abc Factsheet: Asian Local Bond Index (ALBI) Global Research

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1 Fixed Income Global Research Factsheet: n Local Bond Index (ALBI) The HSBC n Local Bond Index (ALBI) tracks the total return 1 performance of liquid bonds, denominated in local currencies, in China, Hong Kong, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand Non-government bond issues, which account for more than half of the ALBI in terms of total number of issues, are included in our China offshore, Hong Kong SAR, Malaysia, Singapore and Thailand sub-indices The index constituents selection criteria for each country and country weightings for the ALBI are set to balance the desire for liquidity and stability Louisa Lam Analyst The Hongkong and Shanghai Banking Corporation Limited [email protected] Kelly Fu Credit Associate The Hongkong and Shanghai Banking Corporation Limited [email protected] Zhi Ming Zhang Head of China Research The Hongkong and Shanghai Banking Corporation Limited [email protected] View HSBC Global Research at: of report The Hongkong and Shanghai Banking Corporation Limited Disclaimer & Disclosures. This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, that form part of it. While each individual local bond index is designed to serve the needs of both domestic and external investors, the ALBI is created to serve the needs of the latter investor base for a regional benchmark index for domestic bond markets and to assist their global asset allocation decisions Local domestic capital markets continue to generate robust interest, both domestically and internationally. We have witnessed strong growth in this segment of the market, as evidenced by the growth of liquidity and strength. Understanding the important role that debt capital markets play, governments in the region have continued to push forward with the development of local currency debt markets. Therefore, it is not surprising that there is a growing need from onshore and offshore investors for a robust benchmark index. Consequently, we continue to see a growing investor base that tracks our ALBI on a regular basis. Since the inception of the ALBI, not only has the investor base that follows this index grown, but the size of the index has grown as well. The ALBI tracks the US dollar total return performance of liquid domestic bonds, denominated in local currencies, in China, Hong Kong, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand. It complements our n Dollar Bond Index (ADBI), which tracks the performance of liquid external debt in ex Japan. 1 Total return defined as the sum of local currency capital and accrual returns plus FX returns, stated in USD

2 1. ALBI versus ADBI, relative performance over one year as of 2 December 2013 ALBI (local currency return) ALBI (USD return) ADBI (USD return) Difference in USD % China Onshore -0.11% 2.10% n.a. n.a. China Offshore 4.26% 6.51% -1.15% 7.66% Hong Kong SAR -1.64% -1.67% 0.79% -2.46% India 2.53% -9.85% 0.49% % Indonesia % % % % Korea 0.13% 2.61% 1.05% 1.56% Malaysia 1.52% -3.87% -0.94% -2.92% Philippines 8.85% 1.76% -5.43% 7.19% Singapore -2.14% -4.62% -0.47% -4.16% Taiwan -2.22% -3.87% n.a. n.a. Thailand 1.64% -3.17% -2.58% -0.59% Mongolia n.a n.a -7.03% n.a. Sri Lanka n.a n.a -3.86% n.a. Pakistan n.a n.a 19.19% n.a. Total (in USD)* -4.89% -4.89% -2.16% -2.73% * The overall ALBI is measured in USD At the moment, many aspects of n local and external debt markets are distinctly different. The difference ranges from type of issuer, tenor of issue, liquidity, tax treatment, ease of transaction, ease and risk of currency conversion, and difference in investment base, all of which contribute to the difference in the risk/reward profile of the two markets. Table 1 summarises the differences in performance between the ALBI and ADBI over a one-year horizon. The sizeable difference suggests the uniqueness of n local bonds and that the efficiency frontier would be expanded by adding n local currency denominated bonds into a global bond portfolio. Barring capital restrictions, the significant difference in total returns also suggests lack of onshore/offshore cross-market activity. The ALBI is calculated daily, based on the weighted returns of each individual local index. The selection criteria for each local index constituent are determined according to the current market infrastructure and secondary market activities in each local centre (see below for more details on each local sub-index). 2

