At the centre of RMB internationalisation

Deutsche Bank March 2014 At the centre of RMB internationalisation A brief guide to offshore RMB A brief guide to offshore RMB 1

Contents 1. RMB becoming a global currency 2 2. Why adopt the RMB? 6 3. FAQ for corporations 7 4. FAQ for investors and financial institutions 10 5. RMB road map 13 6. Debt capital markets 15 7. Credit market 19 8. Foreign exchange and rates 21 9. Transaction banking 24 10. Keeping informed 27 A brief guide to offshore RMB 1

Becoming a global currency The internationalisation of China s Renminbi (RMB) has been described as the most significant global financial markets development since the formation of the Euro. China s global economic power has been enhanced in recent years with the increased representation of its currency in international trade. The world s second-largest economy and its largest exporter, China represents a significant share of global foreign direct investment. Growth in the global use of its currency is testament to China s rising economic status. The RMB now comprises 2.2% of all global FX turnover and has entered the top ten most traded currencies for the first time (Bank for International Settlements (BIS)). China s policymakers have made it clear that they want this growth to continue and we expect further domestic financial deregulation reforms in 2014 and beyond. Key milestones in the development of offshore RMB markets In recent years, a number of measures to promote the use of RMB in cross-border trade, financing and foreign direct investment (FDI) have created fully-functioning offshore RMB markets in Hong Kong, Taiwan and Singapore. For corporations, investors and financial institutions the opportunities are significant. Currency risk can be neutralised by raising capital in the offshore RMB bond market to fund onshore subsidiaries. CNH, CNT and CNS bonds also offer a relatively competitive source of financing and the potential to tap a new investor base. Invoicing goods in RMB for Chinese buyers may provide competitive advantages and the potential for significant cost savings. Investors meanwhile gain unrestricted access to RMB assets through international FX and debt markets. 2008 December Premier Wen announced the pilot scheme of RMB cross border trade settlement with HK, Macau, and ASEAN countries 2009 June PBOC and HKMA sign memorandum of cooperation for RMB cross-border trade settlement pilot scheme July August PBOC and five other authorities issued administrative rules for RMB settlement pilot scheme with HK, Macau and ASEAN countries PBOC issued regulation for implementing the administrative rules for RMB settlement scheme SAFE issued BOP reporting notices for RMB trade settlement Launch of the pilot scheme in five cities - Shanghai, Guangzhou, Shenzhen, Dongguan, Zhuhai with HK, Macau and ASEAN 2010 June Pilot scheme extended to 20 provinces and to trading partners from all countries December PBOC signed RMB20bn bilateral cross currency swap agreement with HKMA 2011 January PBOC announced the pilot scheme for Outward - bound Direct Investment (ODI) in RMB August October RMB cross-border trade settlement pilot scheme extended nation-wide & Initial RMB20bn Mini-QFII Program launched MOFCOM and PBOC issue new circulars on RMB FDI 2012 March RMB cross-border trade settlement scheme expanded to all Chinese companies with import/ export scope on their business licenses 2013 February RMB business officially launched in Taiwan (CNT trading begins and RMB deposits accepted) July September October PBOC appointed ICBC Singapore as the RMB clearing bank in Singapore QFII quota increased to USD150bn from USD80bn Simplified RMB cross-border settlement process announced; Increased borrowing limits by onshore Mainland Correspondent Banks (MCBs) from offshore participating banks; Free RMB flow between onshore MCB bank accounts and offshore RMB accounts permitted Shanghai Free Trade Zone is set up to test an offshore RMB market in Shanghai RMB QFII program launched in Singapore (RMB50bn quota granted) and London (RMB80bn quota granted) 2014 February PBOC Shanghai released the notice to support the expansion of cross border RMB usage in the Shanghai Free Trade Zone 2 A brief guide to offshore RMB

How global has the RMB become? The internationalisation of the RMB continues to accelerate. Along with Hong Kong, Taiwan and Singapore have become offshore RMB centres, and a functioning RMB debt market has been established in London. To support this growth, the Chinese authorities have continued relaxing capital account barriers to allow more two way flows into and out of China. This has resulted in an ongoing increase in RMB liquidity. Recent data shows RMB deposits in Taiwan have more than trebled to around RMB184bn in December 2013 (Central Bank of China (CBC)), while Singapore has RMB deposits of around RMB140bn (Monetary Authority of Singapore (MAS)). CNH liquidity within the Hong Kong market has also shown a notable pick up. Deutsche Bank estimates that total offshore RMB spot FX daily volume is approximately USD3.5-4bn as of December 2013. There has been sharp growth in the RMB business in London as well. RMB FX market daily turnover has more than tripled in 2013 from 2012 (Deutsche Bank). Equally impressive is the continued expansion in the use of RMB as a trade settlement currency. According to SWIFT, as of February 2014, RMB is ranked #7 as a payment currency with a market share of 1.39%, a significant leap from where it was in January 2012 (ranked #20). RMB is the second most used currency in trade finance (active share globally) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jan-12 Total market share of trade financing currency globally Oct-13 USD RMB EUR JPY Source: Deutsche Bank, SWIFT Top-five users of RMB in trade finance Looking ahead, Deutsche Bank expects the use of RMB as a trading, investment and reserve currency to continue to grow. CNH deposits reach CNH860bn CNH deposits and cross-border trade on the rise 1000 900 800 700 600 500 400 300 200 100 Monthly HK-China cross-border settlement (RMB bn) RMB deposit base (RMB bn) 0 0 Jul-09 Jan-10 Jul-10 Jan-11 Jul-12 Jan-13 Jul-13 Jan-14 Source: HKMA, Deutsche Bank Research Hong Kong s CNH deposit base stood at RMB860.5bn as of December 2013 (HKMA). Growth was initially driven by retail deposits on the expectation of RMB appreciation, however corporations, investors and banks continue to increase their share of total deposits. RMB cross-border trade still rising RMB cross-border trade settlement has been growing gradually, with RMB578bn in December 2013, up from RMB352bn in January 2012 (Deutsche Bank). This has been largely driven by the expansion of the trade settlement program to allow more companies with export/import scope on their business licenses to settle in RMB. China cross-border trade settlement volume (RMB bn) 700 600 500 400 300 200 Cross-border RMB settlement 500 450 400 350 300 250 200 150 100 50 Hong Kong 100 0 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 14 % Europe 5 Korea 2% 72 7 Others China Source: Bloomberg Finance LP, Deutsche Bank Source: PBOC, Deutsche Bank Three FX markets exist for RMB Onshore CNY, which remains restricted for foreigners; offshore CNH, which is fully deliverable; and the USD-denominated nondeliverable forward market. Daily trading volumes in USD-CNH (spot + forward) now exceed USD12bn equivalent (Deutsche Bank). A brief guide to offshore RMB 3

