ACCESSING AND TRADING IN

CHINA INTERBANK BOND MARKET AND FX MARKET

FOR FOREIGN PRIVATE SECTOR INVESTORS
March 2017
Table of Contents

1. Overview of the CIBM Direct Access Scheme

2. Opening up of Onshore FX Derivatives Market

3. Bond Trading and Settlement Process

4. Frequently Asked Questions

5. Standard Chartereds Credentials

Appendix A: An Overview of Chinas onshore FX market

Appendix B: An Overview of China Interbank Bond Market

Appendix C: An Overview of Interest Rate Swap in China

2
Overview of the CIBM Direct Access Scheme

3
Executive Summary

The Peoples Bank of China (PBoC) announced a significant expansion of foreign participation in Chinas
interbank bond market (CIBM) on 24 February 2016 , hereinafter referred to as the CIBM Direct Access
Scheme.

The detailed implementation rules were published by PBoC and SAFE on 27 May 2016, with immediate effect.
This marks the official opening of the CIBM to all global financial institutions.

The key implications of the implementation rules are as follows:

Major Implications

All offshore financial institution investors can now access the CIBM

Quota limits have been removed, investors can decide the scale of their investments

Approval requirement has been removed, only filing with PBoC Shanghai Head Office is required

Investment scope is broadened from cash bonds to bond lending, bond forward, forward rate agreement
(FRA), and interest rate swap (IRS) for hedging purpose

4
Investor Eligibility

Investor eligibility requirements

Foreign financial institutions including commercial banks, insurance companies, securities firms,
fund managers and other asset management entities, pension funds, charity funds, endowment
funds, and other medium-to-long term investors recognised by the PBoC

Established in accordance with relevant local laws

Has a sound management structure, internal control system and standard business practices

No violations of bond investment business in the most recent 3 years

The source of funds is legal

Have appropriate risk identification and management ability, understand and can bear the risk of bond
investments

The onshore agent banks have the discretion to assess the eligibility of medium to long term investors. The
agent banks are required to apply the due diligence principles of Know your Client and Know your business
to onboard an investor for trading in the CIBM

PBoC Shanghai will monitor agent banks on an on-going basis to ensure compliance

5
Eligibility Matrix
Overseas
Public Sector Offshore Private Sector
Eligibility Participating QFII/RQFII
Investors Clearing Banks Investors (Note 7)
Banks (OPB)
Cash Bond Yes Yes (Note 1) Yes (Note 1) Yes Yes
Bond Repo Yes Yes (Note 10) Yes (Note 10) No No
Bond Lending Yes Yes (Note 2) Yes (Note 2) No Yes (Note 8)
Products Bond Forward Yes Yes (Note 2) Yes (Note 2) No Yes (Note 8)
IRS Yes Yes (Note 2) Yes (Note 2) No Yes (Note 8)
FRA Yes Yes (Note 2) Yes (Note 2) No Yes (Note 8)
FX Derivatives Yes Yes (Note 3) Yes (Note 4) No Yes (Note 9)

Approval vs. Filing Filing Filing Filing Approval (Note 5) Filing

Requirements
Quota No No No Yes (Note 6) No

Note 1: Offshore Clearing Banks and OPBs are applied to use the CIBM Direct Access Scheme for onshore cash bond trading.
Note 2: Offshore Clearing Banks and OPBs can trade bond lending, bond forward, IRS and FRA under the CIBM Direct Access Scheme with hedging
purpose.
Note 3: Note 4: If Offshore Clearing Banks OPBs accessed CIBM under the CIBM Direct Access Scheme, they can tap the onshore FX market for bond
hedging. Otherwise, FX market is accessible only for position squaring of RMB FX transactions between the Offshore Clearing bank / OPB and their
clients, and conditional on the OPB fulfilling certain responsibilities (e.g. ensuring there is an underlying cross-border trade/investment transaction,
etc.).
Note 5: The approval applies to getting quota from SAFE while only filing is required for gaining access to CIBM.
Note 6: While the PBOC does not set a quota for QFII/RQFII trading bond spot in the CIBM, trading in the CIBM will still consume SAFE quota of the
QFII/RQFII.
Note 7: Under the CIBM Direct Access Scheme.
Note 8: The CIBM Direct Access Scheme has allowed for foreign private sector investors to access these instruments. However, no detailed implementation
rules released by PBoC.
Note 9: For private sector investors under CIBM scheme, they can do FX spot and derivatives transaction through bond settlement agent for the purpose of
onshore bond investment only.
Note 10:PBOC pre-clarification is necessary for Offshore Clearing Banks and OPBs trading Bond Repo.

6
Quota, Cross-border Remittance and Currency Conversion

Quota limit is removed

Investors can decide their investment amount at their own discretion. It is subject to filing rather than
Investment approval
Quota
Investors are required to indicate the investment size in the application form

Within 9 months upon the receipt of PBoCs filing confirmation, if the inflow amount is less than 50% of the
investment size as indicated in the application form, a separate filing needs to be submitted

Cross
Border
There is no restriction on cross-border remittance
Remittance

The inflow and outflow funds can be in RMB or foreign currencies (FCY)

For inbound investment to China, investors can choose to remit in RMB or FCY; FCY can be converted to
RMB onshore. For repatriation of funds, again investors can choose to remit in RMB or FCY; RMB can be
converted to FCY onshore before repatriating to the offshore
Currency
The ratio of cumulative inflow in RMB and FCY should be roughly the same as the ratio of cumulative
Conversion outflow in RMB and FCY (within a deviation of 10%)

First outbound remittance can be in CNY or FCY and is not subject to the same currency composition ratio
restriction, but the amount cannot exceed 110% of cumulative inflows of corresponding RMB or FCY
amount

The FX conversion must be conducted through the appointed onshore agent bank

Lock up

No lock-up period
Period

7
Illustration: Onshore FX Conversion
Scenario: Investment of RMB 100 equivalent from offshore to onshore, through SCBs bond settlement agency service

The ratio of cumulative inflow in RMB:FCY is 40%:60%

So RMB in the currency composition of the outflow would range from 36% (= 90% of 40%) to 44% (=110% of 40%). Therefore,
the ratio of cumulative outflow in RMB and FCY would fall within the range of 36%:64% and 44%:56%.

Offshore Onshore
RMB / USD ratio
CNH 40 CNY 40 = 40 / 60
RMB 100 investment
is transferred Onshore conversion from
USD to CNY
CNY 100
onshore
USD 8.8 USD 8.8 CNY 60
USD/CNY = 6.8

CNY repatriated first (within 10% deviation)

CNH 41.4 CNY 41.4 RMB / USD ratio
After 2 years,
= 36 / 64
investment value has USD 10.51 USD 10.51 CNY 73.6
grown to CNY 115
USD/CNY = 7.0 -OR- CNY 115

CNY repatriated first (within 10% deviation)

CNH 50.6 CNY 50.6
RMB / USD ratio
CNY 64.4 = 44 / 56
USD 9.23 USD 9.23

USD/CNY = 7.0
8
Opening up of Onshore FX Derivatives Market

9
Opening up of China FX Derivatives Market

On 24 February 2017, Chinas State Administration of Foreign Exchange (SAFE) released Circular [2017] No. 5, which is
another major step to attract foreign investment into its onshore fixed income markets, by allowing foreign private sector
investors to tap the onshore FX derivatives market for hedging their onshore cash bond positions.

The key implications of the implementation rules are as follows:

Major Implications

This is a significant opening of Chinas domestic financial markets to foreign investors. By the end of January 2017, over 410
foreign institutions/fund products have gained access to China onshore interbank bond market, including 58 public sector
investors.

