CHINESE ONSHORE BONDS

Transcription

1 CHINESE ONSHORE BONDS The Largest Market You Haven t Heard Of Global X Funds S&P Dow Jones Indices GF International Investment Management Ltd. January 20 th, 2015

2 OVERVIEW Intro by ETF.com Jay Jacobs (Global X) Brief overview of Chinese fixed income landscape» Opening the onshore market James Rieger (S&P Dow Jones Indices) Data on the Onshore Bond Market» Correlations, liquidity, yields» S&P China Composite Select Bond Index Sharon Yang (GF International Investment Management Limited) Chinese Onshore Bond Exposures» Interbank Market vs. Exchanges» Government and Quasi-government Bond Issuers» Chinese Currency Q&A

3 CHINESE FIXED INCOME MARKET LANDSCAPE Historically, China s onshore capital markets have been largely closed to foreign investors. Therefore, investors have used securities trading in Hong Kong to gain access to China. Hong Kong Mainland China Nomenclature Dim Sum Bonds, Offshore bonds Onshore bonds Currency CNH (offshore Renminbi) CNY (onshore Renminbi) Openness Open to foreign investors Closed to foreign investors except those with QFII/RQFII 1 access Issuers Chinese Government, Chinese Corporations, Foreign Companies (16% of market) Currently limited to only Chinese entities (government, agency, corporations, etc.) 1 QFII: Qualified Foreign Institutional Investor, RQFII: Renminbi Qualified Foreign Institutional Investor. QFII and RQFII schemes established to facilitate regulated foreign access to mainland Chinese securities This information does not constitute an offer of investment advisory services. Investment advisory services will be offered by Global X Management only after delivery of certain information and disclosures to prospective clients. This information is neither an offer nor a solicitation to buy or sell securities. Securities mentioned, comments made, or charts included also are not recommendations to buy or sell any security. All expressions of opinion reflect judgment as of the date set forth above and are subject to change.

4 CHINESE FIXED INCOME MARKET LANDSCAPE Historically, China s onshore capital markets have been largely closed to foreign investors. Therefore, investors have used securities trading in Hong Kong to gain access to China. Dim Sum Bonds H Shares Red Chips P Chips Bonds issued and traded in Hong Kong by the Chinese Government, Corporations, and Foreign Companies Shares of companies incorporated in mainland China and listed on HKSE Shares of Chinese State Owned Enterprises incorporated outside of China and listed on HKSE Shares of private sector Chinese companies incorporated outside of China and listed on HKSE This information does not constitute an offer of investment advisory services. Investment advisory services will be offered by Global X Management only after delivery of certain information and disclosures to prospective clients. This information is neither an offer nor a solicitation to buy or sell securities. Securities mentioned, comments made, or charts included also are not recommendations to buy or sell any security. All expressions of opinion reflect judgment as of the date set forth above and are subject to change.

5 CHINESE FIXED INCOME MARKET SIZE China s Onshore Bond market is the 3rd largest in the world Onshore vs. Offshore Bond Market Size % of EM Bond Space 4% 21% 36% 5% 6% 96% 13% 19% Onshore Bonds Offshore Bonds China Brazil Korea India Mexico Other Source: S&P, Wind, Asian Development Bank 2014 This information does not constitute an offer of investment advisory services. Investment advisory services will be offered by Global X Management only after delivery of certain information and disclosures to prospective clients. This information is neither an offer nor a solicitation to buy or sell securities. Securities mentioned, comments made, or charts included also are not recommendations to buy or sell any security. All expressions of opinion reflect judgment as of the date set forth above and are subject to change.

6 ONSHORE BONDS Attractive Yield Onshore Bonds typically have offered higher yields than their onshore counterparts and other major debt markets Currency Exposure Exposure to the official Chinese currency (CNY) Diversification Low Correlation with other Emerging and Developed Market Debt This information does not constitute an offer of investment advisory services. Investment advisory services will be offered by Global X Management only after delivery of certain information and disclosures to prospective clients. This information is neither an offer nor a solicitation to buy or sell securities. Securities mentioned, comments made, or charts included also are not recommendations to buy or sell any security. All expressions of opinion reflect judgment as of the date set forth above and are subject to change.

