At a Glance FICC

China policy financial

bonds A primer
China Macro Strategy team, Global Research
22 March 2017
Contents

An introduction to policy financial bonds (PFBs) 3

Issuer fundamentals 5

Bond technicals 16

Appendix

CDB bond auction schedule 34

EXIM bond auction schedule 35

ADBC bond auction schedule 36

Authors 37

Disclaimer 38

2
An introduction to policy financial bonds (PFBs)

China has three policy banks, established in 1994 under the direct leadership of the State Council
China Development Bank (CDB) Largest of the three and the worlds biggest development finance institution
Agricultural Development Bank of China (ADBC) Provides policy financial support to the agricultural sector
Export-Import Bank of China (EXIM) Smallest of the three, supports Chinas foreign trade and investment

All three policy banks are fully owned by the central government and enjoy its highest support;
they are rated at par with the China sovereign by all international rating agencies
S&P AA-/ Moody's Aa3/Fitch A+
Capital injection in 2015 by government reflected the banks policy roles and extremely strong government support
Policy financial bonds (PFBs), issued by the policy banks, have the largest outstanding amount
among onshore bond types. PFBs enjoy the following unique advantages:
Active primary market: 540 key-tenor auctions in full-year 2016, materially more than 60 CGB auctions
Most liquid bonds: PFBs turnover ratio (2.4x) is higher than that of credits (2.0x), CGBs (0.6x) and LGBs (0.2x)
0% risk weighting: PFBs enjoy the same 0% risk weighting as cash and CGBs
Yield pick-up: Yield difference between PFBs and CGBs (80bps for 10Y) is mainly due to tax rather than credit risk
Active repo market: PFBs account for 50% collateral on the China Interbank Bond Market (CIBM), and are subject
to the same haircuts as CGBs

3
Total return

Annual total return of China onshore bonds in CNY terms (%)

14% CGB PFB Overall

11.9%
12%
10.9%
10.3%
10%
8.2% 8.0% 8.2%
8%
6.9%
6% 4.8% 5.3%

4% 3.6%
2.3% 2.7% 2.2% 2.2%
2.1% 1.8%
2% 1.7%
0.5%
0%
-0.5% -0.3%
-0.8% -0.6%
-2% -1.6%
-2.9%
-4%
2010 2011 2012 2013 2014 2015 2016 2017 YTD

Note: As of February 2017

Source: Chinabond, Bloomberg, Standard Chartered Research 4
Issuer fundamentals
Background

Chinas three policy banks operate under the direct leadership of the State Council
In 1994, China established three policy banks to take over government-directed spending functions, separately
from the big-four state-owned banks
During 2007-2015, CDB underwent reforms to become a commercial bank. However, reform progress slowed on
account of the global financial crisis. CDBs policy-related business continues to predominate
In April 2015, the three banks policy roles and strategic importance were strengthened with the approval of new
reform plans and a capital injection by the State Council
Timeline of CDBs development
(1994) founded with CNY (2007) Huijin injected USD 20bn;
50bn of registered capital; (2008) converted into joint-stock;
(end-1997) NPL ratio rose (2008-2009) leasing, securities
to 32.63% subsidiary companies established;
(2014) housing finance dept. started
1998 2015
Policy finance Re-affirmed role of
Development financing Aim to commercialise
operation development financing

1994 2007 (2015) SAFE injected USD 48bn;

(1998) debut bond issued;
(1998) began new form of bank- (2015) State Council reform plan:
government corporation; stick to development financial
(2002) NPL ratio dropped to 16% institution
through write-off

Note: Big-four state-owned banks are Bank of China, China Construction Bank, Industrial and Commercial Bank of China, Agricultural Bank of
China; Huijin is a wholly owned subsidiary by Chinese government; SAFE is the State Administration of Foreign Exchange 6
Source: Standard Chartered Research
Mandates

CDB, EXIM, and ADBC act as the shadow of fiscal policy, and are among the main institutions
implementing national strategy
CDB provides financing to key infrastructure programmes (e.g., the Three Gorges dam) and shanty-town
development: 17.5% loans provided to highways, 14.7% to urban renewal, 13.4% to public infrastructure in 2015
ADBC and EXIM focus on serving the agriculture sector and facilitating exports and imports, respectively
Policy banks finance the Silk Road Fund and overseas infrastructure projects, which play an important part in
Chinas One Belt, One Road strategy

Key mandates of Chinas policy banks

Key mandates

To support domestic infrastructure development in various sectors, including

China Development Bank industrial, housing, education and environment
(CDB)
To facilitate Chinas cross-border investment and global business co-operation

To promote foreign trade and investment

The Export-Import Bank of China (EXIM)
Sole provider of government concessional loans

Agricultural Development Bank of China

To support and provide financing to domestic agriculture-related development
(ADBC)

