
31%
Source: Wind, HSBC

Note: Data refers to transaction volume, both buy and sell, in interbank market in 2014.
Financial
bonds
3.4%
58. Bond holdings of securities firms
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
Investment funds are the second largest investors

in MTNs and enterprise bonds after commercial
banks. In other bond classes, they like policy bank
bonds because their yields are higher than
Treasuries (Fig 60).
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Rating system
60. Bond holdings of funds

Treasuries
3%
MTNs
27%
Policy bank
bonds
33%
Financial
bonds
16%
Dagong Global (, a local firm)

China Chengxin International (, a
joint venture with Moodys)
Enterprise
bonds
21%
Source: Wind, HSBC

Note: Holding information is available for only 78% total bonds outstanding. Data as of
31 December 2014.
China Lianhe Credit Rating (, a

joint venture with Fitch)
Shanghai Brilliance Credit Rating & Investors
Service ()
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.
61. Bonds need approval from different regulators before

issuance and are listed in different venues
Product
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
Policy bank bonds

Financial bonds
Enterprise bonds
Corporate bonds
MTN, CP, PPN
Rating agencies were set up in the 1990s and their

opinions have become more important as the
market has grown. The market is dominated by
domestic rating agencies, including:
Interbank
Interbank
Interbank, exchange
Exchange
Interbank
Pengyuan Credit Rating (

)
Golden Credit Rating International ()
Shanghai Far East Credit Rating (
)
China Chengxin Security Rating (
)
United Ratings ()
But ratings do not necessarily accurately reflect an
issuers credit quality. Bonds rated AAA account
for 55% of all credit bonds outstanding. Only 18%
of credit bonds are rated below AA+ (Fig 62).
Also only 32% of onshore bond have a rating
because many big bond classes are exempted from
rating requirements, such as Treasuries, policy
bank bonds, municipal bonds that the MoF issues
on behalf of local government, PBoC bills and
Huijin bonds.
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
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March 2015
62. Over half of credit bonds are rated AAA

A-1
10%
63. Gross issuance and repayment (principal and coupon)

schedule of non-financial corporate bonds
3,500
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
Source: Wind, HSBC

Note: both issuance and repayment data exclude CP because it comes due within 1
year and thus distorts growth trend in future years compared with historical years.
Recent developments
64. Bond issuers that have three consecutive years of losses
The onshore bond market has changed rapidly in

the past few years. In addition to increasing in
size, the market is growing in complexity, a trend
that is likely to continue as the financial needs of
the economy become more sophisticated. The
challenge now is how to achieve a balance
between growth and risk.
No. of issuers
Amount of
bonds
outstanding
(RMBbn)
As % of total
credit bonds
outstanding
Default stress
Onshore bond issuance took off in 2009. By 2014

repayment and refinancing was becoming a major
concern as more bonds came due (Fig 63) at a
time when corporate earnings were deteriorating.
As shown in Table 64, the number of bond issuers
that have recorded consecutive losses has been
increasing rapidly.
As of 3Q 2014
As of 2013
As of 2012
54
28
14
405
155
73
2.8%
1.3%
0.8%
Source: Wind, HSBC
There has yet to be a default for a publicly issued

debt instrument. All the near defaults on principal
have resulted in bail-outs by either regulators or
third parties. While this may protect investors in the
short term, it is increasingly detrimental to the longterm development of Chinas bond market because:
Investors go for products that offer higher
yield without doing sufficient due diligence
on the issuer. This disadvantages high quality
issuers that deserve lower yields.
Issuers tend to borrow excessively because
they believe regulators will bail them out if
they have trouble making repayments. This
has become one of the obstacles to
deleveraging.
Chinas debt levels have been climbing faster than
GDP for more than a decade, especially since
2009 when Beijing launched its massive
economic stimulus package to counter the effects
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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 (Fig 65).
5
4
3
65. China bonds and loans as % of GDP

200%
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
Source: CEIC, HSBC
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
100%
Debt: bond
Debt: loan
Total debt / GDP (RHS)
Source: CEIC, Wind, HSBC
Tight liquidity
As we argued in The easing dilemma

(10 February 2015), liquidity remains tight despite
several rounds of monetary easing. This is evident
by a persistently high 7-day repo rate (Fig 66).
66. 7-day repo rate: persistently high
7
67. China and US Treasury yield curve comparison, 2015 vs.

2008
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
Chinas Treasury curve now looks strikingly

similar to the US in January 2008: flat at c3% to
4% and inverted at the short end (Fig 67),
reflecting the challenging financing outlook,
especially for banks.
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 assetbacked securities in 2014.
In the long term some structural issues need to be
addressed, including the lack of a default
mechanism, an unsatisfactory rating system and
the fragmented regulatory landscape. However, as
the economy is in need of more funding, we
expect the onshore bond market to continue to
grow in size and sophistication.
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March 2015
Changing dynamics of
offshore RMB bonds
The CNH bond market has become an increasingly important
channel for Chinese companies to source offshore financing, in

the context of the central governments go abroad strategy
Offshore yields have converged to onshore levels in early 2015 on
the back of broadening channels of cross-border flows and

changing expectations about the RMB FX rate
The growth of the offshore pool and demand for CNH bonds are
likely to resume once currency sentiment stabilises, helped by the

rising number of offshore RMB centres around the globe
The offshore RMB (CNH) bond market

underwent several major changes last year.
Offshore yields, which used to trade as much as
200bp below onshore levels, have now converged
to similar or even higher than onshore peers. The
main driver has been the further liberalisation of
cross-border flows.
1) How important is the CNH market in terms of

offshore financing for Chinese companies?
The CNH bond market has continued to grow

despite the RMB weakening against the USD.
With nearly 15 offshore RMB centres already
established, we expect the pool of CNH liquidity
to increase further, although the rate of expansion
will be affected by currency sentiment.
4) In an environment of currency uncertainty, are

there any new drivers to support the offshore
RMB pool?
In this report, we provide an update to CNH bond

primer: Hot dim sum in The redback primer: An
essential guide to renminbi asset classes (20
March 2014), addressing the top 10 questions
regarding the market in the past 12 months:
26
2) How fast have cross-border RMB flows

expanded?
3) What caused the accelerated convergence of
onshore and offshore yields?
5) How has the primary market evolved in the

past 12 months?
6) Have any new structures emerged in recent
bond offerings?
7) What type of new investors may find CNH
bonds attractive?
Crystal Zhao
Analyst
+852 2996 6514
crystalmzhao@hsbc.ocm.hk
Zhi Ming Zhang
+852 2822 4523
Credit
China Research
March 2015
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8) What are the major changes in the markets

profile?
9) Why are we still positive on the medium-term
market outlook?
10) Will policy makers continue to support the
CNH market amid further capital account
liberalisation?
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March 2015
They will come back

CNH bonds have proved less popular in the last few months due to
expectations of RMB weakness and tighter offshore liquidity