CNH FX market average daily trading volume RMB FX turnover ranked ninth globally 10,000 9,000 8,000 CNH (spot + fwd) CNY NDF 2.50% 2.00% CNY turnover as a % of global FX market daily turnover 7,000 6,000 1.50% 5,000 4,000 1.00% 3,000 USDm 2,000 1,000 0 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 0.50% 0.00% 2004 2007 2010 2013 Source: Deutsche Bank Source: Deutsche Bank, BIS The growth of the CNH FX option market Since the beginning of 2013, the CNH FX option market has seen sizeable growth in three dimensions turnover, option products sophistication, and market participation. Deutsche Bank estimates CNH option daily turnover averaged about USD7bn in 2013, 700 times the 2010 level, implying a 780% annual growth rate in the past three years. CNH FX option turnover has surpassed the traditionally large FX option markets such as KRW, MYR and TWD and has become the most actively traded FX option in the Asia offshore currency options market according to the 2013 BIS Triennial Central Bank Survey. Both vanilla and complex options are traded in the CNH FX option market, and we believe growing participation by corporations this year with real FX hedging demand has set the trend of CNH options gradually substituting NDF options as the dominant offshore RMB option market. The CNH structured FX products market also developed rapidly, supported by exporters strong interests in CNH-structured forwards to manage FX risk exposures and investors demand for CNH-structured notes. RMB FX option turnover ranked sixth as of April 2013 USD bn 350 300 250 200 150 100 50 0 Daily turnover for FX option 5% of global FX option daily turnover USD JPY EUR GBP AUD CNY CHF CAD BRL MXN KRW Source: Deutsche Bank, BIS What s next? CNH assets to grow ten-fold by 2014 Deutsche Bank expects increased demand for RMB financing will see the amount of outstanding offshore RMB loans and bonds grow ten-fold to RMB870bn by the end of 2014. Going forward, continued financial deregulation reform focusing on interest rate liberalisation, exchange rate liberalisation, capital account liberalisation and RMB internationalisation will be the key factors underpinning offshore RMB market growth. The evolving RMB FX option market Source: Deutsche Bank Avg daily volume Avg ticket size Vol bid offer spread Tenor In late 2010 CNH option USD10m USD5m 2 1M to 1Y NDF option USD3bn USD50m 0.2 1M up to 7Y Onshore CNY option Not traded Not traded Not traded Not traded 2013 CNH option USD7bn USD50-100m 0.1-0.2 1W up to 10Y NDF option USD3bn USD50-100m 0.1-0.2 1M up to 10Y Onshore CNY option USD5m USD5-10m 1 1M to 1Y 4 A brief guide to offshore RMB

RMB bonds and loans in Hong Kong (CNH bn) 1200 1000 800 600 400 200 0 Offshore RMB bonds, CDs and loan 2010 2011 2012 2013 2014F Source: Deutsche Bank, Bloomberg Finance LP, Increased RMB cross border trade in 2014 Deutsche Bank expects RMB trade settlement volume to grow by 50% YoY, likely reaching RMB6trn or 20% of China s global trade volume. Deutsche Bank expects offshore RMB FX daily trading volume to rise to USD4-4.5bn in spot and USD7-7.5bn in forwards/fx swaps. Deutsche Bank also expects RMB crosscurrency swap daily turnover to increase to USD5bn and CNH FX daily turnover to rise to USD7-8bn. The expansion of the RMB trade settlement programme in March 2012 to include all Chinese companies with import/export scope on their business licenses, adoption of the RMB by foreign corporations, growth in China s nominal trade volumes and an increase in Chinese outward direct investment are expected to be the key drivers of future growth. RMB trade settlement volumes (forecast) 1800 1600 1400 1200 1000 800 600 400 200 0 RMB settlement amount (USD bn) % of RMB settlement in China s global trade 2011 2012 2013 2014 2015 2016 Source: PBOC, Deutsche Bank 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Offshore deposits to reach CNH2.25 trillion by 2014 Deutsche Bank believes growing volumes of RMB cross-border trade, the launching of RMB business in more offshore centres and the increased use of bank deposits for RMB lending and bond purchases (known as the multiplier effect ) will see deposits in Hong Kong reach CNH2.25 trillion in 2014. Additional offshore RMB centres We expect more clearing banks to be established in Europe and other regional centres, off the back of new markets in Singapore, London and Taiwan and the signing of an RMB cross-currency swap agreement between the ECB and PBOC in 2013. We also expect a relaxation in RMB supply to the offshore RMB market as policy makers further address the offshore liquidity concern by broadening channels of RMB supply. Increased access to onshore assets In 2013, the RMB Qualified Foreign Institutional Investor (QFII) quota in Hong Kong was increased from RMB70bn to RMB270bn in Hong Kong, and similar programs were launched in Singapore (RMB50bn) and London (RMB80bn) also. We anticipate further relaxation of foreigners access to the onshore capital market, as we expect the RMB QFII quota to be allocated to foreign investors who apply under the program in London/Singapore and new quotas to be granted to new markets. In addition to traditional fund options, US and European investors can now gain access to onshore China-listed stocks via two db X-trackers Harvest CSI 300 China A-Shares ETFs, listed on the NYSE, LSE and Deutsche Borse. The RMB QFII ETF listed on the NYSE was the first of its kind outside of China. More diversity in the offshore RMB bond market In 2014 Deutsche Bank continues to expect both increased issuance volume and diversity in terms of issuer. To date, the market has been dominated by China-based issuers, however, as the market increases in size and liquidity new entrants will be attracted. Another key area of growth will be the issuance of longer dated paper. Currently the market is heavily skewed towards the short end of the curve, with the majority of issuance coming in three years or less. As CNH gains traction as an investment currency, so too will demand for duration. This is a key theme for the more developed fixed income markets and will also become a driver for the offshore RMB market as it continues to grow and mature. Offshore RMB deposit (RMB bn) 4500 4000 3500 2015F 2014F 2013 3000 2500 2000 1500 1000 500 0 HK Macao Singapore London Taiwan Others Source: various central banks, Deutsche Bank A brief guide to offshore RMB 5

Why adopt the RMB? Doing business in RMB can have a range of benefits, including lower financing and transaction costs, reduced FX exposure, improved supplier access and greater purchasing power. Why an internationalised RMB matters to you Unrestricted offshore access to RMB trading, hedging and financing Lower transaction costs for foreign companies operating in or buying from China Greater investment choice and yield opportunities for offshore RMB deposits Broader access to onshore buyers and suppliers Reduced FX hedging costs for inward/outward investment Ability to hedge RMB exposure as its use in international trade increases A diversified and competitive source of financing Lays the path for gradual RMB appreciation and eventual capital convertibility 6 A brief guide to offshore RMB

FAQs for corporations Doing business in RMB can have a range of benefits, including lower financing and transaction costs, reduced FX exposure, improved supplier access and greater purchasing power. Cross-border trade and cash management Q: Can I pay or receive in RMB for cross-border trade transactions with Mainland China? Yes. Corporate entities in any part of the world can freely pay and receive in RMB for settlement of cross-border trade of merchandise goods and services with Mainland China. All your trade counterparties domiciled in Mainland China with export-import scope on their business licenses are eligible for RMB trade settlement. This implies if you are buying or selling goods and services with Mainland China in other currencies, you can also freely re-denominate these transactions into RMB. For your new Chinese suppliers and buyers, it is also viable to pay or receive RMB under the aforementioned prerequisites. Q: Can I open RMB deposit accounts outside Mainland China? Yes. Corporate entities can open RMB deposit accounts in accordance with the usual banking practices and regulatory requirements in the account-opening jurisdiction. For instance, both local and offshore corporate entities can open RMB deposit accounts in Hong Kong and banks can provide RMB services in accordance with prevailing banking practices applicable to other foreign currencies. Opening RMB deposit accounts with Deutsche Bank is easy to do and follows the same process as with deposit accounts of any other foreign currencies. You can hold RMB in a time deposit or structured deposit, or simply use it in a current account. While RMB cash accounts can be overdrawn (subject to approval of relevant credit facilities), securities settlement must be pre-funded. Converting your RMB into other currencies offshore is unrestricted, as is using the RMB in your account for cross-border trade with China. While RMB foreign direct investments and intercompany loans into Mainland China are permissible, prior approval from the relevant authorities in Mainland China is required. Q: Do I have to have an RMB deposit account in order to make a payment to a supplier or receive a payment from a business partner in RMB? Not necessarily. You can make RMBdenominated payments to suppliers or receive RMB-denominated payment from business partners based either onshore or offshore via Deutsche Bank s cross currency cross border payment platform, FX4Cash. You can maintain an account with Deutsche Bank in your primary operating currency (eg USD or EUR) and control the spot RMB conversion on a 24 hour basis, maximizing control, transparency and efficiency using Deutsche Bank s market leading FX4Cash platform. Q: Are there any restrictions for RMB deposits and fund transfers outside Mainland China? No. As long as the RMB funds do not entail cross-border flows back to Mainland China, corporate entities can freely determine the use of their offshore RMB funds. Similar to the prevailing practices of other foreign currencies, it is possible and viable to place deposits, make withdrawals, and transfer funds into or out of RMB accounts outside Mainland China. In cases of cross-border flows of RMB funds into or out of Mainland China, it is permissible under the prerequisite that the fund transfer comply with the rules and requirements of Mainland China including but not limited to cross-border trade settlement mentioned above. Q: What RMB trade finance products are available? Key trade finance capabilities for documentary trade and open account trade enabled in other global currencies are also available in RMB at Deutsche Bank. For instance, RMB import or export letters of credit issuance, collection, discounting and financing, pre-shipment financing, receivables financing (with or without recourse), supply chain financing of RMB purchases and sales, as well as RMB letters of guarantee are available in RMB or other global currencies. A brief guide to offshore RMB 7