3 The determination of country weightings for the ALBI An ideal index should be broadly representative, liquid (replicable) and stable. Although the quality of an index is ultimately determined by the quality of the underlying securities and market structures, index construction rules do affect the quality of an index. A majority of the local bond markets represented by the ALBI are in their infancy. Therefore, the need for balancing representativeness, liquidity and stability is challenging but important. For example, passively managed funds and insurance companies would put more weight on the stability of index composition, while actively managed funds and securities houses care more about liquidity in terms of low transaction costs and speedy execution, for both current and future investments. The weightings of individual bonds in each local index are determined by their market capitalisation. However, their respective country weightings in the ALBI, which are reviewed annually by HSBC, affect their final weightings in the ALBI. Because the local bond market structures vary so dramatically across each country, standard metrics, such as total market size or market capitalisation of each local index, fail to provide an approximation of investment opportunities readily available to international investors. For example, the size of the Hong Kong SAR bond market and the market capitalisation of the Hong Kong SAR index are small relative to the tradable amount available to most international investors in comparison with other countries. China provides an opposite case in which the local bond market is virtually closed to external investors, yet the size of its bond market dwarfs most of the others. HSBC sets the country weightings for the ALBI to provide a bond portfolio that defines the market of developing n local currency bonds available to international investors. The weightings of each, subject to annual review, are derived based on the following factors: Total size of each domestic debt market and the total market capitalisation of each country index. Liquidity of the secondary bond market in each country, measured by bid-offer spreads, daily turnovers, and availability of price quotes. Accessibility to foreign investors in terms of currency convertibility, withholding taxes, ease of setting up and operating foreign-owned investment funds, ease of repatriating of funds and profits. Development of infrastructure conducive for fixed-income investments and trading, such as availability of domestic benchmark yield curves, interest rate derivative products (swaps and futures) and the availability of reliable credit rating systems for non-government issues. As of 2 December 2013, the country weightings are as follows: 2. ALBI country weights as of 2 December 2013 Country Weight, % China Onshore 7.9% China Offshore 3.8% Hong Kong SAR 12.9% India 5.7% Indonesia 9.3% Korea 18.9% Malaysia 10.4% Philippines 6.3% Singapore 15.0% Taiwan 2.2% Thailand 7.6% 3

4 FX rates FX spot rates are captured at around 17:30-18:00 HKT during index valuation, sourced from Reuters and Bloomberg based on details indicated in the table below. 3. Data source of FX spot rates applied for ALBI FX Data Source Ticker CNH Reuters BGCHKCNY CNY Reuters BGCNDF1 HKD Bloomberg USDHKD F020 IDR Reuters IDR= INR Reuters BGCHDF1 KRW Reuters BGCNDF1 MYR Reuters BGCNDF2 PHP Reuters BGCNDF1 SGD Bloomberg USDSGD F020 THB Bloomberg USDTHB F020 TWD Reuters BGCNDF1 Rules of construction and calculation methodology for the ALBI The tables below summarise the construction rules and calculation methodology for the ALBI. We also provide summarised characteristics of each domestic bond market. 4. Index computation methodology Index base 29 December 2000 = 100 Weightings Additions and withdrawals and availability Statistics available Total return, including price changes, and accrued and re-invested coupon payments. Each country sub-index is first calculated after closing of each market. The ALBI is calculated as the cumulative value of the sum of the weighted daily total return of each sub-index, measured in US dollar, relative to 100 Weightings of individual bonds within each local index are determined by their market capitalisation. Country weightings are determined and reviewed annually by HSBC that represent a local bond portfolio replicable in practice by external investors Re-balancing of the composition of the each sub-index and the ALBI are made on the first business day of each month HSBC traders at each local centre provide bond pricing at market close on every business day. In case one of the local markets is closed, its daily total return is set to be its daily accrual in calculating the ALBI on that day Total return, yield, modified duration, average life, market capitalisation, average clean price, average coupon 5. Constituent selection criteria Markets Coupon type s Credit ratings Issue size China Onshore, China Offshore, Hong Kong SAR, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. Respective domestic currencies. The composite ALBI index is calculated based on the daily return of each sub-country index in US dollars Fixed rate only Government, quasi-government and corporate bonds Restrictions based on individual country Minimum issue size is required and it varies across country Minimum of one year remaining to maturity 4