Attractive carries on RMB would lure back investors once
sentiment stabilises; Formosa bonds are adding to issuer diversity

We remain positive on the CNH market, given policy support for
domestic companies going abroad and the increasing global use

of the RMB
28
Sep-14
Sep-13
Sep-12
Sep-11
Sep-10
Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

USD3m Libor
Onshore 3m SHIBOR
Onshore 1 year lending benchmark rate
Onshore 1 year household saving benchmark rate
Sep-09
0
Mar-09
Sep-08
Sep-07
Sep-06
Sep-05
Sep-04
Sep-03
Fig.2 Total cross-border claims on China reached USD1.5trn as

of end of September 2014
1600 USDbn
1400
1200
1000
800
600
400
200
0
Sep-02
Fig.1 Onshore funding costs have been much higher than

offshore levels post the financial crisis
7 (%)
We think CNH bonds will continue to play an

essential role in the offshore financing of Chinese
companies, especially at a time when the RMB is
Sep-01
China has become the centre of emerging market

borrowing since quantitative easing was launched
in the US. Driven by cheaper offshore financing
costs, Chinese borrowers have accumulated
USD1.5trn debt from international lenders as at end
of September 2014 (USD1.1trn bank loans and
USD0.4trn bonds), up from a mere USD200bn five
years ago, according to BIS data (Fig.1 and Fig.2).
Offshore bonds are an increasingly important

channel for Chinese entities to raise fund. They have
raised a total of USD500bn bonds in G3 currencies
since 2007 and have been expediting CNH issuance
since the market took off five years ago (Fig.3). In
2014, for every RMB raised overseas by Chinese
issuers, 25% came from CNH bonds (including
bank certificates of deposit).
Sep-00
Q1: How important is the CNH market

in terms of offshore financing for
Chinese companies?
All BIS reporting banks' cross-border claims on China

Outstanding international bonds by China nationals
Source: BIS, HSBC
Note: All BIS reporting banks cross-border claims include banks positions vis--vis
their own offices.
Crystal Zhao
Analyst
+852 2996 6514
crystalmzhao@hsbc.ocm.hk
Zhi Ming Zhang
+852 2822 4523
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March 2015
800
12%
400
6%
0%
0%
-5%
-10%
Expectation of CNY
appreciation against USD
2007 2008 2009 2010 2011 2012 2013 2014
Source: Asian Bond Online, Bloomberg, HSBC

Note: Chinese issuance of CNH bond include bank certificates of deposit
weakening against the USD. In the past, Chinese

issuers preferred to raise USD debt because of the
one-way expectation of RMB appreciation. This has
changed, given the USD strength since last year, and
the market has been looking for a weaker RMB as
economic growth softens (Fig.4). It makes sense for
the companies with limited USD revenues to turn to
the CNH market when raising money offshore.
Some may argue that there is little incentive for
onshore companies to issue CNH bonds this year
given the declining costs at home (See Question 3).
This is not entirely true, especially if we consider the
potential domestic funding gap for lower-quality
companies, such as local government financing
vehicles (LGFVs) which find it harder to borrow
onshore at competitive prices amid the clampdown
Mar-08
Mar-07
-15%
Mar-06
Chinese issuance of G3 currency bond (LHS)

Chinese issuancce of CNH bond (LHS)
% of CNH issuance over (G3+CNH) issuance
Mar-15
18%
Mar-14
1200
depreciation against USD

5%
Mar-13
24%
Mar-12
1600
Mar-11
30%
RMBbn
Mar-10
2000
Fig.4 The 1-year USDCNY NDF as an indicator of currency

expectations
10%
Expectation of CNY
Mar-09
Fig.3 Annual gross issuance of CNH and G3 bonds by China
on local government debt (see Regulation

developments in Dim Sum Tracker, 6 November
2014). A total of RMB2trn in existing LGFV bonds
need to be refinanced in the next three years.
Although the Ministry of Finance recently gave a
quota of RMB1trn to provincial governments to
substitute high-cost borrowing for local
government bonds, this amounts to less than 40%
of the local government debt (including contingent
liabilities) due in 2015, based on the results of the
national audit in June 2013. As asset quality
remains an ongoing concern for banks, it is likely
that lower-tier companies will raise the proportion
of their offshore funding.
Table 1. List of existing CNH bonds issued by LGFVs (excluding private placements; not exhaustive)
Issuer
Keepwell deed provider
Yieldking Investment Limited (

)
Yunnan Energy Investment (overseas)
Company Ltd
Sichuan Development Holding Co ( SIDEVE 5.15%

() ) 07/31/2017
Yunnan Provincial Energy
YNPOWE 5.5%
Investment Group Co ( 12/21/2017
)
Rizhao Port Group Co ( RIZHAO 4.25%
05/15/2017
)
NA
BJEHF 5%
06/30/2016
Shandong Hi-Speed Group Co ( SDEXPR 5.8%
12/07/2015
)
Rizhao Port (Hong Kong) Company

Limited ( () )
Beijing Enterprises Water Group Limited
(371 HK) ()
Shandong International Hong Kong Ltd
( ())
Security name
Amount issued Re-offer

(RMBm)
yield (%)
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
Source: Bond OC, HSBC

Note: Rizhao 4.25% 05/15/2017 managed to price tighter than other LGFV notes because it has the standby letter of credit from the Agricultural Bank of China.
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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
RMB-settled import (goods + service) (RMB3820bn in 2014)

Onshore
RMB-settled export (goods + service)

(RMB2730bn in 2014)
Offshore
Bilaterial currency
swap
RMB FDI (RMB862bn ) in 2014

RQFII (RMB102bn in 2014)
Northbound Stock Connect (RMB75bn in 2014)
Source: Peoples Bank of China, Bloomberg, HSBC
If 5% of LGFV bonds maturing within 3 years

were to be diverted to the CNH market, it would
increase supply by RMB100bn, which is 15% of
the current total of CNH bonds and certificates of
deposit (CD). Some LGFVs started to tap the CNH
market as far back as four years ago and we expect
more to follow (See Question 5 and Question 6).
Table 1 lists outstanding CNH bonds by LGFVs.
Q2: How fast have cross-border RMB

flows expanded?
In order to gauge the potential growth of the CNH
pool, we looked at RMB cross-border flows under
both the current and capital accounts. As Figure 5
shows, the main channels for outbound RMB flows
include: trade settlement on imports and other
current account items; RMB overseas direct
investment (ODI); southbound via the ShanghaiHong Kong Stock Connect (see Question 3); and the
RMB Qualified Domestic Institutional Investor
(RQDII) scheme. The combined outbound RMB
flows via the above-mentioned sources reached
RMB4trn in 2014, according to the Peoples Bank of
China (PBoC) and the Hong Kong Stock Exchange.
On the other side, inbound flows associated with
RMB-settled exports and services, foreign direct
investment (FDI), the RMB Qualified Foreign
Institutional Investor (RQFII) scheme and
northbound via the Shanghai-Hong Kong Stock
30
Connect rose to RMB3.7trn in 2014. As a result,