Deutsche Bank is also able to provide customised RMB trade solutions to optimise costs and gain efficiencies for your cross-border trade financing needs. Q: What RMB cash management products are available? You can manage your offshore RMB in much the same way as other global currencies. RMB accounts offer the same basic services you would expect of any other cash account, including overdraft facilities (subject to approval), interest enhancements for offshore deposits and fixed deposit facilities. Term deposits as well as Deutsche Bank s electronic cash management and FX trading products are also available for all CNH transactions. You can manage your RMB cash balances with cash sweeping, including zero and target balancing services. Q: Can I conduct RMB inter-company crossborder lending from Mainland China to offshore? Yes. In accordance with the PBOC Circular dated July 2013, Mainland Chinese entities are allowed to extend RMB inter-company loans to their offshore parent companies, subsidiaries and affiliates. This has enabled companies to send onshore liquidity outside Mainland China, making RMB a viable currency for regional treasury management. Deutsche Bank is among the leading banks to execute RMB inter-company cross-border lending. Our cash management system can achieve automated sweeping to enable straightthrough processing of cross-border RMB payments. Q: Can I send RMB payment instructions to Deutsche Bank via electronic channels? Yes. Your existing agreed channels for payment instructions with Deutsche Bank, such as electronic banking, host-to-host or paper instructions, are also available for RMB payments. Q: Are all banks in Mainland China eligible to provide RMB cross-border trade settlement services? No. Only qualified commercial banks in Mainland China that have been approved by the PBOC upon inspection on the readiness for RMB cross-border trade settlement business, such as Deutsche Bank, are eligible to provide such services. Financing Q: What is the process for issuing a CNH bond and how long does it take? Issuing a CNH bond follows much the same process as any other offshore bond transaction and typically takes around eight weeks. Obtaining a rating issue is an important step as rated bonds typically pay a much lower yield than non-rated deals. A more detailed timeline with step-by-step requirements for issuing a CNH bond can be found on page 18. Q: What trust and agency services are available for my CNH bond? Deutsche Bank can provide the full range of trustee and agency services for CNH bonds cleared through Euroclear/Clearsteam and the Central Moneymarket Unit (CMU). We can also act as a facility and security agent for CNH loans in China and Hong Kong, as well as providing agency services for escrow accounts in Hong Kong, Shanghai, Beijing and Guangzhou. Q: Who are the main issuers of CNH bonds? The CNH bond market is truly international, with borrowers from 28 different countries (excluding China, Hong Kong and Macau) issuing bonds as of February 2014. Financial institutions and corporations are the largest issuers, accounting for around 85% of all outstanding bonds. Q: Who buys CNH bonds? Investors include institutional asset managers, insurance companies, banks, hedge funds, pension funds and high-net worth retail investors from within Asia and outside the region. The number of RMB-dedicated funds in Hong Kong continues to grow while the first investable CNH bond index (Deutsche Bank s Offshore Renminbi Bond Index Tracker S&P DB ORBIT) provides investors with a passive investment option for the first time. Q: What can I expect to pay for my CNH bond and how does this compare to financing costs onshore? While yields on CNH bonds have tracked higher, largely because of improved credit work on the part of investors and greater RMB volatility, they still present a cheaper cost of funding compared to onshore CNY loans. Deutsche Bank estimates the average yield on BBB and above-rated issuers for outstanding three-year bonds is 3.95% (as of February 2014), while the best-case 3-year loan rate set by the PBOC is 6.4%. 8 A brief guide to offshore RMB

Q: Can I use proceeds from a CNH bond issue to fund onshore subsidiaries? Using proceeds from a CNH bond issue to fund subsidiaries or invest onshore was made easier after the introduction of new foreign direct investment (FDI) rules by China s Ministry of Commerce and PBOC in October 2011. The new rules provide clarity on the use of FDI channels for transferring CNH into China, including buying or setting-up new companies, making shareholder loans or transferring equity stakes. Previously, the transfer of proceeds was approved on a case-by-case basis. Deciding whether to use an intercompany loan or transfer capital as an equity stake has its own considerations. The key benefit of an equity capital injection is the relief of an onshore subsidiary s borrowing limits, although there is a withholding tax of up to 10% on dividend remittance. Intercompany loans however after being registered with SAFE do not require regulatory approval for debt servicing. A more detailed overview of the remittance process can be found on page 17. Q: What financing alternatives are available through the CNH market? Using an intercompany loan structure with a cross-currency swap (CCS) may result in cheaper overall funding costs compared to onshore loans and a potentially quicker way to obtain financing compared to a CNH bond issue. This structure sees a parent company swap EUR or USD principal for CNH, which can then be transferred to the onshore subsidiary via an intercompany loan. The parent will receive a flat Euribor or Libor rate that reflects their funding costs, while paying a flat rate on their CNH loan. The subsidiary meanwhile services the cost of the CNH loan directly with the parent, returning the principal on the maturity date. To find out the latest pricing on such a structure, please contact your Deutsche Bank representative. Q: How do I manage FX and interest rate risk in CNH? USDCNH FX forwards are a common tool to manage FX risk, with trading volumes of around USD5bn per day. Liquidity is mostly concentrated in tenors of 3 months to 1 year, although Deutsche Bank can provide liquidity out to 10 years for CNH FX swaps and forwards. FX options are also available. Liquidity in this market continues to grow, with daily volumes currently around USD7bn and tenors of 1 month to 1 year (although tenors out to five years are possible). Both vanilla and complex options are traded in the CNH FX option market, and we believe growing participation by corporations this year with real FX hedging demand has set the trend of CNH options gradually substituting NDF options as the dominant offshore RMB option market. While an interest rate swap market for USDCNH exists, it is fairly illiquid. Interest rate risk can instead be managed by the cross-currency swap market, where tenors from 3 months to 10 years are available. Deutsche Bank estimates daily trading volumes in USDCNH CCS at around USD4-5.5bn. A brief guide to offshore RMB 9