Onshore FX hedging was previously only available to public sector investors (central banks, sovereign wealth fund, and
multilateral entities). Foreign private sector investors can now also access onshore FX derivatives markets for hedging purpose.
Given cheaper cost of hedging onshore, foreign participation in China onshore bond markets will likely increase.

The move will likely lead to convergence of onshore and offshore RMB FX forward rates.

With onshore FX hedging tools now available, index inclusion has become more probable. Bloomberg-Barclays index
announced the inclusion of CGBs to newly created indices, effective Mar 2017. China onshore bonds are still not eligible for the
inclusion in Bloombergs widely followed Global Aggregate Index. Citi also announced to include China onshore bonds to a
number of its existing emerging markets and regional government bond indices, effective Feb 2018. But the composition of the
flagship Citi index, the WGBI, remains unchanged.

Onshore bond settlement agent (BSA) can provide one-stop solution to their investor clients by offering bond settlement and
FX hedging.

10
Eligibility, Accessible Market and Products

All private sector investors that have gained access to the onshore bond market based on
PBoC Circular (2016) 3:
Foreign financial institutions including commercial banks, insurance companies,
securities firms, fund managers and asset management firms; the products issued by
above financial institutions as well as other medium-to-long term investors recognised
by the PBoC
Investor
Established in accordance with relevant local laws
Eligibility Has a sound management structure, internal control system and standard business
practices
No violations of bond investment business in the most recent 3 years
The source of funds is legal
Have appropriate risk identification and management ability, understand and can bear
the risk of bond investments

The accessible FX derivative instruments are those that are available in the onshore FX
derivatives market as described in Huifa (2014) 53. Instruments include FX forward, FX
swaps, cross-currency swap and options
Accessible

Investors can choose the hedging instruments at its discretion for a particular bond or a
Product bond portfolio

Based on actual hedging needs, BSAs can offer reverse trade for squaring, gross/net
settlement

Eligible investors can access the onshore OTC FX market, but not the onshore interbank FX
Accessible market
Market
Investors should access the onshore OTC FX market via their BSAs. This allows BSAs to
monitor that the FX position is in line of the bond holding position of the investors

11
Trade Counterparty, Size of Hedging and Cross-Border
Repatriation

Trade counterparty must be investors own bond settlement agent

All the FX hedging transaction must be conducted via the special foreign currency (FCY)
Trade
account, according to Huifa (2016) 12
Counterparty
The master agreement used for the FX derivatives transactions are to be agreed between
investors and their BSAs at their own discretion

Eligible investors can access FX market for hedging purpose. Therefore:

The FX derivatives position and onshore bond position should have reasonable
Size of Hedging correlation
If there is any change of cash bond exposure, investors are required to adjust their
FX hedging exposure within 5 working days

There is no restriction on cross-border remittance

Cross-border
The inflow and outflow funds can be in RMB or FCY
repatriation
The ratio of cumulative inflow in RMB and FCY should be roughly the same as the ratio of
cumulative outflow in RMB and FCY (within a deviation of 10%), as per Huifa (2016) 12

12
Bond Trading and Bond Settlement

13
PBoC Filing Process
Appoint Agent
Bank
Investors appoint one
of the eligible agent
banks (aka bond
settlement agent) for
filing with PBoC
Shanghai Head Office
Prepare filing
document
Agent banks serve as
gate keeper to choose
the right investors
Agent banks will work
with investors to
prepare filing
documents
Filing with PBoC
Shanghai and SAFE
PBoC Shanghai will issue
filing confirmation within 20
working days after
accepting the filing
application, and it is valid
for 3 months.
In practice, the filing
confirmation took 3
working days.
Account Opening
Account opening, including
opening of special FCY
account and RMB
settlement account, as well
as accounts with CFETS,
CCDC and SHCH (Note),
needs to be completed
within 3 months after the
filing confirmation by PBoC.

There are two sets of filing forms, one for Incorporated Entities and the other for unincorporated Entities.
Incorporated entities: For proprietary and managed account
Unincorporated entities: For investment product

For multiple products managed by one financial institution, separate filings should be made for each product.

Eligible investor needs to engage an onshore settlement agent bank for filing to PBoC Shanghai as well as trading/settlement
in the CIBM.

For investors that have obtained CIBM quota under the previous CIBM scheme, they do NOT need to conduct the filing again.
Their previous approved CIBM quota will automatically converted as their intended investment amount under the new
framework
14
Roles & Responsibilities CIBM GC Model
Appoint Global Custodian, Local Custodian and BSA Role Player Responsibilities
File with PBOC SH for investing in China
Interbank Bond Market
Global
Client Agreement: appointing Global Custodian, Local
Custodian
Custodian and Bond Settlement Agency
Client Place trade order in market according to
investment guidelines
Place settlement instruction according to the
China Local Custodian SLA arranged with GC
& Comply with relevant regulations
BSA
SCB China Provide cross border custody services
Global Provide required administrative services (if
Custodian
China Regulators required)

Assist market access filing with PBOC/SAFE

Client Related Legal Agreements Account opening with SCB China, CCDC,
Local SHCH, CFETS
a) A Global Custody Agreement between Client and Global Custodian Trade and Settlement of cash & securities
Custodian. & Cross-border funding & cash management
b) A CIBM Bond Trading and Settlement Agency Agreement BSA Injection & repatriation related FX conversion
between Client and SCB China , covering the local (SCB China) Quota monitor & regulatory reporting
custody services. (Custody supplementary document Value Added Services
varies upon GC & underlying clients requirement) Client Services

15
CIBM Trade & Settlement
Trading Models: SCB China provides 2 types of trading models:

Model 1: Trading with SCB and SCB is the bond settlement agent

Model 2: Trading with third-party and SCB is the bond settlement agent

SCB China will act as bond settlement agent to provide settlement and clearing services. The safe keeping of the
bonds will remain in the custody of China Clearing & Depositories Company for government and policy bank
bonds and Shanghai Clearing House for commercial papers and corporate bonds.

2
Place order on behalf
of clients
CFETS
1
Bond trading
instruction
Investor SCB China

3 CCDC/SHCH

Transfer client funds to

depository account,
settle bond delivery,
conduct data
reconciliation
16
CIBM Trade & Settlement Model 1 BSA & TCP

1. Negotiate Order,
We offer settlement cycle extension up to T+5

2.Place Order
(Bloomberg email, Tel, etc) SCB CN - 3. Order Execution
Investor Financial
4.2 Trade Confirmation Markets 4.1 Trade Confirmation
CFETS
9.2 Settlement
Confirmation
6.1 Settlement Inst.(MT54x) * 4.3 Trade Confirmation 5. Executed Data
11.2 Cash/Holding
Reconciliation & EOD Statement
(MT535/536/940/950) 7. Recon Inst. VS.
6.2 Settlement Inst.(MT54x) * CCDC /SHCH record

Global 9.1 Settlement SCB CN - 8. Conduct Settlement

Custodian Confirmation Operations
11.1 Cash/Holding 10. Cash/Holding
Reconciliation & Reconciliation Depository
EOD Statement CCDC/SHCH
(MT535/536/940/950)

CIBM Trading Hour 09:30~16:30

Settlement Cycle Spot Trading: T+0 or T+1

* Settlement Instruction Cut-off Settlement day: 14:00pm

Time (Either Direct or via GC)

17
CIBM Trade & Settlement Model 2 BSA
1. Negotiate Order

2.Place Order
(Bloomberg email, Tel, etc) SCB CN - 3.1 Order Execution 3.2 Order Confirmation
3rd party
Investor Financial
4.2 Trade Confirmation Markets 4.1 Trade Confirmation
CFETS
9.2 Settlement
Confirmation 6.1Settlement 5. Executed Data
11.2 Cash/Holding Inst.(MT54x) * 4.3 Trade Confirmation
Reconciliation & EOD
Statement
(MT535/536/940/950) 6.2Settlement 7. Recon Inst. VS.
Inst.(MT54x) * CCDC /SHCH record
Global 9.1 Settlement SCB CN -
Confirmation 8. Conduct Settlement 9.2 Conduct Settlement
Custodian Operations
10. Cash/Holding
11.1 Cash/Holding Reconciliation Depository
Reconciliation & EOD CCDC/SHCH
Statement
(MT535/536/940/950)

CIBM Trading Hour 09:30~16:30

Settlement Cycle Spot Trading: T+0 or T+1

* Settlement Instruction Cut-off Settlement day: 14:00pm

Time (Either Direct or via GC)

18
Frequently Asked Questions

19
Frequently Asked Questions Accessing CIBM

Q1: Is a branch eligible for the scheme?

