Fixed Income Global Research HSBC Offshore Renminbi Bond Index (CNH Index) The HSBC Offshore Renminbi Bond Index (CNH Index) tracks 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 Becky Liu Fixed Income Strategist The Hongkong and Shanghai Banking +852 2822 4392 beckyjliu@hsbc.com.hk Zhi Ming Zhang Head of China Research The Hongkong and Shanghai Banking +852 2822 4523 zhimingzhang@hsbc.com.hk Linus Fung Associate The Hongkong and Shanghai Banking +852 2822 4687 linusckfung@hsbc.com.hk View HSBC Global Research at: http://www.research.hsbc.com CNH index summary available at: http://www.hsbcnet.com/research/offsh ore-renminbi-bond-index Issuer of report: The Hongkong and Shanghai Banking Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it The index became part of HSBC s n Local Bond index under the China sector since April 2011. Five sub-indices were later launched in July 2012 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 2010. 1. HSBC Offshore Renminbi Bond Index (CNH Index) inclusion criteria Issuer Any government, financial institution, and corporate Type of instruments Bonds, certificates of deposit (CDs) Denomination currency Renminbi (RMB) Settlement currency Renminbi (RMB) Coupon type Fixed rate only Redemption type Bullet only Minimum amount outstanding RMB500m Maturity Minimum one year remaining to 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 to CMU) 2. Computation methodology Index base 31 December 2010 = 100 Return calculation Total return which includes capital gains, accrued interest and coupon reinvestments Weighting of individual bonds Total daily market capitalization Pricing Re-val prices quoted by the HSBC Renminbi bond trading desk at market closing time Business day Index is updated on every Hong Kong business day Coupon reinvestment Full amount of cash coupon payments will be held in cash intra-month, and will be reinvested 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 Available statistics 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
3. Index covers liquid portion bonds with remaining maturity 1yr in the market 4. Sector mix of HSBC Offshore Renminbi Bond Index Retail bonds 2% Others 14% Included in HSBC CNH Foreign bank 8% Foreign corp 19% CD 5% Supr 1% Sov ereign 21% PRC commercial bank 4% index 84% Chinese corp 32% PRC policy bank 10% 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 July 2012, the index covers 84% of total outstanding RMB settled and denominated bonds in nominal outstanding amount with remaining maturity greater than one year, and 86% of total institutional issues. 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 around 6pm HKT. In addition, a daily summary of the overall index is available on the HSBC Research website: http://www.hsbcnet.com/research/offshore-renminbi-bond-index. 5. Summary of overall index characteristics 6. Index return attribution since inception Tickers 12/31/2010 7/5/2012 Total Return in USD HCNHUSD 100.00 104.69 Total Return in RMB HCNHACUM 100.00 100.91 Avg Clean Price HCNHACP 100.00 96.59 Avg Duration (years) HCNHAD 3.00 2.89 Avg Yield (%) HCNHAY 2.28 3.92 Market Cap (RMBm) HCNHAMC 29,914.59 174,570.53 Avg Life (years) HCNHAL 3.23 3.18 Avg Coupon (%) HCNHAC 2.63 3.32 Return since inception Total return in USD 4.69% Total return in RMB 0.91% Return from FX 3.75% Return from Capital Gain -3.41% Return from Coupon 4.31% 107 105 103 101 99 97 95 Dec-10 Feb-11 Capital Loss Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 FX Coupon TR (RMB) TR (USD) Capital Gain 2
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 re-valuation price), and in USD terms will be 0.07% (versus 0.49% based on re-valuation price). And, 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 by adding another 1.5% during HSBC s regular weighting review at end 2011. As of July 2012, the index accounts for 2.46% of the overall ALBI index and 22% of the China sub-index. Sub-Indices Five sub-indices are available, with the same inception dates as the overall index. An additional characteristic average spread 1 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. 1 Average spread refers to spread over offshore China government bonds. 3