RMB250bn of net liquidity was accumulated
offshore last year, according to the available official
data. That said, there are other channels that we
cannot track, such as cross-border intercompany
loans and the movement of funds by financial
institutions.
Some may be concerned that the net RMB
outflows dwindled from RMB500bn in 2013 to
RMB250bn in 2014. But we think the sharp rise
in cross-border volumes matters more than a
temporary hiccup in CNH accumulation amid a
currency correction (see Question 4). RMBsettled trade flows rose around 40% in both
directions and the amount of inbound and
outbound RMB direct investment almost doubled
Fig.6 RMB-denominated cross-border flows have surged
4000 RMBbn
900%
800%
3000
700%
2000
600%
1000
500%
400%
0
300%
-1000
200%
-2000
100%
-3000
0%
RMB
RMB RMB FDI RMB ODI RQFII
trade
trade
receipt payment
2013
Source: PBOC, HSBC
2014
Growth rate (RHS)
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Fig.7 CNH sovereign yields are higher than CNY peers

6 Yield (%)
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
The Stock Connect programme is designed to give

foreign investors direct, flexible access to Chinas
A-share market (northbound). It also offers
Chinese investors exposure to Hong Kong-listed
H-shares (southbound). The gross quota
(northbound and southbound combined) is
RMB550bn, or about 30% of the offshore RMB
deposits globally when the scheme was launched
in November 2014.
Fig.9 Offshore and onshore rates have converged

7 Rate (%)
Nov-14
The key driver has been the expectation of a

further relaxation on cross-border flows,
especially after the launch of the Stock Connect
(see Dim Sum Tracker, 5 May 2014). Given the
higher onshore carry a year ago (Fig.7), the flows
under capital account items have shifted onshore.
Sep-14
Many investors have asked about this in the past few

months. The speed of the convergence in yields
between the onshore and offshore markets surprised
most people. On 11 March 2015, CNH sovereign
yields surpassed CNY levels (Fig.7) as did those for
high-grade non-bank corporates (Fig. 8).
Jul-14
Q3: What caused the accelerated

convergence of onshore and offshore
yields?
Shortly after the details of the programme were

announced in April 2014, offshore rates started
rapidly to catch up with those onshore, well before
the official launch (Fig.9). What matters here is
the expectation that more channels will be
established to facilitate cross-border flows,
rather than the current size of these flows. For
instance, the authorities have made clear that a
Shenzhen Hong Kong Stock Connect will be
launched this year, similar to the Shanghai one.
May-14
(Fig.6). This means the currency has become more

accepted by overseas counterparties when dealing
with China, creating a base for further expansion
of the CNH market.
Mar-14
Onshore 3-year AAA corporate bond

CNH high grade bond (HSBC Index)
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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Credit
China Research
March 2015
Fig.10 CNH bonds were stable amid policy engineered FX

weakness
6 %
6.4
Fig.11 Recent RMB weakness was driven by market forces

6.30
120
6.3
6.25
110
6.2
6.20
100
6.1
6.15
90
6.10
80
5.9
6.05
70
Stable Dim Sum bond yield
Policy engineered FX weakness
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
Source: HSBC, Bloomberg
Another factor pushing offshore yields higher is

weaker RMB sentiment, given the global theme of
USD strength and lacklustre economic data out of
China. To recap on events of the past year, the
first round of an outright RMB depreciation
versus USD was engineered by the central bank,
starting February 2014, to cap speculation flows
driven by one-way appreciation expectations.
More importantly, the regulators wanted to
introduce two-way volatility to make the currency
more market-driven. At last years National
Peoples Congress, Premier Li Keqiang said
China needed to keep the RMB FX rate basically
stable and planned to expand its two-way floating
range (see Dim Sum Tracker, 7 March 2014).
CNH investors have learnt to accept this new
norm and the performance of dim sum bonds has
been largely unaffected (Fig.10).
Fig.12 USDCNH CCS rates have reached record highs

5 Rate (%)
4
3
2
A new challenge emerged in late 2014 when the

RMB spot started to weaken against USD (though
onshore CNY fixings were stable). As Figure 11
shows, USD strength put the RMB under pressure
and CNH yields rose as investors asked for
compensation for potential FX losses (the 1-year
USDCNY NDF priced in around 4% RMB
depreciation against USD in mid-March 2015).
Q4: In an environment of currency

uncertainty, are there any new drivers
to support the offshore RMB pool?
There are worries about the tightness of the CNH
interbank market amid the slowdown of growth in
the offshore pool. For example, CNH HIBOR and
USDCNH cross-currency swap (CCS) rates have
surged to record highs (Fig. 12). However, we
think an increase in RMB ODI will help ease
the tensions in the offshore market.
Fig.13 RMB remittances between Hong Kong and the mainland
1500 RMBbn
4
1200
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
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
Source: HKMA, HSBC
abc
Credit
China Research
March 2015
Fig.14 RMB ODI increased significantly in the past three years

800 RMBbn
30%
25%
600
20%
400
15%
10%
200
0
2012
2013
Fig.15 QDII outbound flows rose significantly in 2013 and 2014

40 USDbn
35
30
25
20
15
5%
10
0%
2014
RMB ODI
Total ODI
% of RMB ODI over total ODI (RHS)
Source: CEIC, HSBC
So far, trade settlement has been key to growth of

the CNH pool and its contribution increases when
RMB sentiment is strong (Fig.13). This is because
Chinese exporters with RMB receipts tend to leave
the money offshore when the CNH spot rate is
lower than CNY spot rate (i.e. RMB sentiment is
positive), as it means they can get more USD
offshore for the same amount of RMB. Similarly,
foreign exporters have an incentive to settle their
bills with Chinese importers in RMB when the
currency is strong. Both sets of transactions add to
the CNH pool.
Currently, amid FX uncertainty, the ratio of inward
remittances to Hong Kong is likely to decline in
comparison with outward remittances to the
Mainland, as it did in 2H 2011 and 1H 2014. That
said, as long as total cross-border RMB remittances
continue to grow, trade settlement is likely to remain
an important contributor to offshore liquidity
(especially when RMB sentiment stabilises).
Meanwhile, RMB ODI has risen sharply, hitting
nearly RMB200bn in 2014 from negligible levels
three years ago. Its percentage of Chinas total
outbound investment also rose to 25% in 2014, or
five times the ratio in 2012 (Fig.14). Looking ahead,
we think the volume of Chinas total ODI and the
portion denominated in RMB will continue to
expand rapidly given Beijings policy of
encouraging more domestic companies to go abroad.
0
2006 2007 2008 2009 2010 2011 2012 2013 2014
Outbound
Inbound
Source: State Administration of Foreign Exchange, HSBC
President Xi Jinping introduced the one belt, one