7 CHINESE FIXED INCOME MARKET ACCESS From 2011 to 2014, major changes have been made to open China s capital markets to foreign investors 2011: Renminbi Qualified Foreign Institutional Investor (RQFII) Scheme established 2012: Quota granted for first A-Share ETF in Hong Kong 2013: RQFII rules revised to allow for access to China s Interbank Bond Market 2014: First onshore Chinese Bond ETFs launch in US With the intra-day liquidity and open ended structure of ETFs, investors now have unprecedented access to onshore Chinese markets This information does not constitute an offer of investment advisory services. Investment advisory services will be offered by Global X Management only after delivery of certain information and disclosures to prospective clients. This information is neither an offer nor a solicitation to buy or sell securities. Securities mentioned, comments made, or charts included also are not recommendations to buy or sell any security. All expressions of opinion reflect judgment as of the date set forth above and are subject to change.

8 Fixed Income Indices: CHINA ONSHORE BONDS J.R. Rieger Global Head of Fixed Income January 20, 2015 For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.

9 FIXED INCOME INDICES: CHINA ONSHORE BONDS CHINA BOND MARKET COMPOSITION CHINA BOND LIQUIDITY CHINA BOND MARKET LOW CORRELATION TO DEVELOPED MARKETS S&P CHINA COMPOSITE SELECT BOND INDEX For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 9

10 CHINA BOND MARKET COMPOSITION 40% 35% 35% 35% 30% 25% 20% Market Size: CNY 33.8 trillion (USD 5.5 trillion) 3 rd -Largest Bond Market 15% 10% 10% 8% 5% 4% 4% 2% 1% 1% 0% Source: Asian Development B. Data as of June 30, Charts and tables are provided for illustrative purposes. For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 10

11 BPS CHINA BOND LIQUIDITY Local Currency Government Bond Bid-Ask Spreads Source: Asian Development B. Data as of June 30, Charts and tables are provided for illustrative purposes. For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 11

12 6 5 CHINA BONDS LOW CORRELATION TO DEVELOPED MARKETS 7-Year Correlation to the S&P China Bond Index Index Beta Correlation Return (%) Risk (%) Return/Risk S&P China Bond Index S&P Global Developed Sovereign Bond Index S&P U.S. Aggregate Bond Index Source: S&P Dow Jones Indices LLC. Correlation data from September 2007 to September Charts and tables are provided for illustrative purposes. Past performance is no guarantee of future results. 5-Year Government Bond Yields junio 2005 junio 2006 junio 2007 junio 2008 junio 2009 junio 2010 junio 2011 junio 2012 junio 2013 junio 2014 US Germany China Japan Source: S&P Dow Jones Indices LLC. Charts and tables are provided for illustrative purposes. Past performance is no guarantee of future results. For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 12

13 S&P CHINA COMPOSITE SELECT BOND INDEX The S&P China Composite Select Bond Index is designed to track the performance of Chinese sovereign bonds, agency bonds and bonds issued by Central State-Owned Enterprises (CSOEs) denominated in Chinese yuan. Agency Bonds (32%) China Development Bank Corporation (23%) Agricultural Development Bank of China (4.5%) S&P China Composite Select Bond Index Chinese Sovereign Bonds (23%) The Export-Import Bank of China (4.5%) Number of Constituents 414 Inclusion Rules Maturity Range 1-7 Years Fixed Rate, Non-Zero Coupon Bonds Tickers S&P China Composite Select Bond Index (USD): SPBCNSUT S&P China Composite Select Bond Index (CNY): SPBCNSIT CSOEs (45%) Total Par Value (CNY Millions) 8,922,393 Market Value Outstanding (CNY Millions) 9,224,322 Weighted Average Coupon (%) 4.47 Weighted Average Maturity (Years) 3.59 Weighted Average Price Yield to Worst (%) 4.18 Modified Duration 3.14 Source: S&P Dow Jones Indices LLC. Data as of Jan. 8, Tables are provided for illustrative purposes. For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 13