FAQs for investors and financial institutions The CNH market provides investors with a range of products from which to gain exposure to the Renminbi. CNH credit market Q: How diverse is the CNH bond market and where is secondary market activity most concentrated? The CNH bond market comprises a diverse range of credits, from local Asian corporations to large multinationals, sovereign and state-owned names and supranational entities. Issuers from 28 countries have issued CNH bonds to date, with banks and corporations both active. The majority of CNH bonds are unrated, however increased participation by foreign issuers as well as greater discernment on the part of investors have seen rated deals take a greater share of the new issue market. Given demand for CNH assets outstrips supply, investors have tended to adopt a buy-and-hold approach. Monthly trading volumes have hit as high as USD9bn, according to Deutsche Bank estimates, with tickets as large as USD500m for CNH spot. Trading activity has picked up in-line with the improvement in global risk sentiment seen in the third quarter of 2013. Q: Can I use my CNH to invest onshore in China? Yes. In 2013, policy makers accelerated the pace of liberalising capital account control by upsizing the RMBQFII quota to RMB270bn from RMB70bn in Hong Kong, launching RMB QFII in Singapore and London with initial RMB50bn and RMB80bn quotas, respectively, and increasing the QFII quota from USD80bn to USD150bn. Investment can be made through an approved fund manager with access to a quota under the Renminbi Qualified Foreign Institutional Investor scheme. In addition to traditional fund options, investors can now also gain access to onshore China-listed stocks via ETF products. Q: Who are the main issuers of CNH bonds? The CNH bond market is truly international, with borrowers from 28 different countries (excluding China, Hong Kong and Macau) issuing bonds as of February 2014. Financial institutions and corporations are the largest issuers, accounting for around 85% of all outstanding bonds. Q: Who are the main investors in CNH bonds? Investors include institutional asset managers, insurance companies, banks, hedge funds, pension funds and high-net worth retail investors. Institutional asset managers hold the bulk of outstanding CNH bonds, with banks and private banks the next largest market participants. 10 A brief guide to offshore RMB

CNH FX market Q: Is there an active CNH FX spot and forward market? Liquidity in the offshore RMB market continues to grow, fueled by rising levels of RMB crossborder trade and the continued expansion of the CNH bond market. Daily spot trading volume is roughly USD3.5-4bn as of the end of 2013, almost doubling from USD2bn a year prior, and up from zero in July 2010. The CNH FX option market has seen daily turnover of about USD7bn in 2013, surging to 700 times 2010 levels, surpassing traditionally large regional FX option markets such as the KRW, MYR and TWD. and has become the most actively traded FX option in the Asia offshore currency options market. Both vanilla and complex options are traded in the CNH FX option market, and we are seeing CNH options gradually offsetting NDF options as the dominant offshore RMB option market. Liquidity is largely concentrated in tenors of 1 month to 1 year, however exposure out to 5 years is available. The structured CNH FX products market has also developed rapidly, and exporters and investors alike can create a range of tailored products to either manage FX risk or gain exposure to the currency. You can trade CNH via Autobahn, Deutsche Bank s electronic trading platform, as well as DBHK <GO> on Bloomberg. Daily spot fixing in USDCNH is provided by Hong Kong s Treasury Markets Association and can be accessed via CNHFIX on Reuters. Q: What is liquidity like in the CNH FX Options market? Daily trading volumes in USDCNH FX options have grown significantly. We estimate the daily turnover averaged about USD7bn in 2013, 700 times the 2010 level, implying a 780% annual growth rate in the past three years. Liquidity is largely concentrated in tenors of 1 month to 1 year, however exposure out to 5 years is available. Growth in USDCNH FX options has led to a structured FX forward market, where investors can create a range of tailored products to either gain exposure to CNH or manage risk. Q: Who are the key participants in the CNH FX market? The bulk of activity in USDCNH stems from cross-border trade and investment settlement,where volumes reached RMB4.6trillion in 2013, up by 57% over the previous year. Average monthly RMB crossborder trade settlement volume between China and Hong Kong reached RMB320bn in 2013, and in Taiwan monthly RMB trade settlement grew by 844% from market launch in February 2013 to December 2013, when it reached RMB323bn. Alongside this, the growing CNH credit market and broader investor participation in the CNH spot, FX forward and FX options markets has helped to underpin liquidity. Continued financial market liberalisation and official relaxation around the trading of CNY presents investors with more opportunities to express a view through short-dated FX products. Q: Can I deposit my CNH with Deutsche Bank? Yes. Current, structured and time deposits are available. Q: How do I open a CNH account and do any restrictions apply? Opening a CNH account is easy to do and follows the same process as with any other bank account. Your account can be used to hold CNH cash on time deposit, structured deposit or for general investment purposes, including securities settlements. Converting your CNH to other currencies offshore is unrestricted, however transferring CNH onshore to China is subject to regulatory approval. Transfers for trade-related purposes, foreign direct investment and inter-company loans is allowed while a Qualified Foreign Institutional Investor scheme allows investors to apply for a quota to buy securities onshore in China using CNH. A brief guide to offshore RMB 11

Clearing and settlement Q: What do I require to settle CNH bonds? You just need to open a security account with Deutsche Bank s Direct Securities Services team, which provides a wide range of custody and settlement services, including CNH listed and traded products such as CNH bonds. The issuer must be set up with either Euroclear or CMU in order to settle in CNH. Q: Can CNH bonds be settled via Euroclear and in USD? Yes. Settlement for CNH bonds via Euroclear is available and offered by Deutsche Bank Direct Securities Services. CNH bonds can be settled in USD or in any agreed major currency of your choice. Q: Would RMB payment clearing services contain both treasury and commercial payments? For purely offshore RMB transactions both treasury and commercial payments are possible in MT103 and MT202 format. For cross-border transactions into China only commercial payments apply. Q: Do I need to provide any documents for banks to check on the eligibility of RMB trade payments? It depends. For RMB payments between two offshore counterparties and offshore FX conversion, no document checks are required. However, for onshore FX conversion conducted for eligible cross-border RMB trade settlement transactions between an offshore corporate entity and a Mainland China corporate entity, banks may request supporting documents such that they can have reasonable assurance on the genuineness of the underlying cross-border trade transaction. 12 A brief guide to offshore RMB

RMB road map What do you need to consider before adopting the RMB? Consideration Understand the offshore RMB market Assess your requirements Evaluate the benefits Evaluate benefits for your suppliers/customers Engage banking partners and share your objectives Establish viable RMB policies and strategies Enable back-end support systems Start negotiation with counterparties on a pilot basis Keep informed Remarks Take some time to understand the drivers behind the CNH market. This is important for determining your suitability for becoming RMB capable, as well anticipating future market and regulatory developments. Are you currently paying for goods and services in China, or are you remitting RMB out of China? If so, using CNH for these transactions may save you time and costs associated with FX conversion and regulatory approvals required to bring foreign currency onshore. Think about which FX flow model suits you best and what financial benefits becoming RMB capable will bring. Start by getting familiar with spot CNH USD and EUR cross rates as well as onshore FX dynamics. Can you reach a better price with your suppliers and customers by pricing goods in RMB? CNH banking services are widely available, yet it is important to find the right partner who can give you the advice and products you need. Establishing a group strategy and policy for RMB transactions will help you maximise the benefits in using the RMB. Ensure your systems can support a new currency. Starting small is recommended. You can test your systems by carving out small batches of invoices or a small business segment and try settling in RMB for a short period of time. This will provide a manageable volume to check your invoicing, sales contracts, payment terms etc are all working as they should be. The CNH market is developing at a rapid pace. Make sure you keep informed of the latest regulatory and market developments and the opportunities they can bring by subscribing to Deutsche Bank s CNH Market Monitor (page 27). A brief guide to offshore RMB 13