A1: No, branch is not eligible as it is not a legal entity. Regulator only accepts one RMB special account against a legal entity name.
Application should be submitted in the name of its group company which is a legal entity according to PBoC Circular [2016]3.

Q2: Can the same entity gain access in two capacities: QFII (under QFII quota) and foreign institutional investors under the direct
access scheme (no quota)?
A2: Yes. But investors need to make separate registration with PBoC, open separate account with CFETS/CCDC/SHCH. Funds cant be
inter-transferrable between the two accounts.

Q3: How does SCB monitor the investment size to satisfy the requirements of inward remittance of 50% of intended investment
size within 9 months?
A3: The investment size shall be examined on a accumulated amount basis.

Q4: If a client fails to meet the 50% investment threshold within 9 months upon the receipt of PBoCs filing confirmation, does
client have to stop trading during the 20-day re-filing period?
A4: The client can continue trading during the re-filing period.

Q5: Can a client sit on cash, not necessarily invest in China interbank bond if windows not right?
A5: Yes, client shall have the flexibility of its investment activities. Regulatory reports (weekly, quarterly) on the investment status need to
be submitted to PBoC.

20
Frequently Asked Questions (contd) Accessing CIBM
Q6: Are there any restrictions on repatriation frequency?
A6: Investors are asked to provide their investment horizon in the application form. There should be legitimate reasons for more
frequent repatriation. PBoC will monitor the utilization of investment quota. Frequent large capital inflow / outflow should be avoided.

Q7: Any minimum or recommended size of investment capital to be stated in the application form? If clients were to put in a
relatively small amount, will this jeopardize their opportunity to receive an approval from PBoC?
A7: We would suggest client to invest based on the actual needs. Clients shall have the flexibility to adjust the investment scale.
However at the initial stage, PBoC prefers participants with certain investment scale.

Q8: In terms of account set up, is there any requirement to keep segregated account for their own fixed income trading desk
and for underlying clients?
A8: An RMB/FCY special account can be opened with the agent bank against each filing confirmation from the PBoC. If an investor
registers the CIBM access with Incorporated Entity (the legal entity of the investor), they can open only one special RMB account
for CIBM investment. We can support onshore sub-cash account (under special RMB account) structure if client requires the
segregation of its proprietary desk and underlying clients. However, there can only be one setup of CCDC/SHCH/CFETS for trading
and settlement purpose. Clients would need to provide narrative during the trade order placement and let us know which sub-account
is used for trade settlement, this will help us to clearly segregate your portfolio.

21
Frequently Asked Questions (contd) Accessing CIBM
Q9: When do we expect bonds in CIBM to be include in global bond index?
A10: There are three major global bond indices:

Citis WGBI: On 6 March 2017, Citi announced to include China onshore bonds to a number of its existing emerging
markets and regional government bond indices, effective February 2018. China will also be included (together with
Korea and Israel) to a newly created index the World Government Bond Index - Extended index (WGBI-extended).
But the composition of flagship Citi index, the WGBI, remains unchanged.

JPMs GBI-EM: The inclusion could happen in the next 2 to 4 quarters. AUMs tracking the GBI-EM index is around
USD180bn according to the index provider, and China will reach 10% eventually (1% each month and spread out in 10
months during inclusion). The index only includes CGBs as it is an EM government bond index.

Barcaps global diversified index: Bloomberg-Barclays index announced the inclusion of onshore China Government
Bonds (CGBs) and Policy Financial Bonds (PFBs) to two newly created indices on 24 January 2017. The two indices
combines the China component to its existing flagship Global Aggregate index, and EM Local Currency Government
Index, and will be launched 1 March 2017. Upon inclusion, China bonds weightings in new global aggregate index will
be c8.5%, and in new EM LCY government bond index will be 10% (capped, otherwise will be close to 40%). Still, China
onshore bonds are not eligible for the inclusion in the original Global Aggregate Index and the EM Local Currency
Government Bond Index.

Q10: What is the tax treatment under this CIBM Direct Access Scheme?
A11: The tax treatment for investment in CIBM bonds:

VAT on interest: Exempted for CGBs & municipals bonds only. 6% for other types of bonds

Withholding tax on interest: Exempted for CGBs & municipals bonds only. 10% (or lower on DTT) for other types of
bonds

Capital gain tax: Exempted for all kinds of bonds

22
Frequently Asked Questions Accessing China FX Market
Q1: Does the new FX hedging scheme apply to QFII/RQFII investors?
A1: SAFE Circular 5 (allowing foreign private sector investors to conduct onshore FX hedging activities) does not apply to QFII/RQFII
investors if they access CIBM through QFII/RQFII route. However, if QFII/RQFII clients have also gained CIBM access via the Direct
Access Scheme, then they can conduct onshore FX hedging via that route.

Q2: A client converts USD into CNH in overseas markets and then injects into China to invest in CIBM (instead of injecting
USD from overseas and convert into CNY in China). Could such FX exposure be hedged onshore?
A2: Investors may convert USD into CNH in offshore markets, then inject the CNH funds into China for CIBM investment. The CIBM
investment is eligible for the onshore FX hedging, regardless of where you get the RMB funds from (China onshore or overseas).

The inbound and outbound currency composition ratio under SAFE Circular 12 (2016) would still apply, which requires the ratio of
cumulative inflow in RMB and FCY to be roughly the same as the ratio of cumulative outflow in RMB and FCY (within a deviation of
10%).

In relation to the onshore FX hedging of the CNH funds, banks can (1) settle the FX derivatives on a net basis for foreign investors, or
(2) investors can spot convert FCY into RMB in order to satisfy the inbound and outbound currency composition ratio.

Q3: A client may maintain a portion of their portfolio in bonds and remaining portion in cash. From the regulation, it seems
only FX exposure associated with the bonds purchased could be hedged onshore. What about the FX exposure associated
with the cash balance?
A3: If an investors onshore portfolio consists of bonds and cash, the FX exposure of the cash balance portion cannot be hedged
onshore.

23
Frequently Asked Questions (contd) Accessing China
FX Market
Q4: The circular requires that the FX derivatives position and onshore bond position should have reasonable correlation.
What does reasonable correlation mean?

Scenario 1: An investor purchases onshore bonds maturing in 6 months. He also enters into 6-month forward to buy USD and sell
RMB.
It is permissible. The tenor of the FX derivatives instrument matches than that of the underlying bonds.

Scenario 2: An investor purchases a bond maturing in 6 months. He also enters into a 1-year forward transaction to hedge the
transaction. When the bond matures in 6 months, the investor immediately purchases a new bond or enters into a reverse trade to
square the forward position.
It is NOT permissible. The tenor of the FX derivatives instruments cannot be longer than that of the underlying bonds.