road Silk Road policy in 2013 to strengthen Chinas
economic and trade relations with neighbouring
countries. This will involve funding for
infrastructure construction, such as roads, railways
and airports, the exploration of natural resources and
industrial and financial cooperation.
Chinese firms can use more RMB to make
outbound investments and encourage their
counterparties to use the currency to purchase
Chinese goods, such as heavy equipment. The
new Silk Road fund was launched with USD40bn
backing from Beijing. As China aims to increase
ODI to USD1.25trn in the next 10 years, RMB
ODI will become an increasingly important part
of outbound flows.
We also think the RQDII programme will play a
role in boosting the offshore pool of RMB. This is
based on the QDII scheme, which was launched in
2006 to give domestic institutional investors
access to overseas securities. The RQDII was
rolled out in November last year to allow
domestic qualified institutions to invest money
raised domestically in RMB-denominated assets
overseas (see Dim Sum Tracker: Beware of rising
volatility, 16 December 2014).
QDII outbound flows rose almost 50% y-o-y in
2014 as domestic investors diversified their
portfolios (Fig.15). We believe the growing range
33
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Credit
China Research
March 2015
Fig.16 Gross and net supply of CNH bonds and CDs

600
Fig.17 Chinese financials accounted for majority of 2014

gross supply
RMBbn
Foreign Sovereign Supranational 1%

corporate 8%
Foreign 2%
financial
3%
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

Note: The gross supply incudes CNH bonds and CDs.
of CNH products will encourage more onshore

investors to use RQDII.
Q5: How has the primary market

evolved in the past 12 months?
For example, CNH high-yield property names are

currently cheaper than their onshore peers. So far
this year, Chinese property developers have issued
1- to 5-year paper in the domestic market with the
majority of yields around 5%-7%. During the
same period, offshore yields for this sector were
in the 7%-20% range. As onshore yields continue
to decline across the board, we believe more
domestic investors will be interested in exploring
opportunities overseas.
We now turn to the specifics of CNH bonds. In

2014, we were encouraged to see a record high
gross supply of RMB530bn (Fig.16). Chinese
issuers accounted for around 80% of the total,
dominated by financial names (Fig.17). Because of
business expansion and increasing offshore
financing demand from clients, Chinese financial
institutions (onshore parent or offshore subsidiaries
and branches) have been active in the overseas debt
capital market, with their net CNH issuance surging
to almost RMB80bn (excluding CDs) in 2014, from
a net redemption in 2013 (Fig.18). Meanwhile, the
issuance from foreign entities was subdued because
of the much lower cost in G3 funding.
Fig.18 The net supply breakdown by sector

140 RMBbn
2014 net issuance
2013 net issuance
120
Fig.19 The USD equivalent cost of issuing in CNH gets cheaper

2.50
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
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
Things are now starting to look a bit different.

Although Chinese issuers will remain the
dominant group this year, foreign issuers are
likely to play catch-up. Because of the heightened
USDCNH CCS rates (see Question 4), the USD
equivalent costs for the multinational issuers in
CNH have declined compared to those for an
outright USD bond (Fig. 19). This gap was over
100bp about a year ago, meaning foreign issuers
were having to pay at least 100bp more to issue in
CNH rather than a direct USD offering (see Dim
Sum Tracker, 4 April 2014).
As USDCNH CCS rates are unlikely to fall in the
near term, we expect issuance from foreign issuers to
pick up this year. Our forecast for full-year 2015
gross issuance of CNH bonds and CDs is between
RMB490-520bn (Fig.20) (see Dim Sum Tracker:
Beware of rising volatility, 16 December 2014)
Fig.20 Forecast of CNH bond and CD supply in 2015

1000
900
800
700
600
500
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
A new rising star: the Formosa bond
Besides the well-known dim sum bond, there is a

new type of offshore RMB bond that is attracting
a lot of attention the Formosa bond, a foreign
currency-denominated bond issued in Taiwans
onshore market.
The islands regulators have long wanted to attract
more foreign issuers and investors to promote the
Table.2 Existing RMB-denominated Formosa bonds on 12 March 2015

Issuer
Agricultural Bank of China
Air Liquide Finance SA
Bank of China
Bank of Communications
Cayman Ton Yi Industrial Holding Ltd
Central American Bank for Economic Integration
Chang Hwa Commercial Bank Ltd
China Construction Bank Asia Corp Ltd
China Construction Bank
China Merchants Bank Co
CTBC Bank Co Ltd
Deutsche Bank AG
Export-Import Bank of Korea
Far Eastern New Century Corp
Yieh Phui Enterprise Co
Goldman Sachs Group
Hana Bank
Industrial & Commercial Bank of China
KGI Securities Co Ltd
Macquarie Bank Ltd
Malayan Banking Bhd
Morgan Stanley
Societe Generale SA
Teco Electric and Machinery Co Ltd
Uni-President China Holdings Ltd
Woori Bank
Yuanta Commercial Bank Co Ltd
Yuanta Securities Co Ltd
Total
Amount Issued (RMBmn)

3,500
500
4,000
5,200
142
1,300
1,000
2,600
4,000
1,000
1,000
2,092
2,300
500
300
1,465
550
2,000
200
600
410
980
1,000
300
2,000
500
250
1,000
40,689
Average of coupon (%) Average of tenor (in years)

3.5
4.0
3.4
3.7
4.2
4.3
2.9
3.9
3.5
4.1
2.9
3.3
4.3
3.0
5.0
2.3
4.6
3.8
3.5
4.4
4.1
4.0
4.0
3.0
3.7
4.5
4.6
3.6
3.7
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
35
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Credit
China Research
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
Security SBLC provider Announcement

date
Maturity
Bid yield Amount issued

(%)
(RMBm)
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
Source: HSBC, Bloomberg

Note: Spread: The yield gap between SBLC backed CNH bonds and senior unsecured notes by the SBLC provider.
local bond market, not only in TWD, but also in

foreign currencies. The proposal to develop a
RMB-denominated Formosa bond market was
first made in November 2012, shortly after China
and Taiwan signed an MOU regarding currency
clearance. The first RMB-denominated Formosa
bond was issued by Chinatrust Commercial Bank
in March 2013.
Because of the higher cost of issuing in RMB than
in USD or TWD, the incentive for local or
international issuers to tap the local RMB bond
market was not strong at first.
Things started to improve in November 2013 when
Mainland banks were allowed to issue RMB bonds
in Taiwan, with a cap of RMB10bn at that time
(now raised to RMB45bn). Apart from ICBC, the
other top five Chinese banks raised a total of
Fig.21 RMB-denominated Formosa bond issuance breakdown
25 RMBbn
20
15
10
5
RMB6.7bn in December 2013 alone, compared

with a total supply of RMB3.9bn previously.
In order to accelerate deregulation, the local
regulator has simplified procedures for foreign
issuers to issue Formosa bonds, removed the credit
rating requirement on Formosa bond issuers and
pushed ahead with moves to link Euroclear and
Taiwans domestic settlement system to enable
non-FINI1 investors to participate in the Formosa
market. In June 2014, Formosa bonds were
excluded from the 45% foreign investment cap for
insurance companies, unleashing strong demand
from local insurers keen to deploy their RMB
positions.
As of 12 March 2015, the balance of RMBdenominated Formosa bonds reached RMB40bn,
having quadrupled in 15 months. A list of the
existing bonds is shown in Table 2. Foreign issuers
have been very active year-to-date (Fig. 21)
because the post-swap cost in USD of raising RMB
bonds in Taiwan is either cheaper or in line with an
outright USD bond offering. For instance, the
Export Import Bank of Korea saved around 40bp
when it issued a 5-year tranche Formosa last month
(see Dim Sum Tracker, 6 March 2015).
0
2013
Foreign issuer
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*
1) Keepwell Deed; 2) Deed of equity interest