Source: Standard Chartered Research 7

Ownership
Policy banks are fully owned by the government, and are rated at par with the China sovereign
The central government retains full ownership of the three policy banks, directly and indirectly, since their founding
The government drives their strategy, determines growth targets, appoints senior management, and approves budgets
The policy banks enjoy a high level of government backing, including via capital injections, liquidity support and no
requirement of dividend payouts
Credit rating at par with the China sovereign
Ratings/outlook
Entity Government ownership Capital injection in 2015
S&P Moody Fitch
China AA- Aa3 A+
sovereign (Neg.) (Neg.) (Stable)
Fully owned by the central
government:
China
AA- Aa3 A+ MoF (36.54%) USD 48bn through
Development
(Neg.) (Neg.) (Stable) Huijin (34.68%) Buttonwood (an FX platform)
Bank (CDB)
Buttonwood (27.19%)
SSF (1.59%)
Export-Import Fully owned by the central
AA- Aa3 A+ USD 45bn through
Bank of China government under the direct
(Neg.) (Neg.) (Stable) Buttonwood
(EXIM) leadership of the State Council
Agricultural USD 10bn new capital and
Fully owned by the central
Development AA- Aa3 A+
government: USD 27bn distributable profit
Bank of China (Neg.) (Neg.) (Stable)
MoF(100%) transferred into paid-in capital
(ADBC)
Source: S&P, Moody, Fitch, Wind, Standard Chartered Research 8
Funding channels

Bond issuance is the primary funding channel of Chinas policy banks:

Policy banks are not allowed to take retail deposits, according to guidelines from the Peoples Bank of China (PBoC)
Policy banks fund themselves mainly through bond issuance
68% of CDBs interest-bearing liabilities are bonds, followed by 27% of non-retail deposits, as of end-2015

Nearly 70% of CDBs interest-bearing liabilities are bonds, as of end-2015

Outstanding interest-bearing liabilities breakdown (%)
Other, 0.8% Deposits from
other financial
institutions,
13.3%

Borrowings
from
governments
and other
financial
institutions,
4.6%

Debt securities Deposits, 13.3%

and
subordinated
debt, 68.1%

Source: Wind, Standard Chartered Research 9

0% risk weighting

PFBs have the lowest risk weighting among all onshore assets
PFBs are among the few 0%-risk weighting assets in China, including cash and CGBs
PFBs risk weighting is lower than that of LGBs and NCDs, which are at 20% and 25%, respectively
Risk weighting of most corporate credit bonds in China is 100%
Before 2015, the China Banking Regulatory Commission (CBRC), reviewed CDBs 0% risk weighting every 1-2 years
after commercial reforms began in 2007
In June 2015, the CBRC confirmed that CDB bonds 0% risk weighting would apply indefinitely

A summary of risk weightings of onshore assets defined by CBRC

Items Risk weighting
Claims on policy banks 0%
Cash and cash equivalents 0%
Claims on central government and PBoC 0%
Claims on Multilateral Development Bank (MDB), BIS , IMF 0%
Claims on foreign sovereign and central banks
- Ratings above AA- (incl.) 0%
- Ratings between AA- and A- (incl.) 20%
Claims on public sectors whose funding comes from the central budget (expect MoF and PBoC) 20%
Claims on provincial entities and municipalities with independent planning status (LGB issuers) 20%
Claims on general corporates 100%

Source: CBRC, Standard Chartered Research 10

Tax treatment for domestic investors
For domestic investors: A summary of the tax treatment of cash bond
CGBs and LGBs Interest income is exempt from investment by local investors
corporate income tax and VAT. Capital gains are subject Withholding tax Value-added tax
to 6% VAT. (WHT) (VAT)
Items
PFB and bonds issued by financial institutions Interest
Capital
Interest
Capital
Interest income is subject to 25% of corporate income gains gains
tax, and an additional 6% VAT if not held to maturity.
Capital gain is subject to 6% VAT. PFBs 25% 25% Not taxed 6%
All other bonds Interest income is subject to 25% of
corporate income tax (12.5% for railway corporations), CGBs Not taxed 25% Not taxed 6%
and an additional 6% VAT. Capital gains are subject to
6% VAT.
LGBs Not taxed 25% Not taxed 6%

Government -
supported 12.5% 25% Not taxed 6%
bonds

PBoC bills 25% 25% Not taxed 6%

Commercial
25% 25% Not taxed 6%
bank bonds

Other bonds 25% 25% 6% 6%

Source: Standard Chartered Research 11

Tax treatment for foreign investors
For foreign investors:
For CGBs and municipal bonds (i.e., LGBs), all taxes are exempt
For non-government bonds (including PFBs):
Interest income is subject to10% withholding tax and 6% VAT;
Tax on capital gains is exempt

Tax treatment for foreign investors in Chinas onshore bond market

Income tax VAT

Capital gains Interest Capital gains Interest

CGBs and
Exempt Exempt Exempt Exempt
Municipals

Other bonds Exempt 10% Exempt 6%

Source: PBoC, Standard Chartered Research 12

Yield difference mainly due to tax rather than credit-risk premium
Spread between PFBs and CGBs mainly to 10Y CDB bond spread over CGB fluctuates
compensate tax differentials, rather than credit risk between 35-135bps with market movement
Term structure (%, years, as of 20 March 2017) Historical 10Y CGB, CDB yield and spread(%, bps)
7.0 300
5.5 10Y Spread (RHS) 10Y CGB yield 10Y CDB yield