Debt capital markets The CNH bond market continues to grow and diversify. The CNH bond market has continued its considerable growth with 2013 recording the highest ever volume of issuance. Foreign issuers became more active, deal sizes and tenors grew, investors became more discerning, while the growing universe of outstanding bonds has made price discovery easier. New FDI rules introduced in March 2012 have made it easier for Chinese borrowers to issue CNH bonds and bring the proceeds onshore. Importantly, new rules governing RMB foreign direct investment (FDI) and offshore direct investment provide improved clarity over the remittance process. Deutsche Bank expects FDI to ultimately contribute RMB150-200bn of new bond supply each year. While many aspects of the CNH bond market mirror that of Asia s offshore G3 bond market, there are important differences new issuers should consider. These primarily relate to the remittance of CNH proceeds onshore and the comparative cost of funds compared to onshore bank loans. CNH bond issuance on the rise (RMB bn) RMB bn 280 240 200 160 120 80 refinancing. For shareholder loans, approval is dependent on the size of the foreign entity s allowable debt quota (up to 6x registered capital for local holding companies). Loans can be a simpler alternative, provided there is sufficient capacity under your approved debt quota, as they can be serviced without regulatory approval after registration with SAFE. Repatriating dividends offshore to service an injection of equity capital however typically requires strict local regulatory conditions to be met. Preference will be given to entities that already trade in RMB and therefore contribute to the cross-border trade settlement scheme. Remittance for trade purposes does not require regulatory approval. What can you expect in terms of price, size and tenor? Deal sizes of RMB1bn are common, while most tenors are at three years. Higher-rated issuers can issue debt out to five or even seven years and across multiple tranches. Pricing of course varies, however Deutsche Bank estimates the average yield on BBB and above-rated bonds is 3.95% (February 2014), This compares to the official 6.4% 3-year onshore loan rate set by the People s Bank of China. 40 0 2008 2009 2010 2011 2012 Source: Bloomberg Finance LP, Deutsche Bank 2013 CNH deal sizes 500m - 1bn Less than 500m Remitting proceeds what influences the approval process? This depends largely on the type of remittance: an injection of equity capital, a CNH shareholder loan, or remittance for trade purposes. Approval for equity capital injections are typically dependent on the funds being used as new capital, rather than for 29 36 % 30 5 3bn + 1bn - 3bn Source: Bloomberg Finance LP, Deutsche Bank A brief guide to offshore RMB 15

CNH bonds by issuer Quasi / SSA 8 24 % 68 Corporate Financial Source: Bloomberg Finance LP, Deutsche Bank Who buys CNH bonds? Investors include institutional asset managers, insurance companies, banks, hedge funds, pension funds and retail investors. First attracted to CNH assets by the prospect of RMB appreciation, investors now also value the diversification benefits of CNH bonds as the market grows to include more international credits. The number of RMB-dedicated funds in Hong Kong continues to grow, while the first investable CNH bond index (S&P DB ORBIT) provides a passive investment option in a range of currencies for the first time. CNH bonds by geography Hong Kong Europe Korea 2% 14 % 5 7 72 Who issues CNH bonds? The CNH bond market is truly international, with borrowers from 28 different countries (excluding China, Hong Kong and Macau) issuing bonds as of February 2014. Financial institutions and corporations are the largest issuers, accounting for around 85% of all outstanding bonds. Others China Source: Bloomberg Finance LP, Deutsche Bank CNH deal tenors 1Y 7Y+ 5Y 3Y 5 5 15 24 % 51 2Y Source: Bloomberg Finance LP, Deutsche Bank * Excludes CDs which are mainly tenors of 1yr & in How well received is my bond likely to be? Offshore RMB continues to grow its depth and liquidity with Singapore and Taiwan now providing clearing and trading services, for CNS and CNT respectively. In addition, an RMB bond market in London has begun to develop since 2012 as a number of commercial banks have successfully placed RMB bonds in the London market. We see significant growth potential for offshore RMB business in Europe (London and Frankfurt) in the next few years supported by large volumes of bilateral trades and cross border investment between China and Europe and strong asset diversification demand by European investors. With many experts predicting RMB to become the fourth member of the G4 currency group, this market is becoming a more attractive, diversified funding channel for global corporate entities. 16 A brief guide to offshore RMB

Remitting proceeds what influences the approval process? This depends largely on the type of remittance: an injection of equity capital, a CNH shareholder loan, or remittance for trade purposes. Remittance for trade purposes does not require regulatory approval. Approval for equity capital injections are typically dependent on the funds being used as new capital or working capital funding. For shareholder loans, approval is no longer required but a filing with SAFE is now the standard procedure and the amount subject to the foreign debt quota of the Foreign Invested Entity ( FIE ) (up to 6x registered capital for local holding companies). Loans can be a simpler alternative, provided there is sufficient capacity under your approved debt quota, as they can be serviced without regulatory approval after registration with SAFE. Repatriating dividends offshore to service an injection of equity capital however typically requires strict local regulatory conditions to be met. Preference will be given to entities that already trade in RMB and therefore contribute to the cross-border trade settlement scheme. CNH Capital Injection CNH shareholder loan Volume Regulatory approval Funding usage Timing to receive funds Capital injections (including size) require the approval of MOFCOM MOFCOM Approval SAFE Filing Working Capital Capex Investment Refinancing onshore or offshore loan Potential time consuming regulatory approval process on capital injection, and FCY conversion into RMB Maximum size of shareholder advance is determined by the FIE s unused Foreign Debt Quota SAFE Filing Subject to Borrowing Gap Working Capital Capex Investment Refinancing onshore or offshore loan Potential time consuming regulatory approval process on fund transfer and FCY conversion into RMB Repayment & Tax Currency risk Withholding tax on dividend repatriation: up to 10% (ultimate tax rate depends on nationality) Tax rate may be reduced to 5% for Hong Kong counterparty. Hong Kong entity needs to demonstrate real business operations Depending on currency pair of FDI and actual utilisation Withholding tax on interest payments: up to10% Business tax can vary Depending on currency pair of offshore loan and actual utilisation Currency risk hedging Allowed onshore Allowed onshore Key benefits Capital injection enables entity to increase its Foreign Debt Quota with the increase of equity base Issuers will not rely on dividends for debt servicing Once the intercompany loan is registered with SAFE, any debt servicing will be allowed automatically A brief guide to offshore RMB 17

Typical timeline for a CNH bond transaction (first time issuer) Action Steps Kick-off meeting with all professional parties Regulatory approval process Due diligence & preparation of documentation Issue rating process (if required) Preparation of marketing materials Completion of preparation process Announce transaction Roadshow Pricing and signing Settlement and closing Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Weeks 1-4 Appoint Lead Manager Appoint and Lead other Manager professional and other parties professional parties IS Kick-off remittance Kick-off process remittance - liaise with process MOFCOM, - liaise PBOC with and MOFCOM, SAFE PBOC and SAFE IS, LM Commence due diligence session Commence due diligence session All Commence issue rating process (if required) and obtain issue rating Week 5 Preparation of supplemental Commence offering issue rating circular process ("SOC"), (if required) principal documents and obtain ("PD" issue - rating subscription agreement, pricing supplement, trust deed, dealer agreement), legal opinions and comf ort letters IS, LM, RA Week 5 Preparation of supplemental offering circular ( SOC ), principal documents Week 7 Finalise all documentation ( PD - subscription agreement, pricing supplement, trust deed, dealer agreement), Prepare roadshow presentation legal opinions and comfort letters IFC Week 8 Obtain Chinese regulatory approval-in-principle Week 7 Roadshow commences, Finalise all release documentation of pricing guidance Announcement of transaction (subject to market conditions) Pricing of transaction IS, LM, IFC, UFC, LC, A Week 9 Closing and settlement (T+5 business days) Prepare roadshow presentation IS, LM Week 8 Obtain Chinese regulatory approval-in-principle IS Key Roadshow commences, release of pricing guidance IS, LM IS - Issuer LM - Lead Manager Announcement of transaction (subject to market conditions) IS, LM IFC - Issuer's Foreign Counsel Pricing of transaction IS, LM UFC - Underwriters' Foreign Counsel LC Week - Local 9 Counsels A - Auditors RA - Rating Agency Closing and settlement (T+5 business days) IS, LM Key IS - Issuer LM - Lead Manager IFC - Issuer s Foreign Counsel UFC - Underwriters Foreign Counsel LC - Local Counsels A - Auditors RA - Rating Agency Weeks 1-5 Week 6 Week 7 Week 8 Appoint Lead Manager and other professional parties IS Kick-off remittance process liaise with MOFCOM, PBOC and SAFE IS, LM Commence due diligence session All Preparation of supplemental offering circular ( SOC ), principal documents ( PD subscription agreement, pricing supplement, trust deed, dealer agreement), legal opinions and comfort letters IFC Commence issue rating process and obtain issue rating IS, LM, RA Finalize all documentation IS, LM, IFC, UFC, LC, A Prepare roadshow presentation IS, LM Obtain Chinese regulatory approval-in-principle IS Roadshow commences, release of pricing guidance IS, LM Announcement of transaction (subject to market conditions) IS, LM Pricing of transaction IS, LM Closing and settlement (T+5 business days, i.e. in week 9) IS, LM 18 A brief guide to offshore RMB

