Enter to the next phase of market liberation and integration to global markets

China Financial Market

Florence LeeHead of China Sales & Business Development - EMEA

HSBC Securities Services

Table of contents

China Capital Market Overview 03

Recent China Market Developments 07

Accessing China Market 13

Future Development 17

Disclaimer 19

Should you have any questions regarding the

materials, please contact Florence Lee at

florencemhlee@hsbc.com

2

3

China Capital Market Overview

< ! ► HSBC

China economy in a resilient

mode in terms of GDP

growth…

…along with increasing

pressure on CPI

…along with rising

forex reserves

Source: National Bureau of Statistics of China,

State Administration of Foreign Exchange

Inflation Rate (%) Value (USDbn) Foreign Exchange Reserve

Sustainable GDP Growth

CPI Strong Forex Reserves

8.3%9.1%

10.0% 10.1% 9.9%10.7% 11.4%

9.0%8.7%

10.3%

9.2%

7.8%7.7% 7.4%

6.9%6.7%

6.9% 6.9%6.8% 6.8%

0%

2%

4%

6%

8%

10%

12%

0.40.7

(0.8)

1.2

3.9

1.5

4.8

5.9

(0.7)

3.3

5.4

2.5

2.62.0

1.62.0

(2)

(1)

0

1

2

3

4

5

6

7

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

212286403

609818

1,066

1,530

1,946

2,3992,847

3,1813,310

3,8213,843

3,330

3,011

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

China Economic Overview

4

Source: Shanghai/Shenzhen Stock Exchange, Japan Stock Exchange, Hong Kong Exchange and Clearing Limited, Taiwan Stock Exchange

SZSE A share IndexSHSE A share Index

Market Cap (as of December 2017)

A-share Market Performance (as of December 2017)

8,650.71

28.03

6,209.63

4,349.41

1,071.67

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

China A-Share China B-Share Japan Hong Kong Taiwan

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

SHSE A Share SZSE A Share

In USDbn

China Securities Markets

5

Source: HSBCSource: HSBC, Bloomberg

China Bond Markets – Third Largest in the World

China bond market development (1997-2017)

Share of Different Bond Markets

Source: CCDC , SCH and CSDC website, end December 2017

Source: CCDC and SCH website, end 2017

6

Market Type

Outstanding

(RMBbn) Percentage

Interbank 64,551 85.39%

Exchange 101,65 13.45%

OTC 731 0.97%

Others 151 0.20%

7

Recent China Market Developments

< ! ► HSBC

Index Inclusion

8

Starting April 2019, to include Chinese RMB-denominated government and policy bank securities to the

Bloomberg Barclays Global Aggregate Index with a weight of 5.49% in 20 month phase.

Tracking AUM ~USD 2.5 trillion; potential flow seeking China bonds ~ USD 140 billion

Bloomberg-Barclays

Fixed Income Indices

Citi Fixed Income

Indices

Effective in Feb 2018, China onshore bonds are included to existing and newly created indices

Tracking AUM ~USD 2 trillion

Potential to include CIBM into the World Government Bond Index (WGBI)

JP Morgan Fixed

Income Indices

China onshore bonds placed under review for inclusion in JPM’s fixed income indices

Possible inclusion in JPM Government Bond Index – Emerging Markets (GBI-EM) and other investment grade

bond indices such as Emerging Market Bond Index (EMBI)

Tracking AUM ~USD 200 billion

Market estimated USD250+ billion of offshore deployment to China onshore bonds catalysed by index inclusion

Source: Market research reports, index providers, slide extracted from HKEX presentation in Q3 2017, latest Bloomberg announcement, HSBC Global Research Report

Last June, MSCI announced a 0.73% China A-share inclusion by two phases in May and August of 2018. This will

include 222 Large Cap companies which are accessible through the two stock connect programmes.

The MSCI Emerging Market Index is currently being tracked by cUSD1.6trn of global assets, about 15% of which

are passive funds. (initial fund inflow c. USD 17.5bn).

MSCI

FTSE Included China A-shares in its global benchmarks by launching two new transitional EM indices in May 2015.

Market estimated once 100% of A-shares are included over the next 5-10 years, foreign fund inflows to top cUSD500bn (cRMB3.5trn).

Bloomberg Barclays Index Inclusion - Timeline

Nov 2020May 2019Apr 201923 Mar 2017

Index Inclusion

Announcement

5.49% weighting

on Bloomberg

Barclays Global

Aggregate Index

1st Increment 5%

Total inclusion is

5% by April

1st Increment 5%

2nd Increment 5%

Total inclusion is

10% by May

1st Increment 5%

2nd Increment 5%

3rd Increment 5%

20th Increment 5%

Full inclusion, 100%

of the 5.49% weighting

completed

9

Source: Bloomberg News and HSBC Global Research Report as of March 2018

Announcement Indices

Potential

Inflow

~ $140 Bn

Methodology

increment each month

over 20 months period

• Delivery versus payment (DVP) settlement

• Block trading

• Clarification on taxations

Required

Enhancements

Tracking AUM

~ $2.5 Tn

Investment Scope

23 March 2018

5%

Weighting

Bloomberg Barclays Index Inclusion - Fact Sheet

386 lines, Chinese

Government Bond &

Policy Bank Bond

April

2019

Effective Date

Bloomberg Barclays Global

Aggregate Index

5.49%

10

Source: Bloomberg News and HSBC Global Research Report as of March 2018

The International

Monetary Fund (IMF)

decided to include

the RMB into the

Special Drawing

Right (SDR) basket,

effective on 1 Oct,

2016.