MTN (AA) 6.0

5.0 250

MTN (AAA)
5.0
4.5
MTN (AAA+) 200

Policy bank 4.0

4.0 bonds
PBoC bills 150

3.0
3.5
CGB 100
2.0
3.0
50
1.0
2.5

0.0 0
Jun-13

Mar-16
Mar-14

Jun-14

Mar-15

Jun-15

Jun-16

Mar-17
Sep-13

Dec-13

Sep-14

Dec-14

Sep-15

Dec-15

Sep-16

Dec-16
2.0
1 2 3 4 5 6 7 8 9 10

Source: Wind, CEIC, Standard Chartered Research 13

Assets and equity

CDB is much larger than the other two policy banks, especially in total asset terms
CDBs total assets stood at CNY 12.6tn as of end-2015, 3x and 4.5x the assets of ADBC and EXIM, respectively
CDBs equity improved sharply after a capital injection in 2015, exceeding that of ADBC as of end-2015
EXIM remains Chinas smallest policy bank

Rapid asset growth, at over 20% CAGR Equity improved sharply in 2015 with capital injection
Total assets as of year-end (CNY bn) Common equity outstanding as of year-end (CNY bn)
14,000 2013 2014 2015 CAGR (RHS) 27% 1,200 2013 2014 2015 CAGR (RHS) 300%

12,000 26.3% 26%

1,000 250%
259.4%

10,000 25%
800 200%
24.1%
8,000 24%
600 150%
6,000 22.6% 23%

400 100%
4,000 22%

200 37.8% 50%

2,000 21%
14.3%

0 20% 0 0%
CDB ADBC EXIM CDB ADBC EXIM

Source: CDB, ADBC, EXIM, S&P, Standard Chartered Research 14

Profitability and NPL ratios

Policy banks enjoy modest profitability and low non-performing loan (NPL) ratios
The policy banks profitability has dropped gradually on declining net interest margins and slowing economic growth
ADBCs RoE was slightly higher than the industry average (15%) in 2015; EXIMs RoE lagged behind significantly
CDB and ADBCs NPL ratios remain lower than the industrial average (1.94%), at 0.81% and 0.83%, respectively

The three policy banks RoEs dropped gradually CDB and ADBCs NPL ratios remain low
Return on equity (%) Non-performing loan ratio (%)
25.0% CDB ADBC EXIM CDB ADBC
1.4%
20.88%
19.57%
20.0% 1.2%

19.40% 17.03%
16.00% 1.0%
15.0% 0.83%
15.10% 15.50% 0.8% 0.72%
0.65% 0.81%
12.00%
10.0% 0.6%
0.57%
0.4% 0.48%
5.0%
0.2%
3.00%
0.0% 0.0%
2013 2014 2015 2013 2014 2015

Note: EXIMs NPL ratio is not available

Source: CDB, ADBC, EXIM, S&P, Standard Chartered Research 15
Bond technicals
PFBs have the largest outstanding among onshore bonds

PFBs have a slightly higher outstanding amount than CGBs and far higher than other rates or credits
PFB outstanding stood at CNY 12.1tn as of end-2016, accounting for 18.97% of total bonds outstanding
PFBs account for 29.69% of rate bonds, surpassing 29.1% of CGBs or 25.87% of LGBs
We expect outstanding PFBs to reach CNY 16-17tn by end-2020, up 33-42% from 2016

Outstanding amounts in the onshore bond market (CNY bn, as of end-2016)

14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
PFBs

MTNs

PPN
Corporate
CGBs

LGBs

Enterprise

Panda
NCDs

CP/SCP

ABS/CB
Other FIs

PBoC bills
Govt support
Source: Chinabond, China Clear, Wind, Standard Chartered Research 17
Outstanding PFBs have exceeded CGBs since 2014

Historical outstanding amounts of CGBs and PFBs (CNY bn)

CGB PFB
14,000

12,000 Outstanding PFBs exceeded

CGBs in 2014

10,000

8,000

6,000

4,000

2,000

0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Wind, Standard Chartered Research 18

Term to maturity

Outstanding PFB amount, by years to maturity (CNY bn, %, as of end-2016)

Amount outstanding Shares of amount (RHS)

