Hong Kong RMB Bond MarketHong Kong RMB Bond Market

Bank of China (Hong Kong)Bank of China (Hong Kong)Global MarketsGlobal Markets

Jan 2011Jan 2011

2

Overview of the MarketOverview of the Market

Increasing Number of RMB Bond Issues: a total of 31 issues by now.

Decent Issue Volume: the aggregate issue amount reached RMB 78.13 billion by now.

More Issuers: mainland China policy banks/commercial banks, mainland subsidiaries of HK financial institutions, HK and international corporate, sovereign, supranational

Variety of Products: both fixed rate and floating rate bond can be issued.

Extended Maturity: From the initial 2 and 3 years to recently 10 years.

Strong Demand: According to HKMA statistics, the total RMB deposit balance in HK stood at RMB 279.6 billion by the end of Nov. 2010. Most of issues in the past years were over subscribed by retail and institutional investors.

Policy Support: Both Central Government and HKSAR Government strongly support the development of the Hong Kong RMB Bond market.

Increasing Number of RMB Bond Issues: a total of 31 issues by now.

Decent Issue Volume: the aggregate issue amount reached RMB 78.13 billion by now.

More Issuers: mainland China policy banks/commercial banks, mainland subsidiaries of HK financial institutions, HK and international corporate, sovereign, supranational

Variety of Products: both fixed rate and floating rate bond can be issued.

Extended Maturity: From the initial 2 and 3 years to recently 10 years.

Strong Demand: According to HKMA statistics, the total RMB deposit balance in HK stood at RMB 279.6 billion by the end of Nov. 2010. Most of issues in the past years were over subscribed by retail and institutional investors.

Policy Support: Both Central Government and HKSAR Government strongly support the development of the Hong Kong RMB Bond market.

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Market Development Market Development –– Bond IssuanceBond Issuance

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The offshore RMB bonds markets had been originally limited to Chinese bank issuers to tap RMB funding in Hong Kong. On 11 Feb 2010, HKMA released Elucidation of Supervisory Principles and Operational Arrangements Regarding RMB business in Hong Kong. It set clear the following

No Restriction for Overseas IssuerNo Restriction on Investors

The growth of offshore RMB bond markets finally took off in 2010 and new types of issuers and structures have been emerging since.

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Market DevelopmentMarket Development -- Bonds Issuance Volume Vs. RMB DepositBonds Issuance Volume Vs. RMB Deposit

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BOCHK Arranged Non-BOCHK Arranged

Thanks to its unique position as RMB Clearing bank and well-rounded RMB related services, Bank of China (Hong Kong) takes the leading position in RMB bond markets.

RMB deposit in Hong Kong has been cumulated very fast along with the development of the offshore RMB market. We expect that RMB bond issuances will follow the suit to fulfill the big gap between investors demand and issuers’ interests to tap cheaper RMB funding.Source: HKMA January 2011

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A Snapshot of A Snapshot of Previous Previous IssuesIssues

Source: BOCHK

2009

Issuer Size(bn)

Tenor Coupon Issuer Rating(Moody / S&P)

Remark

CDB 5 2y 3.00% Aa3 / AA- First OffshoreEXIM 2 2y / 3y 3.05% / 3.20% Aa3 / AA-BOC 3 2y / 3y 3.15% / 3.35% A1 / A-

BANKCOMM 3 2y 3.25% A3 / BBB+EXIM 3 3y 3.40% Aa3 / AA-CCB 3 2y 3.24% A1 / A-BOC 3 2y / 3y 3.25% / 3.40% A1 / A-BEA 4 2y 2.80% NR / A- First HK FI's Mainland EntityCDB 2 2y 2.45% Aa3 / AA-CDB 1 2y Shibor+30bps Aa3 / AA-

HSBC 1 2y Shibor+38bps A1 / NRHSBC 2 2y 2.60% A1 / NRPRC 6 2y / 3y / 5y 2.25% / 2.70% / 3.30% Aa3 / AA- First SovereignHHI 1.38 2y 2.98% NR / NR First Corporate

Mcdonald's 0.2 3y 3.00% A2 / A First International CorporateBOC 5 2y / 3y 2.65% / 2.90% A1 / A-CDB 2 3y Shibor+10bps Aa3 / AA-ADB 1.2 10y 2.85% Aaa / AAA First Supranational

Sinotruk 2.7 2y 2.95% NR / NR First Mainland Non-financial InstitutionCDB 3 3y 2.70% Aa3 / AA-CRP 2 3y / 5y 2.90% / 3.75% Baa2 / BBB

CHM 0.7 3y 2.90% NR / NREXIM 5 2y / 3y 1.95% / 2.65% Aa3 / AA-CAT 1 2y 2.00% A2 / APRC 8 2y / 3y / 5y / 10y 1.60% / 1.00% / 1.80% / 2.48% Aa3 / AA- First Issue Using CMU Bid System

Galaxy 1.38 3y 4.625% NR / NR First Non-investment GradeVTB 1 3y 2.95% Baa1 / BBB First Foreign FICPI 0.8 5y 3.20% NR / NR

World Bank 0.5 2y 0.95% Aaa / AAASinochem 3.5 3y 1.80% NR / NR

IFC 0.15 5y 1.80% Aaa / AAA

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Policy ReviewPolicy Review

On 11 February 2010, HKMA released Elucidation of Supervisory Principles and Operational Arrangements Regarding Renminbi Business in Hong Kong.