5 6. Constituent selection criteria by country Country Breakdown Type Minimum amount Outstanding (LLC) Minimum credit rating source Govt Non-govt for non-govt Govt Non-Govt China Onshore Sovereign CNY10bn CHBK China Offshore All CNY500m CNY500m No restriction HSBC HSBC Hong Kong All HKD300m HKD300m Single-A or equiv. HKMA HSBC India Sovereign INR50bn NDSI Indonesia Sovereign IDR2trn IDMA South Korea Sovereign KRW1trn KSDY Malaysia All MYR2bn MYR500m A- or above by BIDS BIDS RAM/Moody's/S&P Philippines Sovereign PHP3bn PDEX Singapore All SGD1.5bn SGD300m No restriction MAS HSBC Thailand All THB20bn THB15bn A- or above by TRIS TBDC TBDC Taiwan Sovereign TWD30bn TOTC 7. ALBI performance since inception, 29 December 2000 to 02 December 2013 Total return, % Average YTM, % Average tenor, yrs Modified duration Market cap USD bn Weightings ALBI* , China Onshore China Offshore** Hong Kong** India Indonesia** Korea Malaysia Philippines Singapore Taiwan Thailand * USD return, sub-indices are based on local currency returns **Hong Kong sector since Dec 1993; Indonesia sector since Nov 2003; China offshore sector since Dec Domestic market debt profile Outstanding amount, USDbn Government Non-Government Total As of China onshore Q13 China offshore* Q13 Hong Kong SAR Q13 India Q13 Indonesia Q13 Korea Q13 Malaysia Q13 Philippines Q13 Singapore Q13 Taiwan Q13 Thailand Q13 *Non-government number of China offshore includes bank Certificate of Deposit Source: bond monitor, CEIC, Bloomberg Appointed third party calculation agent The appointed third party calculation agent is currently Euromoney Trading Ltd. 5

6 Sub-index constraints/boundaries China Onshore: Rules of Index Construction and Calculation Methodology China government Chinese yuan (CNY) Fixed-rate straight bonds CNY10 billion Minimum one year remaining maturity Listing requirements Government issues listed on the China Interbank Market Selection criteria for index constituents Bonds satisfying all of the above criteria At the beginning of each month, new issues satisfying the selection criteria are included while current constituents with remaining maturity less than one year are removed Bid prices quoted on the China Interbank Market Index is updated on every Hong Kong business day. In the case of Chinese holidays, the index return will reflect coupon accrual only Index base 29 December 2000 = 100 Total daily market capitalization ALBI China index at month end Total return which includes capital gains, accrued interests and coupon reinvestments Total return, average yield, average modified duration, average life, market capitalization, average clean price (net capital gains/losses), average coupon China Offshore: Rules of Index Construction and Calculation Methodology Any government, financial institution, and corporate Chinese yuan (CNY) Fixed-rate straight bonds CNY500 million Minimum one year remaining maturity Listing requirements No restriction Issuance series Institutional tranches only Credit ratings No restrictions Settlement Bonds settled via CMU, and/or Euroclear/Clearstream (via links o CMU) Selection criteria for index constituents Bonds satisfying all of the above criteria At the beginning of each month, new issues satisfying the selection criteria are included while current constituents with remaining maturity less than one year are removed Re-val prices quoted by the HSBC Renminbi bond trading desk at market closing time Index is updated on every Hong Kong business day. In the case of Chinese holidays, the index return will reflect coupon accrual only Index base 31 December 2010 = 100 Total daily market capitalization ALBI China offshore index at month end Total return which includes capital gains, accrued interests and coupon reinvestments Total return, average clean price (net capital gains/losses), average yield, average modified duration, average life, market capitalization, average coupon, average spread (available for credit sub-indices) Sub-indices 1) Government 2) Non-government 3) Investment-grade overall 4) Investment-grade credit 5) High-yield and non-rated 6