2500 17% 18%

16%

2000 14% 14%

14%

11% 12%
11%
1500
10%

8%
8%
1000 6% 6%
6%
5% 6%

4%
500
2%
2%

0 0%
< 1Y [1,2)Y [2,3)Y [3,4)Y [4,5)Y [5,6)Y [6,7)Y [7,8)Y [8,9)Y [9,10)Y >10Y

Source: Wind, Standard Chartered Research 19

CDB is the largest PFB issuer among the three policy banks

CDB is the biggest issuer of PFBs, although issuance from ADBC is catching up quickly
CDB bonds accounted for more than 50% of annual PFB issuance before 2014, despite its share dropping to 44%
each in 2015 and 2016
Issuance from ADBC has risen at a much faster rate (23% CAGR in 2011-16 versus 10% for EXIM and 7% for CDB),
boosting its PFB issuance share to 37% in 2016 from 22% in 2012
We expect CDB to remain the biggest issuer and EXIM the smallest in the foreseeable future, due to their asset sizes

CDB remains the biggest issuer of PFBs despite having the slowest issuance growth rate
Historical gross issuance of PFBs (CNY bn)
4000
3500
EXIM
3000
2500
ADBC
2000
1500
1000 CDB
500
0
2006

2007

2008

2009

2010

2012

2013

2014

2015

2016
2011

Source: Wind, Standard Chartered Research 20

Most PFBs are traded on the interbank bond market

CIBM is the dominant platform for PFBs

99% of PFBs are issued and traded on CIBM as of 2016 (CNY 12.2tn outstanding vs CNY 9.5bn on exchange market)
On the exchange market, there have been only 8 PFB issues (3 new, 5 re-opened) since 2013, totaling CNY 30bn
None of the policy banks have announced issuance plans for the exchange market since 2015
PFBs are not fungible between CIBM and the exchange market
CGBs or LGBs can be traded on both the CIBM and exchange markets; positions between the two markets are fungible
However, PFBs issued on CIBM cannot be traded on exchange and vice versa, thus separating the two platforms

CGBs, LGBs and enterprise bonds are fungible between CIBM and exchange markets, but not PFB

CIBM Exchange

CGB Corporate bonds

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

Note: CIBM is China Interbank Bond Market

21
Source: Wind, Standard Chartered Research
Primary market
PFBs enjoy a more frequent and flexible primary market than CGBs:
Frequency: 540 key-tenor PFB auctions were held in full-year 2016, versus only 60 CGB auctions
Auction day: Multiple key-tenor PFB auctions are held weekly:
No fixed auction calendar for PFB; auction details are released to the market 3-5 days prior
Tuesdays and Thursdays for CDB, Mondays and Wednesdays for ADBC, Thursdays for EXIM
Auction placement: Only primary dealers are allowed to submit bids at PFB auctions, other investors need to
submits bids through primary or secondary dealers (same as CGBs)
Details of the primary market for PFBs and CGBs
CGB PFB
Issuer Ministry of Finance CDB, ADBC, EXIM
Auction style Single/Multiple/Hybrid Single/Multiple
Wednesday, Friday (calendar available Variable
Auction day
for the year) (no fixed calendar released)
Auction cut-off 10:30 or 11:35 Usually 10:30, 11:30 or 14:50
Primary dealers (2016) 45 institutions 81 institutions for CDB
Coupon Discount/Fixed Discount/Fixed/Floating
Average issue size CNY 20-30bn CNY 2-15bn
Auction-based Yield-based/Price-based
Coupon frequency Zero/Semi-annual/Annual
Key tenors 1Y, 3Y, 5Y, 7Y, 10Y
Settlement platform China Central Depository and Clearing Company (CCDC)
Source: Standard Chartered Research 22
Key tenors

PFBs have five key tenors:

The key PFB tenors are 1Y, 3Y, 5Y, 7Y and 10Y (same as CGBs)
92% of PFB issuance is in the key tenors, 8% is in tenors of 15Y, 20Y or 30Y
The highest issuance tenor in 2016 was the 10Y (32% of total issuance), followed by 5Y (22%) and 3Y (16%)

Key issuance tenors: 1Y, 3Y, 5Y, 7Y, 10Y

Shares of issuance amount by tenor, 2016
2Y
>10Y 1Y 0%
8% 10%
3Y
16%

10Y
32%

5Y
7Y 22%
12%

Source: Wind, Standard Chartered Research 23

Re-opening issuance

PFBs are mainly issued via re-opening the existing bonds:

Re-opening issuance has been used more frequently since 2012, and exceeded the new-issue amount in 2014
Share of PFB issuance amount via re-opening soared to 90% in 2016, from a mere 6% in 2011
CGB re-opening issuance amount accounts for less than half of total issuance, at 44.5% in 2016
Booming re-opening issuance has contributed significantly to the liquidity of PFBs in the secondary market

Re-opening issuance is popular since 2012 90% of PFB issuance was re-opened in 2016
Historical PFB issuance breakdown, by style (CNY bn) Historical share of re-opening amount to total issuance (%)
4000 New issue Re-opening 100% PFB CGB
89.8%
3500 90% 85.8%

80%
3000 75.4%
70%
2500
60%
2000 50% 44.5%
45.5%
1500 40%

30%
1000
20% 25.6%
500
10% 5.2%
0.0% 0.0%
0 0% 5.6%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Wind, Standard Chartered Research 24