100%
purchase and liqudity support undertaking;
3) Cross-border standby facility and 4)
Interest reserve account agreement
Sichuan Developemnt
Holding (The company)
Bank
Standby
Facility
ICBC Sichuan
branch
Yieldsun Investment
Limited (The guarantor)
Source: Bond OC, HSBC

Note: Sichuan SASAC refers to the State-owned Assets Supervision and Administration Commission of Sichuan Province
Formosa bonds offer longer duration than dim

sum bonds. It is common to see 7- to 10-year
Formosa bond offerings because of the assetliability management requirements of local
insurers. The typical tenor of dim sum bonds is
normally between 3-5 years. However, the
secondary liquidity on Formosa bonds is poorer
than for dim sum bonds.
Q6: Have any new structures

emerged in recent bond offerings?
We have seen a rise in the number of CNH
offerings by Chinese issuers that are backed by a
standby letter of credit (SBLC) from banks. Five
Chinese companies raised a total of RMB4.3bn
last year via this method (Table 3). SBLCs enable
companies with higher credit risks (such as local
government financing vehicles) to tap the offshore
market much more cheaply than if they were to
issue their own bonds (if successful). They also
allow banks to generate fee income without
drawing on their own cash liquidity. Some
investors like these notes, which enjoy the same
credit rating as the bank that provides the SBLC
and give 10-40bp in extra yield over the senior
unsecured note offered by the SBLC issuing bank.
But others are less enthusiastic, preferring to stay
away as this new credit structure has yet to be
stress-tested.
In July 2014, another new structure appeared. A

3-year note was offered by Sichuan Development
Holding (SDH) via its offshore subsidiary,
Yieldking Investment Ltd. Instead of using an
SBLC, SDH obtained a bank loan standby facility
from ICBCs Sichuan branch and entered a crossborder standby facility agreement with the
offshore guarantor of the note (Fig.22). Without
credit ratings from the top three agencies, the
yield of SIDEVE17 was higher than its SBLC
peers (Table 3).
In another development, the State Administration
of Foreign Exchange (SAFE) has greatly
simplified the approval process for arranging
cross-border guarantees for Chinese companies
(see Asia FX & Credit: SAFE reforms crossborder guarantee rule, 23 May 2014). This has
Fig.23 Growth of international RMB payments from 9M2013
to 9M2014
Others
Taiwan
Australia
US
Switzerland
France
Germany
Belgium
UK
Luxembourg
Singapore
0% 100% 200% 300% 400% 500% 600% 700%
Source: SWIFT, HSBC
37
abc
Credit
China Research
March 2015
Fig.24 CNH benchmark curve offer attractive yield pick-up

over EUR peers
5 Yield (%)
4
Fig.25 The EUR is on a depreciating trend versus RMB

12
EURCNY
spot
11
10
0
1Y
-1
2Y
3Y
4Y
5Y
EUR German sovereign

EUR France sovereign
EUR Spanish sovereign
7Y
10Y 15Y 20Y 30Y

CNH sovereign
EUR Italy sovereign
6
1999 2001 2003 2005 2007 2009 2011 2013 2015
allowed more CNH bonds to be issued with a

direct onshore guarantee from the parent company
(e.g. Bohai Steel and Wanhua Chemical).
Q7: What type of new investors may

find CNH bonds attractive?
We think investors from countries with strong
RMB-denominated trade flows are likely to join
the CNH market. Europe and Singapore stand out.
The RMB-denominated international payment
flows in Europe topped the list among regions
outside China and Hong Kong in the first nine
months of 2014. The average growth of flows in
Luxembourg, UK, Belgium, Germany, France and
Switzerland reached 276% from 9M2013 to
9M2014 (Fig. 23). This creates a natural demand
Fig.26 Annual outstanding amount of CNH bonds and CDs

800
RMBbn
700
for assets that allow Europeans to deploy their

RMB receipts. CNH bonds, especially the ones
issued by European high-grade corporates (such as
Total SA, BP Plc, Volkswagen and Volvo), are
likely to be sought after. The carry on CNH bonds
is much more attractive than their EUR peers (Fig.
24) and the EUR is likely to weaken further
against RMB given quantitative easing by the ECB
(Fig. 25). Although European yields are capped by
monetary easing, room for further tightening is
limited given that the 7-year German Bund yield
was already negative on 12 March 2015.
Some Singaporean investors have already acquired
a taste for CNH bonds as the amount of RMB
accumulating locally rose and their knowledge of
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
2008 2009 2010

Outstanding bond
38
2011 2012 2013

Outstanding CD
2014
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Annual RMB appreciation against USD
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
Fig.28 Outstanding CNH debt breakdown by sector
Fig.29 The average coupon of 1-year CD

4.5 %
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
Chinese issuers increased. By the end of 2014,

there was a total of RMB277bn in deposits in
Singapore, more than in Taiwan and in excess of
five times the RQFII quota available to invest in
Chinese domestic assets. RMB payments between
China and Singapore are likely to expand further
given their close trade and business relationship,
boosting demand for CNH bonds.
We also expect more RQDII investors to explore
the CNH market. As discussed in Question 4,
CNH high yield bonds are more attractively valued
than domestic peers. Also, the potential supply of
preference shares issued by Chinese banks in the
CNH market will offer an option for RQDII
investors to enhance their yields. For instance,
Bank of China sold RMB28bn in preference shares
domestically at 5.5% via a private placement on 10
March 2015 (source: Bloomberg, 11 March 2015),
while its offshore peer yields 5.7% with better
secondary liquidity.
Q8: What are the major changes in

the markets profile?
Size: The fact that the market has continued to
expand rapidly despite the FX factor is
encouraging. By the end of 2014, the balance of
CNH bonds and CDs reached RMB711bn, up
nearly 30% y-o-y (Fig. 26). This is the first time
since the market was launched in 2007 that it has
not been supported by RMB appreciation (Fig. 27).