7 Hong Kong: Rules of Index Construction and Calculation Methodology Hong Kong government, quasi-government, super-national and corporate Hong Kong dollar (HKD) Fixed-rate straight bonds HKD300 million Minimum one year remaining maturity Credit rating for non-governments Single A or equivalent Selection criteria for index constituents Bonds satisfying all of the above criteria At the beginning of each month, new issues satisfying the selection criteria are included while current constituents with remaining maturity less than one year are removed Market closing prices for government issues (HKEFN) published by HKMA. Individually priced (based on bid spreads & mid HIBOR rates) by traders at HSBC Hong Kong treasury office for nongovernments around Hong Kong market closing time Index is updated on every Hong Kong business day. Index base 31 December 1993 = 100 Total daily market capitalization ALBI Hong Kong index at month end Total return which includes capital gains, accrued interests and coupon reinvestments Total return, average yield, average modified duration, average life, market capitalization, average clean price (net capital gains/losses), average coupon Sub-indices Overall: ALBI HKD Overall Total Index ALBI HKD Overall 1-3 Year Index ALBI HKD Overall 3+ Year Index ALBI HKD Overall 1-5 Year Index ALBI HKD Overall 5+ Year Index Government bonds: ALBI HKD Government Total Index ALBI HKD Government 1-3 Year Index ALBI HKD Government 3+ Year Index ALBI HKD Government 1-5 Year Index ALBI HKD Government 5+ Year Index Non-government bonds: ALBI HKD Non-government Total Index ALBI HKD Non-government 1-3 Year Index ALBI HKD Non-government 3+ Year Index ALBI HKD Non-government 1-5 Year Index ALBI HKD Non-government 5+ Year Index India: Rules of Index Construction and Calculation Methodology India government Indian rupee (INR) Fixed-rate straight bonds INR50 billion Minimum one year remaining maturity Liquidity criteria Number of bonds in each maturity band 1-5 years years years 4-6 Selection criteria for index constituents Average daily turnovers during the past month as established from the transaction data released by RBI on a daily basis Bonds satisfying the above set of criteria with the highest average daily turnovers in the most recent month are selected. The total number of bonds may vary within the maturity band defined above The index portfolio is re-balanced at the beginning of each month, taking into account of new issues and changes in liquidity Bond prices from the Reserve Bank of India around India market closing time Index is updated on every Hong Kong business day. In the case of Indian holidays, the index return will reflect coupon accrual only Index base 29 December 2000 = 100 Total daily market capitalization ALBI India index at month end Total return which includes capital gains, accrued interests and coupon reinvestments Total return, average yield, average modified duration, average life, market capitalization, average clean price (net capital gains/losses), average coupon 7

8 Indonesia: Rules of Index Construction and Calculation Methodology Indonesia government bond, including recapitalisation bond Indonesian rupiah (IDR) Fixed-rate straight bonds only IDR2trn Minimum one-year remaining Criteria None Selection criteria for index constituents Bonds satisfying all of the above criteria At the beginning of each month, new issues satisfying the selection criteria are included while current constituents with remaining maturity less than one year are removed Bond prices from IDMA (Inter Dealer Market Association) Index is updated on every Hong Kong business day. In the case of Indonesian holidays, the index return will reflect coupon accrual only Index base 29 December 2000 = 100 Total daily market capitalisation ALBI Indonesia index at month end Total return which includes capital gains, accrued interests and coupon reinvestments Total return, average yield, average modified duration, average life, market capitalization, average clean price (net capital gains/losses), average coupon Korea: Rules of Index Construction and Calculation Methodology Korea government, mainly Korea treasury bonds (KTB), Korea monetary stabilization bonds (MSB) and FX stabilisation bonds Korean won (KRW) Fixed-rate straight bonds KRW1 trillion Minimum one year remaining maturity Selection criteria for index constituents Bonds satisfying all of the above criteria All fungible bonds are included even if their initial issue size is less than KRW 1 trillion. However, if the total size of a fungible bond does not reach KRW 1 trillion by the last issuance tranche, it will be removed from the index At the beginning of each month, new issues satisfying the selection criteria are included while current constituents with remaining maturity less than one year are removed Closing prices by KSDY (Korea Securities Dealers Association OTC Yield Quote) Index is updated each Hong Kong business day. In the case of Korean holidays, the index return will reflect coupon accrual only Index base 29 December 2000 = 100 Total daily market capitalization ALBI Korea index at month end Total return which includes capital gains, accrued interests and coupon reinvestments Total return, average yield, average modified duration, average life, market capitalization, average clean price (net capital gains/losses), average coupon 8