Scenario 3: An investor purchase a RMB100m bond maturing in 1 year. He also enters into 1-year forward to buy USD sell RMB.
After 6 months, the investor decides to sell the bond, then within 5 working days purchase a new RMB 100m bond with 6-month
tenor.
It is permissible. The investor purchases new bond of which the amount and the tenor matches that of the FX derivatives within 5
working days.

Scenario 4: An investor purchases a RMB 100m bond maturing in 6 months. He also enters into two FX derivative transactions: RMB
200m 6-month forward transaction to buy USD sell RMB; and RMB 100m 6-month forward transaction to sell USD and buy RMB.
It is NOT permissible. There are two FX derivative transactions but only one underlying bond.

Scenario 5: An investor enters into a RMB 100m 6-month forward transaction. After 4 days, he purchases RMB 100m 6-month
bonds.
It is permissible. Investors can enter into a FX hedging transaction first before purchasing bonds, as long as the investor purchases
the bonds within 5 working days of its FX hedging trade.

24
Frequently Asked Questions (contd) Accessing China
FX Market
Q5: Is the size of onshore FX hedging restricted to the notional amount of the bonds? Or should the bonds be marked-to-
market when calculating the eligible FX hedging size?
A5: There are no regulatory requirements on whether the size of FX hedging should be calculated based on the notional or marked-to-
market value of the bonds. The processing bank (BSA of the investors) should determine at its own discretion the reasonableness of
the expected bond returns.

Q6: Can interest expected to be earned from the bond investment be included in the calculation of the size of onshore FX
hedging?
A6: Yes. Please refer to question 5.

Q7: Can FX forward transaction be net settled?

A7: Yes.

Q8: Can investors purchase FX option combination (such as call spread) for hedging their bonds?
A8: Yes, investors can purchase European vanilla FX option or option combination per Huifa 2014 (53). For example, investors can buy
a call spread directly from their BSA to hedge its bond position. However, they cannot buy a call option and sell a call option separately
to achieve the same payoff profile as a call spread because it would be deemed as two FX derivative transactions (please refer to
question 4).

Q9: Will both ISDA and NAFMII agreement be acceptable for FX derivatives and IRS/FRA when trading with BSA client?
A9: Yes, the transacting parties can decide which master agreement to use for FX hedging, whether it is ISDA or NAFMII agreement.

Q10: Does the 20% reserve charge on RHS flows (long FCY) apply to the FX hedging for CIBM investment?
A10: Still pending feedback from PBoC on whether to impose 20% reserve on RHS flows for China onshore FX hedging of CIBM
investment. We are lobbying with the regulator to waive this reserve charge requirement.

Q11: An investor should adjust its derivative position within 5 business days after any change in its bond related FX
exposures. Does the investor have to execute such adjustment (e.g. unwinding) with the BSA?
A11: Yes

25
Standard Chartereds Credentials

26
Our Full Suite of RMB Offerings and Licenses
Licenses
1 of 23 foreign banks to be granted Interbank CD
FX/Rates issuance qualification
Trading
The only foreign bank with most complete bond
trading licenses: China Government Bond
Bond Trading Underwriter; Primary dealership for PBOC Open
Market Operation; Interbank bond market maker
1 of 4 foreign banks to underwrite domestic bonds for
Bond FIs and co-manager for non-financial corporates
Underwriting 1 of 3 foreign banks allowed to conduct ABS business
as lead manager
1 of 5 foreign banks to offer CIBM bond settlement
Securities agency services to overseas investors
1st foreign bank to obtain full custodian license for
Services insurance clients
1 of 19 banks included in the first batch of direct
RMB participation in the Cross-border Interbank Payment
Clearing System (CIPS)
1 of 3 foreign banks with a gold import license
Commodities 1 of 2 foreign banks to be a SGE fixing member
Market Leadership
Top 3 foreign banks for FX transaction volume in
2016
Market maker for key CNY direct currency pairs
Ranked 1st for bond trading amount among foreign
banks in 2016
Ranked 2nd for dim sum bond and 6th (2nd among
foreign bank) for panda bonds issuance
Successfully lead-arranged 6 auto loan ABS
1st batch of banks to become a QFII, RQFII, QDII,
and RQDII custodian bank
Among the 1st batch of banks to offer the CIBM
bond settlement service to foreign investors
Ranked 1st for number of offshore indirect
participants signed up
Completed the 1st RMB clearing transaction
through CIPS
1st bank to provide a platinum loan on the SGE
27
Deep Local Market Engagement
Over 158 years of history in China market (since 1858), at the forefront of the changing China landscape;
Among the first banks to help entities benefit from the deregulation of the China Capital Market;
Member of CBRC
Standardise Committee,
Member of SPMG
2003 2009 2015
(Securities Market
Practice Group),

Granted QFII Custodian
QFII Cash Clearing
One of four foreign banks Member of SBA
License bank License licensed to act as (Shanghai Banks
settlement agent bank for Association)
CIBM

1992 2003 2006 2009 2011 2015 2016

1992 2006 2011 2016

Appointed as the sole
clearing agent for
Shenzhen B-shares
during its opening in
1992

Granted QDII
Inter-bank bond
Since 2015, SCB has worked
Custodian License settlement agent with other custodians in
license tabling the proposal to PBOC
for further opening up of
CIBM to foreign institutional
investors this led to the
Feb16 PBOC announcement
granting a wider access to
CIBM
28
Our Securities Services Offerings in China
Securities Services Offering

Provide guidance and assistance in preparing documentation for market access
Access Filing &
Follow-up with regulators on the status or any additional information required
Application
Facilitate lobby meetings and dialogues with key regulators

Monitor broker activities

Settlement
Promptly advise any irregular transactions

Proactively assist in resolving any transactional errors

Account opening
Cash
Manage fund injection
Management

Assist in repatriation of principal and profit

Prepare monthly and annual regulatory reports

Regulatory
Work with investors appointed auditor for the year-end audit
Reporting and

Monitor shareholding and provide alerts for substantial shareholdings
Audit Support

Liaise with CSD to facilitate substantial shareholdings disclosure announcements

Provide updated market information and impact analyses by issuing newsflashes etc

Organize client conferences to provide market developments and market insights
Client Services

Respond to all client inquiries within agreed response hours

Conduct periodic service review with client on the SLA assessment

Value Added
Act as a bridge between Investors and Regulators to facilitate communication on market initiatives and key
Services developments

Share overseas experiences with the Chinese regulators to ensure international standards are adopted

29
Our Expertise and Awards
Experience our Expertise
Domain specialists with
average 15+ years industry
experience
Experienced in servicing broad
range of clients from Asset
Managers, International Banks to
SWFs in multiple jurisdictions
Active and on-going dialogues
with key Regulators at the
industry forums
Dedicated Implementation
Manager to work with client
Be Eyes & Ears for clients
Mature and flexible structure
supporting cooperation with
major GCs or SCB regional hub /
direct model
Clients & Industry
Recognition
Top rated by Global
Custodian Agent Bank Survey
since 1997
2016 & 2015 Global Finance
Awards Best Sub-custodian
Bank among foreign banks
2014 Triple A Asset Asian Awards
nominated to be Best
Transaction Bank in China
2014 Global Custodian Awards
Agent Banks in Major Markets and Shanghai Finance AMAC
Emerging Markets Innovation Awards Member
2013 Global Custody Emerging
Market Survey - Top-rated in both
Leading and CB/NA category
and only custodian bank with
Best in Class in CB/NA
category SAC
Member
30
Our Onshore Trading Capability

Standard Chartered is ranked No.1 among all foreign banks in China in terms of bond trading volume
in 2016.

