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Insights

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    1 June 2016

    HSBC wins renminbi award

    HSBC has been named best bank overall for offshore renminbi (RMB) products and services in Asiamoney’s Offshore RMB Poll for the fifth year in a row. The bank also won all 10 category prizes.

    More than 2,000 companies, financial institutions and investors that use the Chinese currency voted in the awards. They recognised the bank’s expertise in areas including offshore RMB foreign exchange and clearing services, fund services, research on offshore RMB, as well as advice on regulations concerning the currency’s offshore use.

    We act as a bridge between what China’s policies mean and the implications for our customers

    Candy Ho, Global Head of RMB Business Development, HSBC, said: “We act as a bridge between what China’s policies mean and the implications for our customers and I think clients are appreciative of that.”

    The RMB has risen rapidly in prominence as an international trade, investment and reserve currency since the introduction of reforms to encourage its use. It is due to be included in the International Monetary Fund’s basket of international reserve currencies from October 2016.

    HSBC identified growing business from the internationalisation of the RMB as one of 10 strategic actions at its Investor Update in June 2015.

    Asiamoney Offshore RMB Poll 2016

    HSBC won the following awards:

    • Best overall offshore RMB products and services
    • Best for offshore RMB wealth management
    • Best for offshore RMB bond origination
    • Best for offshore RMB derivatives
    • Best for offshore RMB foreign exchange
    • Best for offshore RMB fund investment
    • Best for offshore RMB clearance, transaction banking and settlement
    • Best for offshore RMB fund services
    • Best for offshore RMB liquidity management
    • Best for advice/information on offshore RMB regulations
    • Best for offshore RMB research

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    6 April 2016

    Shenzhen connects to Hong Kong

    The Shenzhen-Hong Kong Stock Connect should launch before the end of 2016, building on the existing link between the Hong Kong and Shanghai stock exchanges. It will introduce foreign investors to a selection of small, private companies that are the mainstay of China’s ‘new economy’.

    The Shenzhen-Hong Kong link is long overdue, but will allow China’s government to show global investors that it can move ahead with capital-account liberalisation and capital-market reforms despite challenging economic and market conditions.

    Getting it off the ground may also increase the chances of China’s A-shares bring included in key stock indices, showing further international recognition of its markets.

    Mainland investors poured more than 24 billion renminbi (USD3.7 billion) through the Shanghai link to Hong Kong in the first quarter of 2016 while in the other direction there was net selling of A-shares. The consistent southbound flows indicate that interest in Hong Kong stocks by Chinese mainlanders has been steady. That is why we think the time is right to roll out Shenzhen-Hong Kong Stock Connect.

    The Shenzhen stock exchange is home to many Chinese internet, high-technology and software start-ups – ‘new economy’ stocks. These are energetic companies with innovative services and products. The Chinese authorities emphasised in their new Five-Year Plan that smaller companies and the ‘new economy’ are crucial to economic rebalancing and reinvigorating growth.

    Yet, the exchange may be the biggest bourse that overseas investors have never heard of. Its market capitalisation is the sixth largest in the world at around USD3 trillion and by turnover it ranks fourth, with average daily dealing exceeding USD50 billion.

    The Shenzhen-Hong Kong Stock Connect will be a new milestone in Beijing’s liberalisation of capital controls in both directions. While Shenzhen’s ChiNext board is dominated by ‘new economy’ companies and skewed towards smaller start-ups, the biggest weights in Hong Kong’s Hang Seng Mid/Small-Cap Composite index are machinery, property, and diversified financials.

    China’s authorities have outlined a blueprint for a multi-layered equity market to serve the financing needs of different companies, large and small. This will comprise the main board in the Shanghai and Shenzhen stock exchanges, the smaller-companies board in Shenzhen, plus ChiNext for emerging industry and high-growth companies, together with the National Equity Exchange & Quotations in Beijing (NEEQ) which is mainly for small high-tech companies.

    There would also be a regional equity exchange in each province servicing limited- liability companies with fewer than 200 shareholders, plus an over-the-counter market.

    This paves the way for thousands of private-equity investors, venture-capitalists and angel investors to provide equity financing to more than 15 million small, medium, and micro-enterprises in China. The number of companies listed on NEEQ tripled in the year to March to more than 6,000 and it now has twice as many listed companies as Shanghai and Shenzhen combined.

    As financing is challenging for most small- and medium-sized companies, more and more enterprises are switching to NEEQ. From May, it is separating listed companies into ‘innovative’ and ‘basic’ and we think a mechanism for automatic upgrade to ChiNext will be introduced soon after, making NEEQ even more desirable for innovative high-growth companies.

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    5 April 2016

    China’s bond market grows

    China’s onshore bond market grew substantially in 2015. The value of outstanding bonds increased 35 per cent during the year to exceed 48 trillion renminbi – USD7.3 trillion. That is the fastest growth in the history of major global debt markets and makes China the world’s third-largest bond market, after the US and Japan in dollar terms.

    And as China’s market grew, diversification widened. Credit bonds issued by companies or commercial financial institutions now comprise 45 per cent of the outstanding total, compared to around 20 per cent in 2010.

    The share of bonds representing explicit state credit risks has thus declined. China Government Bonds are now only 22 per cent of the market compared with more than 70 per cent 15 years ago. Meanwhile municipal bonds now account for 10 per cent, up from 2 per cent to 3 per cent five years ago.

    Bond issues more than doubled to 23 trillion renminbi last year: growth over the previous three years had averaged just 16 per cent.

    Five base rate cuts within 12 months plus four reductions in the reserve requirement ratio that banks must hold helped drive down bond yields and credit spreads. That not only made the bond market an attractive place to raise debt for corporates, many offshore Chinese issuers also came back onshore to take advantage of cheaper funding.

    State-owned enterprises are still the dominant issuers, but 2015 was the first year they accounted for less than 70 per cent of corporate gross issuance. Private enterprise issues hit a record high.

    There was also a boom in interbank certificates of deposit, as banks bolstered their liquidity and short-term funding because the competition for retail deposits is intensifying as China liberalises its interest rates.

    The other reason for last year’s large increase in issuance was the introduction of municipal bonds – a key component of Beijing’s attempt to regulate and streamline local-government financing. Between May and December 2015, some 3.84 trillion renminbi of these bonds were issued.

    Local-government financing vehicles declined slightly last year but remain important and exchange-traded corporate bonds boomed.

    There have also been major regulatory advances in expanding and deepening the investor base of the onshore bond market. Qualified retail investors can now purchase and trade non-treasury bonds in the interbank market on an over-the-counter basis, and bond investment quotas for medium-to-long-term offshore investors were removed.

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    1 April 2016

    Clues to China’s monetary policy

    The current stability of China’s money-market rates has surpassed the most optimistic expectations. In June 2013 a serious cash-crunch created huge levels of volatility in interbank rates and rattled global markets but the money market has since evolved, and the explanation can be found in the central-bank’s balance sheet.

    The People’s Bank of China’s claims on deposit-taking financial corporations, non-deposit-taking financial corporations and non-financial institutions has risen from 8.3 per cent of its total assets in January 2013 to 17.7 per cent, as of February 2016.

    These claims have surged because of the central bank’s widespread provision of liquidity to the monetary system. Without this, the money market would be nowhere as stable as it is today. Investors therefore need to be aware of the channels through which liquidity is added to the system, their differences, and the implications they have for portfolio investments and China’s monetary policy.

    But first, a little context. Even as China seeks to internationalise its economy, one feature is missing. In most countries, monetary-policy signals are picked up by observing the decisions made by central banks at scheduled monetary-policy meetings.

    However, China has no such schedule for investors to follow and benchmark policy rates and the required reserve ratio – deposits commercial banks must make with the central bank – are adjusted whenever the government deems appropriate.

    The central bank’s frequent money-market interventions fill the gap by giving a chance to monitor the type, size and interest rate attached to its liquidity operations. Even the slightest adjustment can send a powerful monetary-policy signal.

    This intervention is made through open-market operations that are now held daily and offer more timely clues about the direction of monetary policy. Investors can also follow the ad hoc use of the measures such as Short-term Liquidity Operations, the Standing Lending Facility, the Medium-term Lending Facility, and Pledged Supplementary Lending as well as rediscount facilities.

    These are relatively new additions to the central-bank’s policy toolkit and reflect its desire to reduce money-market volatility. And further improvements are in the pipeline.

    China’s most commonly referenced money-market rates are the overnight and seven-day repo rates – the repo market is the most active money market, followed by the Shanghai Interbank Offered Rate market.

    However, in February the central bank said it was exploring ways of creating an interest corridor to guide borrowing and lending costs. We believe this corridor will involve an upper band that is the seven-day interbank repo rate – the rate at which banks can borrow from the central bank during the daily open-market operations ¬– and a lower band that is the seven-day repo rate, the rate at which banks are paid for parking excess funds with the central bank.

    The difference between the two represents the width of the policy-rate corridor and also the degree of potential volatility of the seven-day interbank repo rate. In our view, such a policy framework would further reduce uncertainty over the interest-rate environment and ensure a stable future for China’s money market.

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    18 March 2016

    China gets greener

    China’s new five-year plan is greener than its predecessor, not just because of its targets but because the themes of green and low-carbon permeate much of the entire plan – from manufacturing to agriculture, and from investment to consumption.

    Improving the ecological environment over the period up to 2020 is a key objective of the economic and social development plan adopted at March’s National People’s Congress meeting in Beijing.

    The new plan embeds the notions of greener production, greener living and low-carbon development being better for the economy, better for citizens and better for international relations. The government aims to encourage ‘prosperous industries’, including infrastructure such as parking and charging facilities for new-energy vehicles, more environmentally-friendly construction with greener materials, and the development of cleaner energy.

    China’s energy intensity declined by 18.2 per cent between 2011 and 2015, exceeding the 16 per cent target of the last five-year plan. The new target is just 15 per cent, but is still important because the country’s energy intensity is double the G20 average. China thus needs to shift its economy away from heavy industry.

    A cap has been set on total energy consumption of 5 billion tonnes of standard coal equivalent but we think it could be more ambitious since it implies a higher growth rate than in recent years. We were also disappointed not to see a cap on greenhouse gas emissions.

    China accounted for almost half of global wind power and more than a quarter of solar installations in 2015. Renewables, hydro and nuclear satisfy 12 per cent of its primary energy consumption – higher than the original target of 11.4 per cent for non-fossil fuels. Longer-term targets are 15 per cent by 2020 and 20 per cent by 2030 but these may be exceeded too.

    Coal contributed to only 64 per cent of total energy consumption in 2015 and the expansion of coal production and coal-fired generation will be further restricted over the next five years. We expect a continuation of policies aimed at using cleaner coal, for example converting to gas-fired generation in specific city centres and implementing the ‘ultra-low emissions from coal-fired power plants’ initiative.

    New targets mean that by 2020, nuclear capacity should reach 88GW, up from the current 28.3GW, which is less than 2 per cent of national electricity capacity. Inland construction was discussed amid concerns about water availability and safety.

    The plan also discusses safe drinking water and water quality plus broader conservation issues. The new water-intensity target for the economy is for a 23 per cent cut in consumption per unit of GDP by 2020.

    China continues to suffer from smog episodes. The proportion of “good air days” was 76.7 per cent last year but the aim is to raise that to 80 per cent by 2020.

    We anticipate more financial reforms to include green elements. For example, a new green development fund will support the green and low-carbon economy. Also, opening capital markets, including bond markets, to foreign investment, should help to channel capital into areas such as the strategic emerging industries and the environmental-protection and energy-saving sectors.

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    18 March 2016

    Full speed on the New Silk Road

    Cross-border mergers and acquisitions involving Chinese companies have been front-page news in 2016. This is another step in the globalisation of China’s capital and should be mutually beneficial for that country’s investors and for countries receiving direct investment from China.

    For the first time, China’s outbound non-financial direct exceeded foreign direct investment into the country in 2015. This happened despite, or perhaps even because of, the slowdown in the domestic economy.

    We think China’s outbound direct investment (ODI) will continue to grow rapidly because its excess domestic savings give the opportunity to acquire assets that can generate long-term returns. It allows firms and savers to diversify their income streams internationally and also generates greater global demand for China’s exports.

    The New Silk Road – the land and sea routes often known as the One Belt, One Road initiative – is an important part of the plan. Chinese enterprises invested in 49 countries along the New Silk Road in 2015, with investment there reaching USD14.8 billion, or one-eighth of China’s total non-financial ODI.

    Investment along the New Silk Road – and beyond – is being driven by China seeking access to markets, better technologies and a stable income stream to pay for future imports. The recipient countries often lack sufficient savings to pay for still-needed investment.

    However, not all outward direct investment will hold up as China’s economy slows. The appetite for natural resources and mining assets is falling because of the cyclical slowdown and the long-term structural shift from heavy industry. So China’s ODI to Africa fell by 5 per cent in 2014 and Latin America countries received 10.5 per cent less.

    China has also been switching its international assets from reserves accumulated abroad towards investment, especially direct rather than portfolio investment. And more than 80 per cent of the direct investment is equity, not loans. Indeed, mergers and acquisitions now account for about 60 per cent of outbound investment with last year’s 593 deals totalling USD40 billion.

    Yet despite the rapid growth, China’s ODI was just 1.2 per cent of GDP in 2014 – far below developed countries.

    But how will the world react to this fast-rising M&A and outbound investment? One common worry is whether this overseas investment will make receiving countries too dependent on Chinese capital – for trade as well as investment. China is already, or will become, the biggest trade partner for many countries it invests in, especially those along the New Silk Road in Asia and Europe. However, the net import of both capital and goods or services is an effect of a country wishing to invest more than it saves – it is not a cause.

    But restricting foreign investment would merely increase the would-be recipients’ cost of capital and make the deficits even more unsustainable. It would also forego the other benefits of foreign direct investment, such as technological transfer, job creation, stronger growth in productivity and incomes.

    Ultimately, the type of buyer matters more than their nationality. So Chinese owners are likely to have an even greater incentive to prove that they are responsible, long-term owners, and grow the value of their overseas investments.

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    March 2016

    China's shift to digital

    Online shopping is transforming the face of China’s economy and putting pricing power in the hands of its 1.37 billion consumers.

    China has promoted greater use of the internet to spearhead economic reform and foster the development of a consumption-led economy.

    For decades, mainland China’s expansion was powered by low-value-added manufacturing – cheap toys, shoes and textiles “Made in China” and exported to the rest of the world. The focus now is increasingly on making the country’s economy more productive, innovative and market-oriented.

    Chinese consumers have adopted the digital world with lightning speed

    Chinese consumers have adopted the digital world with lightning speed. Just a decade ago, there were fewer than 100 million internet users in mainland China, about 7 per cent of the population. Now, nearly 50 per cent of the nation is online, with some 667 million internet users as of June 2015.

    The country is the world’s largest e-commerce market: online retail sales in mainland China totalled RMB3.87 trillion (USD589.61 billion) in 2015, up 33.3 per cent from a year earlier, according to official data.

    This eager embrace of the internet has injected transparency and competition into the mainland Chinese economy, ensuring that quality, price, efficiency and service are rewarded more than ever before.

    But the real impact will come if these market forces take root across all parts of the economy – in particular, the country’s large state-owned sector.

    Mainland China’s approximately 150,000 state-owned enterprises employ more than 30 million people and contribute nearly a third of China's GDP. Their actions have a big impact on the speed and direction of China’s economic rebalancing.

    Not all state-owned enterprises have been quick to harness the internet. However, those that do can reap substantial benefits. Chinese authorities have seen the successes in the private sector and are now encouraging change in the state-owned sector, too.

    In March 2015, Premier Li Keqiang announced the “Internet-Plus” initiative. This aims to encourage China’s manufacturers to deploy mobile internet, cloud computing, Big Data analysis and other tools. It promotes the development of internet banking, mass entrepreneurship and innovation. It also aims to support higher-tech approaches in agriculture, energy, finance, public services, logistics, e-commerce, traffic, biology and artificial intelligence.

    China spent RMB430 billion in 2015 to improve the country’s internet system. A further RMB700 billion of public funds will be spent in 2016 and 2017.

    These policies could help provide momentum for China in the years ahead. They will create new markets for innovative products and services. And they will generate jobs for workers with digital and high-tech skills. In the long term, China’s digital economy will help its international ambitions.

    The heavy capital investment and labour force expansion that fuelled China’s rise over the past three decades cannot be sustained indefinitely. The country’s embrace of the internet can ultimately support China’s goal of creating a more sustainable digital economy. China’s policy makers, and the country’s online shoppers, are helping to bring that change about.

    A version of this article first appeared in The South China Morning Post on 14 March 2016.

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    March 2016

    China's redback rises higher

    The renminbi will pass an important milestone this year when the Chinese currency is included in the IMF's basket of reserve currencies. And although Beijing's commitment to market reforms and greater financial openness is testing market volatility, we believe China has not lost sight of its long-term objectives for capital-account liberalisation and renminbi internationalisation.

    The long-run solution for China should be to keep its monetary-policy independence, accompanied by greater cross-border capital mobility and exchange-rate flexibility. But, in the short run, the choice can be more nuanced, so China has adopted partial controls over exchange rates and capital flows.