Credit market Offshore RMB bonds are the primary asset class for investors looking to gain exposure to RMB along with a growing range of internationally-recognised credits. Expansion of the fixed income market The size of the CNH bond market has grown significantly in the past two years, from around CNH60bn of bonds outstanding in January 2011 to nearly CNH560bn as of December 2013. Average monthly new issue supply since 2011 stands at CNH14bn with CNH195bn in 2013 (Bloomberg). Offshore RMB fixed income instruments outstanding (RMB bn) 700 600 500 400 300 200 100 0 CD outstanding Bond outstanding Jun-07 Feb-08 Oct-08 Jun-09 Feb-10 Oct-10 Jun-11 Feb-12 Oct-12 Jun-13 Source: Bloomberg Finance LP, Deutsche Bank Offshore RMB fixed income instruments annual net issuance (RMB bn) 350 300 250 200 150 100 50 0 CD Bond 2007 2008 2009 2010 2011 2012 2013 2014F Source: Bloomberg Finance LP, Deutsche Bank Growing range of maturities The offshore credit market has developed from being dominated by largely short-dated certificates of deposit to seeing longer-dated bonds over a range of maturities. While most issuance remains between 3-5 years, the introduction of high quality investment grade names has allowed maturities to extend up to the 30Y tenor. Offshore RMB fixed income market maturity profile (RMB bn) 70 60 50 40 30 20 10 0 <0.5Y <0.5Y-1Y 1Y-1.5Y 1.5Y-2Y 2Y-2.5Y 2.5Y-3Y 3Y-5Y 5Y-7Y 7Y-10Y 10Y-30Y Source: Bloomberg Finance LP, Deutsche Bank Secondary market trading Monthly trading volumes of offshore RMB bonds hit as high as RMB4bn in early 2013, before easing off in June as risk aversion experienced in global credit markets impacted Asia. With risk appetite improving in July, secondary market activity has begun to recover with monthly average trading volume at close to RMB2.5bn, according to Deutsche Bank estimates. The first investable CNH bond index - S&P DB ORBIT As well as trading individual bonds, investors can also gain exposure via S&P and Deutsche Bank s Offshore Renminbi Bond Index Tracker (S&P DB ORBIT) the market s first investable CNH bond index. S&P DB ORBIT is available in a range of currencies and in 2013 returned 4.10% to RMB based investors and 6.92% to USD-based investors. Visit DBCNH <INDEX> on Bloomberg for index performance in RMB, DBCNHA <INDEX> for performance in USD terms and DBCNHAY <INDEX> for index yields. S&P DB Offshore Renminbi Bond Index Tracker (S&P DB ORBIT) USD total returns 117 115 S&P DB CNH bond index (CNH total return) S&P DB CNH bond index (USD total return) 113 111 109 107 105 103 101 99 97 Jan-11 Jan-12 Jan-13 Jan-14 Source: Bloomberg Finance LP, Deutsche Bank A brief guide to offshore RMB 19

Foreign exchange and rates Three key markets exist for the RMB: onshore deliverable RMB (CNY), offshore deliverable RMB in Hong Kong (CNH), Taiwan (CNT), Singapore (CNS), and the offshore non-deliverable forward market for RMB. Liquidity in the offshore RMB FX market continues to build thanks to both growing levels of RMB cross-border trade and an offshore RMB bond market that s experiencing high levels of growth and increased diversification. Currency exposures can be managed via CNH FX forwards, FX options and cross-currency swaps. FX option turnover in particular has experienced substantial growth in 2013 and has become the most actively traded FX option in the Asia offshore currency options market, according to the BIS Triennial Central Bank Survey. Daily spot trading volumes in USDCNH now stand at over USD12 billion, up from zero in July 2010, and have long surpassed the daily trading volumes of the non-deliverable forward market. Daily spot fixing in USDCNH is provided by Hong Kong s Treasury Markets Association. RMB trade settlement grew by 58% YoY in 2013 RMB bn 800 700 600 500 400 300 200 100 0 Cross border RMB settlement: ODI+FDI Trade Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Source: Deutsche Bank What influences USDCNH and why does it diverge with the onshore rate? As a fully deliverable FX market, CNH is exposed to supply and demand dynamics. For most of 2013 strong demand for RMB exposure, driven by investor expectations for the currency s appreciation, saw USDCNH trade at a premium to the onshore CNY spot rate. This remains the case despite the recent weakness in Asian currencies. The strong performance of CNH has been driven by (1) ongoing lowering of USD-CNY fixing, (2) stronger data pulse in China and (3) strong cross border flows into China. CNH and CNY spot converging 6.40 6.35 6.30 6.25 6.20 6.15 6.10 6.05-100 -200-300 6.00-400 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Spot spread (RHS) USD -CNY spot USD -CNH spot Source: Bloomberg Finance LP, Deutsche Bank Ultimately, the onshore CNY rate continues to serve as a soft anchor point for USDCNH. While there are deviations from CNY, levels usually find their way back to an equilibrium as market participants move between the curves to find the most favourable rates. Over the longer term, demand for CNH will be primarily supported by rising levels of RMB trade and CNH asset creation, both of which have a clear growth trajectory. The ongoing change in regulations (such as the change in net open positions, expansion in RMB swaps between PBOC and HKMA and the introduction of a liquidity facility) will also ensure ample liquidity within the system and reduce volatility between the onshore and offshore CNY spot rates. Implied appreciation NDF vs. CNH market %, Implied RMB annuallised appreciation 0.0% -0.2% -0.4% -0.6% -0.8% -1.0% -1.2% -1.4% CNY NDF 400 300 200 100 1M 2M 3M 4M 5M 6M 7M 8M 9M 10M 11M 12M Source: Bloomberg Finance LP, Deutsche Bank CNH DF 0 A brief guide to offshore RMB 21