9 Malaysia: Rules of Index Construction and Calculation Methodology Malaysian government, quasi-government (mainly Danamodal, Danaharta, Cagamas and Khazanah) and corporate bonds Malaysian ringgit (MYR) Fixed-rate straight bonds MYR2 billion for governments and MYR500 million for non-governments Minimum one year remaining maturity Credit rating for non-governments A- and above rated by RAM, A3 or above by Moody's and A- or above by S&P or equivalent Selection criteria for index constituents Bonds satisfying all of the above criteria At the beginning of each month, new issues satisfying the selection criteria are included while current constituents with remaining maturity less than one year are removed Bond prices from BIDS (Bursa Malaysia, Kuala Lumpur Stock Exchange) around Malaysian market closing time Index is updated on every Hong Kong business day. In the case of Malaysian holidays, the index return will reflect coupon accrual only Index base 29 December 2000 = 100 Total daily market capitalization ALBI Malaysia index at month end Total return which includes capital gains, accrued interests and coupon reinvestments Total return, average yield, average modified duration, average life, market capitalization, average clean price (net capital gains/losses), average coupon Sub-indices 1) ALBI MYR Overall Index 2) ALBI MYR Government Index 3) ALBI MYR Non-government Index Philippines: Rules of Index Construction and Calculation Methodology Philippine government Philippine peso (PHP) Fixed-rate straight bonds PHP3 billion Minimum one year remaining maturity Selection criteria for index constituents Bonds satisfying all of the above criteria At the beginning of each month, new issues satisfying the selection criteria are included while current constituents with remaining maturity less than one year are removed Best bid Fixing price from Philippine Dealing and Exchange Corporation (PDSF). Index is updated on every Hong Kong business day. In the case of Philippine holidays, the index return will reflect coupon accrual only Index base 29 December 2000 = 100 Total daily market capitalization ALBI Philippines index at month end Total return which includes capital gains, accrued interests and coupon reinvestments. All return calculations take into account the 20% withholding tax, calculated based on bond yields, which are applied to all market participants Total return, average yield, average modified duration, average life, market capitalization, average clean price (net capital gains/losses), average coupon Sub-indices 1) ALBI PHP Overall Index 2) ALBI PHP 1-3 Year Index 3) ALBI PHP 1-5 Year Index 4) ALBI PHP 5+ Year Index 6) ALBI PHP Liquid Index ALBI PHP Money Market Index The Money Market Index shares the same calculation methodology and constituent criteria with ALBI PHP Index except for maturity, which only includes short-term notes with tenors between 3 months to 1 year (inclusive) 9

10 Singapore: Rules of Index Construction and Calculation Methodology Singapore government, quasi-government, super-national and corporate Singapore dollar (SGD) Fixed-rate straight bonds SGD1.5 billion for governments and SGD300 million for non-governments Minimum one year remaining maturity Credit rating for non-governments No rating restrictions Selection criteria for index constituents Bonds satisfying all of the above criteria At the beginning of each month, new issues satisfying the selection criteria are included while current constituents with remaining maturity less than one year are removed Market closing prices for government issues published by MAS. Non-government bonds individually priced by traders at HSBC Singapore treasury office around Singapore market closing time Index is updated on every Hong Kong business day. In the case of Singapore holidays, the index return will reflect coupon accrual only Index base 29 December 2000 = 100 Total daily market capitalization ALBI Singapore index at month end Total return which includes capital gains, accrued interests and coupon reinvestments Total return, average yield, average modified duration, average life, market capitalization, average clean price (net capital gains/losses), average coupon Sub-indices 1) ALBI SGD Overall Index 2) ALBI SGD Government Index 3) ALBI SGD Non-government Index Taiwan: Rules of Index Construction and Calculation Methodology Taiwan government Taiwan dollar (TWD) Fixed-rate straight bonds TWD30 billion Minimum one year remaining maturity Selection criteria for index constituents Bonds satisfying all of the above criteria At the beginning of each month, new issues satisfying the selection criteria are included while current constituents with remaining maturity less than one year are removed Closing prices by TOTC (Taiwan GreTai Market) Index is updated on every Hong Kong business day. In the case of Taiwan holidays, the index return will reflect coupon accrual only Index base 29 December 2000 = 100 Total daily market capitalization ALBI Taiwan index at month end Total return which includes capital gains, accrued interests and coupon reinvestments Total return, average yield, average modified duration, average life, market capitalization, average clean price (net capital gains/losses), average coupon 10