The European

Central Bank (ECB)

completed an

investment

equivalent to €500m

of the ECB’s foreign

reserves in RMB in

H1 of 2017

Central banks in

Europe including ,

France, Belgium, and

Slovakia held RMB

reserves. Germany

and Spain are

considering to

include RMB as

reserve currency.

World Bank issued

the first bond

denominated in SDR,

total 500m SDRs,

(roughly USD 700m)

Over 60

countries/regions

including Singapore,

ECB and Russia,

have included RMB

as reserve currency

Nov

2015

Jun

2017Jan

2018

Aug

2016

Oct

2017

Inclusion of RMB into the Special Drawing Right (SDR) basket

11

Source: various Reuters Report

Financial Market Liberalisation

Raise the cap on foreign ownership of

securities investment companies, fund

management companies (FCMs) and

futures companies via direct or

indirect investment to 51%.

Completely remove the cap in three

years after the implementation of

aforementioned measures.

Ease the 20% cap on a single foreign

investors’ stakes and 25% cap on

aggregated foreign ownerships of any

Chinese banks and asset

management companies.

Ease the cap on single or aggregated

foreign investors’ stakes in life

insurance companies to 51% in three

years.

Completely remove the cap in five

years.

Banks and AMs Life insuranceFinancial

companies

12

Source: 9th UK-China Economic and Financial Dialogue Policy Outcome paper

13

Accessing China Market

< ! ► HSBC

Multiple Direct Access Routes into China

14

QFII - Qualified Foreign Institutional Investor

RQFII - RMB Qualified Foreign Institutional Investor

Onshore

Access

Offshore

Access

(via HK)

Equity Market Bond Market

Stock Connect Bond Connect

QFII

RQFII

CIBM Direct

QFII

RQFII

Allocated RQFII Quota in RMB (billion), as of 27 Dec 2017

Total RQFII Quota: RMB1,740 billion

No. of RQFII markets: 18

Source: PBOC, CSRC and SAFE website

RQFII Markets Development

15

32.006

8.653

0

24

10.543

305.637

0

0

75.387

15.187

0.6

0

69.355

7

1.1

38.994

17.994

41.347

50

56

69.457

50

50

44.613

34.813

49.4

30

30.645

43

48.9

50

41.006

233.4

50

50

50

80

80

500

50

50

120

50

50

30

100

50

50

50

80

2500 50 100 150 200 250 300 350 400 450 500

Australia

Canada

Chile

France

Germany

Hong Kong

Hungary

Ireland

Korea

Luxembourg

Malaysia

Qatar

Singapore

Switzerland

Thailand

UAE

UK

USA

Allocated Unallocated

16.6

0

194.363

Building China Onshore Financial Investment Business

16

QFII

RQFII

CIBM

MRF

(Northbound)

Stock Connect

(Northbound)

Outbound

Inbound

QDII

QDLP

QDII Onshore

Public Fund

Private Fund

WFOE

Bond Connect

(Northbound)

17

Future Development

< ! ► HSBC

China - Capital Market Developments

Impact to International Asset Managers

Nov 2017

H1 2018

May 2018

H2 2018

Q4 2018

Foreign Ownership:

The China State

Council announced the

decision to further ease

access to China

financial industries for

foreign investors.

Bond Connect*:

Expect to see Bond

Connect

enhancements, such

as DVP solution, pre-

trade allocation, and

taxations.

MSCI EM:

China A-shares

inclusion into

MSCI EM

indices starting

in May with

0.73%

weighting, 222

lines of A-

Shares.

Bond Index

Inclusion*:

Potential China

bond inclusion

into major bond

indices: JPM,

FTSE Citi,

Bloomberg

Barclays.

ETF Connect*:

More likely to

launch between

HK and China,

expanding from

the current

Stock Connect

program.

Impact Analysis

Announcements and Market

Expectation*

Global asset managers

started to re-visit their

China Strategy such as

JV, WFOE and

distribution channels in

mid to long term.

Remove major barriers

to receive regulatory

approval to use Bond

Connect on regulated

funds, i.e. UCITS,

SICAV.

Estimated initial fund inflow

c. USD 17.5bn. Once 100%

A-shares (full) inclusion over

the next 5-10 years,

estimated foreign fund

inflows to top c. USD500bn

(c.RMB3.5trn), Stock

Connect & RQFII will be the

key channels.

Market estimated

USD250+ billion of

offshore deployment

to China onshore

bonds catalysed by

index inclusion.

Accelerate the ETF

development in both

markets, provide China

investors a new means

for diversification into

overseas assets, a new

distribution channel for

international ETF players

18

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