    Temporary policy actions – tighter restrictions on certain capital outflows and targeted currency intervention – should therefore be seen in the context of managing the risks amid near-term challenges. Monetary-policy easing, complemented by fiscal stimulus, can support the economy and allow market and economic conditions to settle to become more conducive to long-run reforms.

    The broader story is still one of increasing openness and connectivity to global markets. China's economy and its domestic capital market now match the world's largest. However, domestic savers want to diversify their investments while global investors are significantly under-invested in China. Opening up the capital account will lead to greater portfolio flows in both directions.

    If China achieves even half the portfolio openness of emerging-market Asia by 2025, that would add USD1,200 billion in outflows and USD1,800 billion in inflows.

    So the arguments for more capital-account liberalisation to support China's financial development remain valid, despite market concern at large capital outflows. Not all outflows are bad, and much of the outflow is repayment of foreign debt and outward direct investments (ODI), not capital flight.

    China's ODI should continue growing as the country diversifies its savings into foreign assets. ODI flows are shifting away from mining and natural resources and towards assets that provide long-term income, access to new markets and better technologies. China's private-sector firms' investments in foreign companies have surged at the start of 2016.

    As for trade, China's shares of global imports and exports have risen steadily since it joined the World Trade Organization in 2001. The rising share of exports implies that disappointing trade data stem from weak global demand rather than pricing or a lack of competitiveness.

    A deliberate devaluation of the renminbi would not be an effective way to stimulate growth. Better options include easing monetary policy and increasing government spending to boost domestic demand, avoiding the risks of competitive devaluation where nobody wins.

    The rise of the redback could be an important catalyst for a potential transition from the current US dollar-centric system to one involving multiple reserve currencies. That is contingent on continued reform of China's exchange rate, financial sector, and the development of the broader economy. China and the rest of the world could benefit from the renminbi's eventual rise to become a major international currency.

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    February 2016

    China's "Belt and Road" plan is boom for Asia capital markets

    China's "Belt and Road" infrastructure initiative is an essential part of the country's domestic economic rebalancing and of its outbound ambitions.

    The initiative entails investing billions of dollars into infrastructure such as railways, highways and ports that link mainland China and the dozens of countries to its west and south. The goal is to encourage more cross-border trade while creating opportunities for Chinese companies.

    Raising the vast amount of capital needed to meet Asia's infrastructure needs will also inject fresh momentum into the region's capital markets. Investment in "Belt and Road" projects could total RMB1.5 trillion in the coming years. Part of this will come via a USD40 billion Silk Road Fund, and the newly launched USD100 billion Asian Infrastructure Investment Bank.

    Yet this is only a small part of the trillions that will need to flow into transport and urban infrastructure over the coming decades as developing nations aim to raise productivity and deal with rising urbanisation. In China alone, more than 200 million people are expected to leave rural communities for the city in the next 15 years.

    Reforms in mainland China have expanded the options available to foreign and domestic investors and bond issuers in recent years. The "Belt and Road" initiative will trigger more issuance and investment. It could also galvanise China's financial reforms, and encourage policymakers to further open the country's capital market to global participants.

    This is good news. A more liquid and diverse bond market will help improve the allocation of capital and reduce the Chinese economy's heavy reliance on bank lending.

    Local-currency markets in many of Asia's smaller countries could also increase in depth and range. "Belt and Road" investments will help to attract investor attention globally, and expand corporate access to long-term capital around the region.

    This convergence of supply and demand could help transform Asian financing markets in the coming years. It has the potential to expand the role of bond markets in recycling Asian savings into long-term investment in infrastructure for growth – especially if policymakers manage to bring about more cohesion in areas such as taxation, foreign exchange regulation and credit ratings. The initiative will also help boost the internationalisation of the Chinese currency as more transactions are settled in renminbi.

    The "Belt and Road" initiative will help make it easier for trucks, ships and trains to transport goods around large parts of the globe. But it could well have another valuable impact in oiling the wheels of finance.

    A version of this article appeared in the FT's beyondbrics column on 27 January 2016.

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    February 2016

    Chinese tourists go global

    As China welcomes in the Year of the Monkey, many Chinese are expected to use the extended holiday to travel abroad.

    Tourism contributed 10 per cent to global GDP and accounted for USD1.5 trillion in global exports in 2014 – and China’s share of this important industry has grown significantly over the past 10 years. So it’s little wonder that countries around the world are courting visitors from the world’s second largest economy.

    Collectively, tourists from China now spend more than any other nation, according to the United Nations World Tourism Organization. Preliminary figures from the China National Tourism Administration indicate spending by Chinese outbound tourists rose 17 per cent to USD104.5 billion in 2015. The number of visits rose too, with Chinese travellers making 120 million trips abroad in 2015, up 12 per cent on the year before.

    They are exploring new overseas destinations, encouraged by cheaper flights, favourable exchange rates and plentiful shopping opportunities

    Chinese travel trends are changing as tourist numbers increase. The country’s affluent middle classes are increasingly looking for cultural adventures beyond travel within mainland China, Hong Kong and Macau. They are exploring new overseas destinations, encouraged by cheaper flights, favourable exchange rates and plentiful shopping opportunities.

    As competition grows at home, countries worldwide are also actively competing for the custom of Chinese tourists, who are significant buyers of goods and services and regularly spend money on clothing, cosmetics, electronics, visiting attractions and eating out when they travel overseas. Chinese tourists are big buyers of luxury goods. According to HSBC economists, tourists represent about 45 per cent of global luxury goods sales each year, with Chinese visitors accounting for about 60 per cent of that figure.

    South Korea, Japan and Taiwan have particularly benefited from an increase in travellers from China. Countries within the Association of Southeast Asian Nations, notably Thailand, have also seen a rise in Chinese tourists.

    The easing of visa rules has contributed to a rise in visitors from China to places such as Japan over the past few years, according to HSBC economists. In 2010 Japan lowered the minimum income requirement on tourist visas for Chinese visitors and at the start of 2015 it relaxed the requirements on a range of multi-entry visas.

    More favourable exchange rates and flexible visa requirements may help lift tourist numbers to countries outside Asia, too. China overtook Germany as the biggest source of tourism to Russia in 2014, according to Russia’s Federal Agency for Tourism, for example.

    Countries such as Canada, the US, the UK, Spain and France have also been looking to attract more Chinese visitors by simplifying their visa application processes.

    In Canada, which has long standing cultural ties with China, Chinese travellers can apply for 10-year, repeat-entry visas. The two countries are also working together to help add more direct flights from China to Canada.

    Despite their willingness to travel further afield, Hong Kong and Macau still remain favoured destinations for mainland Chinese tourists.

    The Lunar New Year will provide a short-term boost to travel in China. And with HSBC forecasts predicting that visits overseas by Chinese tourists could exceed 240 million within a decade, China looks set to remain a major influence on the global tourism industry.

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    February 2016

    Driving financial reform

    China’s “Belt and Road” infrastructure initiative is an essential part of the country’s domestic economic rebalancing and of its outbound ambitions.

    The initiative entails investing billions of dollars into infrastructure such as railways, highways and ports that link mainland China and the dozens of countries to its west and south. The goal is to encourage more cross-border trade while creating opportunities for Chinese companies.

    Raising the vast amount of capital needed to meet Asia’s infrastructure needs will also inject fresh momentum into the region’s capital markets. Investment in “Belt and Road” projects could total RMB1.5 trillion in the coming years. Part of this will come via a USD40 billion Silk Road Fund, and the newly launched USD100 billion Asian Infrastructure Investment Bank.

    Raising the vast amount of capital needed to meet Asia’s infrastructure needs will also inject fresh momentum into the region’s capital markets

    Yet this is only a small part of the trillions that will need to flow into transport and urban infrastructure over the coming decades as developing nations aim to raise productivity and deal with rising urbanisation. In China alone, more than 200 million people are expected to leave rural communities for the city in the next 15 years.

    Reforms in mainland China have expanded the options available to foreign and domestic investors and bond issuers in recent years. The “Belt and Road” initiative will trigger more issuance and investment. It could also galvanise China’s financial reforms, and encourage policymakers to further open the country’s capital market to global participants.

    This is good news. A more liquid and diverse bond market will help improve the allocation of capital and reduce the Chinese economy’s heavy reliance on bank lending.

    Local-currency markets in many of Asia’s smaller countries could also increase in depth and range. “Belt and Road” investments will help to attract investor attention globally, and expand corporate access to long-term capital around the region.

    This convergence of supply and demand could help transform Asian financing markets in the coming years. It has the potential to expand the role of bond markets in recycling Asian savings into long-term investment in infrastructure for growth – especially if policymakers manage to bring about more cohesion in areas such as taxation, foreign exchange regulation and credit ratings. The initiative will also help boost the internationalisation of the Chinese currency as more transactions are settled in renminbi.

    The “Belt and Road” initiative will help make it easier for trucks, ships and trains to transport goods around large parts of the globe. But it could well have another valuable impact in oiling the wheels of finance.

    A version of this article appeared in the FT’s beyondbrics column on 27 January 2016.

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    December 2015

    RMB comes of age

    On 30 November, the International Monetary Fund announced that the renminbi will be included in its basket of so-called Special Drawing Rights (SDR), putting the Chinese currency on a par with main reserve currencies such as the US dollar and the euro.

    The move represents a major step along the renminbi's path from a national currency to an international one.

    Just over a decade ago, renminbi usage was largely confined to mainland China.

    The move represents a major step along the renminbi’s path from a national currency to an international one

    Now, more than a quarter of China's trade is settled in renminbi. Cross-border schemes allow foreign investors to buy stocks and bonds in mainland China. A large pool of offshore renminbi is freely convertible for trade payment and investment.

    The SDR inclusion – long an aspiration for policymakers in Beijing – sends several important messages.

    It underlines how far the Chinese currency has come, vindicating Beijing's financial-market reforms to date. It serves as a sign of long-term quality assurance, underlining that the currency is liquid and stable as a store of value. And it will give greater confidence to companies and institutions around the world to trade and invest in renminbi.

    Inclusion in the SDR basket will prompt some central banks to adjust their holdings of the Chinese currency. The renminbi has been assigned a 10.92 per cent weighting in the SDR basket, higher than that of the pound and the yen. Central banks and reserve managers who hold assets denominated in SDRs, or who match their reserves to the SDR, will need to adjust their renminbi holdings accordingly.

    According to a survey of central banks carried out earlier in the year, the renminbi will make up an estimated 2.9 per cent of foreign-exchange reserves by the end of this year and will account for 10 per cent of world reserves by 2025.

    The SDR inclusion is also likely to encourage financial and capital account liberalisation.

    In the run-up to the International Monetary Fund's review of the SDR basket, policymakers in Beijing stepped up financial reforms in a bid to attain inclusion.

    In July, the People's Bank of China made it easier for other central banks, sovereign wealth funds and international financial institutions such as the World Bank to invest in China's inter-bank bond market. In August, the authorities gave market forces a greater role in how the central parity rate of the renminbi against the US dollar's daily trading band is determined. And in October, China increased the quota for how much South Korean institutional investors can invest through the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, while in November, China increased Singapore's RQFII quota and designated Malaysia as a new RQFII participant.

    The SDR inclusion is likely to prompt more moves by China to progressively open its doors to two-way capital flows. A Shenzhen-Hong Kong equivalent of the Shanghai-Hong Kong Stock Connect, which allows investors from both sides direct access to each other's market, is in the works. So is a scheme that will start allowing retail investors in mainland China to invest overseas.

    As China seeks to rebalance its economy towards more consumption, services and higher-value manufacturing, it needs a more open capital account: liberalisation will help support economic growth, improve the allocation of capital, and help bring down borrowing costs. The SDR inclusion is another step in this important and fundamental change.

    A version of this article appeared in the South China Morning Post on 7 December 2015.

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  • December 2015

    SDR inclusion – A reminder for business

    Monday’s inclusion of the renminbi into the Special Drawing Rights (SDR), a reserve asset managed by the International Monetary Fund (IMF), is a major milestone in China’s mission to globalise its currency. The decision has been a long time coming, and has effectively granted the status of global reserve currency on to the renminbi.

    At first glance, it looks like the kind of development that should be of primary interest to central bankers, who will be thinking about how to reallocate their reserves to match more closely the basket of currencies that makes the SDR. With a little reflection however, it should be clear that the move by the IMF is a reminder for companies across the world that the renminbi needs to be part of their business strategy.

    The reasoning is as follows. The renminbi’s newfound status as a reserve asset is going to, over the medium term, boost demand for the currency among central banks. A recent Bloomberg poll of reserve managers gave a median prediction that 10 per cent of global foreign exchange reserves will be held in the Chinese currency by 2025.

    To put this into perspective, there is currently USD7.8 trillion worth of reserves globally outside of China. So if such a diversification were to take place today it would require nearly USD800 billion to go into renminbi-denominated assets.

    As countries hold more of their wealth in the renminbi, it gives a powerful sign to businesses that the currency is a viable store of value. The result will be an uptick in companies using the currency to settle international trade.

    At the same time, China’s capital outflows are growing rapidly, as local investors diversify into foreign assets. Outbound investment by businesses and individuals is expected to generate USD1.5 trillion worth of outflows by 2020.

    The renminbi will therefore be stuck in the middle of a supply and demand tug of war that is set to increase the level of two-way volatility in its exchange rate. It will be a sharp turnaround from the situation just a few years ago, when the Chinese currency was considered by many to a one-way bet on appreciation.

    Any company that does business with China should take note of this upcoming chain of events, as movements in the renminbi are set to become a consideration that cannot be ignored. Different companies however, will have different areas of focus.

    A manufacturer, for example, that sources some of its parts from China may well be mostly focused on the exchange rate, which could influence the cost of some of its components. A foreign firm that is investing in China while directly trading with local customers, will need a more advanced currency strategy which not only takes into account the value of the renminbi, but also the liquidity conditions to ensure that it can get hold of enough cash to meet its obligations.

    With volatility in the renminbi increasing, the costs of eschewing currency considerations could be considerable – even for companies that have a small direct exposure to China. As the world’s second largest economy, it has a huge influence on everything from the health of emerging markets to the price of commodities. A significant shift in the outlook for the renminbi could therefore have a substantial impact on financial markets, trade flows, and even international relations.

    We got a taste of the renminbi’s importance during the summer, when the People’s Bank of China increased the currency’s flexibility via a one-off adjustment that led to a sharp, but short-lived, devaluation. Financial markets went into a spin, and the media was quick to announce that China had fired its first shot in a global currency war.

    The panic quickly died down, and although the central bank’s move was a shock to some, for those who pay close attention to the renminbi, it was simply the latest step in China’s long-term goal to introduce more market forces into the value of its currency.

    There’s no one-size-fits-all renminbi strategy that is applicable to all companies. Every business needs to find an approach that fits its circumstances. But what’s clear is that despite encouraging signs that companies want to do more business with China, many firms are missing out on the chance to get ahead of their rivals by including the renminbi into their business planning. According to HSBC’s RMB survey this year, only 22 per cent businesses are using the currency to settle trade.

    The trend though, is clear – the renminbi is on track to enter the top tier of global currencies, and the IMF’s SDR decision is only the latest reminder. The imperative for businesses the world over it is to make the currency a key part of their foreign exchange considerations. Those who fail to do so, could find themselves playing catch-up with their competitors.

    Read more SDR Inclusion – A reminder for business
  • November 2015

    Renminbi unleashed

    The advance of the RMB continues. No longer a newcomer on the global financial scene, it could be said to have reached adolescence – a little more volatile, but still growing up fast.

    And according to panellists at HSBC’s New Roads to China event in London, the RMB will soon be a fully-fledged currency, roaming even more widely around the world.

    The increasing visibility and use of the RMB is a natural effect of shifting capital flows. While still attracting major foreign direct investment, China outbound investment is catching up in volume, growing by 15.6 per cent in 2014. Nearly 60 per cent of this outbound investment is now denominated in RMB.

    Two-way flow

    The rise of the RMB is striking for two reasons, Stuart Gulliver, Group Chief Executive, HSBC, told delegates at the event.

    “First, it indicates that China’s capital flows are moving increasingly naturally in both directions,” he said. “Second, China’s policymakers are not just content to let it happen – they are actively encouraging it.”

    Particular excitement is being generated by the ambitious One Belt, One Road (OBOR) initiative, which aims to connect China to Eurasia via land and sea routes. The China Development Bank has estimated the programme will require cross-border cooperation projects valued at USD890billion – a figure several panellists felt was an underestimate.

    How much of the investment in the 63 countries along the OBOR routes will be denominated in RMB is an open question, said Dr Fan Gang, Director of the National Economic Research Institute and Chairman of the China Reform Foundation. “It’s likely that a Chinese company building a railway in Kazakhstan would want to use RMB,” he said. “Will the currency predominate in financing OBOR? It depends on the bilateral or international nature of each project.”

    China’s ambitions

    China has encouraged the integration of the RMB into the global financial system through systematic liberalisation – facilitating trade settlement in RMB, expanding foreign access into the onshore RMB market and developing the offshore RMB market through bond issuances and other products. The eventual outcome should be a fully convertible RMB.