Onshore investment quota for foreigners and FDI to support demand for CNH assets Over the course of the past two years, the Chinese authorities have gradually opened up more cross border channels for RMB to flow in and out of China. In April 2012, the authorities introduced an RMB70bn quota to allow foreign investors to use RMB obtained offshore for investment into China s capital markets. Given the strong demand for CNY products as of July 2013, the authorities have expanded the quota by RMB200bn, making the aggregated quota size of RMB270bn. This sizeable increase in the quota further increases the demand for CNH. In addition, the ongoing removal of capital account barriers by the authorities and strong expectation of RMB appreciation (we expect 2-3% CNH appreciation in 2014) should continue to support cross border flows and drive demand for CNH. This is evident given the sizeable positioning foreign investors have in CNH relative to other Asian currencies. Risk management products in USDCNH The CNH FX market provides a number of familiar risk management products, including FX forwards, FX options, interest rate swaps, cross currency swaps and bespoke structured risk management products. While liquidity for some products is still small, like most aspects of the CNH market, growth is on a strong trajectory. The FX forward market for example now sees daily volumes of USD5bn equivalent per day and tenors from 3 months to 1 year. It has become a useful tool for corporations and investors alike to either manage FX risk or position for possible RMB appreciation. By comparison, the USDCNY NDF market currently has USD3bn of daily volume. Over time, the NDF market will likely cease to exist as market participants move to where liquidity is best. Deutsche Bank estimates average daily turnover in the CNH FX options market has grown substantially since 2011 from USD30m to USD7bn in 2013, with liquidity available in tenors from 1 month to 1 year. Growth in 2013 has been particularly strong, driven by structured flows. An interest rate swap market has also emerged, with fixing to the 3-month Shanghai Interbank Offering Rate (SHIBOR). The development in the CNH cross-currency swap (CCS) market since the start of 2013 has been remarkable, underpinned by three key features: market liquidity has improved significantly with daily turnover having grown from USD1.5-2bn in January 2013 to USD4-5.5bn currently (including FX swaps). In particular, daily turnover in the 2Y and longer tenors almost doubled from where it was in January 2013 to around USD400-500m as of February 2014; while the most liquid sector remains the three-year or shorter tenor, there is liquidity up to the 10Y tenor. more CNH bond issuance has brought along growing demand for corporate funding/ liability hedging; and more real money and hedge fund investors trade the CNH CCS curve for hedging or trading purposes. Deutsche Bank believes the CNH CCS curve has now evolved into the most important offshore RMB benchmark interest rate curve. Three main advantages of the CNH CCS market drive its substantial growth potential, in our view: with deliverability, the CNH CCS curve has now been actively used by market participants for real funding and hedging purposes; the CNH CCS market complements the existing offshore RMB interest rate derivatives market where Repo NDIRS and SHIBOR NDIRS are traded; and participants in the CNH CCS curve have become more diversified. Corporates, asset managers, banks, hedge funds and high net worth investors are the main players in the market. The balance between their flows determines the dynamic in the CNH CCS market. We believe the expansion in market participation has contributed to: higher turnover; a reduction in transaction costs, whereby the bid-offer spread of the most liquid tenor has narrowed from 5-10 basis points (bps) two years ago to 2-4 bps currently; and better risk distribution in the CNH CCS market. In our view, these positive developments in the CNH CCS market facilitate further growth in the depth of CNH cash, derivatives and structured products. 22 A brief guide to offshore RMB

A brief guide to offshore RMB 23

Transaction banking Rising use for trade and investment has made RMB the 7th largest international payments currency, 2nd largest trade finance currency and 9th largest FX currency in the world as of February 2014. (Source: SWIFT RMB Tracker, BIS) Widespread acceptance of the RMB in global trade settlement is the ultimate measure of success for the internationalisation of China s currency. Signs so far are encouraging. Monthly RMB cross-border trade volumes between Hong Kong and China exploded in 2013, up 48% from 2012 levels which in turn were 32% up on 2011 levels (HKMA). Global trade in RMB is also on the rise as growing numbers of corporations open RMB accounts in order to buy and sell goods in China. With no restrictions on transferring RMB between offshore accounts, converting offshore RMB to another currency, remittance onshore for trade settlement purposes, it has never been easier for foreign corporations with links to China to adopt the RMB. Defying recent volatility in overall global trade, strong and sustained redenomination of China trade into RMB 1200 1000 800 600 400 200 0 Q1 Q2 Q3 Q4 2010 QoQ decrease in total amount of China EXIM trade Q1 Q2 Q3 Q4 2011 EXIM denominated in RMB (RMB bn) Denominated in RMB % Q1 Q2 Q3 Q4 Q1 2012 2013 Source: SWIFT RMB Tracker, China Customs Statistics, PBOC Quarterly Monetary Policies Report 18% 16% 14% 12% 10% Treasury departments considering deploying RMB as part of their international treasury management and investment strategies need to be aware of the implications of the heightened pace of regulatory reform during 2013. Initiatives from China to encourage the use of RMB are gaining momentum. With the additional flexibility enabled by policy makers and increasing uptake by multi-national companies, the RMB is rapidly emerging as a treasury management currency, enabling corporates to save costs, improve efficiency, manage risk and enhance access to China. 8% 6% 4% 2% 0% To harvest these opportunities, it is critical to work with a partner bank that has a strong focus on enabling its clients success in the RMB space. A payments and FX powerhouse with a good grasp of the ever-changing regulatory environment with a full-suite of RMB solutions will be vital for guiding corporates intending to migrate payments to RMB and to realise the full extent of the burgeoning opportunities from RMB cross-border trade and investment activities. RMB cross-border lending an exit route for onshore liquidity Since July 2013, the People s Bank of China (PBOC) has allowed onshore Chinese companies to extend RMB intercompany loans to their offshore parent companies, subsidiaries or affiliates. This has enabled corporate treasuries to move RMB liquidity from onshore entities to offshore Regional Treasury Centres (RTCs). Apart from further enhancing the centralisation and standardisation of treasury operations, creating cost and time saving efficiencies, the policy is also conducive to risk management in FX hedging, trade financing and debt capital market (DCM) funding opportunities via the offshore RMB market. Simplified procedures for RMB trade settlement The aforementioned PBOC July announcement also vastly improved the efficiency of RMB trade settlement through the nationwide rollout of the Simplified RMB Cross-Border Payment Scheme (SRCP). RMB payments can be processed prior to documentary verification to enhance Straight-Through Processing (STP) and further automate cross-border payments. This has also better enabled corporates to integrate RMB into their Electronic Data Interchange (EDI) for expedited payments processing and treasury management. 24 A brief guide to offshore RMB

Making the most of RMB internationalisation As the regulatory environment has evolved, the RMB has become a more viable and effective currency for cross-border trade and investment. Corporates can make the most of RMB internationalisation through invoicing, paying, hedging, repatriating and financing in RMB (see Figure 1). Settling trade in RMB allows corporates to widen their supplier and customer base to include more Chinese companies who may have been previously inaccessible due to an unwillingness or inability to transact in a foreign currency. Furthermore, typical cost reductions of 2 3% can be negotiated, due to businesses in China factoring the reduction of FX risk and hedging costs into their price, thereby passing cost savings to their offshore trade counterparties. Deploying RMB as a treasury management currency Despite the generally-accepted benefits from using RMB, the crucial issue is implementation. Since USD and EUR have been the key currencies for trade settlement with China for decades, using RMB as a treasury management currency will necessitate changes to corporates existing treasury management, operating procedures, accounting valuation, as well as contractual arrangements for cross-border trade receivables and payables. These practical issues may create certain challenges during implementation. The role of a partner bank is to deeply understand the cross-border transaction mechanism of corporates, provide one-stop customised RMB solutions leveraging a full suite of cash, trade and FX products and services, as well as to provide full support and guidance for the global RMB transaction needs of corporate treasurers. Figure1. Making the most of the RMB internationalisation Pay in RMB (Save Costs) Not Considering Investments in China RMB FX (Manage Risk) Invoice in RMB (Enhance Access) Net Import from China Offshore RMB Financing (Raise working capital) Source: Deutsche Bank RMB Regional Treasury Centres TCs (Gain Efficiencies) Shanghai FTZ Existing / Considering Investments in China Net Export from China PBoC cross-border lending scheme (Repatriate onshore liquidity) Figure 2. Deploying RMB as Treasury Management Currency Suppliers / Buyers RMB Local Trade Settlement Subsidiary ON 1 Subsidiary ON 2 Onshore Offshore Offshore HQ Investment Projects Head Office RMB Entrustment Loan FCY Repatriation to Head Office PBoC Cross-Border Lending Scheme RMB Entrustment Loan China Treasury / Pool Head Regional Treasury Centre FCY Working Capital / Source of Repayment Subsidiary OF 1 Subsidiary OF 2 RMB Trade Settlement Cash Management Financing, Hedging Onshore Offshore Source: Deutsche Bank A brief guide to offshore RMB 25