Note: The secondary offer rates of CDs are normally 20-30bp higher than the coupons.
Financials: Another recent development is the

rise in the number of Chinese financial companies
entering the market. Outstanding paper issued by
domestic financials accounted for 16% of the
entire pie as of the end of 2014, up from 7% in
2013. This is being driven by strong supply from
Chinese banks and non-bank financial institutions,
such as securities houses (Fig. 28). Bank issuers
have accelerated their overseas expansion, raising
more capital from the offshore markets.
Meanwhile, securities houses have been trying to
build up the profiles among offshore investors and
to establish their overseas portfolios.
Slowing CD momentum: Due to tight offshore
liquidity (Fig. 9), the net supply of CDs declined
from RMB119bn in 2013 to RMB24bn in 2014
(Fig.16). The offering rates have also been climbing
since last April (Fig. 29). On 13 March 2015, 1-year
Fig.30 The average tenor of CNH issuance extended slightly
3.00
2.50
Tenor
(years)
2.00
1.50
1.00
0.50
2013
Including CD
2014
Excluding CD
39
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Credit
China Research
March 2015
Fig.31 The RMB REER continued to appreciate

130
10%
125
8%
6%
120
4%
115
Fig.32 1-year USD/Asia FX at-the-money volatility

50
40
30
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)
Source: BIS, HSBC
20
10
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
INR
CNY
KRW
SGD
IDR
CDs issues by the big four Chinese banks were

offered at 4.0%-4.4%, a new high. Meanwhile, after
two interest rates cuts by the PBoC since last
November, the ceiling of 1-year onshore deposit
now is 3.25%. Banks are reluctant to pay too much
in the offshore market, while investors want higher
yield to make up for the potential FX losses. We
think the CD market will remain subdued until the
currency sentiment improves.
Slightly longer tenors: Because the net supply of
bonds (normally with 3-5-year tenors) was more
than five times greater than that of CDs (which
normally mature within 12 months), the average
tenor of CNH debt lengthened slightly in 2014
(Fig. 30).
Increasing variety of issuers: New types of CNH

issuers have appeared in the past 12 months. For
instance, the UK government printed the first
foreign sovereign CNH bond in October 2014. It
generated nearly RMB6bn demand from 85
investors, allowing the government to increase the
offering from RMB2bn to RMB3bn and tightened
the pricing from an initial guidance of 2.9% to
2.7%. One month later, the New South Wales
Treasury made a debut CNH offering; in January
2015, the French public social debt manager Caisse
dAmortissement de la Dette Sociale (CADES)
inaugurated in the primary market. In addition, a
couple of foreign banks also tapped the CNH
market to raise Basel III compliant capital. See
Appendix I for the benchmark deals in the past year.
Table.4 The list of existing offshore RMB centres
Europe
North America
MENA
Asia
Total
Offshore RMB centre
Bilateral currency swap line (RMBbn)
RMB deposits (RMBbn)
RQFII quota (RMBbn)
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
abc
Credit
China Research
March 2015
Fig.33 Cross-border RMB settled trade continued to rally

30%
5,000 RMBbn
4,000
Fig.34 Global offshore RMB deposits close to RMB2trn

2,000
RMBbn
1,600
20%
3,000
1,200
2,000
10%
1,000
800
400
0%
2012
2013
2014
Cross-border RMB trade receipt

Cross-border RMB trade payment
% of China total trade* (RHS)
Source: CEIC, HSBC
Note: % of China total trade= cross-border RMB trade receipt and payment (for goods
and services) / Chinas total trade (goods only)
Q9: Why are we still positive on the

medium-term market outlook?
Think long-term. We think the CNH market, as
with any other market, has its own cycle. It is
currently weighed down by the soft currency and
tight liquidity, but as China continues to promote
international use of the RMB, growth of the
offshore pool should pick up again when the
currency sentiment stabilises. We need to bear in
mind that the RMB continues to appreciate in
REER terms (Fig. 31) and remains a low volatility
currency in an Asian context (Fig. 32).
Offshore RMB centres: It is encouraging to see
more offshore RMB centres being established and
the currencys reach now extends from Asia to
Europe and North America (Table 4). We think
this trend is likely to continue, given the surge in
global RMB payment flows that are building a
strong foundation for further expansion of the
CNH pool and RMB-denominated assets (Fig.
33). Total offshore RMB deposits are now
approaching RMB2trn, after surging 40% y-o-y in
2014 (Fig. 34).
Supply from the new offshore RMB centres has
helped to diversity the type of dim sum issuers.
After the UK, South Korea and Sri Lanka have
also expressed interest in issuing CNH bonds. We
think more sovereigns will appear in the pipeline
Jan-10 Jan-11 Jan-12

Hong Kong
Korea
London
Taiwan
Jan-13 Jan-14 Jan-15

Paris
Luxemburg
Singapore
Macau
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
this year. Also, quasi-sovereigns and local banks

located in these centres are likely to extend their
funding channels by issuing CNH bonds, further
educating local investors about RMBdenominated investments.
Valuation: From a valuation prospective, CNH
bonds look more attractive than a year ago in
comparison with peers. The average yield of Asia
local currency bonds and Asia USD bonds (as
tracked by HSBC indexes) have tightened more
than 50bp in the past 12 months, with the
composite CNH yield up almost 100bp (Fig. 35).
We think buying interest in offshore RMB bonds
will resume once the FX finds its near-term
trough (see Dim Sum Tracker, 6 March 2015).
Q10: Will policy makers continue to

support the CNH market amid further
capital account liberalisation?
There is no doubt that China has been expediting
capital account liberalisation. New channels have
been introduced for outbound portfolio investments
to improve the cross-border circulation of RMB,
such as RQDII (see Question 2), the Stock Connect
programme (see Question 3) and the Qualified
Domestic Investment Enterprise (QDIE) scheme
(Fig. 36 and Appendix II). QDIE allows qualified
domestic investors to tap into a wider variety of
foreign asset classes (compared to the QDII
41
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Credit
China Research
March 2015
domestic investors to explore these offshore

markets should offer structural support to the
CNH pool.
Fig.35 The risk-reward profile looks more attractive now than

a year ago
6.0 Yield (%)
Bloomberg
USD EM
5.5
Index
HSBC CNH
HSBC Bloomberg
5.0
Index
ADBI Index USD EM
4.5
Index
HSBC CNH
HSBC ALBI
Index
4.0
Index
HSBC
HSBC ALBI ADBI Index
3.5
Index
Bloomberg
Bloomberg
3.0
Global IG
Global IG
Corp Index
2.5
Corp Index
M_duration
2.0
0
3
Mar-14
4
Mar-15