    China also wants to see the RMB earn a place alongside the euro, sterling, US dollar and yen in the basket of currencies with ‘special drawing rights’ (SDR). This would recognise the RMB as a global reserve currency.

    This goal will itself be a useful push towards a more visible and accessible RMB, according to Qu Hongbin, Chief Economist, Greater China, HSBC.

    “It can act as a trigger for more decisive financial reform in China,” he told the audience. “One of the pre-requirements for joining SDR is that a currency is freely used globally, so this should become a push factor for China to speed up the process.”

    “Reform takes a lot of political commitment – sometimes you need external pressure to get that done.”

    Dr Fan Gang warned that a further major leap was required: the issuing of more bonds in RMB. “At present, the Chinese government does not have a big appetite to issue more debt,” he noted. “This will play a big role in internationalisation.”

    New volatility

    But the momentum of the currency seems unstoppable. Already, it has overtaken the yen as the world’s fourth largest payments currency. A quarter of Chinese trade is already settled in RMB.

    A long record of steady appreciation of the currency came to a pause in August of 2015, when China reformed the USD-CNY mid-point fixing mechanism.

    But panellists were clear that – while users of the currency need to take this new short-term volatility into account – the move was a necessary one that brings the RMB closer to the market, narrowing the gap between onshore and offshore rates.

    For Helen Wong, Chief Executive Greater China, HSBC, there is a simple reason for the increasing embrace of RMB: convenience for businesses in the world’s second economy. “I think there is a natural need that is fuelling the uptake of the RMB, and that need will continue to grow,” she said. “China wants to use its own currency to handle trade.”

    Spreading the word

    Nevertheless, the experience of a couple of delegates at the event were different. Ironically, these western businesses were keen to settle in RMB, but had found it difficult to persuade their Chinese partners to do so.

    In part, this is because the benefits of settling in their own currency have not yet fully filtered through to businesses across China. It’s an issue that Vina Cheung, HSBC’s Global Head of RMB Internationalisation, Global Payments and Cash Management, has helped clients to surmount in the past.

    “In general, the electronics sector is a little more resistant, because they have a US dollar-based cost and like to use the dollar to maximise the natural hedging opportunity,” she explained.

    “At HSBC China we have a lot of relationships with domestic suppliers, and we can provide the bridge to help both foreign and Chinese companies embrace the opportunity to switch from USD to RMB.”

    Best pricing

    Cheung spelled out the potential benefits of that opportunity for foreign businesses, whether importers or suppliers.

    “For importers, the ability to settle your buying in RMB gives you transparent pricing. The risk management moves from the Chinese seller to your side, allowing you to negotiate the best price,” she said.

    “Suppliers who are open to settling in RMB help their customer to shed the burden of FX management. It can help to build a better relationship with your buyer, and to extend your client base in China.”

    For foreign companies with a Chinese presence, new freedoms make it much simpler to repatriate profits, according to Frederik van Tuyll, Chief Executive of TMF Group.

    Flexible model

    “It’s no longer a concern that your money will be trapped in China, which once was the big fear,” he said. “Yes, there are processes to be followed, but these are manageable.”

    Vina Cheung elaborated: “As long as you can prove that your working capital in China is a surplus, you can deploy your funds out from China and bring them back later as required.

    “This is definitely a more flexible and sustainable model for continuous growth, comparing to traditional methods like dividend payments.

    “The further relaxation of the eligibility criteria for cross-border movement of RMB is allowing smaller corporates to benefit. And rather than using a local entity to connect your onshore and offshore positions, you can use a foreign entity or a non-resident account, giving you more flexibility in structuring your solution.”

    Read more
  • November 2015

    China: a sustainable future?

    A strong economy and a healthy environment go hand-in-hand in China’s vision for its future development.

    At HSBC’s New Roads to China event, held in London, panellists pondered the prospects for success on both fronts. Can China successfully recover from faltering growth, while simultaneously equipping itself to meet startlingly tough new commitments on emissions reductions?

    Cyclical factors

    Dr Fan Gang, Chairman of the China Reform Foundation and Director of the National Economic Research Institute, believes the recent slowdown is merely a feature of the cyclical nature of the Chinese economy.

    He pointed out at the New Roads to China event that the economy overheated in the early 1990s before going through inflation, and then experienced further overheating between 2004 and 2007 and again during 2009 and 2010.

    “We are experiencing another soft landing,” he declared. “But soft landings take a longer time. The last one lasted eight years in the 1990s – in a sense, we are only half way through this cycle.”

    “The economy may slow down further before stabilising in 2016, and then we may have another couple of years of slow growth.”

    Meanwhile, he believes the period of adjustment is having a positive effect: “We are seeing a restructure of industry – consolidation, mergers, acquisitions, and the elimination of some inefficient companies. People are really reorganising.”

    Services growth

    China is acting to fuel its domestic recovery. The unprecedented encouragement of Chinese overseas investment is designed to facilitate trade partnerships across the world. It should also create a demand for exports and help to boost Chinese jobs and incomes.

    A more balanced economy is slowly emerging through greater domestic demand and a shift towards the services sector as a growth engine.

    “The growth of the services sector is just a natural development, a result of rising incomes,” said Helen Wong, Chief Executive Greater China, HSBC. “It is now contributing about 50 per cent of gross domestic product (GDP) in China.”

    She also reflected on social trends that saw the number of Chinese students abroad soar by 11 per cent in 2014 over the previous year, while the government extended the availability of traditional insurance products in response to public demand.”

    “Among the biggest opportunities (in China) will be in areas such as insurance and education – people seeking more protection for the next generation, sending children overseas to study,” she said.

    “Healthcare is another huge growth area: the spend was USD357 billion (in 2011) and may reach USD1 trillion by 2020. Clean technology will become important too, as people expect to have a better living environment.”

    Green commitments

    China is staking a lot on its green commitments. The world’s largest carbon emitter, whose megacities are frequently smog-bound, China has pledged to cut emissions per unit of GDP by 60-65 per cent over 2005 levels, with emissions to peak by 2030.

    Stuart Gulliver, HSBC Group Chief Executive, told event delegates that state lenders had been told to increase green finance, while Chinese investors had been asked to source sustainable investments at home and abroad. “This isn’t a political sop – it is a serious statement of intent,” he said.

    China has had little option but to act, according to Qu Hongbin, Chief Economist Greater China, HSBC.

    He told the event: “The need for China to do more on green investment is clear. It’s not just economic – pollution has become a growing consumer issue within the rising middle class in China.

    “Now they have a nice apartment and a nice car – what they want next is blue skies. The demand is there, but it needs the right policy framework, including tax incentives, to facilitate green investment.”

    Sustainable projects

    Businesses are starting to take China at its word on sustainability. David Whittleton, Deputy Chairman of engineering consultancy Arup, said: “The commitment China is making for the 2015 Paris climate conference (Conference of the Parties COPP21) is pretty dramatic. It’s a huge drop in carbon emissions per GDP. I’m certainly coming round to believing that China is serious about it and will achieve that.”

    The One Belt, One Road vision, which would see massive infrastructure investment along trade routes between China and Eurasia, will have to lead the way, he added.

    The strategy could see land and sea routes create a logistics chain stretching from China’s east coast to western Europe, as well as developing corridors to Mongolia, Russia, and central and south-east Asia. The routes cover 63 countries with which China hopes to strengthen trade ties and drive investment opportunities. “There’s only going to be one sort of project built for One Belt, One Road – sustainable ones,” Whittleton said.

    “Anything else would be unthinkable, partly because of China’s internal commitment, and partly because no international funders will join in and then watch something unsustainable done in a country along the route.”

    Green opportunities

    Changing China

    Read more
  •  

    November 2015

    China looks abroad

    China’s reversal from sustained capital inflows to outflows has been quick. These outflows largely reflect companies and households purchasing overseas assets and paying back debt.

    Despite market volatility, Beijing’s policymakers have continued to liberalise access to onshore assets by relaxing access for foreign central banks, international financial institutions and sovereign-wealth funds. The People’s Bank of China has removed what remained of the deposit-rate ceiling and all interest rates have now been liberalised: the next step is full capital-account convertibility, which the bank says should be complete in 2015.

    We expect more concrete steps on other reforms that will help China achieve the goal of full convertibility and allow the renminbi to be included in the International Monetary Fund’s (IMF) special drawing rights basket. These include further opening the domestic capital market (including a scheme linking the onshore and offshore bond markets), relaxing individual cross-border investment and additional deregulation of cross-border transactions.

    Further liberalisation being considered for the Shanghai Free-Trade Zone, includes allowing individual investment into physical as well as financial assets, expanding overseas investment for qualified investors, wider currency-conversion quotas and allowing non-resident companies to issue renminbi bonds.

    What will capital flows look like when China achieves capital-account convertibility? Despite being almost convertible on the capital account, China has remained a relatively closed economy. However, its integration into the global financial system if capital-account openness increases should generate sizeable inflows as well as outflows.

    We are now witnessing the beginning of the big shift as the Chinese private-sector increasingly buys foreign assets while the rest of the world steadily purchases more of China’s assets.

    How far this goes depends on how quickly China closes the ‘openness’ gap, and how quickly its economy grows. If its gross domestic product (GDP) expands at 7 per cent a year over the next decade, combined external assets and liabilities will amount to USD33 trillion - more than four-times the current amount.

    We expect China’s inward investment to grow at a post-crisis average of around 5.3 per cent a year and outward investment to expand at around 20 per cent annually as the liberalisation boosts foreign-asset purchases. This means outward investment will exceed inward from 2015, implying a gradual drawdown of currency reserves.

    But given China’s large stock of existing foreign direct investment, its net foreign domestic investment position is unlikely to become negative in the medium term, meaning China will remain a net debtor to the rest of the world under direct investment account.

    Meanwhile, we expect portfolio flows to increase both ways. Inflows will likely be sizable following greater openness of the onshore asset markets. But outflows will also be large as households and corporates diversify. China should remain a net recipient of portfolio flows in the short run, although again this balance will likely decline over time as China becomes an increasingly bigger lender and investor relative to the rest of the world.

    Ultimately, a declining net portfolio and direct investment balance implies that currency reserves should gradually fall. This is in line with the basic goal of capital-account convertibility, which is to shift assets from the official sector to the private sector.

    Disclaimer

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  • September 2015

    Mapping China’s future growth – The ‘One Belt, One Road’ initiative

    Renewed economic strength

    The past few years have seen a gradual slowing of the Chinese economy. Referencing Qu Hongbin, Managing Director, Co-Head of Asian Economic Research and Chief Economist, Greater China, HSBC – a speaker at the recent HSBC Forum: RMB and China’s Global Future – three areas have influenced this trend, including slowing exports, a decline in domestic consumption, and a cooling in investment from both overseas and domestic players.

    Recent events, however, point towards a recovery, albeit a gradual one. According to Qu, two facets of the nation’s economy are showing positive signs, including property sales and fiscal easing on the part of the Chinese government. Indeed, between May 2015 and August 2015 housing sales rose steadily, which in turn is expected to spur growth in property-related industries like steel, electronics and future manufacturing, and construction.

    Moreover, since November 2014, the People’s Bank of China (PBOC) has enacted monetary easing measures by cutting interest rates on three. Given that PBOC is the only major central bank globally that has not opted for near-zero interest rates, Qu believes China will use excess capacity to invest in infrastructure development across third- and fourth-tier cities nationwide.

    “Stronger housing sales will likely encourage greater property investment, while fiscal easing is expected to lead to infrastructure spending in areas like subways, railways and highways,” Qu explained. “Both events will likely offset downward pressures from declining exports, falling investments and slowing domestic consumption. And as a result, we will probably see the stabilisation of the Chinese economy and possibly higher GDP growth by the end of this year,” he added.

    RMB and financial reform

    China’s present leadership views the renminbi (RMB) as a key tool in promoting the nation’s trade and investment capabilities abroad. And while much has been written about the currency’s movements over the past month, Qu believes it is continuing to fulfil its purpose by promoting Chinese interests overseas. “The ultimate goal of RMB reform is to make the currency fully convertible, which we believe will probably happen before the end of this year,” said Qu.

    According to the Chief Economist, this will involve advancements in three areas: first, current restrictions placed on the corporate sector’s ability to conduct cross-border foreign exchange transactions will be lifted; second, China’s capital markets with be further liberalised through the broadening of schemes like the Shanghai-Hong Kong Stock Connect and further opening up of the country’s vast bond market; and last, retail investors will have more channels with which to access overseas financial markets. Upon these three developments taking place, according to Qu, the RMB will likely be accepted into the Special Drawing Rights (SDR) basket of the International Monetary Fund (IMF). This grants it reserve currency status – a key objective of the present Chinese leadership and a move that will see increased interest in China’s currency globally.

    ‘One Road, One Belt’

    In 2013, the Chinese government announced the nation’s ‘One Belt, One Road’ (OBOR) initiative – otherwise referred to as the ‘New Silk Road’. A developmental plan that will link China’s Southern and Eastern regions with Europe and Africa, OBOR mimics two ancient trade routes – one by land and the other by sea – that are designed to increase connectivity between China’s foremost industrial zones and neighbouring Central Asia, South Asia, Southeast Asia and the Middle East.

    Launched in 2014, the plan aspires to further advance economies that lie on these trade routes, as well as help grow China’s economic interests overseas. Indeed, the initiative’s blueprint describes the vision of the scheme as means of promoting “Peace and cooperation, openness and inclusiveness, mutual learning and mutual benefit” and stresses the need for unimpeded trade and financial integration, among other objectives.

    “The New Silk Road is an important national strategy for the Chinese leadership,” said Qu. “As part of its reform agenda – as well as helping to meet the nation’s expansion needs – the plan will ensure China’s economy continues to grow while helping to develop emerging markets in areas like infrastructure and general connectivity. This is not just good for local economies, but also for Chinese businesses.”

    A key component in realising OBOR is the RMB. Indeed, settling cross-border trade in RMB holds a multitude of benefits for both importers and exporters. For businesses that export to China, the RMB can act as a competitive tool with which to win new business, as trading in the same currency saves the importer on FX costs and mitigates currency risk. Settling in RMB also allows exporters to diversify their currency positions. And, for businesses that have operations in China, RMB-denominated export proceeds can be used to directly fund company overheads.

    Supporting international trade along OBOR, China has conducted RMB bilateral swap agreements with nations that stretch the two routes. These include Southeast Asian nations Singapore, Malaysia, Indonesia and Thailand; Central Asian states Kazakhstan and Uzbekistan; South Asian countries Nepal, Pakistan and Sri Lanka; Middle Eastern nations United Arab Emirates and Qatar; and Eastern European countries Belarus, Russia, Ukraine and Turkey. Furthermore, RMB clearing centres have been established in Singapore, Malaysia, Thailand and Qatar.

    To finance OBOR projects, China established the Asia Infrastructure Investment Bank (AIIB) in late-2014, of which more than 60 nations from across Asia and beyond have pledged financial support. “China’s New Silk Road is, in my view, the best way for Asia’s economy to fix itself,” Qu remarked. “In realising the plan, Asia will no longer need to rely on external demand from places like Europe and the Americas, as well as spur greater interregional trade and investment,” he concluded.

    Sustainable growth

    While the Chinese economy has been slowing over the past few years, growth in the property market, coupled with anticipated infrastructure spending, will likely see the nation’s economy incrementally expand towards the end of 2015 and beyond. In tandem with this, the RMB’s liberalisation journey will continue to evolve, and which will likely result in full convertibility before the end of this year. This will see increased usage of the currency as a global trade and investment currency, as well as likely see it feature as a reserve currency among the IMF’s SDR basket of currencies.

    Supported by the two trends above, China’s OBOR will lead to China increasing its presence across Asia and beyond. Not only will China benefit from the plan, nations that lie along the New Silk Road will also prosper, with OBOR supporting sustainable economic not just in Asia, but also the ambitions of nations located further afield.

    1 Vision and Actions on Jointly Building Silk Road Economic Belt...

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  • June 2015

    Case study: Shenzhen MTC Co Ltd

    Shenzhen MTC (SMTC) is a leading Chinese digital and consumer electronics company with 4,000 people globally and annual sales of RMB6.5 billion. With a strong reputation for quality and innovation, the company designs and manufactures a range of products including LCD/LED TVs, DVD players and digital set-top boxes.

    The Challenge

    SMTC has a long-term commitment to delivering global growth outside its domestic market. The company’s products are already sold in over 60 countries and regions including Europe, the Americas, Asia and Oceania. This global expansion has enabled SMTC to double its annual sales since 2010 to RMB6.5 billion today. Now SMTC is targeting three strategic goals to help take its growth ambitions to the next level:

    • Building market share in established product categories such as LED TVs, DVD players and set-top boxes, while looking to grow new segments including LED products and mobile internet devices. SMTC is currently an Original Design Manufacturer (ODM) that makes products for big-name brands. However, in the medium-term, it also plans to move into own-brand manufacturing.

    • Developing its 'going-out' strategy. This means looking beyond China to develop an international network that will help the company increase global market share for its products.