11 Thailand: Rules of Index Construction and Calculation Methodology Thai government, quasi-government and corporate Thai baht (THB) Fixed-rate straight bonds THB20 billion for governments and THB15 billion for non-governments Minimum one year remaining maturity Credit restrictions A- or above (rated by TRIS) Selection criteria for index constituents Bonds satisfying all of the above criteria At the beginning of each month, new issues satisfying the selection criteria are included while current constituents with remaining maturity less than one year are removed TBDC (Thai Bond Dealing Centre) that updates closing prices around 5:30pm Index is updated on every Hong Kong business day. In the case of Thai holidays, the index return will reflect coupon accrual only Index base 29 December 2000 = 100 Total daily market capitalization ALBI Thailand index at month end Total return which includes capital gains, accrued interests and coupon reinvestments Total return, average yield, average modified duration, average life, market capitalization, average clean price (net capital gains/losses), average coupon Sub-indices 1) ALBI THB Overall Index 2) ALBI THB Government Index 3) ALBI THB Non-government Index 11

12 Appendix Major changes Effective from 1 December 2013 ALBI changed IDR FX rate to onshore spot rate from offshore NEF spot rate, effective from 1 December This was followed by a commitment from Indonesian central bank to improve the onshore FX rate transparency and the development between the onshore and offshore FX rate, with the onshore rate becoming more indicative. In order to minimize the impact of large spread differential from the onshore and offshore rate switch, the IDR FX rate was rebased to the onshore rate after November s valuation. That said, there were two IDR FX rates on 30 November: offshore NDF rate of for the valuation ending November 2013 and onshore spot rate of at the beginning of December 2013 and onward. Effective from 1 January 2014 ALBI China Onshore Index changed the government bond pricing source to the interbank market from Shanghai Exchange, effective from 1 January The China onshore interbank market has accounted for over 90% of the onshore bond market s turnover, and it offers more indicative bond pricing compared to the Shanghai Exchange, in which the bond prices can be stale with lack of trading. In addition, following the gradual opening of the interbank bond market, foreign investors can access the market through multiple channels, namely QFII, RQFII and the China Interbank Market (CIBM) pilot scheme. 12

13 HSBC Offshore Renminbi Bond Index (CNH Index) The HSBC Offshore Renminbi Bond Index (CNH Index) tracks the total return performance of Renminbi-denominated and Renminbi-settled bonds and certificates of deposit issued outside the People s Republic of China. Ensuring a fair and representative benchmark, the constituent selection process is completely mechanistic and strictly follows criteria specified in this report. The index has become part of HSBC s n Local Bond index under the China sector since April Five sub-indices were later launched in July Inclusion criteria and computation methodology The HSBC Offshore Renminbi Bond Index (CNH Index) tracks the total return of Renminbi fixed-income instruments issued outside the People s Republic of China. The total return index starts at 100 and has a base date of 31 December HSBC Offshore Renminbi Bond Index (CNH Index) inclusion criteria Type of instruments Denomination currency Settlement currency Coupon type Redemption type Listing requirements Issuance series Credit ratings Settlement 2. Computation methodology Any government, financial institution, and corporate Bonds, certificates of deposit (CDs) Renminbi (RMB) Renminbi (RMB) Fixed rate only Bullet only RMB500m Minimum one year remaining to maturity No restriction Institutional tranches only No restrictions Bonds settled via CMU, and/or Euroclear/Clearstream (via links to CMU) Index base 31 December 2010 = 100 Total return which includes capital gains, accrued interest and coupon reinvestments Total daily market capitalization Re-val prices quoted by the HSBC Renminbi bond trading desk at market closing time Index is updated on every Hong Kong business day Full amount of cash coupon payments will be held in cash intra-month, and will be re-invested in the index at month-end Rebalance frequency & date Monthly, on the first business day of each month before index calculation Addition of new constituents Qualified new issues launched intra month are added to the index at the following rebalance using offer prices Withdrawal of constituents Securities that no longer qualify for inclusion (e.g. remaining time to maturity falls below one year, outstanding amount drops below RMB500m, issue in default) are removed from the index at the following rebalance Total return, average clean price (net capital gains/losses), average yield, average modified duration, average life, market capitalization, average coupon, average spread (available for credit sub-indices) Sub-indices 1) Government; 2) Non-government; 3) Investment-grade overall; 4) Investment-grade credit; 5) High-yield and non-rated 13