With regard to the RMB funds that have flowed into Hong Kong, Participating AIs can develop RMB businesses based on the regulatory requirements and market conditions in Hong Kong, as long as these businesses do not entail the flow of RMB funds back to the Mainland.

RMB bonds: The range of eligible issuers, issue arrangements and target investors can be determined in accordance with the applicable regulations and market conditions in Hong Kong. Participating AIs can also provide their customers with related services such as account-opening, bond trading, custodial and financing in accordance with usual banking practices in Hong Kong. Bond issuance by Mainland entities will continue to be governed by the relevant regulations and requirements in the Mainland.

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Policy ReviewPolicy Review–– Implication on RMB Bond Implication on RMB Bond IIssued in HKssued in HK

No Restriction on Overseas Issuer: HK RMB Bond market is an off-shore market and is regulated according to Hong Kong Securities and Futures Ordinance. Only the Mainland issuers are subject to mainland authority’s approval.

No Restriction on Investors: The amended Clearing Bank Agreement broadened the investor base from participating bank to all overseas investor.

No Restriction on RMB Purchasing/Borrowing: the overseas investors can purchase or borrow RMB from any overseas financial institution which has available RMB for sale or lend.

Capital Repatriation back to Mainland China: subject to Mainland Authority’s Approval.

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Benefits of Issuing RMB Bond in Hong KongBenefits of Issuing RMB Bond in Hong Kong

Strong Demand: In August 2010, Hong Kong's RMB deposits grew substantially 25.8% to 130.4 billion and to 279.6 billion in November. On the other hand, RMB assets supply are limited, hence RMB bonds issued in Hong Kong are warmly welcomed by investors.

Alternative Funding Source for Mainland Operations : the major RMB funding sourcefor the foreign companies’ mainland China operation is bank loans which is tightly controlled. Issuing RMB bond in Hong Kong by the overseas entity of certain international corporate and repatriating the bond proceeds to mainland China as capital injection/shareholder loan will provide an alternative funding source for business development of the mainland China operations.

Relatively Low Cost of Funding: Because of the imbalance of RMB assets supply & demand in Hong Kong, RMB bonds issued in Hong Kong have a relatively lower funding cost on average than that issued on mainland China market, and is substantially lower than the lending rate in China.

Reducing FX Risk for China Operation: the RMB assets of the borrower will match its RMB liabilities, reducing the FX risk for China Operation. For capital injection, RMB capital injection into mainland China projects will also help overseas shareholder to avoid FX risk.

Good Publicity: All RMB bonds issued in Hong Kong so far have attracted huge public attention, enabling the issuer to build up a good image.

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Issuance Related FactorsIssuance Related Factors

Form of RMB Bonds : RMB bonds in Hong Kong can be issued in any form, either issued as bond or through EMTN/CD/CP program.

Documentation: RMB bond issued in Hong Kong is off-shore issuance and normally Euro-dollar bond documentation will be applied.

Tenor: currently 2 or 3-year RMB bonds are the most liquid sectors. 5-year or even longer sectors remains to be developed. Demands for longer term RMB assets starts to emerge.

Issue Size: for corporate issuer above investment grade, RMB 500 Million to RMB 2 Billion will be good size. Smaller or larger size can be considered.

Credit Rating: no compulsory requirement for RMB bonds issued in Hong Kong market.

Governmental Approval: for public issues, i.e. bonds offered to Hong Kong public, are subject to Hong Kong SFC approval. For private placement, such as bonds offered to professional investors/institutional investors or one-one-on private placement by international issuers, no governmental approval is needed.

Accounting Rules: no specific requirement.

Selling Restrictions: the distribution of RMB bonds issued in Hong Kong is subject to the restriction of Regulation S.

Form of RMB Bonds : RMB bonds in Hong Kong can be issued in any form, either issued as bond or through EMTN/CD/CP program.

Documentation: RMB bond issued in Hong Kong is off-shore issuance and normally Euro-dollar bond documentation will be applied.

Tenor: currently 2 or 3-year RMB bonds are the most liquid sectors. 5-year or even longer sectors remains to be developed. Demands for longer term RMB assets starts to emerge.