    • Pursuing rigorous cost control, particularly given high mainland finance costs, while at the same time closely managing foreign exchange risk.

    To deliver on its priorities, SMTC needed a secure and highly efficient financing and payment process for cross-border trade, cross-border cash management services, and a robust approach to hedging foreign exchange risk.

    SMTC chose HSBC as its partner because the bank offered a one-stop solution across trade, receivables finance, cash management, hedging, and wealth management.

    The Solution

    SMTC chose HSBC as its partner because the bank offered a one-stop solution across trade, receivables finance, cash management, hedging, and wealth management. Key benefits of HSBC solutions included the following:

    Cost efficiencies help fund the growth strategy. HSBC introduced a China and Hong Kong RMB cross-border trade financing solution to support SMTC’s rapidly growing business and working capital requirements. Instead of sourcing materials such as LCD or LED panels from overseas suppliers directly to its Chinese entity, SMTC now sources these materials via its Hong Kong trading arm, MTCE. The cross-border trade financing solution would support the Hong Kong entity MTCE’s sourcing with lower funding cost than mainland china. By doing so, the company has reduced interest expenses and freed up cash flow, which can then be re-invested in growth segments and markets.

    Developing the 'going-out' strategy. HSBC put in place an export trade solution to shift SMTC’s overseas export function to the Hong Kong trading arm. This expanded the Hong Kong operation’s role from its existing sourcing function to both export and import activity. This allows HSBC to not only finance SMTC’s imports, but also its exports. It also allows SMTC to make better use of preferential financing in Hong Kong. HSBC also introduced a payments and RMB trade settlement solution to facilitate cross-border payments, which is essential to SMTC’s global ‘going-out’ strategy. Using the HSBCnet tool, SMTC can now consolidate its accounts and payments into one platform.

    Pursuing cost control and managing foreign exchange risk. For cost control, HSBC put in place a tailored cross-border trade financing solution and export trade facility. These give SMTC access to competitive financing compared with mainland costs. In addition, HSBC’s global markets hedging solution ensures SMTC can control foreign exchange risk, including currency mismatches in payables/ receivables. It is a solution that is founded on a shared philosophy of strong risk management. Mr. John Yan , CFO of SMTC, said: "It quickly became apparent to us that HSBC has an extremely strong risk management culture. Stability and control are very important to us. Our collaboration with HSBC on risk management has been excellent."

    Results

    HSBC’s solution is helping SMTC to deliver against its key strategic priorities for growth. In terms of funding support to grow its core and new product segments, cross-border financing (RMB UDC) increased by double to around HKD3 billion in 2014. In terms of cost control, US dollar financing costs for RMB UDC — including mainland UDC issuance costs — is around 1.8 per cent lower than mainland dollar financing. This equates to a saving of around HKD54 million in the past 12 months.

    Mr. John Yan, CFO of SMTC, said: “This cross-border trade financing solution is very important to us. It will ensure SMTC’s cash management is more efficient and improve FX risk control. Overall, it will support our goal of accelerating SMTC’s global business expansion.” By helping SMTC accelerate its overseas growth, HSBC has ensured that the company not only ‘goes global’, but does so successfully and sustainably.

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  •  

    April 2015

    Supporting China's future growth through sustainable financing

    The term 'sustainable financing' has become synonymous with the funding of low-carbon initiatives. These ordinarily include renewable energy ventures, like solar and wind projects, and energy efficiency initiatives, like LED lighting and building retrofitting. Such industries are becoming increasingly important to China, as the nation consciously moves its economic base from manufacturing and heavy industry to higher value sectors, like clean technology and precision engineering. Supported by China's recent push to mitigate climate change, the nation's sustainable financing market is expected to grow exponentially during the forthcoming decade.

    "China's strive towards a cleaner economy coincides with growing demand for sustainable products," says Wai-Shin Chan, Director of Climate Change Strategy, Asia Pacific, at HSBC. "Sustainable financing has the potential to play a critical part in China's next phase of growth, as well as provide new opportunities for investors," he adds.

    Green bonds

    In particular, the past few years have witnessed the emergence of green bonds – fixed income instruments that work in the same manner as conventional bonds, but where the proceeds are solely used for environmentally enhancing projects. To date, most interest in green bonds has taken place in Europe and North America, with global issuance reaching USD39.6 billion in 2014, according to the Climate Bonds Initiative. HSBC expects worldwide green bond issuance to top USD100 billion during this year.

    Currently, demand for the asset class is driven by the need of Western institutional investors to include environmentally considerate investments in their portfolios. In addition, public sector bodies in Europe and the US are also issuing bonds to finance infrastructure projects in areas like water provision and waste management.

    China's interest in green bonds is noteworthy, as this presents several openings: first, as an asset class they provide the Chinese government with additional vehicles with which to further lessen the country's carbon footprint; second, green bonds can help further liberalise China's capital markets – something the country's leadership are eager to pursue; and third, the widespread rolling out of green bonds nationwide will provide domestic savers with further investment opportunities. Chris Harris, Group Vice President and Head, Greater China and Japan, at Philips Capital, adds, "Chinese banks, too, can benefit from green bonds, as these would have no impact on the lending quotas currently imposed by the People's Bank of China."

    Market adoption

    The Chinese government has voiced its intention to develop a competitive green fixed income market on several occasions. In August 2013, for instance, the State Council pledged to develop a corporate green bond market as part of the 12th Five-Year Plan. And earlier this year, both the Development Research Council and the People's Bank of China recommended the formation of a Green Bond Market Development Committee, with the aim of overseeing advancement of the market and ensuring that environmental standards are upheld.

    "China has declared war on pollution," asserts Jeanne Ng, Director of Group Sustainability at CLP Power. "It has announced carbon reduction targets and its intention to cap coal use by 2020. All of this seems to be creating demand for environmental projects," she adds. This stance, coupled with the liberalisation of China's financial system, presents the opportunity to grow a market that is steered by the private sector, rather than solely by government entities. China also has the opportunity to introduce new regulations where participants have equal access to market openings.

    "A significant challenge facing environmental projects – irrespective of whether they are built in China or elsewhere – is that they require substantial upfront investment with limited returns in the short-term," explains Philippe Ahoua, Principal Finance Officer of Treasury Client Solutions, Asia Pacific, at the International Finance Corporation. Although returns for low-carbon investments will likely remain somewhat conservative when compared to those of other asset classes, Ahoua nonetheless believes interest will be driven by the growing desire of Chinese government and local and foreign businesses to invest in carbon-neutral assets.

    "In our conversations with some of the largest banks in China, for example, we know that part of their lending portfolio is going to be earmarked for energy efficiency and green projects, so it is only a matter of time before this interest moves into the fixed income market," he adds.

    Towards market maturity

    China's green bond market shows much future promise. Indeed, a number of market forces are presently coming together, which will likely contribute to exponential growth of the asset class. These include China's move towards a cleaner economy, backed by numerous climate change mitigation measures; liberalisation of the nation's capital markets; and the need to provide growth opportunities for domestic investors.

    In order to ensure market best practices, however, the Chinese government will need to collaborate with the private sector, foreign regulators and global trading firms, which – given the strong relationships it currently holds with such organisations – it will likely do. In addition, China could also turn to industry-specific groups, like the Climate Bonds Initiative and the UN-backed Principles for Responsible Investment, in order to leverage market and regulatory know how.

    All of the above means that as China's green bond market advances, it will increasingly present 'win-win' opportunities for both issuers and investors. Indeed, on one hand, issuers now have the opportunity to enact environmental and social change, and on the other, investors can access healthy returns while simultaneously supporting green projects, which will lessen the effects of climate change and spur long-term sustainability within China and beyond.

    Disclaimer

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    April 2015

    Internationalisation and innovation – Drivers of China's global future

    Much attention has been given to China’s economic slowdown in the past year. While it is widely accepted that the nation’s leadership deliberately pulled back on its quickly expanding economy in favour of long-term growth, experts predict that China’s industrial base will soon experience a hard landing.

    What is often forgotten, however, is the sheer size and scale of the nation’s economy. Indeed, even with lowered growth forecasts, China’s outlook dwarfs almost all other markets worldwide.

    “China is trying to shift from breakneck growth to a more sustainable model in a way that no other country has tried to do before,” explains Stuart Gulliver, Group Chief Executive HSBC plc. “That it is trying to do so whilst undertaking a comprehensive programme of financial reform only makes that task harder. As it is, Beijing has managed a gradual deceleration from double-digit growth in a measured and controlled way.”

    In Gulliver’s opinion, China has gone about its reform agenda wisely by gradually opening its economy to foreign investors and letting market forces steer change. While the nation faces significant challenges within this process, he believes China has the ability to overcome present-day hindrances, as well as mute concerns held by factions of the financial community.

    “If anything, we think that 7 per cent is more a growth floor than a target, and signs indicate that Beijing is preparing to cushion China’s transition through further easing,” adds Gulliver.

    RMB and reform

    Playing a central role in the nation’s economic development is China’s currency, the RMB. Starting from near-zero usage in 2010, RMB has become the world’s number-two trade finance currency2 and is among the top-five payment currencies globally. In fact, the use of RMB to settle international trade accounted for 22 per cent of China’s total trade in 20141.

    “Over the past few years, we've seen many different RMB centres opening up worldwide, which is accelerating use of the currency,” says Paul Mackel, Head of Asia Currency Research at HSBC. “By 2020, we believe the RMB will be one of the top-five traded currencies on a daily basis, so this gives us an idea of how big the RMB could become.”

    As an investment currency, however, the RMB is less developed. The majority of advancements in this space have focused on foreign players investing in China, rather than Chinese investors looking overseas. Current RMB-denominated initiatives available to investors include various qualified investor schemes and the Shanghai-Hong Kong Stock Connect initiative, all of which act as testing tools to monitor the performance of cross-border capital flows.

    Significant reforms to China’s capital account are nonetheless expected in the near future, which will encourage equally weighted two-way flows. Schemes likely to be rolled out include: a new stock connection between the Shenzhen and Hong Kong exchanges; international access to mainland corporate bonds through the Shanghai Free Trade Zone; expansion and merger of the qualified investor schemes; and, completion of China’s interest rate liberalisation programme with the lifting of its deposit rate ceiling. In addition to this, China is also expected to introduce a deposit insurance scheme for business and consumer savers by mid-2015.

    HSBC predicts full convertibility of the RMB will take place by 20173, allowing the RMB to be granted reserve currency status by the International Monetary Fund (IMF). Although it is unlikely that the IMF will make the RMB a reserve currency before then, some countries, including several Asian and African central banks, already hold RMB for this purpose.

    Global acceptance

    China’s ascension to becoming the world’s second largest economy, supported by the RMB’s increasing importance in today’s currency markets, has disrupted the historical global economic model. Yet some Western economies have been slow to recognise this, despite the growing number of RMB hubs located worldwide.

    “If you look at today’s financing institutions, many of these were created in the West for the West, and without the foresight of how the world might change decades later,” explains Stephen King, Group Chief Economist at HSBC. “Over the course of half-a-century, economic gravity has shifted from Europe and the US to Asia, and predominantly China, with many in the financial community still somewhat reluctant to accept that this change has taken place.”

    According to King, Western sceptics must now fully embrace China and other Asian nations as equals. In doing so they will not only boost trade and investment revenues in the East, but also elevate economic activity in Europe and North America. Furthermore, the roll out of organisations like the recently launched Asian Infrastructure Investment Bank (AAIB) will also present opportunities to Western organisations. Indeed, the establishment of the AIIB, and the ensuing applications of the UK, German, French and Italian governments to join the initiative, underlines the importance China and its currency plays in advancing other economies, irrespective of size or status.

    High-value industries

    In tandem with China’s broader development agenda, which includes environmental and social considerations, the past decade has seen the nation’s economy move further up the value chain. Previously, China was a producer of low-cost items like garments and simple electronic goods. Today, however, it is focusing its attention on high-value industries ranging from information technology (IT) and healthcare, to renewable energy and Internet-based businesses. Chinese companies are also looking at areas such as real estate and consumer goods.

    Resulting from this shift, new opportunities for both domestic and foreign entities will arise, accompanied by somewhat novel financing mechanisms. For instance, China’s green bond market is gathering pace and is supporting the nation’s drive towards a low-carbon economy. Similarly, investments in mobile- and Internet-based ventures have soared, driven by the increasing desire of China’s younger generation to access global products online.

    China’s recent Internet phenomenon has made the nation the largest e-commerce sector globally, with technological transformation – in particular, the introduction of mobile browsing – having played a large part in this development. While market forces have steered the advancement of China’s Internet industry, the public sector and the finance community have also contributed to the
sector’s success with the government’s pro-online retailing policies and banks providing access to financing.

    Global integration

    While there is some way to go for China to fully integrate its industrial base into the global economy, the nation’s breakneck development coupled with increased liberalisation in its financial markets will ensure greater harmonisation with the rest of the world. The RMB’s role in this process remains critical, as are wider economic reforms, both of which will make China’s industrial base more attractive to investors entering the country as well as outward seeking Chinese firms.

    In order to be successful – and there is every indication that China will indeed be so – the nation must continue to innovate and compete with Western entities. Furthermore, the country’s global future will also need the support of foreign actors, whether the private sector, financial institutions or state governments. “China cannot do it alone. Global and central banks, national governments and international institutions all have a part to play by inviting China to play a larger role in the global economy. If they do so successfully, we will all benefit,” concludes Gulliver.

    1 RMB internalisation

    2 RMB now 2nd most used currency in trade finance, overtaking the Euro

    3 What is renminbi?

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    March 2015

    China's Free Trade Zones accelerates wider economic reform

    The launch of China's new Free Trade Zone (FTZ) programme is set to take the country's financial reform journey into a new chapter.

    China has a recent history of using special economic zones to experiment and act as sandboxes for future development on a national scale. In the past 30 years, the country has achieved phenomenal economic growth from an agricultural backwater to the world's factory and second largest economy by creating Special Economic Zones (SEZs) to lead the way. These SEZs were given greater autonomy and successfully tested the market economy. However, the long-standing advantage in foreign trade stemming from cheap labour and low cost of land and resources cannot last.

    China's "next phase" of growth will partially depend on the successful development of its pilot free trade zones – a new breed of economic zone.

    While the SEZs of the 1980s focused on the development of manufacturing and exports, the establishment of the free trade zones is significant progress in accelerating financial sector liberalisation which is a crucial step in taking China's deepening economic reforms to the next level. Free trade zones will also have a major catalysing impact on cross-border trade and investment flows, whilst boosting growth in domestic services and innovation.

    A number of FTZs were announced in quick succession since 2013, from Shanghai to Guangdong, Fujian and Tianjin. Each represents a zone of development intended to play to the strengths of each regional location.

    China's central government recently expanded the Shanghai free trade zone, by including sites such as the Lujiazui financial district, making it larger than any of the new FTZs. We believe the expansion will allow Shanghai to give full play to the advantages to test reform on a larger scale.

    The Shanghai FTZ is seen as taking the role of creating a regulatory and operating environment for testing new initiatives and market reform. The intention is to lessen the burden for foreign organisations wanting to conduct business in mainland China by removing certain financial and currency impediments and administrative constraints imposed on foreign investors elsewhere in China. The zone is also being used as a test-bed for new arrangements using different tools to encourage efficiency and innovation, including lower-cost financing opportunities using equity or debt solutions.

    The zone in Shanghai is accelerating capital market development domestically and will also, over the longer term, contribute to the eventual operation of the renminbi as a freely convertible currency, initially in a carefully controlled area.

    After Shanghai FTZ came into operation, two-way renminbi flows arising from cross-border sweeping reached more than 27.2 billion yuan, between January and August last year. We believe that the offshore borrowing for firms in the Shanghai free trade zone will be relaxed further – and that the new regulation will include banks – is a significant breakthrough.

    The risks associated with the zone are proving manageable. A negative list was put in place to restrict foreign funds from investing in specific industries within the zone. This list has since been shortened, demonstrating the Chinese government's growing level of confidence in the zone. The commercial banks are enforcing know-your-customer procedures to ensure that the funds moving in and out of China are supporting genuine trade.

    Since the Shanghai FTZ was announced, more cities have launched their own FTZ plans. FTZs in Guangdong, Fujian and Tianjin will be modelled on Shanghai's, but would rather advance a new round of the country's opening and reform, based on their different economic and geographic locations.

    We believe the expansion of the free trade zones will have a significant effect on Hong Kong, Macau and Taiwan in various aspects, especially services firms such as banks, e-commerce, foreign traders and other high-end innovative service providers. The free trade zones may prove a magnet to Hong Kong, Macau and Taiwanese investors due to their geographic proximity. Businesses in greater China need to be prepared and monitor developments of the free trade zones in tapping mainland China's huge market.

    Guangdong's FTZ consist of three regions: Guangzhou Nansha, Shenzhen Qianhai Shekou and Zhuhai Hengqin New District. It will play a key role in deepening economic cooperation with Hong Kong and Macau to drive the liberalisation of trade in services.