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15 PERFORMANCE DISCLOSURE The S&P China Composite Select Bond Index was launched on September 30 th, All information presented prior to the launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Complete index methodology details are available at It is not possible to invest directly in an index. S&P Dow Jones Indices defines various dates to assist our clients in providing transparency on their products. The First Value Date is the first day for which there is a calculated value (either live or back-tested) for a given index. The Base Date is the date at which the Index is set at a fixed value for calculation purposes. The Launch Date designates the date upon which the values of an index are first considered live: index values provided for any date or time period prior to the index s Launch Date are considered back-tested. S&P Dow Jones Indices defines the Launch Date as the date by which the values of an index are known to have been released to the public, for example via the company s public website or its data feed to external parties. For Dow Jones-branded indicates introduced prior to May 31, 2013, the Launch Date (which prior to May 31, 2013, was termed Date of introduction ) is set at a date upon which no further changes were permitted to be made to the index methodology, but that may have been prior to the Index s public release date. Past performance of the Index is not an indication of future results. Prospective application of the methodology used to construct the Index may not result in performance commensurate with the back-test returns shown. The back-test period does not necessarily correspond to the entire available history of the Index. Please refer to the methodology paper for the Index, available at for more details about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations. Another limitation of using back-tested information is that the back-tested calculation is generally prepared with the benefit of hindsight. Back-tested information reflects the application of the index methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities, fixed income, or commodities markets in general which cannot be, and have not been accounted for in the preparation of the index information set forth, all of which can affect actual performance. The Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices LLC maintains the Index and calculates the Index levels and performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the Index or investment funds that are intended to track the performance of the Index. The imposition of these fees and charges would cause actual and back-tested performance of the securities/fund to be lower than the Index performance shown. As a simple example, if an index returned 10% on a US $100,000 investment for a 12-month period (or US $10,000) and an actual asset-based fee of 1.5% was imposed at the end of the period on the investment plus accrued interest (or US $1,650), the net return would be 8.35% (or US $8,350) for the year. Over a three year period, an annual 1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US $5,375, and a cumulative net return of 27.2% (or US $27,200). For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 15

16 THANK YOU Contact Us J. R. Rieger Global Head of Fixed Income New York: (212) Kevin Horan Director, Fixed Income New York: (212) Heather McArdle Director, Fixed Income New York: (212) Jaime Merino Director, Latin America Fixed Income Mexico City: Michele Leung Associate Director, Asia Fixed Income Hong Kong: Tyler Cling Sr. Manager, Fixed Income New York: (212) For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 16

17 A LOOK INTO ONSHORE BONDS THE MARKETS Interbank Wholesale market for institutional investors Highest Liquidity Exchange Non-financial institutions and individual investors Lower Liquidity OTC Non-financial institutions and individual investors Lower Liquidity % of Total Trading Volume % of Amount Outstanding Interbank Shanghai SE Shenzhen SE Interbank Exchange OTC & Other Source: S&P, Wind, Asian Development Bank 2014 This information does not constitute an offer of investment advisory services. Investment advisory services will be offered by Global X Management only after delivery of certain information and disclosures to prospective clients. This information is neither an offer nor a solicitation to buy or sell securities. Securities mentioned, comments made, or charts included also are not recommendations to buy or sell any security. All expressions of opinion reflect judgment as of the date set forth above and are subject to change.

18 A LOOK INTO ONSHORE BONDS THE ISSUERS Bond Type Issuer Listing Venue Government Bonds Ministry of Finance Interbank, Exchange Policy Bank Bonds Central State-Owned Enterprises Bonds (CSOEs) Non-Government Corporate Bonds 1. China Development Bank Corporation 2. Agricultural Development Bank of China 3. The Export-Import Bank of China Chinese corporations directly governed by SASAC and are typically entities focused on strategic sectors such as: -State Grid Corp of China (Electric Power) -China National Petroleum Corp (Energy) -Wuhan Iron and Steel Group Corp (Manufacturing) Companies without substantial government ownership, such as: -Zhejiang Geely Holding (Consumer Goods) -Tianrui Group Cement (Materials) Interbank Interbank, Exchange Interbank, Exchange Source: S&P Dow Jones Indices, GF International This information does not constitute an offer of investment advisory services. Investment advisory services will be offered by Global X Management only after delivery of certain information and disclosures to prospective clients. This information is neither an offer nor a solicitation to buy or sell securities. Securities mentioned, comments made, or charts included also are not recommendations to buy or sell any security. All expressions of opinion reflect judgment as of the date set forth above and are subject to change.