Issue Size: for corporate issuer above investment grade, RMB 500 Million to RMB 2 Billion will be good size. Smaller or larger size can be considered.

Credit Rating: no compulsory requirement for RMB bonds issued in Hong Kong market.

Governmental Approval: for public issues, i.e. bonds offered to Hong Kong public, are subject to Hong Kong SFC approval. For private placement, such as bonds offered to professional investors/institutional investors or one-one-on private placement by international issuers, no governmental approval is needed.

Accounting Rules: no specific requirement.

Selling Restrictions: the distribution of RMB bonds issued in Hong Kong is subject to the restriction of Regulation S.

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Use of Proceeds & Capital RepatriationUse of Proceeds & Capital Repatriation

The proceeds of RMB bond can be used for any purpose.

If the RMB bond proceeds will be repatriated to mainland China, it is subject to mainland approval:

1) For RMB Repatriation under Current Account

RMB bond proceeds can be used for the cross-boarder RMB trade settlement purpose. RMB payments to mainland exporter are subject to the Regulation on Cross-boarder RMB Trade Settlement on Pilot Basis, a policy which is published by PBOC on July 2, 2009 to encourage the RMB cross-boarder trade. Currently there are 20 provinces or cities on the list and the RMB cross-boarder trade settlement are subject to the standard approval procedure of SAFE (State Administration of Foreign Exchange).

2) For RMB Repatriation under Capital Account

Capital Injection: with the approval of SAFE and PBOC, the overseas entities can inject RMB capital into mainland China operation via FDI (Foreign Direct Investment) quota which is assigned by the Ministry of Commerce of PRC.

Shareholder Loan: with SAFE & PBOC approval, RMB bond proceeds can be lent as shareholder loan to mainland entities which have Investment-Capital Injection Balance (i.e. the balance between total projected investment amount and the injected capital) or foreign debt quota assigned by NDRC.

The proceeds of RMB bond can be used for any purpose.

If the RMB bond proceeds will be repatriated to mainland China, it is subject to mainland approval:

1) For RMB Repatriation under Current Account

RMB bond proceeds can be used for the cross-boarder RMB trade settlement purpose. RMB payments to mainland exporter are subject to the Regulation on Cross-boarder RMB Trade Settlement on Pilot Basis, a policy which is published by PBOC on July 2, 2009 to encourage the RMB cross-boarder trade. Currently there are 20 provinces or cities on the list and the RMB cross-boarder trade settlement are subject to the standard approval procedure of SAFE (State Administration of Foreign Exchange).

2) For RMB Repatriation under Capital Account

Capital Injection: with the approval of SAFE and PBOC, the overseas entities can inject RMB capital into mainland China operation via FDI (Foreign Direct Investment) quota which is assigned by the Ministry of Commerce of PRC.

Shareholder Loan: with SAFE & PBOC approval, RMB bond proceeds can be lent as shareholder loan to mainland entities which have Investment-Capital Injection Balance (i.e. the balance between total projected investment amount and the injected capital) or foreign debt quota assigned by NDRC.

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Major Issues to be Major Issues to be CConsidered onsidered –– Repayment Related FactorsRepayment Related Factors

Source of Repayment: If the RMB bond proceeds are approved by SAFE to repatriate, the mainland China end-user may wire RMB to the overseas issuer either in form of shareholder dividend or external debt interest/principle repayment as the case may be. The issuer may also convert other currency into RMB to repay the debt in Hong Kong. RMB conversion in Hong Kong is not restricted, but may be subjected to the limited market depth.

Tenor Match: currently the tenors of RMB bonds issued in Hong Kong remain to be short, which may not fit the need of capital injection or long-term working capital. RMB bond refinancing maybe an alternative.

Source of Repayment: If the RMB bond proceeds are approved by SAFE to repatriate, the mainland China end-user may wire RMB to the overseas issuer either in form of shareholder dividend or external debt interest/principle repayment as the case may be. The issuer may also convert other currency into RMB to repay the debt in Hong Kong. RMB conversion in Hong Kong is not restricted, but may be subjected to the limited market depth.

Tenor Match: currently the tenors of RMB bonds issued in Hong Kong remain to be short, which may not fit the need of capital injection or long-term working capital. RMB bond refinancing maybe an alternative.

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Documents preparation of RMB bond issuance (in the form of institutional placement) in Hong Kong requires around 4 – 6 weeks; The book-building period takes around 1 week.

Major Participants:─ The Issuer─ Lead Manager/Bookrunner, underwriters, Issuer’s Counsel, Underwriter’s

Counsel, Fiscal Agent, Issuer’s Auditors, Trustee (optional) , Rating Agency (optional)

─ Regulatory Bodies: Relevant Regulatory Bodies in the Mainland if cross boarder capital transfer is involved

*Note1：If the issue of cross-border funding transfer is involved, the approval from the Mainland regulatory bodies may be needed.