    A new wave of cooperation between Guangdong and Hong Kong will focus on developing an integrated regional service industry. The province's future lies in reorienting its consumer industries towards China's large and growing domestic market and upgrading from low-end manufacturing to develop the high-end services sector. With China's largest and most open regional economy, Guangdong and Hong Kong can lead the way to high quality growth, with benefits flowing to both.

    Hong Kong, Taiwan and Macau together contribute to over 31 per cent of Guangdong's trade, mainly driven by Hong Kong contributing 24.6 per cent. Hong Kong is also the largest source of foreign direct investment in Guangdong, accounting for 65 per cent of Guangdong's GDP. The investment now flowing into Guangdong has been diversified from manufacturing to the service sector. Guangdong will benefit from Hong Kong's well established services sector and broader international standing.

    We expect Qianhai to play a big role in leading financial reforms through Hong Kong-Shenzhen collaboration as efforts to bring greater convergence of cross-border business. It also takes up its intended role as an experimental laboratory for renminbi liberalisation and strengthen Hong Kong's role as an offshore renminbi centre.

    Hong Kong's firms need to prepare for the challenges posed by the rapid development of free trade zones in China. We need to think of the position of Hong Kong when the renminbi is freely convertible. Hong Kong needs to work more closely with Guangdong province and to keep close watch on the opportunities arising from the internationalisation of renminbi.

    Zhuhai can be expected to continue to foster economic links with Macau. Nansha has an existing development zone, and the local government has a stated ambition to attract more investment in manufacturing, trading, education, logistics and tourism.

    Given its geographic advantage, Fujian is one of the wealthiest regions in the country and will focus on further strengthening links with Taiwan. Current major industries of both regions are geared towards electronics, petrochemicals and mechanical components.

    Tianjin free trade zone is expected to focus on high-end manufacturing, financial leasing and further integration of the Bohai Bay area. It will also provide deeper connections with neighbouring Japan and South Korea.

    There is much work remaining to be done. A lot of financial reforms in favour of liberalisation have been announced and are at the early stage of development. However, China has always sustained a cautious approach to financial reforms that could possibly disrupt the economy. The free trade zone chapter in China's economic development has only just begun, and further free trade zones will initiate broader reform and growth.

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    March 2015

    The redback keeps rising

    An increasing number of companies and investors are using China's currency for trade, investment, hedging, cash-management and financing. The differences between the renminbi and other major global currencies are rapidly disappearing.

    In 2010 we forecast that 30 per cent of payments for China's imports and exports would be settled in renminbi by the end of 2015. It had risen from 12 per cent of total trade in 2012 to 22 per cent by the end of 2014 and we remain confident our prediction will hold true.

    Renminbi trade settlement will continue to expand, and not solely because of China's rising share of global trade and investment. Beijing is accelerating the pace of financial reforms and making the rules and regulations clearer and simpler.

    Significantly, this expansion has taken place despite the decade-long trend of renminbi appreciation against the US dollar turning into a modest depreciation as China's growth slows. The implication is clear – people use the renminbi because it offers real and practical business benefits, rather than for short-term speculation.

    We thus now make another forecast – that renminbi trade-settlement will exceed 50 per cent of China's total trade by 2020, thrusting the currency into the major leagues.

    This is not just a trade story though. New renminbi centres are opening outside of Hong Kong in different time zones in Asia, Europe and, now, North America. As the currency goes global, connecting these centres to the mainland and to each other will increase the pace, depth and breadth of renminbi internationalisation.

    As China is already the world's largest consumer and producer of most commodities, this should provide a fresh opportunity for the renminbi to be used to price commodities, especially with round-the-clock offshore markets taking shape.

    Greater two-way investment flows are being permitted and more of China's fast-increasing overseas direct investment is being conducted in renminbi. The Shanghai-Hong Kong Stock Connect programme went live last November and could soon be followed by a Shenzhen sister programme. The ambitious New Silk Road plan and China's commitment to the Asian Infrastructure Investment Bank are other channels through which the country's capital is going global.

    The slowdown in growth and rising debt have led to speculation that China will hold back some reforms, especially capital-account liberalisation. But the reality is that Beijing has speeded up the pace of change and, once open, the process rarely reverses. We have long thought capital-account convertibility and other financial reforms are part of the solution to domestic problems.

    The National People's Congress in March confirmed our view that financial reforms and capital-account liberalisation is speeding up. The governor of the central bank has clearly indicated that interest rates will be fully liberalised this year, paving the way for other important reforms and accelerating the development of domestic capital markets.

    These developments, along with further expected changes, suggest the renminbi should become one of the top-five most traded currencies on a day-to-day basis in coming years. We think the currency will become fully-convertible within two years.

    Renminbi facts and forecasts

    • The renminbi is the world's ninth most traded currency, at USD120bn a day, and the fifth biggest for global payments.

    • It is also the second most used currency in trade finance.

    • China has the third largest global equity market, the third largest bond market, and the largest banking system.

    • From just eight listings in 1990, China's A-share market now has 2,600 stocks.

    • Renminbi trade settlement was RMB6,550bn last year – 22 per cent of China's trade turnover.

    Disclaimer

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    March 2015

    Green bonds ready to go mainstream in Asia

    Asia needs to invest heavily in infrastructure to sustain growth. But unless we design sustainable projects, we risk running up an environmental bill that future generations may have to pay with their health and well-being.

    The cities and the power, sanitation and transport systems we build to support them have the potential to help or harm the communities in which we and our children live for the next half century or more. As demonstrated by China's recent shift of focus from the quantity to the quality of growth, emerging Asia is beginning to embrace a more mature view on development – one that emphasises environmental protection.

    One way to promote sustainable growth is to unleash market forces that promote environmentally responsible development. It may sound implausibly utopian, but it is already happening.

    Global issuance of so-called "green bonds", which are like normal bonds but come with a pledge that the funds raised will not be used for environmentally harmful projects, reached USD36.59 billion last year, according to data assembled by the Climate Bonds Initiative1.

    That may be loose change when measured alongside the USD44 trillion that the International Energy Authority estimates the world will have to invest in low-carbon energy supplies over the next 35 years if we are to limit increases in global temperatures to 2°C2 , but it represents a tripling of investment year-on-year, and a twelve-fold increase on the USD3 billion that were sold in 2012.

    And we expect total green bond issuance in 2015 to reach USD100 billion, with significant growth coming from China3. Beijing has called for the growth of a corporate green bond market as it sets out to achieve the goals listed in the National 12th Five-Year Plan on Environmental Protection.

    Globally, green bonds are going mainstream. Early issuers were multilateral development institutions with overt social agendas like the World Bank, but last year a third of all green bonds were issued by corporates. Also, issuers have moved into new currencies including offshore renminbi and Australian and Canadian dollars.

    The exact definition of a green bond still requires some work. Many of the world's biggest banks – including HSBC – have signed up to the voluntary Green Bond Principles which set guidelines on transparency and evaluation, but leave the investor to judge whether a project is environmentally acceptable.

    The World Bank, one of the most prolific issuers in the green bond market, says eligible projects must "seek to mitigate climate change or help affected people adapt to it"4. Most of the capital raised so far has been used to help the transition to a low-carbon economy.

    But some issues remain unclear: the net cost or benefit of nuclear power, for instance, is hotly disputed because it would cut carbon emissions but create nuclear waste; and while some argue that a new highway encourages more traffic, others say it reduces gridlock.

    Issuers are finding no shortage of take-up for their offerings. Investors are keen to diversify into real assets with long-term growth aspects, and green bonds provide a welcome opportunity for pension funds and other long-only investors to invest not just for, but also in the future.

    Green bond investors typically have an appetite for longer tenors, which is particularly suited for infrastructure projects. In July, Washington's District of Columbia Water and Sewer authority issued a USD350-million, 100-year bond to improve wastewater treatment, for example5.

    For Asia, green bonds offer a double opportunity. As well as promoting environmentally responsible development, they represent a new way to accelerate the creation of deeper and more effective capital markets in the region. Asian investment is currently largely funded by bank loans, but funding the next wave of growth – especially through infrastructure investment – will require more sources of capital. More efficient capital markets will also help Asian consumers by providing a new way to recycle their savings into low-risk long-term investment, a facility that will become increasingly important as the region ages. The growth of a regional green bond market would offer those savers a new choice.

    For China specifically, the country's huge pool of savings and limited investment opportunities create the perfect match for the development of a corporate green bond market. Such a platform would help finance China's urbanisation mega-project – urbanisation rate is set to rise from the current 54 per cent to 60 per cent by 2020 – while at the same time ensuring that the public infrastructure built would provide clean air and water in a sustainable low-carbon economy.

    True, the recent fall in oil prices may have reduced some of the economic pressures driving the search for greater energy efficiency and a cut in carbon emissions, but the environmental imperative has not become less urgent. Green bonds recognise the long-term need for infrastructure improvements that protect the health of the environment, and through the environment the long-term well-being of the men and women who will be the ultimate drivers of growth in Asia and elsewhere. It's an idea whose time has come.

    1 Climate bonds initiative website

    2 Yale Environment 360 – Can Green Bonds Bankroll A Clean Energy Revolution?

    3 Bonds and Climate Change: The State of the Market in 2014

    4 World Green Bond Factsheet

    5 Marketwatch.com

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    February 2015

    Where now for the renminbi?

    We expect the renminbi to continue becoming more market-oriented, with the Chinese currency used more widely for global payments, financial investment and even reserve management. Here we answer some key questions on the 'Redback'.

    How has China's currency policy shifted?

    The People's Bank of China is liberalising the exchange- rate regime and hardly intervened on spot markets in the second half of 2014. Its dollar/offshore-renminbi fix has smoothed volatility. China has accelerated its currency-reserve diversification via, for example, funding the new Silk Road Fund. The authorities are also still actively pushing for the renminbi's internationalisation, currency reforms and capital-account liberalisation.

    What are 'hot-money' outflows?

    Currency outflows happen in the form of the private sector accumulating foreign-exchange deposits, repaying external debt, increasing currency hedges and through financing to overseas counterparties.

    How large is China's external debt?

    We estimate the external debt at about USD1.4 trillion, using IMF standards – 13 per cent of GDP or 35 per cent of currency reserves, which is low, compared to other countries. However, given its currency reserves and current-account surplus, plus the private-sector's rising foreign assets, we do not think China's external debt poses a major problem to solvency standpoint or the renminbi.

    Is the offshore renminbi leading the onshore currency?

    Pricing developments in the onshore currency market have increasingly been led by the offshore renminbi. This is a natural consequence of growing offshore trading volumes and broadening cross-border foreign-exchange channels. The growth in offshore turnover partly reflects greater renminbi trade settlement, but it should not threaten China's monetary-policy independence and banking-system stability.

    What's next for renminbi reform & internationalisation?

    Renminbi reforms will likely accelerate in 2015, with a more flexible currency policy, further deregulation and more two-way portfolio flow channels. Most importantly, we expect a major boost of 'round-trip' renminbi flows via outward direct investments. This will support the development of offshore renminbi liabilities and significantly boost overseas usage of the currency.

    Will the 'redback' be used more in commodity trading?

    Its role in commodity trade- invoicing, settlement and financing is still limited, but we are seeing launches of renminbi-denominated commodity trading infrastructures inside and outside China. More renminbi centres have been set up in commodity-exporting countries and the renminbi could become an invoicing currency in at least some commodities.

    What is new in the offshore renminbi centres?

    Renminbi centres were aggressively expanded in 2014, especially in Europe. This year the focus will likely be on connecting these centres and expanding in commodity-producing countries and states along the 'New Silk Roads' that stretch to Europe and South-east Asia. This would help the renminbi become more global.

    Will the IMF's Special Drawing Rights include the renminbi?

    The IMF conducts its twice-a-decade review of Special Drawing Rights (SDR) in 2015 and could include the renminbi. That could encourage China to increase data transparency and take further currency reforms. It would also strengthen the legitimacy of the SDR as a reserve asset.

    Disclaimer

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    December 2014

    Shanghai-Hong Kong Stock Connect

    SHSC is essentially a mutual trading and clearing connection, initially between the stock exchanges of Shanghai (SSE) and Hong Kong (HKEx). It links the two exchanges, their clearing houses and the two securities regulators concerned.

    One of the most striking aspects of the link is that it permits any type of Hong Kong and overseas investors to invest anonymously (without any investor ID) in China's A share market. In these respects, it is a distinct and very significant departure from China's existing Qualified Foreign Institutional Investor(QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII) investment regimes. By the same token, Chinese investors are now for the first time able to invest directly (outside the constraints of Qualified Domestic Institutional Investor fund wrappers) in equities that are listed in Hong Kong.

    Investment activity under SHSC is classified as either Northbound or Southbound. The former is defined as investment into eligible SSE-listed equities via Hong Kong and overseas markets, while the latter consists of investment in eligible HKEx-listed equities from the mainland.

    Quotas

    Both Northbound and Southbound flows over SHSC are subject to a quota mechanism. For Northbound investment, the quota has initially been set at RMB300 billion (approximately USD49 billion) and the daily quota is set at RMB13 billion. For Southbound investment, the quota is set at RMB250 billion (approximately USD40 billion) and the daily quota is set at 10.5 billion. Both the Aggregate Quota and the Daily Quota apply on a "net buy" basis. Under that principal, investors will always be allowed to sell their cross-boundary securities or input order cancellation requests regardless of the quota balance. An important point to note is that these are public quotas and not tied to any individual, intermediary or fund. Therefore, as public quotas, they are made available on a first-come first-served basis.

    SHSC operates solely in Renminbi, so purchases made in China on SSE by foreign investors are paid for in offshore Renminbi deliverable in Hong Kong, while mainland investors' purchases of Hong Kong listed equities are settled with their brokers in onshore Renminbi. However, this does not automatically imply that foreign investors will need to hold offshore Renminbi: all they require is a broker or FX provider capable of delivering the requisite currency for settlement.

    Eligible securities

    Initially SHSC is limited to a predefined range of cash equities. For foreign investors this consists of the constituents of the two main indices in Shanghai – the SSE 180 and the SSE 380, plus any dual listed A shares1. As of 17 November 2014, that consists of 568 individual equities representing approximately 90 per cent of the SSE market's capitalisation and some 80 per cent of its average daily turnover.

    For mainland investors investing into Hong Kong, the eligible securities are the constituents of the Hang Seng Composite LargeCap index and Hang Seng Composite Mid-Cap index and any dual listed H shares2. As of November 2014 that comprises 268 equities representing approximately 82 per cent of Hong Kong's market capitalisation and some 78 per cent of its average daily turnover.

    Points to consider

    Shanghai-Hong Kong Stock Connect

    While SHSC represents a major step forward, in common with market changes anywhere, there are some points of which to be aware.

    The legal ownership and absolute beneficial right to A shares purchased via SHSC is one of the key concerns of investors. This issue is particularly important for those traditional asset managers that invest on behalf of pension funds or other highly regulated funds, such as Dublin and Luxembourg-based UCITs.

    The A shares purchased via SHSC Northbound is registered in the name the Hong Kong Securities Clearing Company Limited ("HKSCC") in an omnibus securities account opened by HKSCC with ChinaClear3, and HKSCC is a "nominee holder". Although the HKEx has clarified in a FAQ4 to investors that, pursuant to the relevant PRC laws, regulations, rules and measures, a nominee holder is holding A shares purchased via SHSC on behalf of Hong Kong and overseas investors who are the beneficial owners of such A shares and the investors enjoy the rights and benefits of the SSE A shares acquired through SHSC. HKSCC, as the nominee holder, does not have proprietary interest in such A shares, there remains some uncertainty as to how their rights are enforceable as HKSCC expressly state that it shall have no obligation to enforce any rights on behalf of the investors in China or elsewhere. However, it might in practice becomes less clear who the beneficial owner is if the voting rights have been subsumed into some kind of discretionary structure, where a manager votes on behalf of the underlying fund. The ambiguity over the definition of beneficial ownership also creates a further knock-on ambiguity regarding, for example, the calculation and application of foreign ownership limits which is 10 per cent for single foreign entity and 30 per cent for aggregate foreign entities.

    Pre-trade delivery is another consideration that may (at least initially) make SHSC slightly operationally complex for investment managers - especially when selling equities. This is because China's domestic equity market operates on a split settlement basis: securities settle on T+0, while cash settles on T+1. This creates some operational complexity, as well as potentially some credit risk.

    However, these issues can be avoided through the use of services such as HSBC Custody Plus platform, which provides investors with an integrated execution, custody and clearing and foreign exchange platform. This avoids the associated risks and operational challenges involved in pre-delivering securities from a client's custodian to its broker the day before the execution date of sell orders on the SSE, as is required by Stock Connect.

    Opportunities and expectations

    Prior to SHSC going live, HSBC engaged with more than 1,000 institutional investors of various types across Asia, Europe, the Middle East and America. This has provided an interesting insight into their perception of SHSC across the different investor categories and the opportunities that they perceive.