7. Total return of selected sub-indices 8. Average yields of selected sub-indices Total Return (RMB) 107 105 103 101 99 97 95 Average Yield (in %) 7.5 6.5 5.5 4.5 3.5 2.5 1.5 0.5 Jun-12 Apr-12 Feb-12 Dec-11 Oct-11 Aug-11 Jun-11 Apr-11 Feb-11 Dec-10 Jun-12 Apr-12 Feb-12 Dec-11 Oct-11 Aug-11 Jun-11 Apr-11 Feb-11 Dec-10 Gov t IG Ov erall NY & NR Gov t IG Ov erall NY & NR 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 inter-bank 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, 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 email to ensure the transparency of our index calculation. These prices offer much better accuracy than other pricing sources that are currently publicly available, and can be used for mark-to-market/re-valuation purposes. 4
Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Zhi Ming Zhang, Becky Liu and Linus Fung Important Disclosures This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means. This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice. Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products. The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results. 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. 5
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 08 July 2012, the distribution of all credit opinions published is as follows: All Covered Companies Companies where HSBC has provided Investment Banking in the past 12 months Count Percentage Count Percentage Overweight 139 22 58 42 Neutral 355 57 133 37 Underweight 133 21 43 32 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 www.hsbcnet.com/research. HSBC Legal Entities are listed in the Disclaimer below. Additional disclosures 1 This report is dated as at. 2 All market data included in this report are dated as at close 6 July 2012, 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. 6
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Global Fixed Income Research Team Steven Major, CFA Global Head of Fixed Income Research +44 20 7991 5980 steven.j.major@hsbcib.com Rates Europe Bert Lourenco Head of Rates Research, Europe +44 20 7991 1352 bert.lourenco@hsbcib.com Subhrajit Banerjee +44 20 7991 6851 subhrajit.banerjee@hsbcib.com Theologis Chapsalis +44 20 7992 3706 theologis.chapsalis@hsbcib.com Wilson Chin, CFA +44 20 7991 5983 wilson.chin@hsbcib.com Di Luo +44 20 7991 6753 di.luo@hsbcib.com Chris Attfield +44 20 7991 2133 christopher.attfield@hsbcib.com Johannes Rudolph +49 211 910 2157 johannes.rudolph@hsbc.de Sebastian von Koss +49 211 910 3391 sebastian.von.koss@hsbc.de André de Silva, CFA Head of Rates Research, -Pacific +852 2822 2217 andre.de.silva@hsbcib.com Pin-ru Tan +852 2822 4665 pinrutan@hsbc.com.hk Grace Qiu +852 2822 6569 gracetqiu@hsbc.com.hk Americas Larry Dyer +1 212 525 0924 lawrence.j.dyer@us.hsbc.com Jae Yang +1 212 525 0861 jae.yang@us.hsbc.com Pablo Goldberg Head of Global Emerging Markets Research +1 212 525 8729 pablo.a.goldberg@us.hsbc.com Bertrand Delgado EM Strategist +1 212 525 0745 bertrand.j.delgado@us.hsbc.com Gordian Kemen +1 212 525 2593 gordian.x.kemen@us.hsbc.com Victor Fu +1 212 525 4219 victor.w.fu@us.hsbc.com Alejandro Mártinez-Cruz +52 55 5721 2380 alejandro.martinezcr@hsbc.com.mx Credit Europe Ben Ashby Head of Credit Research, Europe +44 20 7991 5475 ben.ashby@hsbcib.com Lior Jassur +44 20 7991 5632 lior.jassur@hsbcib.com Dominic Kini +44 20 7991 5599 dominic.kini@hsbcib.com Laura Maedler +44 20 7991 1402 laura.maedler@hsbcib.com Remus Negoita, CFA +44 20 7991 5975 remus.negoita@hsbcib.com Anna Schena +44 20 7991 5919 anna.schena@hsbcib.com Peng Sun, CFA +44 20 7991 5427 peng.sun@hsbcib.com Pavel Simacek, CFA +44 20 7992 3714 pavel.simacek@hsbcib.com Alexander Rozhetskin +44 20 7992 3703 alexander.rozhetskin@hsbcib.com Raffaele Semonella +44 20 7991 3153 raffaele.semonella@hsbcib.com Dilip Shahani Head of Global Research, -Pacific +852 2822 4520 dilipshahani@hsbc.com.hk Zhiming Zhang +852 2822 4523 zhimingzhang@hsbc.com.hk Devendran Mahendran +852 2822 4521 devendran@hsbc.com.hk Philip Wickham +65 6658 0618 philipwickham@hsbc.com.sg Keith Chan +852 2822 4522 keithkfchan@hsbc.com.hk Becky Liu +852 2822 4392 beckyjliu@hsbc.com.hk Louisa Lam +852 2822 4527 louisamclam@hsbc.com.hk Yi Hu +852 2996 6539 yi.hu@hsbc.com.hk Crystal Zhao +852 2996 6514 crystalmzhao@hsbc.com.hk Linus Fung +852 2822 4687 linusckfung@hsbc.com.hk Alex Zhang +852 2822 3232 alexdzhang@hsbc.com.hk Americas Van Hesser Head of Credit Research, US Financial Institutions +1 212 525 3114 van.hesser@us.hsbc.com Robert J Schmieder Head of Latam Corporate Credit +1 212 525 4829 robert.j.schmieder@us.hsbc.com Mary Ellen Olson +1 212 525 0191 mary.ellen.olson@us.hsbc.com Sarah R Leshner +1 212 525 3231 sarah.r.leshner@us.hsbc.com Arjun Bowry +1 212 525 3119 arjun.bowry@us.hsbc.com