14 3. Index covers liquid portion bonds with remaining maturity 1yr in the market 4. Sector mix of HSBC Offshore Renminbi Bond Index Others 60% Retail bonds 1% Included in HSBC CNH Index 39% CD 43% Foreign Corp 7% Supr 1% Foreign Financial Institutions 8% Sovereign 11% China Financial Institutions 7% Greater China Corp 23% Source: Bloomberg, HSBC The index covers institutional tranches of fixed-rate straight bonds and certificates of deposit (CDs), which are denominated and settled in Renminbi (RMB). The following types of bond are excluded from our index: (1) RMB-denominated but USD-settled synthetic bonds, (2) floating rate notes, (3) bonds with embedded options, and 4) retail bonds. Detailed inclusion criteria and computation methodology are summarised in tables 1 and 2. As of September 2013, the index covered 39% of total outstanding RMB-settled and denominated bonds and CDs in nominal outstanding amount with remaining maturity greater than one year. Total return and index characteristics Total returns in both RMB and USD terms are calculated and published on a daily basis, together with index characteristics, including average modified duration, average yield, market capitalisation, average life (tenor), average clean price (net capital gains/losses) and average coupon. Availability The Offshore Renminbi Bond Index is open to all of HSBC s trading clients. It is available on Bloomberg HSLI page under the China sector (HSLI 2) China Options 2) to 7)). The index is updated daily at around 19:00 HKT. In addition, a daily summary of the overall index is available on the HSBC Research website: 5. Summary of overall index characteristics 6. Index return attribution since inception Tickers 12/31/ /2/ Total Return in USD HCNHUSD Total Return in RMB HCNHACUM Avg Clean Price HCNHACP Avg Duration (years) HCNHAD Avg yield (%) HCNHAY Market Cap (RMB m) HCNHAMC Avg Life (years) HCNHAL Avg Coupon (%) HCNHAC Return since Inception Total return in USD 15.98% Total return in RMB 7.08% Return from FX 8.32% Return from Capital Gain -2.66% Return from Coupon 9.73% 95 Capital Loss TR(USD) TR(RMB) Capital Gain FX Coupon 14

15 Inclusion price and adjustment for bid-offer spreads New issues, when entering the index for the first time, are included at offer prices at the date of inclusion. Subsequent mark-to-market calculations are based on re-valuation (i.e. indicative bid) prices provided by HSBC s Renminbi bond trading desk. As all bonds were included at re-valuation prices at the date of index inception, we calculated the impact of bid-offer spreads at index inception, and quantify this cost at 0.41% in total returns in both RMB and USD terms. By including bonds using offer levels, return in the first business day since inception (i.e. 31 December 2010 to 3 January 2011) in RMB terms will be -0.36% (versus 0.05% based on the re-valuation price), and in USD terms will be 0.07% (versus 0.49% based on the re-valuation price). The total return of the index in January 2011, after adjusting for the cost of bid-offer spread, will be 0.23% in RMB and 0.35% in USD, versus 0.64% and 0.76% without the adjustment, respectively. Inclusion in n Local Bond Index (ALBI) The CNH index was included in the n Local Bond Index (ALBI) starting April 2011, after running as a standalone index in 1Q11. Initial weighting of the overall index was set at 1%, before adjusting upwards in end-2011 and end As of 2 December 2013, the index accounted for 3.8% of the overall ALBI index and 33% of the China overall section. Sub-Indices Five sub-indices are available, with the same inception dates as the overall index. An additional characteristic average spread 2 is available for all credit sub-indices. Government bond index: Only bonds issued by the Chinese government are included Non-government credit index: All non-government bonds are included Investment-grade overall index: Government and non-government issues are included, rated at or above BBB-/Baa3/BBB- by S&P/Moody s/fitch. We also include the senior debt of investmentgrade issuers that are unrated on the issue level Investment-grade credit index: All non-government issues rated at or above BBB-/Baa3/BBB- by S&P/Moody s/fitch are included High-yield and unrated credit index: All issues rated at or below BB+/Ba1/BB+ by S&P/Moody s/ Fitch are included, as well as issues that are unrated on both the issue and the issuer level 2 Average spread refers to spread over offshore China government bonds. 15