Secondary market

PFB is the most liquid onshore bond type, with the highest turnover volume in secondary market:
PFB turnover exceeded that of credit bonds in 2014, making PFBs the most actively traded bonds onshore
PFB turnover was CNY 55tn in 2016, 4.4x the turnover of CGBs (CNY 13tn) and 27x that of LGBs (CNY 2tn)
PFBs turnover ratio (2.4x) is also higher than other bond types, such as credits (2.0x) CGBs (0.6x) and LGBs (0.2x)

PFB turnover is larger than other bonds PFBs have the highest turnover ratio
Historical turnover volume by type of bond (CNY bn) Turnover ratio by type of bonds, 2016 (CNY bn)

60,000 2014 2015 2016 3.0 turnover ratio

55,291

50,000 2.5 2.41

1.99
40,000 2.0
33,955

30,000 1.5

20,000 1.0
12,480
0.55
10,000 0.5
0.21
1,981
0 0.0
PFB Credits CGB LGB PFB Credits CGB LGB

Source: Wind, Standard Chartered Research 25

PFBs dominate the top actively traded bond list

The top 10 most actively traded bonds on CIBM are PFBs, given their frequent re-opening issuance:
7 of the top 10 most actively traded bonds are issued by CDB and 3 are issued by ADBC
The trading volume of the most active PFBs (CNY 4,498bn) is 4.8x that of the most active CGBs (CNY 938bn)
The turnover ratio of PFB issues (18.6x) is materially higher than that of CGB issues (8.6x); see table below

Ranking of individual bonds by trading volume, 2016

Rank Ticker Bond name Trading volume (CNY bn) Amount outstanding (CNY bn) Turnover ratio (x)

1 JK6282426 SDBC 3.18 04/05/2026 4,498 242 18.6

2 UV7415648 SDBC 3.74 09/10/2025 3,983 210 19.0
3 JK8195618 ADBCH 2.6 04/22/2017 3,016 53 56.9
4 JV4580157 ADBCH 2.47 01/06/2017 2,220 55 40.4
5 EK8290604 SDBC 4.18 04/03/2018 1,712 77 22.2
6 EK8393051 SDBC 4.21 04/13/2025 1,639 161 10.2
7 JV9569197 SDBC 2.96 02/18/2021 1,644 195 8.4
8 LW9529428 ADBCH 2.31 07/27/2017 1,282 27 47.5
9 JK2514491 SDBC 2.72 03/03/2019 1,265 127 10.0
10 QJ2754951 SDBC 2.98 11/04/2018 1,076 57 18.9
11 EH9173897 SDBC 2.15 08/04/2019 969 300 29.5
12 EH9173897 CGB 2.9 05/05/2026 938 109 8.6

Source: Wind, Bloomberg, Standard Chartered Research 26

CDB bonds lead while EXIM bonds lag in liquidity terms

CDB issuance is the most liquid among PFBs, as CDB has the highest outstanding bonds:
CDB bond turnover rose to CNY 31tn in 2016, accounting for 55% of total PFB cash bond turnover
ADBC bonds accounted for 32% of total PFB turnover; its liquidity has improved since 2014 on fast-growing net issuance
EXIM bonds liquidity lags given it has the lowest bonds outstanding among the policy banks

CDB bonds account for 55% of total PFB turnover CDB bonds account for 55% of total PFB turnover
Historical PFB cash bond turnover (CNY bn) Cash bond turnover breakdown by issuer (%)
60,000 CDB EXIM ADBC CDB ADBC EXIM
100%
50,000 90%
80%
40,000
70%
60%
30,000
50%
40%
20,000
30%

10,000 20%
10%
0 0%
2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016

Source: Chinabond, Wind, Standard Chartered Research 27

China has two repo markets

PFBs repo turnover is much larger than that of cash bonds:

The PFB repo turnover amount was CNY 758tn in 2016, 10.7x the amount of cash bonds turnover
There are two repo markets in China CIBM and exchange; the CIBM repo market is much larger
72% of PFB repo turnover came from the CIBM in 2016

Repo turnover of PFB is much larger than that of cash bonds

PFB turnover in cash bond and repo (CNY bn)
900,000 Cash bonds Repo turnover
800,000

700,000

600,000

500,000
758,245
400,000

300,000

200,000

100,000
50,976
0
2011 2012 2013 2014 2015 2016

Source: Wind, Standard Chartered Research 28

CIBM repo: PFBs account for 50% collateral, enjoy low haircuts

PFBs are commonly used as collateral and enjoy very low haircuts on the CIBM repo market:
The CIBM repo market is a bilateral repo market
Terms and conditions, including tenor, collateral, haircut and yield, are negotiated between buyers and sellers
PFBs dominate collateral on the CIBM (51%), followed by CGBs (36%) and higher-rated enterprise bonds (5%)
In general, the haircut for PFBs is very low (can be 0%), owing to its sovereign backing and high liquidity

PFB accounted for 51% of collateral in CIBM

Collateral poll by issuer in 2016 (%)