Standard Chartered can provide flexible settlement schedule. Most market makers or counterparty offers
T+0 and T+1 settlement only while we can offer T+0 up to T+5 settlement cycle.

Our Trading desk has access to a wide variety of credit bonds, one of the broadest array among the
foreign banks.
Bond Trading Amount by Foreign Banks in the CIBM in FY 2016
Bond Trading % of all
Rank Institution Name Volume (RMB mn) foreign banks
1 Standard Chartered Bank (China) Ltd. 2,168,786 11.39
2 Chinese Mercantile Bank 2,029,566 10.66
3 HSBC Bank (China) Ltd. 1,725,694 9.06
4 Mizuho Bank(China) Ltd. 1,600,627 8.41
5 Bank of Tokyo-Mitsubishi UFJ (China) Ltd. 1,576,189 8.28
6 The Bank of East Asia Ltd. 1,343,017 7.05
7 Deutsche Bank (China) Ltd. 1,278,330 6.71
8 DBS bank (China) Ltd. 1,201,550 6.31
9 J.P. Morgan (China) Ltd. 943,229 4.95
10 BNP Paribas (China) Ltd. 915,519 4.81
11 Hang Seng Bank (China) Ltd. 646,710 3.40
12 ANZ Bank (China) Ltd. 594,210 3.12
13 Citibank (China) N.A. 547,156 2.87
14 Fubon Bank (China) Co. Ltd. 511,793 2.69
15 Bank of America, Shanghai branch 359,080 1.89
31
Source: WIND (all types of bonds)
Standard Chartered Bank Full Licence Capability

Primary Dealership for

MOF China Government Designated Interbank Bond Licensed Bond Settlement
PBoC Open Market
Bond Underwriter Market Maker Agent
Operation

China Government Bond
(CGB) Underwriting group
is responsible for
underwriting CGB bond
through every auction.

With this license, our
clients are able to place
bids through the primary
market auctions.

OMO is the window for
PBoC to conduct its
monetary policy with the 48
Primary Dealers including
45 domestic
banks/securities houses
and securities houses and
3 foreign banks.

Market makers are
responsible for maintaining 2-
ways quotes of a pool of
selection of bonds.

Only 3 foreign banks have
this license. This allows us to
provide bond quotation to our
corporate and institutional
clients.

Standard Chartered Bank
China received this license
in 2010, which entitled us
to provide the trading and
settlement services to
global institutions.

Standard Chartered Bank China is the ONLY foreign bank that holds all of the key
licenses of the domestic bond market in both primary and secondary markets

SCB Bank 1 Bank 2 Bank 3 Bank 4 Bank 5

MOF CGB Underwriter Yes Yes
Primary Dealership for PBoC Open Market Operation Yes Yes Yes
Designated Interbank Bond Market Maker Yes Yes Yes
Licensed Bond Settlement Agent Yes Yes Yes Yes Yes
Note that Bank 1 to Bank 5 are the major foreign banks in China

32
Full License Capabilities Explained
Details
Standard Chartered Bank China (SCB CN) has been granted the
license of CGB underwriter since February 2008, and is one of 50
financial institutions to be granted this license.
MOF CGB
The license is approved by the Ministry of Finance (MOF) and
Underwriter is the most important underwriting license in the domestic bond
market.
SCB CN was granted the PBOC Bill Primary Market Dealership
PBOC in February 2008. The license is approved by the PBOC, and
Primary SCB CN is one of 50 FIs to be granted this license.
Dealership PBOC relies heavily on regular Open Market Operations to
for OMO manage the overall interbank liquidity.
Standard Chartered Bank China was approved as a Designated
Interbank Bond Market Maker in January 2010. The license is
Interbank approved by the PBoC is one of the 30 domestic FIs selected.
Bond Market
As a market maker, SCB CN is obligated to make market on a
Maker number of key benchmark instruments under all market
conditions.
Standard Chartered Bank China received this license in 2010
and activated the usage since 2011, which has entitled us to
CIBM Bond provide the trading and settlement services to not only the
Settlement domestic institutions, but also the foreign institutions who are
interested in investing in the local fixed income market.
Agent
Advantages
We are an active trading partner and we can facilitate large
institutions to meet substantial investment needs in the CGB
market through auctions
As a CGB underwriter, we have direct communication with the
MOF regarding its issuance schedule, intention, guideline on
pricing, and macro policies. Our clients receive the most
updated information.
As a primary dealer of the PBOC, we have weekly
communication with the PBOC and effectively provide market
with guidance on PBOC auction and liquidity condition. Such
communication has been helpful to our clients as well on their
understanding of PBOC decision.
As a market maker, we have among the best information on the
secondary market trading, including constant communication
with the PBOC, the MOF and all major dealers. We are the
bank to come to when clients need to trade large block size in
all types of bonds.
Increased flexibility on extended settlement cycle when trading
SCB China as counterparty, the T+0 to T+5 extension provides
the additional buffer for investors cross-border funding
arrangement.
Choosing SCB as the Settlement Agent does not restrict one
from trading with other market participants, nor does it increase
counterparty risk
33
Appendix A:
An Overview of Chinas onshore FX market

34
Onshore FX Trading Platform

Platform: CFETS FX 2009

Trading Hours: 9:30 am to 11:30pm

Fixings: At 9:15am Beijing time , PBOC releases 23 currencies fixing rate against CNY. Including:

USDCNY, EURCNY, JPYCNY, HKDCNY, GBPCNY, AUDCNY, NZDCNY, SGDCNY, CHFCNY, CADCNY, CNYMYR, CNYRUB, CNYZAR,
CNYKRW, CNYAED, CNYSAR, CNYHUF, CNYPLN, CNYDKK, CNYSEK, CNYNOK, CNYTRY and CNYMXN.

Trading Mode:

Bilateral Anonymous

More than 95% of the trades have been
done in this mode
Price shown on screen is only indicative
and price taker need to call for price maker
to get a dealable quote
Price shown on screen is tradable
Due to wider spread and more expensive
transaction cost, anonymous trading is
much less popular

35
Onshore FX Trading Liquidity Overview

Daily trading volume Average trade size

Product Available tenor Bid/ask spread
(USD mn) (USD mn)

Spot NA 30,000 20 5 pips

1M: 8 pips
3M: 10 pips
Outright forwards Available up to 5Y;
5,000 10 6M: 15 pips
Liquid up to 2Y
12M: 15 pips

Available up to 3Y;
Options 2,000 10 1-3M: 0.5 vol 1Y: 0.3 vol
Liquid up to 2Y

1M: 3 pips
FX Swaps Available up to 5Y; 3M: 5 pips
40,000 20
Liquid up to 2Y 6M: 10 pips
12M: 10 pips

36
Hedging FX Risk - Resulting from Currency Mismatch

Other than concerning volatile interest rate movement, for oversea institutional investor who uses a particular
FCY as functional currency and intends to invest in China Interbank Bond Market, they would encounter
currency mismatches of the FCY they have prior investment and of the RMB they receive from bond proceeds.
Thus, there is also a concern of hedging FX Risk

1 FCY remittance and then convert to

RMB for bond purchase

FX Risk resulting from

Oversea
Onshore Currency Mismatch
Institutional FCY Remittance in (1) VS
Investor 2 Bond Coupon in RMB Bond RMB Proceeds in (2)&(3)

3 Bond Redemption in RMB

37
FX Hedging Instruments

For illustration purpose, assume investor remits USD from offshore to purchase 2Y RMB bond via CIBM and
compare the instrument used for FX hedging
Indicative Pricing
Instrument Risk and Benefits Zero Cost
(sample only)