16 7. Total return of selected sub-indices 8. Average yields of selected sub-indices Total Return (RMB) /10 05/11 10/11 03/12 08/12 01/13 06/13 11/13 Govt IG Overall HY&NR Average Yield (%) Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Govt IG Overall HY&NR Aug-13 Frequently asked questions 1. Why are synthetic bonds excluded? In our view, USD-settled synthetic bonds and RMB-settled CNH bonds are two different products, although both offer exposure to Renminbi. There are distinct differences in issuer and investor bases, and therefore they have demonstrated different market mechanics and dynamics. In addition, their exposure to the Renminbi exchange rate is also different. The synthetic bonds are using the onshore CNY exchange rate as the reference, while CNH bonds are exposed to the offshore CNH exchange rate. 2. Why are floating rate notes excluded? The current outstanding floating rate notes are anchored using the onshore SHIBOR rates. In our view, the bulk of the future floating rate notes issued in the offshore market will anchor to an offshore interbank rate when this rate is established. In addition, floating issues typically exhibit poor and more volatile liquidity. 3. Why are retail bonds excluded? Retail bonds are bonds mainly issued by the Ministry of Finance (MoF) and Chinese financial institutions targeting retail customers in Hong Kong. These bonds are typically higher in coupon compared with comparable institutional bonds, and mainly held by retail customers (i.e. institutional investors would find it difficult to have material holdings of such instruments), and have little relevance to institutional investors in terms of pricing and liquidity. 4. Why are certificates of deposit included? Certificates of deposit (CDs) comprise a significant portion of the offshore Renminbi bond market due to their simplicity in terms of issuance all Hong Kong participating banks can issue CDs in Hong Kong without approval. Their trading activities, pricing and market dynamics are similar to comparable CNH bonds. 5. What is the advantage of our index pricing? HSBC s renminbi bond trading desk, a leading secondary market player by market share, directly provides indicative bids daily for each of the bonds included in our index, and these prices are distributed to our index clients daily by to ensure the transparency of our index calculation. 16

17 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: Louisa Lam, Kelly Fu and Zhi Ming Zhang 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) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies 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 longterm 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 recommendations Overweight: The credits of the issuer are expected to outperform those of other issuers in the sector over the next six months Neutral: The credits of the issuer are expected to perform in line with those of other issuers in the sector over the next six months Underweight: The credits of the issuer are expected to underperform those of other issuers in the sector over the next six months Prior to 1 July 2007, HSBC applied a recommendation structure in Europe that ranked euro- and sterling-denominated bonds and CDS relative to the relevant iboxx/itraxx indices over a 3-month horizon. Distribution of fundamental credit opinions As of 03 December 2013, the distribution of all credit opinions published is as follows: 17

18 All Covered Companies Companies where HSBC has provided Investment Banking in the past 12 months Count Percentage Count Percentage Overweight Neutral Underweight 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. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at Additional disclosures 1 This report is dated as at 0. 2 All market data included in this report are dated as at close 02 December 2013, unless otherwise indicated in the report. 3 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 operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. 18

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20 Global Fixed Income Research Team Steven Major, CFA Global Head of Fixed Income Research Rates EMEA Bert Lourenco Head of Rates Research, EMEA Subhrajit Banerjee Theologis Chapsalis Wilson Chin, CFA Di Luo Chris Attfield Sebastian von Koss André de Silva, CFA Head of Rates Research, -Pacific Pin-ru Tan Himanshu Malik Dayeon Hong Americas Larry Dyer Jae Yang Pablo Goldberg Head of Global Emerging Markets Research Bertrand Delgado Gordian Kemen Head of Latin America Fixed Income Research Victor Fu Alejandro Mártinez-Cruz Credit EMEA Lior Jassur Head of Credit Research, EMEA Dominic Kini Laura Maedler Anna Schena Pavel Simacek, CFA Reza-ul Karim Raffaele Semonella Ivan Zubo Dilip Shahani Head of Global Research, -Pacific Zhiming Zhang Devendran Mahendran Philip Wickham Keith Chan Louisa Lam Yi Hu Helen Huang Crystal Zhao Kelly Fu Lan Lan Christopher Li Americas Sarah R Leshner [email protected] Sean Glickenhaus [email protected]