Note: HSBC ADBI Index- HSBC Asia USD bond index; HSBC ALBI Index- HSBC Asia
local currency bond index.
programme) within discretionary quotas approved

by the FX regulator. Implemented in Qianhai, a
special economic zone in Shenzhen, the QDIE
scheme enables domestic qualified institutions and
individuals to access private equity, hedge funds and
real assets in addition to listed equities and debt
securities that are already covered by the QDII
programme. At the most recent annual National
Peoples Congress, PBoC governor Zhou Xiaochuan
said China would continue to support the
development of offshore RMB businesses. On 17
March 2015, Reuters reported that the QDII2
programme is likely to be launched in the Shanghai
Free Trade Zone this year. QDII2 is designed for
qualified domestic individuals to invest overseas.
The head of Shanghais office of financial services,
Zheng Yang, said overseas investments could be in
property, foreign stocks and sectors. Allowing
More domestic companies to issue: China is

considering making it easier for domestic
companies to raise debt offshore, especially in
RMB (source: Securities Times, citing Guo
Jianwei, a senior central bank official). This is
part of the broader policy of encouraging
domestic companies to go abroad and giving them
more funding options. If the rules are relaxed, it
will be easier and faster for domestic entities to
tap the offshore debt market. Mainland financial
institutions may only need to register CNH
issuance with the regulator instead of seeking
prior approval, as they had to do previously.
Meanwhile, the National Development and
Reform Commission (NDRC) is also studying the
possibility of amending the rules for the
repatriation of overseas proceeds. Details are yet
to be announced.
Bond supply backed by the Silk Road plan: As
discussed in Question 4, the ambitious Silk Road
plan will generate tremendous funding needs. We
think it makes sense for the government to
encourage foreign governments and enterprises
with infrastructure contracts with Chinese
companies signed under this plan to issue CNH
bonds, in order to pay their Chinese suppliers.
Support from Hong Kong: The RMB20,000
daily conversion limit for Hong Kong residents
Fig.36 Existing channels of cross-border portfolio investments

QFII
Southbound Stock Connect
QDII
RQDII
Onshore
QDIE
QDLP
Northbound Stock Conenct
RQFII
CIBM
Source: PBOC, SAFE, Reuters, Bloomberg, HSBC
42
Offshore
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China Research
March 2015
ended on 17 November 2014. This gives retail

investors more flexibility, not only in terms of
how quickly they can convert foreign currencies
into RMB, but also how much they can reverse
such a trade should they want to (see Asia Credit
Today: Offshore RMB bonds: Support for Dim
Sum bonds on Hong Kongs removal of RMB20k
daily conversion, 13 November 2014). We think
this helped the growth of Hong Kongs RMB
deposits in December 2014, even though the
RMB lost nearly 1% against the USD that month.
The Hong Kong Monetary Authority (HKMA) also
launched two additional measures to assist offshore
RMB liquidity around the time of the launch of the
Stock Connect programme. First, it provided up to
RMB10bn for an intraday repo facility to banks in
Hong Kong on top of the intraday overdraft offering
by the RMB clearing bank (BOC HK). This was in
addition to the HKMAs existing RMB liquidity
facility, which includes one-day and one-week
funds on a T+1 basis backed by the swap agreement
between the central banks of the Mainland and
Hong Kong, and overnight funds on a T+0 basis up
to RMB10bn from the HKMAs own source of
offshore RMB funds.
Second, the HKMA designated seven banks as
Primary Liquidity Providers (PLPs), providing a
repo line of RMB2bn to each PLP to facilitate
liquidity management when they conduct marketmaking and other businesses in the CNH market
(see Asia Credit Today: Offshore RMB bonds:
HKMA steps up CNH liquidity facility,
15 September 2014).
In order to reduce the volatility of RMB financing
costs in the offshore market for banks, the HKMA
announced in February that it would adjust its
calculations for setting the interest rates for RMB
intraday and overnight funds under the RMB
Liquidity Facility. The calculations will now be
based on the 3-day moving averages of the CNH
HIBOR fixing, instead of referencing to the level of

a single day (See Appendix II for details).
Shanghai Free Trade Zone: On 12 February this
year, the PBOC announced rules for Free Trade
Unit (FTU) Overseas Financing and Cross-border
Flows Macro-prudent Management Measures
(pilot)
() Yin Zong Bu Fa [2015]

No.8. It specified the borrowing limit, use of
proceeds and risk management of offshore
financing for corporates and non-bank financial
institutions in the Shanghai Free Trade Zone
(SFTZ) and for Shanghai financial institutions in
the FTU system. It also united the borrowing
mechanism in foreign currency and RMB based
on the borrowers capital. The idea is to lower
financing costs for onshore entities by giving
them access to offshore financing in different
currencies (see Asia Credit Today: Offshore RMB
bonds: Limited near-term impact from the
offshore financing rules of Free Trade Unit,
13 February 2015).
To sum up, we think the CNH bond market, like
the other components of RMB
internationalisation, will keep growing as capital
flows are liberalised. It remains the most
convenient way for foreigners to get RMBdenominated credit exposure. And once RMB
sentiment improves, we believe the good times
will continue for the CNH bond market.
See Appendix I for benchmark CNH deals in the
past 12 months and Appendix II for the major
regulation changes in the same period.
43
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Credit
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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
Issuer/ Guarantor Amount (RMBbn) Announcement date
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
11/5/2014 11/12/2024 with

call11/12/2019
12/3/2014 Perp with call
12/10/2019
1/21/2015 1/30/2025 with
call 1/30/2020
3/3/2015 3/17/2025 with
call 3/17/2020
NA
BBB+
Ba2
BB
A3
BBB+
Baa2
BBB
Credit
China Research
March 2015
abc
Appendix II: Summary of CNH market developments in the past year

Australia
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
45
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March 2015
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
46
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March 2015
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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
47
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China Research
March 2015
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
48
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Credit
China Research
March 2015
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Notes
49
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China Research
March 2015
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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
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
Credit: Basis for financial analysis
This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's
decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other
considerations.
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its credit research: 1) in corporate credit to identify long-term
investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies
and in the case of covered bonds to identify long-term investment opportunities based on country-specific ideas or themes that
may affect the performance of these bonds, in both cases on a six-month time horizon; and 2) from time to time to identify
trade ideas on a time horizon of up to three months, relating to specific instruments, which are predominantly derived from
relative value considerations or driven by events and which may differ from our long-term credit opinion on an issuer. HSBC
has assigned a fundamental recommendation structure only for its long-term investment opportunities, as described below.
HSBC believes an investor's decision to buy or sell a bond should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to
describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the recommendation. In any case,
recommendations should not be used or relied on in isolation as investment advice.
HSBC Global Research is not and does not hold itself out to be a Credit Rating Agency as defined under the Hong Kong
Securities and Futures Ordinance.
Definitions for fundamental credit and covered bond recommendations

Overweight: For corporate credit, the credits of the issuer are expected to outperform those of other issuers in the sector over
the next six months. For covered bonds, the bonds issued in this country are expected to outperform those of the other
countries in our coverage over the next six months.
Neutral: For corporate credit, the credits of the issuer are expected to perform in line with those of other issuers in the sector
over the next six months. For covered bonds, the bonds issued in this country are expected to perform in line with those of the
other countries in our coverage over the next six months.
Underweight: For corporate credit, the credits of the issuer are expected to underperform those of other issuers in the sector
over the next six months. For covered bonds, the bonds issued in this country are expected to underperform those of other
countries in our coverage over the next six months.
50
Credit
China Research
March 2015
Distribution of fundamental credit and covered bond opinions

As of 18 March 2015, the distribution of all credit opinions published is as follows:
___All Covered Companies___
Overweight
Neutral
Underweight
Companies where HSBC has provided Investment Banking in the past 12 months
Count
Percentage
Count
Percentage
75
190
45
24
61
15
34
73
9
45
38
20
Source: HSBC
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives)
of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
Additional disclosures
1
2
3
This report is dated as at 20 March 2015.