PFBs, 51%
CGBs, 36%

Enterprise
bonds, 5%

LGBs, 3%

Others, 5%

Source: CCDC, Standard Chartered Research 29

Exchange repo: 2% haircut for PFBs

China Clear has tightened regulations on exchange-traded pledged repo transactions: haircut for rates
bonds unchanged, but generally increased for credit bonds; new rule effective from 15 July 2016
Haircut for rates bonds including CGBs, LGBs and PFBs stays unchanged at 2%, regardless of tenor
Haircut for credit bonds increased across the board:
Top-rated increased to 10% from 5%; bottom-rated increased to 50% from 30%
Additional 5% haircut upon a negative rating outlook revision
Haircut can be adjusted based on the quality of issuers information disclosure and credit ratings
Average haircut for credit bonds increased to 22.2% as of end-June 2016 from 13.6% as of November 2015
Fixed income funds (which are fully invested in repo-eligible bonds) and exchangeable bonds are now eligible for repo

Summary of updated haircut requirements for exchange-traded pledge repo transactions

Category Rating Corporate/Enterprise bonds Convertible/Exchangeable bonds
1 Both issuer and issue rating at AAA 10% 33%
2 Issuer rating AA+, issue rating AAA 20% 40%
3 Issuer rating AA, issue rating AAA 25% 47%
4 Both issuer and issue rating at AA+ 30% 53%
5 Issuer rating AA, issue rating AA+ 40% 61%
6 Both issuer and issue rating at AA 50% 68%

Source: China Clear, Standard Chartered Research 30

Holding structure

Commercial banks hold nearly two-thirds of outstanding PFBs, followed by funds and insurance:
Commercial banks held CNY 8,033bn worth of PFBs as of end-2016, accounting for 65% of the outstanding amount
Funds (including mutual funds, pension funds and wealth management products) held 23%, followed by insurance
companies (5%) and credit cooperatives (4%)
Foreign investors held CNY 305bn of PFBs at end-2016, accounting for 2.5% of total outstanding (versus 3.5% for CGBs)

PFBs are held mainly by commercial banks Commercial banks hold 65% of outstanding PFBs
Amount of PFB holdings by investor, end-2016 (CNY bn) Share of PFB holdings by investor, end-2016 (%)

9,000 8,033 PFB holding amount Commercial

8,000 banks, 64.8% Funds, 22.9%
7,000 Insurance,
6,000 4.7%
5,000 Credit co-
operatives,
4,000 3.8%
2,836
3,000 Foreign
2,000 investors,
1,000 583 476 305 2.5%
76 45
0 Securities,
0.6%
Funds

Securities
Insurance

cooperatives

members
investors
Commercial

Foreign

Special
banks

credit

Special
members,
0.4%

Source: Wind, Standard Chartered Research 31

Funds have become key buyers of PFBs

Funds are the biggest net buyers of PFBs since 2015, and their share of holdings continues to rise:
Funds bought 71% and 89% of the net increase in PFBs in 2015 and 2016, respectively
Funds share of PFB holdings rose sharply to 23% as of 2016, up from 13% in 2015 and only 5% in 2010, owing to:
Increasing AUM of funds, especially from mutual funds and wealth management products
Decreasing appetite from commercial banks: Banks need to increase their holdings of government bonds
(CGBs/LGBs) on account of a wider deficit and debt-swap programme, thus decreasing other bonds holdings

Funds are key buyers of PFBs since 2015 Funds share of PFBs is rising quickly
Net change in PFB holdings (CNY bn) Historical holding mix of PFBs (%)
1,600 Special members Commercial banks Securities 90%
Insurance Funds Others
1,400 80% Commercial
1,200 70% banks
1,000 60%
800
50%
600
40%
400
30% Funds
200
20%
0
10% Insurance
-200
0% Foreign
-400

2009
2006

2007

2008

2010

2012

2013

2014

2015

2016
2011
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Wind, Standard Chartered Research 32

Foreign investors holding structure

Foreign ownership by type of bonds (%) Foreign holding of onshore bonds (CNY bn)

4.0% Overall market size CGB PFB Others CGB PFB Other interbank bonds Exchange-traded bonds

3.53% 900
3.5%
57
800
67 67
3.0% 85 52
700 144 105 70
2.50%
2.5% 89
600 153
152 305 285
135
81 122 283
2.0% 500

118 208
400
1.5% 1.33% 246
249
239
300
1.0% 198
200 424 418
386
318
0.5% 0.31% 235 248
100 221
163

0.0% 0
2014-06 2014-12 2015-06 2015-12 2016-06 2016-12 2014-06 2014-12 2015-06 2015-12 2016-06 2016-09 2016-12 2017-02