 Full hedge against currency risk on principal repayment Client pays USD 1.96%p.a.
FX Swap  No participation if CNY appreciates
No

 Full hedge against currency risk on principal repayment Forward price 7.1490
Forward  No participation if CNY appreciates
Yes

 Full hedge against CNY depreciation from Strike to Capped Rate Strike: 7.0125, 1365pips
Capped  Better strike compared to a forward better than usual forward
Yes
Forward  Partial hedge against CNY depreciation above Capped Rate Capped Rate: 7.3000
 No participation if CNY appreciates
Vanilla  Full hedge against CNY depreciation above Strike Strike: 7.1490
 Can participate if CNY appreciates Client pays USD 1.40%p.a.
USDcCNYp  There is a cost for the option
No
Option
 Full hedge against CNY depreciation from Lower Strike to Upper Strike Lower Strike: 7.1490
 Can participate if CNY appreciates Upper Strike: 7.3000
Call Spread  Cheaper than a Vanilla USDcCNYp Option Client pays USD 0.55%p.a. No
 Partial hedge against CNY depreciation above Upper Strike

 Full hedge against CNY depreciation above Upper Strike Lower Strike: 7.0000
Collar  Can Participate if CNY appreciates till Lower Strike Upper Strike: 7.5000 Yes
 Upper Strike is inferior compared to Forward price

 Full hedge against CNY depreciation from Strike 2 to Strike3 Strike1: 7.0000
Seagull  Can Participate if CNY appreciates till Strike1 Strike2: 7.1490 Yes
 Partial hedge against CNY depreciation above Strike3 Strike3: 7.4250

38
Hedging Instrument - FX Swap
USDCNY FX Swap market was established on 2006, and market has achieve dramatic growth in the past 10 years.

FX swap is now the most liquid foreign exchange instrument with daily trading volume of around 30 bio dollar, surpasses CNY FX
forward, option, cross-currency swaps and even USDCNY spot.

From 04 Jan 2016, onshore FX interbank trading hours extended to cover London session to 11:30pm Beijing time, which also
boosted the market capacity.

Interbank participants are CFETS members with a USDCNY FX swap license approved by PBOC. As of the increase of
participants and extended trading hours, spot and swap daily trading volume are forecasted to reach the recorded highest no. at
USD 30bio and USD 40bio respectively.

Daily Trading Volume (in billion USD)

40
35
30
25
20 FX swap

15 FX spot

10
5
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

39
Hedging Instrument - Capped Forward
Illustration Indicative Trade Details (sample only)
Product Description Currency Pair USDCNY

A Capped Forward is a combination of options to provide a Tenor 1 year
better hedge rate compared to a usual forward up till the
Notional USD 1 Billion
capped rate. Beyond the capped rate, the client is only partially
hedged. Strike 6.9500
Capped Rate 7.3500
Client Rationale
ERR USDCNY Expiry Reference Rate on fixing day

Client has USD payable in 1yr time and is worried about CNY
depreciating against USD but would like a zero cost hedging At Maturity,
strategy with a better hedge rate compared to a usual forward. If ERR<Capped Rate, Client Buy USD 1mio against
Despite worrying that CNY depreciation against USD, the client Payoff CNY at Strike
has a view that USDCNY exchange rate will not exceed 7.35 in If Capped Rate=<ERR, Client Buy USD 1mio
1yr time. Thus the client is willing to give away his protection against CNY at ERR-(Capped Rate-Strike)
above 7.35 in return for a better hedge rate Spot Reference 6.9130

Benefits and Risks

If ERR<6.95, the client will have to buy USD at 6.95 instead of Capped Forward Payoff Diagram (sample only)
the favorable market rate Forward

If 6.95=<ERR<7.35, the client can buy USD at 553 pips better Capped Forward
than a usual forward
Gain

If 7.35<ERR, the client will only be partially hedged by buying
USD at ERR-0.40

6.9130 7.3500 USDCNY Spot

7.0053
Loss

40
Hedging Instrument - Call Option
Illustration Indicative Trade Details (sample only)
Product Description Currency Pair USDCNY

European option provides the buyer with the right but not the Tenor 1 year
obligation to exchange USD vs CNY at the strike rate at
maturity Notional USD 1 Billion
Strike 7.2000
Client Rationale ERR* USDCNY Expiry Reference Rate on fixing day

It is suitable for client who would like to be fully protected from
FX risk, and do not mind paying an option premium in At Maturity,
exchange to have the right rather than the obligation If ERR <= Strike, no settlement
Payoff
If ERR > Strike, client exercises the option and
Benefits and Risks buys USD 1bio against CNY at Strike

Unlimited upside / limited downside (worst case cost = option
Spot Reference 6.9130
premium)
* ERR: expiry reference rate

Call Spread Payoff Diagram (sample only)

Call Option
Gain

7.2000 USDCNY Spot

Loss

41
Hedging Instrument - Call Spread
Illustration Indicative Trade Details (sample only)
Product Description Currency Pair USDCNY

A Call spread combines two vanilla call options in one same Tenor 1 year
structure. The structure involves purchase of one option and
Notional USD 1 Billion
sale of another option, both with the same underlying asset
and tenor but with different strike to reduce the overall cost Strike1 7.2000
Strike2 7.4000
Client Rationale
ERR USDCNY Expiry Reference Rate on fixing day

Client has a need to Buy USD in 1yr time and is worried about
CNY depreciating against USD but is only willing to pay an At Maturity,
option premium no more than 1%. A naked call of 7.20 will cost If ERR<Strike1, no settlement
the client 1.3% will not be the solution. Thus the client is willing If Strike1=<ERR<Strike2, Client Buy USD 1bio
Payoff
to give away protection above 7.40 to reduce the cost of against CNY at Strike1
hedging and meet his target of 1% and to be partially hedged if If Strike2=<ERR, Client Buy USD 1bio against CNY
ERR is above 7.40 at ERR-(Strike2-Strike1)
Spot Reference 6.9130
Benefits and Risks

Client met his option purchasing budget by selling protection Call Spread Payoff Diagram (sample only)
above 7.40.

If 7.40=<ERR, Client will only be partially hedged by buying Call Spread
USD at ERR-0.20
Gain

7.2000 7.4000 USDCNY Spot

Loss

42
Hedging Instrument - Cross Currency Swap

Other than hedging FX and Interest Rate risks separately, oversea institutional investors can consider to use a
FCYCNY Cross Currency Swap or Performance Swap to hedge FX and Interest Risk all at once

For illustration purposes, assume investor remits USD 10mio from offshore to purchase 2Y RMB bond via CIBM
and the bond pays quarterly coupon of 4% p.a.