All market data included in this report are dated as at close 19 March 2015, unless otherwise indicated in the report.
HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
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price sensitive information is handled in an appropriate manner.
51
Credit
China Research
March 2015
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Disclaimer
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[451985]
52
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Global Fixed Income Research Team

Steven Major, CFA
Global Head of Fixed Income Research
+44 20 7991 5980
steven.j.major@hsbcib.com
Rates
Credit
EMEA
Bert Lourenco
Head of Rates Research, EMEA
+44 20 7991 1352
bert.lourenco@hsbcib.com
EMEA
Jamie Stuttard
Head of European Credit Strategy
+44 20 7991 5919
james.stuttard@hsbc.com
Subhrajit Banerjee
+44 20 7991 6851
Dominic Kini
+44 20 7991 5599
subhrajit.banerjee@hsbcib.com
dominic.kini@hsbcib.com
Theologis Chapsalis
+44 20 7992 3706
theologis.chapsalis@hsbcib.com
Raffaele Semonella
+971 4423 6554
raffaele.semonella@hsbcib.com
Wilson Chin, CFA

+44 20 7991 5983
Ivan Zubo
+44 20 7991 5975
wilson.chin@hsbcib.com
Chris Attfield
+44 20 7991 2133
christopher.attfield@hsbcib.com
Di Luo
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di.luo@hsbcib.com
Tom Nash
+44 20 7991 5022
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Reza-ul Karim
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Himanshu Malik
+852 3941 7006
Dayeon Hong
+852 3941 7009
philipwickham@hsbc.com.sg
keithkfchan@hsbc.com.hk
Louisa Lam
+852 2822 4527
louisamclam@hsbc.com.hk
Helen Huang
+852 2996 6585
pin.ru.tan@hsbc.com.sg
Crystal Zhao
+852 2996 6514
crystalmzhao@hsbc.com.hk
himanshu1malik@hsbc.com.hk
Desmond Kuang
+852 2996 6557
desmond.z.kuang@hsbc.com.hk
dayeonhong@hsbc.com.hk
Lan Lan
+852 3941 7186
lanlan@hsbc.com.hk
Christopher Li
+852 2822 3232
christopherbli@hsbc.com.hk
Anna Zhang
+852 3941 7066
anna.x.zhang@hsbc.com.hk
frank.will@hsbc.de
Americas
Larry Dyer
+1 212 525 0924
lawrence.j.dyer@us.hsbc.com
Suvrat Prakash
+1 212 525 4219
suvrat.x.prakash@us.hsbc.com
Gordian Kemen
Head of Latin America Fixed Income Research
+1 212 525 2593
gordian.x.kemen@us.hsbc.com
Alejandro Mrtinez-Cruz
+52 55 5721 2380
alejandro.martinezcr@hsbc.com.mx
Aaron T Gifford
+1 212 525 3277
Devendran Mahendran
+852 2822 4521
devendran@hsbc.com.hk
Keith Chan
+852 2822 4522
Asia
Andr de Silva, CFA
Head of Global EM Rates Research
+852 2822 2217
andre.de.silva@hsbcib.com
Pin Ru Tan
+65 6658 8782
Zhiming Zhang
+852 2822 4523
Philip Wickham
+65 6658 0618
Sebastian von Koss

+49 211 910 3391
sebastian.von.koss@hsbc.de
Frank Will
+49 211 910 2157
ivan.zubo@hsbcib.com
Asia
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
Zhi Ming Zhang

The Hongkong and Shanghai Banking Corporation Limited
+852 2822 4523
Zhi Ming Zhang, Head of China Research, has 17 years experience in Markets and Research. At HSBC, he started on the Asian fixed
income trading desk and in Asian products before moving to Research covering credit, local rates and developments in Chinas
capital markets. Zhi Ming was a professor of finance at David Eccles School of Business at University of Utah and has a PhD in
economics from Indiana University. He worked for a year for the Shanghai Government after completing his BSc in engineering at
Shanghai Jiao Tong University.
Helen Huang
Analyst, Fixed Income
+852 2996 6585
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
+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.
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Disclosures and Disclaimer

Gross and net supply of onshore bonds

Gross and net supply of CNH bonds and CDs

Onshore bond market: Bigger,

Growth accelerates in 2014

Changing dynamics of offshore

They will come back

Onshore bond market:

size, issuance and the contribution it makes to fund raising

regulation need to be addressed

However, when adjusted for GDP, Chinas bond

China is now the third largest issuer of bonds in the

1. China is now the third largest bond market in the world

Growth accelerates in 2014

Total bonds outstanding

Zhi Ming Zhang

2. Bonds outstanding breakdown, 2000-2014

Growth rate YoY, RHS

Source: Wind, HSBC

3. Gross issuance breakdown, 2000-2014

Quasi-gov (PBoC, policy bank)

Source: Wind, HSBC

4. Net issuance breakdown, 2000-2014

Quasi-gov (PBoC, policy bank)

Source: Wind, HSBC

Offshore investors have access to the onshore

Qualified Foreign Institutional

USD66.9bn, all securities

Source: CEIC, HSBC. Data as of December 2014

RMB299.7bn, all securities

6. Offshore investors holdings in onshore financial assets

Opening up to the world

Source: PBoC, HSBC

7. Breakdown of bonds outstanding by issuer, 2000

8. Breakdown of bonds outstanding by issuer, 2014

Source: Wind, HSBC

Source: Wind, HSBC

10. Breakdown of Treasuries outstanding by tenor

Treasuries, also referred to as onshore Chinese

9. Yield on Treasuries: a key indicator

Source: Wind, HSBC

11. Treasury issuance and as % of total bond issuance

Among Chinese bonds, Treasuries have the most

As % of total bond issuance

Source: Wind, HSBC

Source: Wind, HSBC

The slow growth is quite deliberate as Beijing wants

Muni-bonds are issued by local governments. This

12. Muni-bond issuance and as % of total bond issuance

Local government bonds (muni-bonds)

As % of total bond issuance

Source: Wind, HSBC

14. Breakdown of muni-bonds outstanding by issuer, 2014

Jiangxi Shenzhen Beijing Ningxia

The muni-bond market is important because it is

13. Major changes in regulation for muni-bonds since 2009

MoF issued and repaid muni-bonds on behalf of local governments

Source: MoF, State Council, HSBC

channels called local government funding vehicles

refinancing existing Type 1 debt, accounting for

16. LGFV bond gross issuance and repayment amount, 20062019