    Meetings with hedge fund managers reveal a generally positive view of SHSC. Previously this class of investor had no access to RQFII and so had to rely upon QFII to invest directly into China, however this was only possible in a synthetic forms via P-Notes, Lepos and Swaps. Under these arrangements, the investors will only enjoy the economic rights of A shares but not the voting rights. Therefore, one interesting possible outcome of the introduction of SHSC is that hedge funds may use it as an alternative channel to access China's A share markets.

    Traditional asset managers have a more mixed outlook. Some definitely see an opportunity to invest and intend to invest immediately via SHSC, subject to the legal ownership issues being further clarified, while others see the opportunity to invest but not at once. Finally, there are those that see no immediate opportunities or regard them as too opaque and/or without sufficient clarity on investable opportunities.

    Index funds in general expressed the view that they were waiting for the explicit inclusion of China in one form or another in the major indices (FTSE, MSCI). We understand that this inclusion is being contemplated for Q2 of 2015.

    Finally, private banks and those servicing individual investors were generally positive about the SHSC and keen to use it as a channel via which to deliver China access to clients.

    Conclusion

    Despite a few microstructure issues, the introduction of SHSC clearly represents an important opportunity for investors. Foreign investors can now trade selected China A-shares from Hong Kong directly, while mainland investors can access to selected Hong Kong listed stocks via SSE directly. That in itself is an important step towards greater market convergence, and it helps accelerate the process of RMB internationalisation and the opening up of China's capital account.

    It seems likely that the Shenzhen Stock Exchange will in due course be added to the mechanism and that the range of available equities on each market will also be extended. Article 24 of "The Co-operation Plan of Qianhai Shenzhen – Hong Kong Modern Service Industry Co-operation Zone" (issued on 4 December 2014) has specifically mentioned that the Co-operation Zone will enhance the co-operation of the capital markets between Shenzhen and Hong Kong and support Shenzhen Stock Exchange and HKEx to explore new co-operation methods based on the experience of SHSC.

    Risk Disclosure relating to the user of SHSC

    This document does not necessarily deal with every important topic relating to SHSC or cover every aspect of the topics with which it deals. Part of this document is based on publicly available information as of the date of issue of this document. Certain clearing and trading rules and regulations are not yet completely promulgated by the relevant authorises, regulatory bodies and exchanges and therefore their understanding might be subject to changes in the future. HSBC is under no obligation to keep current the information in this document. Clients are advised to read the HKEx website for SHSC and the relevant Chinese rules and regulation.

    1A shares that are also listed in the equivalent H share form in Hong Kong.
    2H shares that are also listed in the equivalent A share form in Shanghai.
    3China Securities Depository and Clearing Corporation Limited.
    4Shanghai-Hong Kong Stock Connect FAQ for Investors published by the HKEx (updated: 28 November 2014), Questions 49, 51, 52 and 53.

    Disclaimer

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    November 2014

    Optimising working capital via the Shanghai Free Trade Zone

    On 29 September 2013, the government of the People’s Republic of China announced the establishment of a Free Trade Zone in Shanghai. The Shanghai Free Trade Zone (FTZ) is seen as a testing ground for a number of economic reforms, enabling financial institutions and corporations to benefit from increased liberalisation of the China market.

    Shanghai FTZ's benefits

    • Reduced administrative burden for both inbound and outbound funds movement (e.g. filing with relevant government bodies instead of prior approval and quicker processing).
    • Streamlined processes of cross-border flows of goods and supervision over domestic flows of goods with other parts of China will be enhanced.
    • Ability to fund China business via excess cash held in other locations.
    • Ability to redeploy surplus liquidity in China for offshore operations.
    • Reduced costs of borrowing, and improved return of funds.
    • Minimum capital amount to be paid for business registration.

    HSBC’s commitment to China

    As part of our strategic commitment to China, HSBC is one of the first foreign banks to set up a branch in the Shanghai FTZ. With our extensive network globally and across the China mainland, HSBC is well-placed to help corporate clients with their liquidity needs at both a domestic and international level. With the liberalisation of the regulatory framework arising from the FTZ, and leveraging our deep understanding of the local market practices, HSBC is well placed to support your growth in China.

    The Shanghai FTZ gives corporates opportunities to:

    • Optimise internal funding structures and improve yields on balances by leveraging excess RMB cash held across multiple jurisdictions.

    • Connect Mainland China liquidity with global cash pools, thereby the ability to fund its China business or leverage on excess cash held in China.

    • Consolidate, transform analytical and reporting data into actionable intelligence.

    • Increase treasury efficiency and lower resourcing costs by automating processes.

    First Bank to offer RMB two-way cross-border cash concentration for corporates
    in Shanghai FTZ

    HSBC is the first bank to launch RMB two-way cross-border cash concentration for corporates in the Shanghai FTZ. The RMB two-way cross-border sweep enables corporates to deploy funds on an automated basis between their onshore and offshore entities by linking their mainland and overseas liquidity. It also brings greater transparency to their operations and enhances their ability to optimise working capital management.

    These benefits can be achieved by using a combination of market leading solutions:

    1. Multilateral Entrusted Loan

    Facilitating lending between different legal entities

    As direct lending between different legal entities is not allowed, an entrusted loan structure is necessary. An entrusted loan is defined as a loan where a bank acts as an agent of entrusted funds from a depositor. With our multilateral entrusted loan, it is possible to distribute funds and reduce the need for external financing between multiple legal entities via one agreement. As part of the Shanghai FTZ regulatory framework, corporates have the ability to connect their Shanghai FTZ entity balances with their onshore China entities.

    2. Optimised Domestic Cash Concentration

    Reducing outstanding entrusted loan amount, while decreasing operating cost

    Our optimised domestic cash concentration solution executes liquidity in the most optimised way. Only the necessary funds will be transferred from cash surplus accounts to cover any deficit positions. This effectively reduces the entrusted loan amount to a minimum thus reducing individual participant’s operating costs. Our solution is highly customisable, allowing your specific situation to be addressed.

    3. Cross-border two-way RMB Cash Concentration

    Funding RMB deficit position or defunding excess RMB positions across onshore and offshore, when and where you needed on an automated basis

    Our cross-border cash concentration solution gives you the ability to fully enjoy the benefits of your RMB funds held across any location. Either to fund any deficit or to use for working capital purposes. In addition, with our automated limit management, you do not have to worry about breaching any regulatory lending or borrowing limits.

    A successful partnership with Dover Corporations

    After the launch of the Shanghai FTZ, HSBC has been working in collaboration with our clients to capitalise on the opportunities available. Dover is one of the first foreign-invested enterprises to capitalise on these opportunities. Dover is a world-leading manufacturer of diversified industrial products. The two-way RMB cross-border sweep allows Dover to deploy funds more efficiently between its overseas and domestic affiliates, raising its capital efficiency and evaluating the RMB’s position as one of its primary settlement currencies. The liquidity structure for Dover includes a China domestic liquidity structure and a cross-border component, whereby funds or deficits are concentrated in its offshore entity. Benefits to Dover cover:

    • Optimisation of working capital.

    • Reduction of overdraft charges occurring currently at non-China based entities.

    • Improved returns on funds.

    HSBC Partnership with Dover corporations


    Key elements of RMB two-way cross-border cash concentration

    A corporation registered in the Shanghai FTZ has the ability to conduct RMB two-way cross-border cash concentration within the following framework:

    • Leading Company must be the Shanghai FTZ entity holding both RMB special purpose account and master account of domestic cash concentration.

    • Other participants can be both Shanghai FTZ entities and non-Shanghai FTZ entities.

    • RMB special purpose account must be opened under the name of the leading company facilitating cross-border fund movement.

    • Outbound lending limit (from China to overseas): Limited to self-owned funds generated from domestic participants’ operating activities and investment activities. Funds generated from domestic participants’ financing activities such as RMB capital/debt market or from bank loans are not allowed to be used for cross-border lending.

    • Inbound borrowing limit (from overseas to China): Limited to finance working capital needs only. Capital and fixed asset expenditure, investment to stock/share, bond, corporate deposit, structured deposit and derivatives are not allowed.

    • Fund direction: Fund movements can be in both directions as long as it is within the outbound lending and inbound borrowing limits.

    • Interest rate: Interest rate applied on the loan have no restriction, but are strongly recommend to be at arm’s length basis.

    To understand how HSBC can help you to capitalise on these opportunities, please contact your Relationship Manager, Global Payments and Cash Management Sales Manager or visit the HSBC website.

     

    * RMB Specific Risks for RMB Products Renminbi (RMB) is currently not freely convertible and conversion of RMB through banks in Hong Kong is subject to certain restrictions. Clients should be reminded of conversion risk in RMB products. In addition, there is a liquidity risk associated with RMB products, especially if such investments do not have an active secondary market and their prices have large bid/offer spreads. RMB products in Hong Kong are denominated and settled in RMB deliverable in Hong Kong, which represents a market which is different from that of RMB deliverable in Mainland China. Please refer to the offering documents of the respective RMB products for details, including risk factors.

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    10 JULY 2014

    China’s capital markets and the rise of the RMB

    The ascent of the renminbi has been sure and swift, according to Douglas Flint, HSBC Group Chairman. Speaking at the UK-China Financial Forum in London, Mr Flint addressed the emergence of the renminbi as a global currency, the importance of China’s capital markets, and London’s status as a global renminbi centre.

    He said: “The emergence of China and the rise of the renminbi go hand-in-hand. And just as China’s rapid yet predictable growth has been a comforting constant at a time of unprecedented global economic upheaval, the ascent of its currency has been sure and swift.

    China will assume an increasingly prominent role in global financial flows, particularly as the renminbi becomes more international and the offshore market grows deeper and broader

    “The first stage of China’s three-stage plan for the renminbi – to establish it as a trade currency – is already well-advanced. The proportion of China’s total trade settled in renminbi has increased from 3 per cent in 2010 to 18 per cent in 2013. We expect it to reach 30 per cent within a couple of years. And at the end of 2013, according to SWIFT, the renminbi overtook the euro as the number two trade currency in the world.

    “The second stage – establishing the renminbi as an investment currency – is also well underway. It is now firmly in the top 10 global payment currencies, up from 20th two years ago." He added: “The third stage of the renminbi’s development – establishing it as a reserve currency – is the least advanced of the three stages, but many central banks and reserve managers already hold it on a small scale and this will only grow as more countries look to diversify their reserves and gain exposure to the Chinese economy. We can see careful deliberation around this diversification taking place around the globe for multiple reasons.

    “Put simply, the renminbi is already a major global currency."

    Mr Flint said that China will assume an increasingly prominent role in global financial flows, particularly as the renminbi becomes more international and the offshore market grows deeper and broader. "We expect China’s cross-border capital flows to double within three years of full convertibility and its USD18 trillion of domestic financial assets to underpin global growth over the decades to come."

    He said: “At the start of this week, HSBC worked with the International Finance Corporation to issue the first offshore renminbi-denominated green bond. This adds an important asset class to the renminbi and marks its entry into a sustainable finance market that is expanding in size and scope. It is also another essential step on the journey towards full internationalisation.”

    Read the full speech

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    09 JULY 2014

    Why companies are getting RMB-ready

    China overtook the US in 2013 to become the world’s largest trading nation, with its trade in goods passing the USD4 trillion mark. This rapid growth has created significant opportunities for international businesses. But global use of China’s currency, the renminbi (RMB), remains low despite its increasing internationalisation.

    Although the RMB is a relative newcomer as a global trade and investment currency, it has evolved quickly as China has implemented a series of reforms to remove financial and bureaucratic barriers to its use. China is pursuing a three-stage approach: expanding the RMB’s role in foreign trade settlement, increasing its use in cross-border investment, and finally establishing it as a reserve currency. The first stage is well underway. The RMB was used to settle 18 per cent of China’s total trade last year, up from 3 per cent in 2010, according to HSBC Global Research.

    Significant progress has also been made in the second stage of development. The offshore RMB bond market – so-called dim sum bonds – has doubled in size each year since 2008, while offshore RMB centres have been established in locations including Hong Kong, Singapore and London. As of March, we estimate that more than 10,000 financial institutions were doing business in RMB, compared with just 900 in June 2011.

    But despite the RMB’s increasingly international status, many businesses that trade with China have yet to embrace the currency, according to a new survey we have just conducted. This survey, which covered more than 1,300 businesses in 11 countries and territories around the world, found that only 22 per cent of companies are currently settling their cross-border business with or from China in RMB. Outside mainland China, Taiwan and Hong Kong, RMB use is led by France and Germany – two countries that have both focused on developing stronger trade relationships with China.

    Strikingly, around two-thirds of businesses in mainland China and Hong Kong think that foreign firms that do business in RMB benefit financially and build stronger trading relationships. Overseas companies don’t all share this view, with awareness of the RMB’s potential advantages varying significantly around the world.

    There are signs that the number of businesses using RMB for cross-border trade settlement will increase, with larger companies leading adoption. Some 42 per cent of survey respondents with turnover over USD500 million said they’re doing some business in RMB compared with only 15 per cent of companies with turnover of between USD3 million and USD5 million.

    Around a third of businesses that don’t use the currency today told us that they intend to do so in future. Their main incentives for adopting the RMB are to win more business and to meet requests from trading partners, with businesses in the UK, mainland China and Taiwan most likely to switch.

    In addition, almost six in ten businesses that already use the currency plan to expand their RMB activities over the next 12 months. Their principal reasons for doing so are convenience, reduced foreign exchange risks or costs, and requests from trading partners. But the survey respondents also highlighted a number of obstacles to the currency’s adoption, including regulatory uncertainty, complex documentation and trading partners that are not yet ‘RMB-ready’.

    Undoubtedly the RMB will become more widely used. At a key policy meeting last November, China’s leaders underlined their commitment to accelerating financial reforms. They have implemented a number of new measures, including a doubling of the daily trading band for the RMB-USD rate and an easing of restrictions on cross-border capital flows in the Shanghai Free Trade Zone, which is acting as a test bed for many of the country’s reforms.

    Given the scale and speed of these recent reforms, HSBC now expects that the RMB will be fully convertible by 2017, several years earlier than we’d previously anticipated. In the even shorter term we estimate that it will be used to settle 30 per cent of China’s total trade by the end of 2015. The internationalisation of the RMB is gathering pace, and businesses everywhere should be considering the implications of a currency that’s already far more ‘mainstream’ than many people realise.

    About the RMB Survey

    HSBC commissioned Nielsen to conduct a market survey of 1,304 international companies that currently do business with Mainland China or are a business in Mainland China that imports/exports outside of the region. The survey was in field between 3 April and 7 May 2014 and was undertaken to understand clients’ attitudes towards using RMB, reasons of using / not using RMB for trade and investment activities, as well as other insights they can offer about the RMB.

    The research surveyed international businesses in Australia (n=100), China (n=200), Germany (n=100), Hong Kong (n=200), Singapore (n=100), the UK (n=100), the USA (n=100), Canada (n=100), Taiwan (n=100), France (n=100), and the UAE (n=100). Of the companies surveyed, approximately 50 per cent had an annual sales turnover between of USD3m-50m, 40 per cent had a turnover of USD50m-500m and 10 per cent had an annual sales turnover above USD500m. (Copyright © 2014, The Nielsen Company)"

    About Nielsen

    Nielsen N.V. (NYSE: NLSN) is a global information and measurement company with leading market positions in marketing and consumer information, television and other media measurement, online intelligence and mobile measurement. Nielsen has a presence in approximately 100 countries, with headquarters in New York, USA and Diemen, the Netherlands.

    Related Insight:

    Accelerate your China strategy: Top reasons to start using the renminbi

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  •  

    JULY 2014

    Accelerate your China strategy: Top reasons to start using the renminbi

    China’s rapid ascent as a major global economy makes it too big to ignore for international companies around the world. As the manufacturing “workshop of the world”, China plays a critical role in many companies’ global supply chains. Its large and increasingly affluent population also makes the country a key target destination for exporters.

    The opportunities are huge, but there are also signs that many companies could do more to streamline trade and reduce the costs of their cross-border transactions with China. A recent HSBC survey1 indicates that only a fraction of firms (22 per cent) are using the renminbi (RMB) for trade and settlement with China. The other 78 per cent could be missing out on a range of important advantages relating to switching to renminbi.

    As liberalisation of the use of China’s currency across its borders continues, we believe it is critical to implement a robust RMB strategy as quickly as possible.

    1. Lower transaction costs

    Apart from the greater convenience and reduced risk for the Chinese counterparty, one of the key benefits in using RMB for trade settlement with China is the possibility of a ‘natural hedge’. This presents an opportunity to reduce overall foreign exchange costs, and the savings may be enjoyed by both sides. Since interest rates in China are relatively high, Chinese counter parties with a need for working capital may be able to obtain financing at a lower interest rate off-shore. The costs savings’ benefits can be shared between the Chinese and its overseas’ counterparties.

    2. Reduce exchange rate risk

    • Top reason firms trade in renminbi (48% in survey) = reduce FX risks and costs (Source: HSBC Renminbi 2014 survey)

    With a natural hedge in place i.e. receivables/payables and assets/liabilities in the same currencies, the companies can potentially reduce their exposure to exchange rate volatility. The recent movement of RMB’s exchange rate, along with the widening of the daily trading band for the onshore spot rate from +/- 1 per cent to +/-2 per cent make this even more of a priority for companies in China.