Growing range of trade products and services The growth in cross-border trade between Hong Kong and China has led to the expansion of trade-related products and services that are commonplace in international markets. Today, whether it s the use of RMB in the form of import and export letters of credit, trade finance and cross-border payments or through cash and liquidity management, corporates can manage their entire trade lifecycle and payment processes through this dynamic currency. Relevance of RMB trade for both exporters to China and importers of Chinese goods There are multiple benefits to be achieved from invoicing and paying for products and services in RMB. Invoicing goods in RMB may result in: Growth in your client base, given the preference for Chinese importers to pay in RMB The ability to minimise FX exposures related to any RMB costs incurred in the sales process Eliminate costs associated with foreign FX conversion and regulatory approvals for funding onshore subsidiaries Reduce supply chain costs by recycling RMB received from sales to fund onshore operations Paying for goods in RMB may result in: A broader supplier base, given the preference for Chinese exporters to invoice in RMB More favourable and transparent pricing of goods Minimised FX risk by funding purchases with RMB Reduced supply chain costs Try comparing RMB and USD invoices Why not try comparing your costs of goods in USD, EUR and RMB terms to evaluate the benefits? 26 A brief guide to offshore RMB

Keeping informed Deutsche Bank is committed to keeping its clients informed on the latest developments in RMB internationalisation. Deutsche Bank s fixed income and foreign exchange strategy teams produce a fortnightly report, The CNH Market Monitor, which provides corporations and investors with insight and perspective on the latest regulatory reforms, market developments, financing conditions and other key factors influencing RMB internationalisation. To receive the report and keep informed, please contact our research team or speak with your Deutsche Bank representative: Linan Liu Greater China Rates & FX Strategist linan.liu@db.com +852 2203 8709 Perry Kojodjojo Asia FX Strategist perry.kojodjojo@db.com +852 2203 6153 Sameer Goel Head of Asia Rates & FX Research sameer.goel@db.com +65 6423 6973 Key contacts Debt Capital Markets Herman van den Wall Bake Head of Fixed Income Capital Markets, Asia herman.bake@db.com +65 6423 8581 Jacob Gearhart Head of Global Risk Syndicate, Asia jacob.gearhart@db.com +65 6423 5934 Andrew Stephen Head of Private Placements and Local Currency Issuance Asia andrew.stephen@db.com +65 6423 8554 Credit Market Vishal Goenka Head of Local Currency Credit Trading, Asia vishal.goenka@db.com +65 6883 0666 Foreign Exchange & Rates Jerry Li Head of FX and Rates Trading, Asia jerry.li@db.com +852 2203 8508 Beng-Hong Lee Head of Markets, China beng-hong.lee@db.com +86 (21) 2080 2801 Capital Markets & Treasury Solutions Oliver Brinkman Head of CMTS, Greater China oliver.brinkman@db.com +852 2203 8535 CNH Remittance Stephanie Miao Senior Relationship Manager, China stephanie.miao@db.com +86 (532) 5568 6886 Transaction Banking Joe Ng Head of RMB Payments and Product Management, Asia joe.ng@db.com +852 2203 8243 Venkatesh Somanathan Regional Head, Trade Finance Product Management, Asia venkatesh.somanathan@db.com +65 6423 6101 Trust and Agency Services Ivy Fung Head of Greater China Sales ivy.fung@db.com +852 2203 7887 Custody and Clearing Services Susanna Chan Head of Direct Securities Services, Hong Kong susanna-yk.chan@db.com +852 2203 7351 A brief guide to offshore RMB 27

28 A brief guide to offshore RMB

This presentation is for information purposes only and provides a general overview of the range of services offered by Global Transaction Banking of Deutsche Bank AG. The general information provided in this presentation is based on Global Transaction Banking Services as they may be offered to clients on the date this presentation was published 2014. This information is subject to change. This presentation and the general information on the services offered by Global Transaction Banking merely serve as an illustration; no contractual or non-contractual obligations on the part of Deutsche Bank AG or its subsidiaries, or liability claims against Deutsche Bank AG or its subsidiaries, can be derived from them. This document is intended for discussion purposes only and does not create any legally binding obligations on the part of Deutsche Bank AG and/or its affiliates ( DB ). Without limitation, this document does not constitute an offer, an invitation to offer or a recommendation to enter into any transaction. When making an investment decision, you should rely solely on any specific final documentation relating to a transaction and not the summary contained herein. DB is not acting as your legal, financial, tax or accounting adviser or in any other fiduciary capacity with respect to any proposed transaction mentioned herein. This document does not constitute the provision of investment advice and is not intended to do so, but is intended to be general information. Any product(s) or proposed transaction(s) mentioned herein may not be appropriate for all investors and before entering into any transaction you should take steps to ensure that you fully understand the transaction and have made an independent assessment of the appropriateness of the transaction in the light of your own objectives, needs and circumstances, including the possible risks and benefits of entering into such transaction. For general information regarding the nature and risks of the proposed transaction and types of financial instruments please go to www.globalmarkets.db.com/riskdisclosures. You should also consider seeking advice from your own advisers in making any assessment on the basis of this document. If you decide to enter into a transaction with DB, you do so in reliance on your own judgment. The information contained in this document is based on material we believe to be reliable; however, we do not represent that it is accurate, current, complete, or error free. Assumptions, estimates and opinions contained in this document constitute our judgment as of the date of the document and are subject to change without notice. Any projections are based on a number of assumptions as to market conditions and there can be no guarantee that any projected results will be achieved. Past performance does not guarantee or predict future results. This material was prepared by a Sales or Trading function within DB, and was not produced, reviewed or edited by the Research Department. Any opinions expressed herein may differ from the opinions expressed by other DB departments including the Research Department. Sales and Trading functions are subject to additional potential conflicts of interest which the Research Department does not face. DB may engage in transactions in a manner inconsistent with the views discussed herein. DB trades or may trade as principal in the instruments (or related derivatives), and may have proprietary positions in the instruments (or related derivatives) discussed herein. DB may make a market in the instruments (or related derivatives) discussed herein. Sales and Trading personnel are compensated in part based on the volume of transactions effected by them. DB seeks to transact business on an arm s length basis with sophisticated investors capable of independently evaluating the merits and risks of each transaction, with investors who make their own decision regarding those transactions. The distribution of this document and availability of these products and services in certain jurisdictions may be restricted by law. You may not distribute this document, in whole or in part, without our express written permission. DB SPECIFICALLY DISCLAIMS ALL LIABILITY FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL OR OTHER LOSSES OR DAMAGES INCLUDING LOSS OF PROFITS INCURRED BY YOU OR ANY THIRD PARTY THAT MAY ARISE FROM ANY RELIANCE ON THIS DOCUMENT OR FOR THE RELIABILITY, ACCURACY, COMPLETENESS OR TIMELINESS THEREOF. DB is authorised under German Banking Law (competent authority: BaFin - Federal Financial Supervising Authority) and regulated by the Financial Services Authority for the conduct of UK business. In the US this document is approved and or distributed by Deutsche Bank Securities Inc., a member of the NYSE, FINRA, NFA and SIPC. A brief guide to offshore RMB 29