Instrument Risk and Benefits (sample only) Indicative Pricing (sample only)
Cross Currency Swap  Full hedge against FX and Interest Rate Client Pay CNY 4.00%p.a., Q, A/365
(Both initial and Final Risk Client Rec USD 2.15%p.a., Q, A/360
Exchange)  No participation if CNY appreciates
Performance Swap  Full hedge against Interest Rate Risk Client Pay CNY 4.00%p.a., Q, A/365
Coupon Only CCS +  Additional USD 0.85%p.a. received Client Rec USD 3.00%p.a., Q, A/360
Capped Forward compared to Cross Currency Swap
 Partial hedge against FX risk when Expiry For Final Exchange,
Reference Rate>=7.2695 if Expiry Reference Rate>=7.2695,
 No participation if CNY appreciates Client Rec USD 10mio, Pay CNY 10mio*(ERR
0.39)
If Expiry Reference Rate<7.2695
Client Rec USD 10mio, Pay CNY 68.795mio

43
Hedging Instrument - Cross Currency Swap
Using CCS to swap fixed RMB
coupon into a fixed USD coupon to
hedge FX&Interest Rate Risk

Final Exchange: RMB Notional

Initial Exchange: RMB Notional 2 Bond Purchase in RMB

Fixed Coupon in USD

Onshore 1 Cross Currency Swap Overseas 3 Bond Coupon in RMB Onshore

Swap Institutional
Bond
Market Bond Coupon in RMB
Investors
4 Bond Redemption in RMB
Initial Exchange: FCY Notional

Final Exchange: FCY Notional

44
27 Public Sector Entities Have Gained Access to Onshore FX
Markets
Foreign public sector entities were given full access to Chinas onshore FX market, including spot, forward, swap, options,
without quota and cross-border remittance limitations
Entity Approval date Spot Forward Swap Options
1 Hong Kong Monetary Authority 25-Nov-15 Y Y Y Y
2 Reserve Bank of Australia 25-Nov-15 Y
3 Hungarian National Bank 25-Nov-15 Y Y Y
4 IBRD 25-Nov-15 Y Y Y Y
5 IDA 25-Nov-15 Y Y Y Y
6 World Bank Group Trust Funds 25-Nov-15 Y Y Y Y
7 GIC Private 25-Nov-15 Y Y Y Y
8 Reserve Bank of India 12-Jan-16 Y
9 Bank of Korea 12-Jan-16 Y Y Y Y
10 Singapore Monetary Authority 12-Jan-16 Y Y Y Y
11 Bank Indonesia 12-Jan-16 Y Y Y
12 Bank of Thailand 12-Jan-16 Y Y Y Y
13 BIS 12-Jan-16 Y Y Y Y
14 IFC 12-Jan-16 Y Y Y Y
15 Abu Dhabi Investment Authority 23-Mar-16 Y Y Y
16 Bank Negara Malaysia 23-Mar-16 Y Y Y Y
17 Asia Development Bank 25-Apr-16 Y Y Y
18 IMF 25-Apr-16 Y Y Y Y
19 New Development Bank 19-May-16 Y Y Y Y
20 African Development Fund 22-Aug-16 Y Y Y
21 African Development Bank 22-Aug-16 Y Y Y
22 National Bank of Slovakia 22-Aug-16 Y Y Y
23 World Bank MIGA 22-Aug-16 Y Y Y Y
24 Arab Monetary Fund 21-Sep-16 Y Y Y
25 Central Bank of Jordan 21-Sep-16 Y Y
26 Central Bank of Iraq 21-Sep-16 Y
27 State Bank of Pakistan 21-Sep-16 Y Y Y

Source: China Clear, Standard Chartered Research 45

Appendix B:
An Overview of China Interbank Bond Market

46
China Bond Market is the Third Largest in the World but
the Foreign Ownership is Very Low
World bond markets at a glance
Outstanding amounts as of Q3-2016 (USD bn)
Foreign holdings of China bonds is c. 3%, materially lower
than other SDR currencies
Foreign holdings of onshore Treasury bonds, %

40,000 70%
Corporate credits
Financials Germany
35,000 60%
Governments

30,000
50%

25,000 US
40%
20,000
2020E: CNY 100-105tn
(c. USD 15.3-16tn) 30% UK
15,000

20%
10,000
Japan
5,000 10%
China
0 0%
US JP CN GB FR DE IT CA NL ES 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

47
 PFBs is the Most Liquid Onshore Bonds while the
Commercial Banks Issuance is Mainly in NCDs
65% in rates bonds and 35% in credit bonds (as of Feb-2017) China Bonds Outstanding (as of Feb 2017)

Rates bonds ABS/CB/W MTN, 7%

14,000 Bs, 2%
Credit bonds
12,000 Enterprise CGB and
bond, 5% LGB, 18%
10,000
CNY bn

CP/SCP,
8,000 3%
6,000 Gov't
Corporate Support,
4,000 bond, 7% 2%
2,000
0 NCD,
11.2%
PFB, 19%

Source: Chinabond, Chinaclear, Wind, Standard Chartered Research

Like in most markets, rates bonds generally have better liquidity than credit bonds:
Rates bonds: On-the-run PFBs and CGBs have the best liquidity, consisting of 2-30 benchmarks of 1-10yr. Typical clip size
of RMB 30-100mn. Smallest tradable lot is 10mn. The bid-offer spread is around 1-2 bps. LGBs are relatively illiquid due to
an overly concentrated holding structure (mainly held to maturity commercial banks).
Credit bonds: the bid offer spread is around 5-10 bps, with a minimum ticket size of RMB 10mn. The typical ticket size is
RMB 30-100mn. Short dated high grade papers are more liquid.

48
Two Types of Bonds: Rates or Credit Bonds
Chinas onshore bonds are either traded on the Interbank There are two types of bonds:
Bond Market (CIBM) or on the exchange market Rates bonds or Credit bonds
Exchange
Market
CNY 5.3tn
(9.5%) Credit
bonds,
36%
CIBM Rates
bonds,
CNY 50.2tn 64%
(90.5%)

Regulators of the Two Bond Markets

Rates Bonds
PBOC A rates bond has endorsement from the Central
government / is supported by state-owned
NAFMII CSRC entities; hence, it has no credit risk in theory,
and mainly affected by macro economic factors
CIBM Exchange Market

Credit Bonds
A credit bond has no endorsement from the
Primary and Secondary Bond Markets government or state-owned entities and is
dependent upon the credit risk of the issuer

49
Source: Standard Chartered Research
 Description of Bonds
Bond type Acronym Description Tenor
Central Government Bonds CGB Issued by MoF to fund budget deficits 3M to 50Y
Issued by 3 wholly government owned banks that help
execute government policies:
Rates Bonds

Policy Financial Bonds PFB
China Development Bank (CDB), 3M to 50Y

Export Import Bank of China (EXIMCH), and

Agricultural Development Bank of China (ADBC)
Local Government Bonds LGB Issued by local governments 3Y, 5Y or 7Y
Fixed Rate: 1M, 3M, 6M, 9M, 1Y
Negotiable Certificates of Deposit * NCD Issued by banks
Floating Rate: 1Y, 2Y, 3Y
Medium Term Note MTN Issued by general corporates MTN: > 1Y
Credit Bonds

Commercial Paper CP Issued by general corporates CP: < 1Y

Super & Short Term SCP Issued by general corporates SCP: < 270 days
Corporate bonds -- Issued by general corporates No specific tenors
Usually 3Y to 7Y, but longer term can
Enterprise bonds -- Mainly issued by SOEs and LGFVs
reach up to 30Y
Private placement notes PPN Issued by general corporates 6M to 5Y
Convertible bonds CB Issued by listed companies 3Y to 5Y

CIBM Exchange

CGB Corporate bonds

PFB CD/ NCD Convertible bonds
LGB
MTN PPN PFB
Enterprise bond
CP / SCP

* Note: while an NCD is not necessarily issued by the government, the credit risk and liquidity are
very close to that of rates bonds, and hence is classified as a rates bond 50
Source: Standard Chartered Research
Liquidity of CGB and CGTB

Chinese Government Bond Chinese Government Treasury Bills

Auction frequency: Wednesday and Friday.
Issuance size: around 30bn RMB each time.
A same bond can be reissued several times.
Tenor: 1y, 3y, 5y, 7y, 10y, 30y, 50y
Better liquidity.
Auction frequency: every Friday.
Issuance size: only 10bn RMB each time.
A bond can only be issued once, no reissuance.
Tenor: 3m, 6m
Poorer liquidity.