*Exchange data for foreign investors for Q1-2017 is unavailable; Source: Wind, Standard Chartered Research 33
Appendix 1: CDB bond auctions since 2017
CDB bond auction CDB bond auction
Auction Amount Pricing Bid-to- Auction Amount Pricing
Tenor Type Tenor Type Bid-to-cover
date (CNY bn) Yield (%) cover date (CNY bn) Yield (%)
5-Jan-17 4 20 new issue 4.01 2.27 16-Feb-17 2 20 re-opening 4.27 3.77
5-Jan-17 5 7 new issue 3.85 2.77 16-Feb-17 6 5 re-opening 3.94 3.16
5-Jan-17 6 5 re-opening 3.71 1.88 21-Feb-17 5 5 new issue 3.86 2.98
5-Jan-17 6 3 re-opening 3.57 2.32 21-Feb-17 6 3 re-opening 3.78 2.05
5-Jan-17 9 10 re-opening 3.77 2.33 21-Feb-17 10 10 re-opening 4.04 3.60
10-Jan-17 8 5 re-opening 3.61 1.89 23-Feb-17 6 1 re-opening 3.14 2.53
10-Jan-17 6 3 re-opening 3.51 3.02 23-Feb-17 2 20 re-opening 4.25 3.80
10-Jan-17 10 10 re-opening 3.69 1.95 23-Feb-17 4 7 re-opening 4.06 3.69
12-Jan-17 4 20 re-opening 3.95 2.62 28-Feb-17 6 1 re-opening 3.14 3.54
12-Jan-17 6 7 re-opening 3.87 1.99 28-Feb-17 3 20 re-opening 4.31 2.54
12-Jan-17 6 1 re-opening 3.05 2.57 28-Feb-17 4 7 re-opening 4.07 4.20
17-Jan-17 7 1 new issue 3.20 1.93 2-Mar-17 5 5 re-opening 3.97 2.61
17-Jan-17 8 5 re-opening 3.72 2.61 2-Mar-17 6 3 re-opening 3.81 2.01
17-Jan-17 10 10 re-opening 3.82 2.82 2-Mar-17 8 10 re-opening 4.11 3.93
19-Jan-17 4 20 re-opening 4.14 1.95 2-Mar-17 8 20 new issue 4.52 1.00
19-Jan-17 6 7 re-opening 3.93 1.97 2-Mar-17 12 10 new issue 4.29 1.00
19-Jan-17 6 3 re-opening 3.53 2.31 7-Mar-17 6 1 new issue 3.20 2.16
24-Jan-17 46 20 new issue 4.27 1.00 7-Mar-17 6 5 re-opening 4.02 2.25
7-Feb-17 6 1 re-opening 3.30 2.63 7-Mar-17 9 10 re-opening 4.12 3.32
7-Feb-17 8 5 re-opening 4.06 2.54 9-Mar-17 3 7 re-opening 4.20 3.94
7-Feb-17 10 10 re-opening 4.18 3.89 9-Mar-17 7 3 re-opening 3.94 1.90
9-Feb-17 2 20 re-opening 4.28 4.24 14-Mar-17 5 1 re-opening 3.38 1.89
9-Feb-17 6 7 re-opening 4.08 4.04 14-Mar-17 4 5 re-opening 4.03 2.92
9-Feb-17 6 3 re-opening 3.80 2.64 14-Mar-17 5 3 re-opening 3.93 3.15
14-Feb-17 3 7 re-opening 4.09 5.42 14-Mar-17 7 10 re-opening 4.13 4.89
14-Feb-17 6 3 re-opening 3.77 2.31 21-Mar-17 3 1 re-opening 3.58 3.23
14-Feb-17 10 10 re-opening 4.09 4.05 21-Mar-17 5 3 re-opening 3.96 3.24
16-Feb-17 6 1 re-opening 3.23 2.85 21-Mar-17 4 5 re-opening 4.04 3.26