19 A LOOK INTO ONSHORE BONDS THE CURRENCY CNH (Offshore Renminbi) Traded in markets outside Mainland China Currency exposure for Dim Sum Bonds Not freely transferable to/from China Floating 2 FX Rate determined by free markets CNY (Onshore Renminbi) Traded in Mainland China Currency exposure for Onshore Bonds Official Currency of China Managed floating FX rate introduced by PBoC Premium/Discount of CNY vs. CNH over time Source: Bloomberg (8/23/2010 1/7/2015) 2 A floating foreign exchange (FX) rate regime means a currency s value fluctuates based on market expectations of a currency s value. A managed FX rates means a country s central bank plays an active role in managing the FX rate. This information does not constitute an offer of investment advisory services. Investment advisory services will be offered by Global X Management only after delivery of certain information and disclosures to prospective clients. This information is neither an offer nor a solicitation to buy or sell securities. Securities mentioned, comments made, or charts included also are not recommendations to buy or sell any security. All expressions of opinion reflect judgment as of the date set forth above and are subject to change.

20 A LOOK INTO ONSHORE BONDS THE CURRENCY USD vs. CNY over time Time Pre Jul-05 May-07 Aug-08 Jun-10 Apr-12 Mar-14 Policy CNY pegged to the USD. Introduced a managed floating exchange rate. CNY would be allowed to float within a specified daily trading band of +/-0.3% against a basket of world currencies. The specified daily trading band of CNY s managed floating exchange rate was extended to +/-0.5%. CNY re-pegged with the USD due to US subprime crisis. CNY would be allowed to float within a specified daily trading band of +/-0.5% against a basket of world currencies. The specified daily trading band of CNY s managed floating exchange rate was extended to +/- 1%. The specified daily trading band of CNY s managed floating exchange rate was extended to +/- 2%. Source: Bloomberg (8/23/2010 1/7/2015), GF International This information does not constitute an offer of investment advisory services. Investment advisory services will be offered by Global X Management only after delivery of certain information and disclosures to prospective clients. This information is neither an offer nor a solicitation to buy or sell securities. Securities mentioned, comments made, or charts included also are not recommendations to buy or sell any security. All expressions of opinion reflect judgment as of the date set forth above and are subject to change.

21 CHINA OUTLOOK Accommodative Monetary Environment Support economic growth Reasonable level of inflation risk High interest rate in real terms Mild Currency Appreciation Accelerate CNY internationalization process Avoid capital outflows This information does not constitute an offer of investment advisory services. Investment advisory services will be offered by Global X Management only after delivery of certain information and disclosures to prospective clients. This information is neither an offer nor a solicitation to buy or sell securities. Securities mentioned, comments made, or charts included also are not recommendations to buy or sell any security. All expressions of opinion reflect judgment as of the date set forth above and are subject to change.

22 GLOBAL X GF CHINA BOND ETF Access the high end of the credit quality spectrum in China with the first US ETF to access the Chinese Interbank Bond Market Attractive Yield*: 3.82% 30-Day SEC Yield Currency Play: Exposure to official Chinese currency (CNY) Diversification: Historically low correlation to other developed and emerging market debt *As of 1/14/2015. Unsubsidized SEC Yield 3.74%

23 DISCLOSURE Expenses Performance Since Inception to 12/31/2014 Gross Expenses 0.58% Fund NAV -1.52% Net Expenses* 0.50% Closing Price -1.63% Inception date: 11/18/2014 S&P China Composite Select Bond Index -0.73% *Pursuant to an Expense Limitation Agreement, the Adviser has agreed to reimburse or waive fees and/or limit Fund expenses to the extent necessary to assure that the operating expenses of the Fund will not exceed 0.50% of the Fund's average daily net assets per year until at least November 19, The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. For performance data current to the most recent month end, please call GXFUND-1 or visit our website at Investing involves risk, including possible loss of principal. International investments may involve risk of unfavorable fluctuation in currency values, differences in generally accepted accounting principles, or economic or political instability in other nations. The Fund is non-diversified. Because the Fund s investments are concentrated in Chinese bonds that are concentrated in the financials sector, the Fund will be susceptible to loss due to adverse occurrences affecting this country and sector. The information presented here is for informational purposes only. It was prepared on information and sources that we believe to be reliable, but we make no representations or guarantees as to the accuracy or the completeness of the information contained herein. Carefully consider the Funds investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Funds prospectus, which may be obtained by calling GX- FUND-1 ( ), or by visiting Read the prospectus carefully before investing. Global X Management Company, LLC serves as an advisor to the Global X Funds. The Funds are distributed by SEI Investments Distribution Co., which is not affiliated with Global X Management Company or any of its affiliates.