CGB and CGTB issuance in 2016 Recent Five Issuance

In 100 mns(RMB) In 100 mns(RMB)
450
80,000
70110.4 400
70,000
350 120 120 120 120
60,000 120
300
50,000
250 CGTB
40,000 CGB
200 CGB
CGTB
30,000
150 283 283 283 283
260
20,000 100
10,000 50
2670.9
0 0

51
Trade Information of CGB and CGTB
Chinese Government Bond Tenor Avr. trade size(RMB) Bid-ask spread(bps)

Chinese government bonds (CGB) have great liquidity. 1y 5

Prices can usually be easily acquired from the market. 2y 5
Average trade size (market convention) is from 30mn to 50mn. 50mn
Smaller size is also available by negotiation. 3y 5
Smallest trade size is 10mn. 5y 3
Bid-ask spread (shown on the right side) is for bonds under run.
Old bonds may either have wider spread or no offer in the market. 7y 3
30mn
10y 2

Chinese Government Treasury Bills Tenor Avr. trade size(RMB) Bid-ask spread(bps)

Chinese government treasury bills have poor liquidity. 3m 50mn or 100mn 10

Prices can not be quite easily acquired from market like CGB. 6m 50mn or 100mn 10
Particular price of a CGTB needs time to be found.
Average trade size (market convention) is either 50mn or 100mn,
usually larger than CGB. Smaller size is also available by
negotiation.
Smallest trade size is 10mn.
Bid-ask spread (shown on the right side) is for bonds under run,
which is usually wider than CGB. Old bonds may either have wider
spread or no offer in the market.

52
Adequate Bond Liquidity

To ensure the liquidity of bonds issued in the market, Chinese government has made mainly two efforts
to support the bonds liquidity as well as fair price quoting.

Structure of CGB Investors

Sufficient trading Mandatory liquidity
accounts available 3.90%
5% 4% 15%
4%
There are more than 3000 Apart from the 3000 China 4%
financial institutions working as interbank bond market members, 1%
the China interbank bond market there are also 30 market makers
members. in the bond market.
These members provide These 30 market makers include 67%
sufficient trading accounts to Chinese commercial banks,
ensure adequate liquidity in Chinese policy banks, Chinese
China bond market. securities companies and foreign Special Settlement Member
banks. Commercial Banks
In last 6 months, there was no
Credit Unions
liquidity shortage problem in the When liquidity shortage really Non-bank Financial Institutions
happens, these market makers Securities Companies
market. Issurance Companies
are obligated to quote prices of Funds
bonds. Non-financial Institutions
Individuals
Exchanges
Overseas agencies
Others
53
Primary Market Trading Procedure-Before Bidding
CGB (CGTB included) Policy Bond
Twice (Wednesday & Friday) Usually once per issuer
Auction Frequency/week
Detailed Information (time, volume & bond code) will be disclosed 3-5 days before the auction

# of Bonds Bid/auction 1-2 1-5

Draft calendar will be published at the beginning
of each year;
Draft Calendar No draft calendar published.
Special events (e.g. public holidays) will be
updated and published.

Day Wednesday & Friday for CGB; Friday for CGTB Generally Monday, Tuesday & Thursday

9:30-11:30 or 14:00-15:30
Bidding Time
Time (Detailed information will be publicly
10:30-11:30
slot announced about 3-5 days before the
auction.)
10yr Mixed(1) of Dutch and American
Types of Auctions Dutch
> 10 yr Dutch

Mixed auction: a type of auction which uses both American and Dutch auction, of which:

Bidding yield Weighted average yield, bidders buy at the weighted average yield;

Weighted average yield < Bidding yield Margin rate, bidders buy at their bidding yields;

Bidding yield > Margin rate, bidders wont get the bond.

54
Trading Procedure Bidding Procedure
CGB (CGTB included) Policy Bond

Traders would inform investors on Bloomberg of the bond issuance. Meanwhile, a yield
Before auction
range forecast will be provided by the traders of SCB, which clients might refer to.

Bidding Bidding Amount/bid

Min 20m RMB, Max 1000m RMB
Process price

After Auction The traders would notice clients the final auction result immediately once it is disclosed.

Payment Date SCB prepays the bond price for clients.

Coupon interests and funding costs (e.g. 7d repo yield) during the interval are imbedded in
Interval(2)
bond price. Actual calculations will be sent as a spreadsheet one day before the settlement.
Settlement

On Bond Listing Date or one working day after, SCB transfers the bond to clients and
Bond Listing Date
closes the order via DVP (Delivery Versus Payment) on CFETS.

(2) Interval: 2-3 working days between Payment date and Bond Listing Date.

55
Appendix C:
An Overview of Interest Rate Swap in China

56
Hedging Instrument - Interest Rate Swap

In the past, both 7 Day Repo and 3m Shibor are quite volatile, thus there is a need for investor to hedge their
interest rate risks.

Interest Rate Swap is able to hedge such risk resulting from volatile interest movement

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
Feb-09

Aug-09

Nov-09

Feb-10

Aug-10

Nov-10

Feb-11

Aug-11

Nov-11

Feb-12

Aug-12

Nov-12

Feb-13

Aug-13

Nov-13

Feb-14

Aug-14

Nov-14

Feb-15

Aug-15

Nov-15

Feb-16

Aug-16

Nov-16

Feb-17
May-09

May-10

May-11

May-12

May-13

May-14

May-15

May-16
7 Day Repo 3 Month Shibor

Source: Bloomberg

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Hedging Instrument - Interest Rate Swap

China has liquid interest rate swap market which allows users to
freely swap fixed interest into two commonly used floating rate 7 Day Repo IRS 3 Month SHIBOR IRS
benchmark: (1) 7 Day Repo (2) 3m SHIBOR
Floating Leg:
Floating Leg: Act/360

7 Day Repo Rate: The short term interest rate charged on 7 Day Count Act/365
Fixed Leg: Act/365
Day repurchased agreement (Repo) on China Government Fixed Leg: Act/365
Bond. Repo is actively traded and is the best reflection of Fixing/Payment
market liquidity and also the cost of interbank funding on RMB 7Days/Quarterly Quarterly/Quarterly
Frequency
in China.
Average Daily
CNY 20 Billion CNY 3 Billion

Repo fixing is a benchmark based on repo trading rates for the Market Volume
interbank market on each trading day while fixing is released Average Ticket
to public at 11:00am and is a median number of the sorted CNY 50 Million CNY 50 Million
Size
sequence trades.
Average
1-5bps 3-7bps

3 Month SHIBOR: The three month Shanghai Interbank Offer Bid/Offer Spread
Rate is the unsecured interbank lending rate on RMB. It is
conceptually similar to LIBOR and has the potential to gain Available Term 1month 5 years 6 months 5 years
wider acceptance in the future. The fixing is the arithmetic
Central Clearing
average of all the quotations posted by 18 commercial banks Yes* Yes*
Counterparty
that maturity after taking out four highest and four lowest
quotations. Floating Rate
CNRR007 Index SHIF3M Index
Ticker

The fixings are published at 9:30am on each business day by
* For oversea institutional investors, central clearing is required
National Interbank Funding Center on www.shibor.org.
when transacting RMB Interest Rate Swap

58
Case Study: Hedging Interest Rate Risk using SHIBOR IRS

After comparing which floating benchmark to use for hedging, investor could use pay 7 Day Repo
Interest Rate Swap to hedge the value of the bond purchased.

1 Bond Purchase in RMB RMB 7Day Repo Rate+Spread

3 Pay Interest Rate Swap

Overseas Onshore
Onshore 2 Bond Coupon in RMB Institutional Swap
Bond
Investors Bond Coupon in RMB Market
4 Bond Redemption in RMB

59
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