Source: Wind, Standard Chartered Research 34

Appendix 2: EXIM bond auctions since 2017
EXIM bond auction EXIM bond auction
Auction Amount Pricing Bid-to- Auction Amount Pricing
Tenor Type Tenor Type Bid-to-cover
date (CNY bn) Yield (%) cover date (CNY bn) Yield (%)
5-Jan-17 3 5 re-opening 3.75 2.46 9-Mar-17 3 1 re-opening 3.35 3.64
5-Jan-17 4 3 re-opening 3.56 3.74 9-Mar-17 5 5 re-opening 4.10 2.41
5-Jan-17 5 10 re-opening 3.90 1.97 9-Mar-17 4 10 re-opening 4.26 3.95
12-Jan-17 4 5 re-opening 3.71 2.01 16-Mar-17 3 1 re-opening 3.52 3.14
12-Jan-17 4 3 re-opening 3.51 3.11 16-Mar-17 5 3 re-opening 3.92 2.93
12-Jan-17 5 10 re-opening 3.90 1.75 16-Mar-17 5 5 new issue 4.05 2.73
19-Jan-17 4 5 re-opening 3.75 3.06 16-Mar-17 3 10 new issue 4.11 6.09
19-Jan-17 4 3 re-opening 3.54 3.86 23-Mar-17 4 3 re-opening
19-Jan-17 4 10 re-opening 3.96 4.88 23-Mar-17 4 5 re-opening
23-Jan-17 4 1 new issue 3.04 3.48 23-Mar-17 4 10 re-opening
23-Jan-17 4 3 re-opening 3.53 3.75
9-Feb-17 4 1 re-opening 3.30 3.02
9-Feb-17 4 5 re-opening 4.02 2.98
9-Feb-17 5 3 re-opening 3.86 2.14
9-Feb-17 3 10 re-opening 4.23 6.78
16-Feb-17 3 1 re-opening 3.30 4.06
16-Feb-17 4 5 re-opening 3.99 3.71
16-Feb-17 5 3 re-opening 3.87 2.66
16-Feb-17 3 10 re-opening 4.20 7.12
23-Feb-17 5 3 new issue 3.80 2.43
23-Feb-17 3 1 re-opening 3.20 4.52
23-Feb-17 5 5 re-opening 3.96 2.12
23-Feb-17 4 10 re-opening 4.13 4.09
2-Mar-17 5 3 re-opening 3.81 2.73
2-Mar-17 3 1 re-opening 3.26 3.52
2-Mar-17 5 5 re-opening 4.00 2.31
2-Mar-17 4 10 re-opening 4.19 4.04
9-Mar-17 6 3 re-opening 3.93 1.84

Source: Wind, Standard Chartered Research 35

Appendix 3: ADBC bond auctions since 2017

ADBC bond auction ADBC bond auction

Auction Amount Pricing Bid-to- Auction Amount Pricing
Tenor Type Tenor Type Bid-to-cover
date (CNY bn) Yield (%) cover date (CNY bn) Yield (%)
4-Jan-17 4.0 10 new issue 3.85 3.26 1-Mar-17 5.7 5 re-opening 3.98 2.50
4-Jan-17 4.0 7 new issue 3.83 2.94 1-Mar-17 4.0 1 re-opening 3.26 3.27
4-Jan-17 4.0 5 new issue 3.70 4.14 6-Mar-17 4.0 7 re-opening 4.21 3.13
4-Jan-17 4.0 3 new issue 3.54 4.25 6-Mar-17 6.3 3 re-opening 3.83 2.37
4-Jan-17 4.0 1 new issue 3.20 2.82 8-Mar-17 4.0 10 re-opening 4.25 4.44
11-Jan-17 6.0 10 re-opening 3.88 2.13 8-Mar-17 6.0 5 re-opening 4.08 2.48
11-Jan-17 5.0 7 re-opening 3.87 2.15 8-Mar-17 5.3 1 re-opening 3.33 2.67
11-Jan-17 5.0 5 re-opening 3.70 3.16 13-Mar-17 2.0 15 new issue 4.45 2.65
11-Jan-17 5.0 3 re-opening 3.53 3.90 13-Mar-17 6.0 7 re-opening 4.27 2.51
11-Jan-17 5.0 1 re-opening 3.18 3.03 13-Mar-17 7.9 3 re-opening 3.96 2.54
18-Jan-17 6.0 10 re-opening 3.99 2.11 15-Mar-17 5.0 1 re-opening 3.50 2.39
18-Jan-17 5.0 7 re-opening 3.99 2.35 15-Mar-17 7.5 5 re-opening 4.10 2.67
18-Jan-17 5.8 5 re-opening 3.76 3.55 15-Mar-17 5.5 10 re-opening 4.22 5.13
18-Jan-17 5.0 3 re-opening 3.57 3.78 22-Mar-17 5.0 1 re-opening
18-Jan-17 5.0 1 re-opening 3.20 2.92 22-Mar-17 6.0 5 re-opening
6-Feb-17 5.0 10 re-opening 4.30 2.52 22-Mar-17 4.0 10 re-opening
6-Feb-17 5.0 7 re-opening 4.21 2.16
6-Feb-17 5.0 5 re-opening 4.02 3.44
6-Feb-17 5.0 3 re-opening 3.81 2.65
6-Feb-17 6.0 1 re-opening 3.36 2.08
22-Feb-17 3.0 10 re-opening 4.14 5.62
22-Feb-17 3.0 7 re-opening 4.10 3.97
22-Feb-17 5.8 5 re-opening 3.97 2.91
22-Feb-17 5.1 3 re-opening 3.79 2.66
22-Feb-17 4.0 1 re-opening 3.19 3.74
27-Feb-17 4.0 7 re-opening 4.10 3.68
27-Feb-17 4.0 3 re-opening 3.77 3.03
1-Mar-17 4.0 10 re-opening 4.16 4.28

Source: Wind, Standard Chartered Research 36

Authors

Jeffrey Zhang +852 3983 8540

Jeffrey.Zhang@sc.com
Fixed Income Strategist
Standard Chartered Bank (HK) Limited

Becky Liu +852 3983 8563

Becky.Liu@sc.com
Head, China Macro Strategy
Standard Chartered Bank (HK) Limited

37
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39