    3. Gain market share

    • 61% = share of Chinese companies saying foreign partners who use renminbi will enjoy relationship advantages over competitors (Source: HSBC Renminbi 2014 survey)

    Companies in China with an RMB cost basis are likely to prefer partners who are willing to settle for trade in the local currency. Willingness to use renminbi may open new avenues in China and strengthen existing relationships. By making it easier to do business with your organisation, you can help your company build market share. In our survey, 47 per cent of companies using renminbi believe it enables them to win more business.

    4. Better manage liquidity between China and global operations

    • 65% = share of firms with limited or no knowledge of SFTZ)
    • 38% = share of UK firms planning to use renminbi liquidity management solutions in next 12 months (Source: HSBC Renminbi 2014 survey)

    For multinational companies (MNCs) with operations in China, a major benefit derived from the relaxation of cross-border renminbi policy is the improved ability to use onshore liquidity to support funding needs outside of China. Historically, repatriation of liquidity from the country was only possible by way of paying a dividend—a cumbersome and expensive process. Changes in renminbi regulation can gradually reduce these barriers. For example outbound intercompany loans between Chinese corporates and their overseas affiliates are now permitted in most parts of the country without the need to obtain regulatory approval. In addition, companies in the Shanghai Free Trade Zone can now sweep funds between their offshore and onshore RMB cash pools, on an automated basis as often as on a daily basis. This gives MNCs the ability to fund their working capital needs internally and to incorporate excess cash from China into regional or global liquidity structures, thereby improving the efficiency of their capital.

    1 HSBC, RMB International Study 2014 (June 2014)

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    JULY 2014

    Trading in renminbi: reducing costs, managing risks

    There is currently a stark mismatch between China’s huge importance to global trade and the relatively small fraction of global payments that are made in renminbi. In a recent HSBC survey of international companies conducting business in China1 , only 22 per cent are using renminbi for settlement.

    That discrepancy has its roots in the tight restrictions the Chinese government has, until relatively recently, placed on the use of the renminbi outside China’s borders. However, the situation changed four years ago when the Chinese government introduced measures to allow renminbi accounts to be held offshore, creating the opportunity for foreign businesses to conduct physical trades in the currency. Firms that do regular business with China, but have not explored the benefits of trading in renminbi, could be missing out.

    Save money, manage risk

    Key facts from the HSBC Renminbi Survey 2014

    • Out of 1,304 companies doing business in China surveyed by HSBC, 22% use renminbi for cross-border settlement
    • 58% of companies are using renminbi to reduce foreign exchange risks or costs

    At a simple level, paying for goods in renminbi saves money. We have seen that the difference between paying for imported goods in dollars, versus paying for those goods in renminbi can be as much as 5 per cent2.

    Trading in renminbi can also help corporates to reduce their foreign exchange risks and to manage their cash flows better. While firms that still deal in US dollars or euros can hedge their exposure to the renminbi using non-deliverable forward contracts (NDFCs), this method creates uncertainty. This is because NDFCs settle at the onshore rate, which on any given day could potentially be percentage points out of line with the offshore rate. So the attraction of the physical market is that corporates get much more certainty and control over their cash flow.

    There are also plenty of offshore options for firms looking to invest their surplus renminbi. These include time deposits; “Dim Sum” corporate and government bonds, in which yields are often higher than in dollars; Renminbi Qualified Foreign Institutional Investor (RFQII) funds, which allow offshore entities to invest in the onshore stock market; and renminbi equities. With this combination of benefits – managing risk, reducing costs and new opportunities – renminbi creates a lot more choices for businesses operating in China.

    No going back

    This is not to say that the switch to renminbi trading is simple. For firms that have historically traded in US dollars there are a number of challenges to navigate. The accounting infrastructure will need to be altered, staff will need to be trained, new relationships built and new accounts opened. This may be one reason why small firms, arguably better able than larger peers to experiment with individual transactions, have been leading the way with renminbi invoicing and hedging. In time, however, the benefits should outweigh the costs for small and large firms alike.

    A surprising number of businesses are reluctant to take the plunge because they are worried those upfront costs might be a wasted investment if China decides to reverse the renminbi’s internationalisation. These fears are probably misplaced. China is not going to rush the internationalisation process. It will move gradually, feeling its way across a river, as a Chinese saying goes, one stepping stone at a time. But there won’t be any going back. In fact, HSBC expects the renminbi to be fully convertible in two to three years3. Firms dealing with China should at least explore the new options that are available to them when managing their cash flows.

    1HSBC, RMB International Study 2014 (June 2014)

    2HSBC, RMB International Study 2014 (June 2014)

    3“Renminbi: the world’s next reserve currency”, HSBC, 4 May 2014

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    JULY 2014

    China liberalising, renminbi rising

    The convergence of onshore and offshore markets is happening. The next few years will see progressive convergence of these markets for the renminbi.

    Trade settlement in renminbi has expanded significantly as China’s policymakers have encouraged the currency’s adoption globally. Businesses are already showing a keen interest in renminbi as a tool to help them cut costs and manage FX risks more efficiently. Even more importantly, renminbi will allow foreign companies to build long-term strategic partnerships with China. Companies that are unaware of the advantages of using the renminbi may therefore be missing out on important benefits.

    There is huge potential for increasing the use of the renminbi to trade with and invest in China. Today only a small, but growing, proportion of these transactions is currently denominated in the currency. For trade denominated in renminbi, the share rose from 3 per cent in 2010 to 18 percent at Q1 20141 , and HSBC expects around 50 per cent of China-Emerging Markets trade to be settled in renminbi by 2015, making it the third largest trade currency2.

    Last year, HSBC reaffirmed our belief that conditions will allow the renminbi to be fully convertible by 2018, but the sheer scale and speed of reform now leads us to believe that China can achieve this in two to three years time.

    While the renminbi progress continues, HSBC’s 2014 renminbi survey3 of business professionals in 11 countries suggests significant interest in renminbi-denominated trading. But it also shows that there is little awareness of the benefits this could bring, as opposed to the perceived difficulties in terms of restrictions and regulations. Knowledge of the commercial possibilities simply has not kept pace with significant deregulation of the onshore market for renminbi, the growth of the offshore market and the progressive convergence of the two.

    The path of deregulation

    The onshore market for renminbi, the China mainland (CNY) market, is used by domestic Chinese companies, Chinese individuals and foreign companies with a presence in China. The onshore market currently trades at exchange rates relatively controlled by the government, although progress has already been made by the Chinese Government to relax these controls.

    Until a few years ago the CNY market was the only market for renminbi. Then in 2010, the offshore, or CNH, market was launched by the Chinese and Hong Kong authorities. It is a market driven environment. The offshore markets have been growing rapidly with Singapore, London and Taiwan renminbi centres being established , making it easier for companies around the world to participate. Foreign companies are now able to issue renminbi-denominated “Dim Sum” bonds outside China to fulfil their funding needs.

    On course to converge - two key elements to watch for

    For now, China’s onshore and offshore markets remain separate – but there are clear signs of progress towards a single, accessible market.

    The recently announced collaboration between the Hong Kong and Shanghai stock exchanges was a major step forward, driving regular interactions between the onshore and offshore markets. Similarly, the introduction and expansion of Free Trade Zones will accelerate greater international activities.

    Many restrictions on capital flows between the two markets have been eased, and the key development for business over the next few years is their likely convergence of these markets. Rapid changes in the next few years (especially the reform plans within the Shanghai Free Trade zone) will not only make it easier for foreign companies to invest in China, but will also encourage Chinese capital to seek out new investment opportunities abroad. Two-way capital flows will be the key driver for the next phase of renminbi liberalisation.

    More cross-border interaction and integrations are needed to drive the convergence of the onshore and offshore markets. The next steps in this process will be:

    • First, the onshore CNY market will benefit from further deregulation. The key here will be to watch the progress of the Shanghai Free Trade Zone (SFTZ), launched in September 2013, where most of the restrictions that apply to onshore currency trading in China have been lifted. If this continues to be successful, we expect to see further liberalisation within the SFTZ and eventually extension of SFTZ principles to further parts of China. This will offer significant opportunities to businesses. For example, new rules will allow corporate treasuries with operations within a free trade zone to both be borrowing from and lending to offshore counterparties. It will also give Chinese companies easier access to foreign sources of funds (such as issue bonds offshore). Over half (54 per cent) of respondents (multinational corporate clients) to HSBC’s renminbi survey say they expect their businesses to benefit from the SFTZ.4

    • Second, the offshore CNH market is set to expand quickly. In 2013 the UK and China agreed to establish direct renminbi-sterling trading and Chinese bank branches in the UK. In February 2014 Singapore and London agreed to work together to boost offshore trading in the Chinese currency in their two markets. And in 2014 Paris was authorised to establish an offshore CNH market. Other global financial centres are already following such as Germany, Luxemburg, Switzerland and Canada out of North America. Direct trading between two countries will drive down transaction costs for companies trading with and investing in China, improve the liquidity of the offshore market, and create new business opportunities around the world.

    In addition, the government will continue with its plans on liberalisation for interest rates, exchange rate and cross border fund movement towards full capital-account convertibility. It will also implement further reforms affecting trade and investment.

    For corporates, these reforms will make it easier to have their trade, investment and financing denominated in renminbi. For financial institutions, especially those global asset managers, these developments could mean bigger quotas under the various ‘Q’ schemes (QFII, RQFII). For China companies and investors ‘going out’, it creates more freedom in outward direct investment in renminbi and more renminbi-denominated securities investment via schemes such as QDII scheme.

    All of this will help accelerate the speed of renminbi full convertibility and help the convergence between renminbi onshore and offshore markets. But the process will take time. China needs to develop a deep, healthy and accessible domestic financial market, which is a pre-condition for renminbi full convertibility. More importantly China needs to develop a stronger, internationally compatible framework to control the risks, balance growth and allow its currency to effectively help a globalising China fulfil its ultimate aim – financial integration with the world via trade and investment.

    1 ‘Renminbi: the world's next reserve currency’, HSBC article, published on 7 May 2014

    2 HSBC, Global Research ‘Rise of the redback III’ (March 2014)

    3 HSBC, RMB International Survey of 1,304 companies doing business in China, 2014 (June 2014)

    4 HSBC, RMB International Survey of 1,304 companies doing business in China, 2014 (June 2014)

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    JULY 2014

    Renminbi: a new reserve currency?

    China’s renminbi(RMB) is set to join the elite club of world reserve currencies, alongside the US dollar and the euro. The dollar is currently the dominant international reserve currency: according to the International Monetary Fund, it accounts for over 60 per cent of global allocated foreign-exchange reserves, with the euro accounting for just under 25 per cent 1.

    Most of the remaining currencies are held in sterling, Japanese yen, Swiss francs, and Canadian and Australian dollars. Today, less than 1 per cent of global reserves are held in renminbi. This is likely to change in the medium term, as corporates and financial institutions are increasingly keen to take advantage of the benefits of using renminbi 2.

    The speed and scale of the progress with RMB internationalisation from both corporates and financial institutions is already at an exponential rate, but there still remains untapped potential – as evidenced from a recent HSBC survey, 59 per cent of corporates businesses currently trading in renminbi expect to increase their use of the currency within the next 12 months, while 32 per cent of non-users expect to start doing so 3. At the same time, we are already seeing convergence between the onshore and offshore markets for renminbi. China’s onshore market is steadily opening up, with strong demand driven by large global investors. The renminbi will continue playing an increasingly important role in strategic asset allocation as more foreign investors start to tap into China’s financial markets.

    While the RMB continues its journey as an international trade and investment currency, some structural shifts in the world reserves market are also under way. Twenty years ago, 65 per cent of reserves were held by developed countries and 35 per cent by emerging markets. Now that position is reversed, with 67 per cent of world reserves held by emerging markets, reflecting the economic rise of Asia in general and in particular, China 4.The uncertainties facing the US dollar and euro have increased sharply in the wake of the global financial crisis and the Eurozone crisis. There are also concerns about the sustainability of the ever-growing volume of US Treasury debt and the continued willingness of markets to absorb it. These factors have led to increasing interest across the world in holding non-traditional currencies, especially the renminbi, in foreign-exchange reserves. Many central banks and global investors are increasingly seeing renminbi as another alternative to diversify and improve yield.

    Use of the renminbi outside China

    • 150+ countries doing RMB business in a typical month
    • 23 countries / territories with swap/settlement agreements
    • 5 offshore RMB centres (Hong Kong, Singapore, Taiwan, London, Frankfurt)

    The renminbi’s journey continues

    Generally speaking, a reserve currency needs three broad characteristics: convertibility; acceptability and broad use in international markets; and stable value. Its popularity will also depend on the size of the home economy, the openness of international financial markets for the currency and supportive domestic macroeconomic policies. Increasingly, China is scoring on all these fronts.

    Renminbi is already held as a reserve currency by some central banks despite existing restrictions on foreign investment. In addition to the China Interbank Bond Market, Qualified Foreign Institutional Investor and the CNH bond market, central banks also have access to renminbi liquidity via bilateral FX swaps, which are worth around RMB2.5 trillion and have been set up with 23 other countries so far. They can be tapped by these central banks to support CNH transactions in their local markets.

    It is expected that more countries will sign currency-swap agreements with China in the near future, promoting market confidence in the renminbi. These “SWAP line” agreements are seen as the first step to prepare the renminbi on its journey to becoming a global reserve currency. The central banks of Australia, Chile and Nigeria have publicly confirmed their renminbi holdings, and sovereign wealth funds are already amongst the largest investors in China’s financial markets.

    China’s influence in the world will further aid with the currency’s progress. China’s share of world trade and output will continue to grow. Between 2003 and 2013 its share of world merchandise trade doubled from 5.5 per cent to 11 per cent, and its share of world gross domestic product (GDP) (in nominal US dollars) almost trebled from 4.3 per cent to 12.6 per cent. Nearly one-fifth (18 per cent) of China’s total trade was settled in renminbi in 2013 5 , and HSBC believes this figure could reach 30 per cent by 2015 6.

    Policy help on the way

    The Chinese government’s policies to improve the renminbi’s full convertibility, acceptance and usage will also enhance its attractiveness as a potential reserve currency. Current-account full convertibility was largely achieved in 1994, subject to restrictions and other non-tariff barriers on the imports of goods and services, and the government will continue to deregulate interest rates and exchange rates and progress towards full capital-account convertibility. HSBC expects the renminbi to be fully convertible under capital account within the next two to three years, subject to the success of China’s overall reforms 7.

    There are some risks that need to be navigated. The renminbi’s path to becoming a reserve currency is largely dependent on the global market involvement. It is also important that China’s reform plans are successfully implemented. These challenges should not be underestimated, but China’s ability to address them is not in doubt.

    The dollar, the euro ... and soon the renminbi

    Over the next decade, the internationalisation of the renminbi should be completed and there is real potential for it to become a widely-held reserve currency, not only in Asia but globally. Central banks and global investors may look to update their strategic asset allocations to reflect the increasing importance of the renminbi to the world economy. For central banks, the US dollar’s position as the incumbent reserve currency does not necessarily mean that the renminbi cannot emerge as another reserve currency.

    The renminbi will not replace the US dollar in the near future, if ever. But it should become an increasingly popular alternative and should strengthen the stability of the global financial system. The renminbi – with strong potential to be the world’s third reserve currency could increase global access to liquidity and reduce risk in strategic asset allocations. The size of the Chinese economy and its increasing share of global trade and GDP will further justify a greater role for renminbi in the years to come.

    1 IMF, Currency Composition of Official Foreign Exchange Reserves (COFER), updated 31 March 2014.

    2 HSBC, RMB International Study 2014 (June 2014)

    3 HSBC, RMB International Study 2014 (June 2014)

    4 HSBC, Global Research ‘Rise of the redback III’ (March 2014)

    5 “Renminbi internationalisation”, Bank of China, March 2014

    6 “China’s big bang”, HSBC, November 2012

    7 “Renminbi: the world’s next reserve currency”, HSBC, 4 May 2014

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    24 MARCH 2014

    Riding China's investment wave

    Investment flows between Europe and China have been eclipsed by trade flows until now – perhaps unsurprisingly, given that trade flows have grown by 500 per cent over the past 10 years. However, we believe the conditions are now ripe for investment flows to catch up

    For nearly a decade the EU has been China’s largest export destination – even during the worst of the eurozone recession. China’s exports to Europe still far exceed its imports but European sales to China have risen more than fourfold since 2002, to USD167 billion in 2012, making it the EU’s largest export market after the US.

    But foreign direct investment flows have been much slower to expand. China accounts for less than 1 per cent of the total stock of foreign direct investment (FDI) into the EU, and less than 2 per cent of the inward flow.

    However, this could change dramatically over the next decade. Although China’s outflows of direct investment are tiny, they are rising – from EUR2.2 billion.

    China’s companies, faced with tougher competition at home and slow growth in the developed world, are going global. The government’s 2002 ‘going out’ campaign to encourage companies to expand overseas has seen a spectacular rise in outward direct investment (ODI). With over 58 per cent of China’s oil imported, state-owned energy companies have been acquiring stakes in foreign oil fields while manufacturers are buying overseas brands.