**Note2: Including Underwriting Agreement and Fiscal Agent Agreement, etc.

Obtain the internal approval

Submit relevant application to the Mainland regulatory bodies*

Start the project

Due Diligence

Prepare the prospectus and otherdocumentation**

Obtain the official approval from the Mainland regulatory bodies*

Book-building Period

Issue Date

Timeline for Institutional placementTimeline for Institutional placement

Road show

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Major Major Documents RequiredDocuments Required for RMB Bondfor RMB Bond

Prospectus

Underwriting Agreement

Fiscal Agent Agreement

Legal Opinion

Auditor’s Comfort Letter

Issuer’s internal approval

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Credentials Credentials -- No. 1 Lead Manager of RMB Bonds in HKNo. 1 Lead Manager of RMB Bonds in HK

From 2007 to 2010, BOCHK lead arranged 21 out of 31 HK RMB Bond issuance and is the leader in both primary and secondary markets.

From 2007 to 2010, From 2007 to 2010, BOCHK lead arranged BOCHK lead arranged 2211 outout ofof 3131 HK RMB HK RMB Bond issuance and is Bond issuance and is the leader in both the leader in both primary and secondary primary and secondary markets.markets.

RMB 3 B. 2y, 3yJoint Lead & BookrunnerSept. 2008

RMB 3 B, 3yJoint Lead & BookrunnerSept. 2008

RMB 3 B. 2yJoint Lead & BookrunnerJuly 2008

RMB 4 B. 2yJoint Lead & BookrunnerJuly 2009

2007

2008

2009 RMB 2 B, 2yJoint Lead & BookrunnerAug. 2009

RMB 6 B.2y, 3y, 5yJoint Lead & BookrunnerOct. 2009

RMB 1 B. 2yJoint Lead & BookrunnerAug. 2009

RMB 2 B. 2yJoint Lead Sept. 2009

RMB 5 B, 2yJoint Lead & BookrunnerJune 2007

RMB 3 B. 2y, 3yJoint Lead & BookrunnerSept. 2007

RMB 2 B, 2y, 3yJoint Lead & BookrunnerAugust 2007

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Credentials Credentials -- No. 1 Lead Manager of RMB Bonds in HKNo. 1 Lead Manager of RMB Bonds in HK

In 2010, BOCHK lead arranged 10 out of 15HK RMB Bond issuance and is the leader in both primary and secondary markets.

InIn 2010, BOCHK lead 2010, BOCHK lead arranged arranged 1010 outout ofof 1155HK RMB Bond HK RMB Bond issuance and is the issuance and is the leader in both primary leader in both primary and secondary markets.and secondary markets.

RMB1.38 B. 2ySole Lead & BookrunnerJuly 2010

2010 RMB 5 B. 2y, 3yJoint Lead & BookrunnerSept. 2010

RMB 2 B. 2yJoint Lead & BookrunnerOct. 2010

RMB 1.2 B. 10yJoint Lead & BookrunnerOct. 2010

RMB 2.7 B. 2yJoint Lead & BookrunnerOct. 2010

RMB 2 B, 3y /5yJoint Lead & BookrunnerNov. 2010

RMB 0.7 B, 3ySole Lead & BookrunnerNov. 2010

RMB 3 B, 3yJoint Lead & BookrunnerNov. 2010

RMB 5 B, 2y, 3yJoint Lead & BookrunnerDec 2010

RMB 8B.2,3, 5,10yJoint Lead & BookrunnerDec. 2010

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ContactsContacts

(852)2810 9515alexchen@bochk.comAlex Chen

(852)2537 0247pwong@bochk.comLaurence Wong

(852)2826 6380zhumin@bochk.comJeremy Zhu

(852)2826 6048tonywang@bochk.comTony Wang

(852)2826 6372yzwang@bochk.comYizhou Wang

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DisclaimerDisclaimerTo the extent that any information in the Material is identified as being indicative, you should note that such information is reflective of the terms as of the specified date and is based on current assumptions and market conditions under which BOCHK group believes an issuance might be carried out or a product offered. No assurance can be given that such an issuance could in fact be executed and no specific issuer is obligated to issue such an instrument. Although the information in this Material has been prepared in good faith from sources believed to be reliable, BOCHK group does not represent or warrant its accuracy, truthfulness and completeness. All estimates and opinions included in this Material constitute BOCHK group’s judgement as of the date of this Material and may be subject to change without notice. At any time, member(s) of the BOCHK group may act as distributor or market maker or otherwise be long or short of or have a financial interest in transactions described in this Material or the underlying securities.

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DisclaimerDisclaimer

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