    We expect this growth to continue. China’s ODI was still only 6 per cent of global foreign direct investment in 2012 against its 12 per cent of world gross domestic product (GDP). Also, the Chinese save half their GDP, so excess savings are likely to turn into ODI.

    The internationalisation of its currency has resulted in a rapid rise in renminbi international-trade settlement. This is likely to increase further now domestic companies can make ODI and remit revenues in renminbi. Policymakers are also relaxing restrictions on outward investment and simplifying approval procedures.

    We expect an increasing share of China’s ODI to find its way to Europe, not least because the worst of the eurozone crisis is now over and most countries have returned to positive GDP growth. So, with improved labour and product market flexibility in many member states, Europe looks more attractive.

    The nature of the current wave of outward Chinese investment should also favour Europe.

    China’s ODI has grown in three waves. The first was investment in primary industries, dominated by coal, oil and metals – understandable for a fast-growing economy that is not rich in natural resources – but this phase is tailing off. The second wave, investment in infrastructure, including rail, shipping and ports, is also slowing.

    But a third wave of growth in goods and services – including investment in cars, food products, telecoms and technology – is at a much earlier stage, and growth rates are still accelerating.

    This progression from primary to infrastructure to goods and services has important implications for Europe because Europe is much more exposed to the third wave than to the first two. In the past five years, Europe was the destination for 14 per cent of China’s ODI in goods and services compared with only 1 per cent in primary industries and 5 per cent in infrastructure.

    Further, negotiations on a comprehensive investment treaty between China and Europe began in 2014 and, while a conclusion is realistically two to three years away, this indicates the direction of policy.

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    20 march 2014

    A guide to renminbi asset classes

    Developments in renminbi asset classes are happening rapidly as China reforms its financial system. Renminbi internationalisation is accelerating and offshore renminbi financial markets are growing fast. Recent milestones include:

    • China’s foreign trade volume reached USD4.16 trillion in 2013, more than 200 times greater than when reform began in 1978. The country now has the highest volume of trade in the world.

    • The renminbi overtook the euro to become the most-used currency in global trade finance after the US dollar in December 2013.

    • Offshore renminbi bond markets have doubled every year since 2008 as more international issuers use this platform for renminbi financing and as global investors see the currency as an asset class that offers attractive yields and, until recently, an appreciating exchange rate. The pool of offshore renminbi assets, including deposits, bonds and bank certificates of deposit, now totals about RMB1.8 trillion (almost USD300 billion).

    And the momentum is still building. The number of offshore renminbi centres is growing, increasing liquidity and product innovation; renminbi bond issuance outside China reached record volumes this year; and the number of swap agreements with central banks is rising. Meanwhile, greater participation by foreign institutional investors is improving pricing efficiency and expediting renminbi interest rate and foreign exchange rate liberalisation.

    More opportunities lie ahead. The offshore renminbi equity capital market remains in its infancy as renminbi-denominated stock offerings have yet to take off. However, Hong Kong Exchanges & Clearing’s USD2.2 billion acquisition of the London Metal Exchange provides a launch pad for introducing renminbi-denominated commodity products at a time when China accounts for 40 per cent of the world’s demand in metals.

    China is also investing aggressively overseas - USD90.2 billion of non-financial outbound direct investment in 2013 - and last year’s launch of the Shanghai Free Trade Zone provides a testing ground for financial reforms, including full convertibility of the renminbi.

    But with growth comes greater risk. China’s debt levels have been climbing faster than GDP for more than a decade, especially since 2009 when Beijing launched a massive stimulus package to counter the effects of the global financial crisis. Debt was around 180 per cent of GDP last year compared with less than 130 per cent in 2000.

    Onshore rates and yields are rising despite a deceleration in growth over the last two years, raising funding costs for all borrowers and squeezing corporate margins. Meanwhile, stress in the onshore credit markets is building, with a series of near defaults.

    While this year’s decision to widen the renminbi trading band to 2 per cent will make the exchange rate more market-driven, it also raises concern about how the offshore renminbi bond market in particular, and renminbi internalisation in general, will handle the resulting bigger two-way volatility. Much of the past rise in the offshore renminbi asset pool is related to the currency’s steady appreciation and a decline against the dollar over six-months in 2012 led to a five-month fall in the offshore renminbi deposit base.

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    19 March 2014

    Renminbi: the world's next reserve currency

    The reforms finalised at China’s Third Plenum in November 2013 were the boldest package of policies seen in decades, indicating the new leaders’ determination to put the country on a new course. But subsequent concerns about shadow banking, local-government debt and possible defaults have made policymakers even more determined to speed up financial reforms.

    Beijing is already freeing up interest rates for foreign-currency deposits, easing restrictions on cross-border capital flows in the Shanghai free-trade zone, easing foreign investors’ access to Chinese markets and the daily trading band for the renminbi-dollar rate has now been doubled to + or -2 per cent.

    China has a three-pronged approach to renminbi internationalisation: expand the currency’s role in foreign trade settlement – it has already overtaken the euro to become the second to the dollar – encourage its use in cross-border investment, and develop offshore renminbi centres.

    As a consequence, several foreign central banks now hold renminbi reserves, suggesting some already see the renminbi as a viable reserve currency. But becoming a true reserve currency depends on the size of the home economy, deep and open financial markets with the currency used for cross-border transactions, plus supportive government policies and macroeconomic stability.

    The renminbi scores well on all counts. And as China’s financial reform continues, we believe the renminbi will play a much more prominent role on the world stage. Making the currency convertible is key, and Beijing has now made it clear that convertibility will be speeded up.

    China is learning from other countries’ mistakes. It opened its current account well before the capital account, and in a controlled manner. To mitigate the risks of opening the capital account, reforms will be tested in the Shanghai free-trade zone before being rolled out nationwide.

    Measures include the deregulation of services sectors, simplifying customs clearance and interest rate liberalisation, plus cross-border trade settlement, two-way portfolio investment and allowing foreign companies to issue renminbi bonds and access the domestic equity market.

    The Shanghai free-trade zone should prove as significant for China as the setting up of the Pudong New Area in the same city in the 1990s, or entry to the World Trade Organisation in 2001.

    In light of all this, we now expect full renminbi convertibility to come earlier than many expect –probably in the next two to three years, when last year we projected ‘within five years’. That will give bigger quotas for overseas investors, freeing outward direct investment, easing rules on foreign ownership of banks, and lifting the ceiling on individual currency purchases.

    As renminbi internationalisation and financial reforms accelerate, the currency’s role in global reserve management should expand quickly. It will soon be ready to take its place at the top table. That doesn’t mean the redback will replace the dollar as the world’s dominant reserve currency, but it will help create a multiple reserve currency system in which the dollar, euro and renminbi all play their part.

    Redback rundown

    • The renminbi is one of the 10 most-used currencies for payments worldwide
    • More than 10,000 financial institutions do business in renminbi – up from 900 in June 2011
    • The offshore renminbi bond market – ‘dim sum bonds’ – has doubled each year since 2008
    • About18 per cent of China’s trade is settled in renminbi: in 2010 it was just 3 per cent
    • China has currency-swap agreements with at least 20 central banks
    • There are now four offshore renminbi centres – Hong Kong, Singapore, London and Taiwan

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    March 2014

    The Shanghai Free Trade Zone: A Wealth of Opportunity

    The SFTZ was launched in late September 2013, after final approval was given by the State Council. It is likely to prove one of the most important stages in not only the internationalisation of the renminbi, but also of the Chinese economy – especially the service industry.

    SFTZ: Background and Role in Reform

    The SFTZ comprises four existing but geographically distinct zones and covers an area of just under 29 km2. Given its relatively modest size, the economic potential offered by these four locations is somewhat limited. However, the key point about the SFTZ is just about what happens in the zone economically, but also the new policies, business practises and environment created there that could in due course be replicated throughout China.

    The strategic possibilities of this bigger picture are linked to the macro picture of where China stands today: the old growth model is no longer sustainable, but the new growth model is yet to take root. Therefore, the SFTZ is a part of China’s overall strategic plan to further liberalise its economy, it is seen as a means of experimenting with reforms that can support trade and investment growth, and as a route to making services a larger driver in the country’s overall economic strategy.

    Apart from the changes in financial regulation relating to the SFTZ, there are three broader underlying principles involved:

    Supporting the needs of the real economy: The reforms relating to the SFTZ are key to unlocking the potential of China’s private investment and sustaining long-term growth, but these need to connect with the needs of the real economy, which includes all those doing business within both the zone and the rest of China. Ultimately the changes pioneered in the SFTZ could help to create an environment that will enable banks such as HSBC to make better risk-based decisions in providing financing to companies and create tools to assist companies in managing their financial risks efficiently.

    Openness to external markets and players: Chinese corporations have expanded overseas and are now competing in global markets and need access to the same financial tools as other global corporations. The previously limited connectivity between domestic and global financial markets has restricted the availability of these tools to Chinese corporations. Therefore the opening up of Chinese financial markets within the zone is particularly significant in allowing easier access to non-domestic financial solutions, such as offshore renminbi loans.

    Replicability: It important to recognise that the SFTZ is much more than just another free trade zone, as it has the crucial role of serving as a control testing ground for reforms that may subsequently be deployed nationwide. Therefore, corporations should regard the zone as it develops as an opportunity to preview how financial and other transactions may be conducted in the future in China.

    SFTZ: Financial Regulation

    The most significant announcement to date relating to regulatory reform and the SFTZ came in early December 2013 from People’s Bank of China’s (PBOC) 30 item ‘Opinion’, which highlighted focus areas for the future development of the zone all of which offer important opportunities for companies with SFTZ entities. Some of these areas are

    Interest rate liberalisation: the SFTZ is an opportunity for China to test interest rate liberalisation within a controlled environment. In early March 2014 the PBOC removed the interest rate cap for foreign currency deposits of USD3 million or less, which means that entities (individual or corporate) in the SFTZ can now earn more than the benchmark rate for deposits. A similar step as regards renminbi is also anticipated.

    Expansion of cross-border renminbi usage: early 2014 saw a number of announcements from the PBOC and the State Administration for Foreign Exchange (SAFE). These now mean that SFTZ entities are no longer required to provide supporting documentation for current account transactions in either renminbi or foreign currency. In addition, the PBOC has deregulated the supporting documentation required for renminbi-denominated cross-border direct investment transactions. The newly announced guidelines also enable services such as two-way cash sweeping and netting generally available for SFTZ corporates rather than requiring case-by-case approval.

    FX management reforms: companies in the SFTZ can now convert foreign currency proceeds in their capital account to renminbi at will. This removes the FX risk of injecting capital in foreign currency and having it depreciate versus the renminbi before it could be converted (outside the zone this is still only allowed at the point of disbursement).

    Free trade accounts and banking units: while detailed rules are still awaited from the PBOC, its 30 item ‘Opinion’ outlined the concept of SFTZ entities being able to open a ‘free-trade account’. Funds will be able to flow freely to and from these accounts to accounts offshore, thus allowing SFTZ entities access to offshore as well as onshore markets.

    Permit of entrance to financial institutions: financial institutions (FIs) will be able to establish entities in the SFTZ. Apart from the commercial opportunities this will afford these institutions, it is also anticipated that it will make new risk management tools available to non-FI SFTZ entities.

    SFTZ: Treasury Management in Practice

    The changes implicit in the SFTZ represent much more than conceptual opportunities; they mean that corporate treasuries can achieve hard number, bottom line benefits. While recent regulatory changes have enabled nationwide outbound renminbi lending to offshore related entities, this only enabled unilateral cross border sweeping, as lending from offshore to onshore was not permitted. (Any inflows could only be repayments of prior lending to offshore entities.) However, SFTZ entities are now allowed to engage in both borrowing/lending from/to offshore counterparties for working capital purposes. The funding source should be from corporate operations and investments (not from external financing sources) and funds must flow via a special renminbi bridging account owned by the SFTZ entity. As the image below illustrates, this means that an SFTZ entity can now act as a renminbi liquidity conduit between corporate entities on the mainland and the offshore market.

    SFTZ treasury management in practice

    SFTZ treasury management in practice

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    MARCH 2014

    Offshore RMB financing: A much needed solution for corporate funding

    Financing and investment on a global scale are everyday matters for multinational corporations. In the long run, experiments in the Shanghai Free Trade Zone (SFTZ) will go beyond cross-border trade and investment and into financing both direct and indirect. Cross-border indirect financing mainly involves borrowing from offshore banks, while direct financing is focused on equity and debt financing.

    Hong Kong has long been a ‘bridgehead’ for Chinese offshore financing; in particular, its ‘dim sum bonds’ or offshore RMB bonds have grown into a substantial market worth several hundred billion yuan. Many onshore corporate clients are talking about the possibility that the SFTZ will one day become another offshore ‘dim sum’ bond market and are full of anticipation; at the same time, many of our overseas corporate clients are interested in the potential benefits in terms of equity financing to be derived from registering in the SFTZ.

    The Opinions on Financial Measures to Support the China (Shanghai) Pilot Free Trade Zone released by the People’s Bank of China (PBOC) sets out that “financial institutions and businesses in the SFTZ can invest and trade on the securities and futures markets in Shanghai in accordance with relevant regulations. The overseas parent company of a business registered in the zone is allowed to issue RMB-denominated bonds in China’s domestic capital market in accordance with relevant regulations.” Additionally, the SFTZ’s separate accounting system permits offshore institutions not registered in the zone to open non-resident free trade accounts, and to transfer cash freely from or to resident free trade accounts, offshore accounts and non-resident PRC accounts outside the SFTZ. Offshore institutions seeking to conduct business within the SFTZ will find a less restrictive policy framework in which to conduct trade, financing and investment.

    Furthermore, the PBOC’s Shanghai Head Office has also clarified regulations governing offshore financing in RMB for financial institutions and businesses registered in the SFTZ, as set out in its circular concerning expanded cross-border use of the RMB released on 20 February 2014. The document provided a concrete basis for the delivery of these services. HSBC will continue to monitor and study policy developments related to the SFTZ, and will endeavour to provide our clients with new solutions in such an ever changing environment.

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    MARCH 2014

    HSBC’s advantage & its SFTZ sub-branch

    As one of the first foreign banks approved to establish a presence in the Shanghai Free Trade Zone (SFTZ), HSBC continues to stand at the forefront in supporting the country’s financial reform initiatives including RMB internationalisation, maintaining its leadership among foreign banks in China across a broad spectrum of businesses.

    On 27 January 2014, HSBC officially announced the opening of its SFTZ sub-branch. While focusing initially on servicing corporate customers with cross-border financial needs, the new outlet offers a range of banking services, such as account opening, cross-border payment and settlement in multiple currencies. Its service scope and business scale are set to expand further as policies governing the zone evolve. The opening of HSBC’s SFTZ sub-branch represents another concrete step in the bank’s support of and active participation in China’s financial reform.

    HSBC will leverage this platform as it continues its efforts in advancing product and service innovations. As a leading international bank, HSBC is ideally positioned to deliver its cross-border expertise into the zone to meet customers’ financial needs for trade and investment and to support the development of China’s real economy.

    As one of the oldest foreign banks in China, HSBC is well versed in the country’s financial policies and regulations not only on paper but also between the lines. At the same time, HSBC is pragmatic when providing services and products on the ground and is a forward partner in all projects. HSBC also has the advantage of a global network, with a wealth of experience in cash pooling, financing, trade and investment, which allows it to learn from success in different markets and then create tailored solutions for customers based on local realities, helping them to succeed within the SFTZ and beyond in the wider Chinese and international markets.

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Video: Client case study

RMB Specific Risks for RMB Products: Help

Renminbi (RMB) is currently not freely convertible and conversion of RMB through banks in Hong Kong is subject to certain restrictions. Clients should be reminded of conversion risk in RMB products. In addition, there is a liquidity risk associated with RMB products, especially if such investments do not have an active secondary market and their prices have large bid/offer spreads. RMB products in Hong Kong are denominated and settled in RMB deliverable in Hong Kong, which represents a market which is different from that from that of RMB deliverable in Mainland China. For individual clients, conversion of RMB is subject to daily limit in Hong Kong, the clients may have to allow time for conversion of RMB from/to another currency of an amount exceeding the daily limit. Please refer to the offering documents of the respective RMB products for details, including risk factors.

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The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Paul Mackel

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This document has been prepared and is being distributed by the Research Department of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.

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The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures

  1. This report is dated as at 09 February 2015.
  2. All market data included in this report are dated as at close 06 February 2015, unless otherwise indicated in the report.
  3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

* Legal entities as at 30 May 2014

‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch

Issuer of report
The Hongkong and Shanghai Banking Corporation Limited
Level 19, 1 Queen's Road Central
Hong Kong SAR
Telephone: +852 2843 9111
Telex: 75100 CAPEL HX
Fax: +852 2801 4138
Website: www.research.hsbc.com

The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) has issued this research material. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. This material is distributed in the United Kingdom by HSBC Bank plc. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient.

This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.

This material is distributed in Japan by HSBC Securities (Japan) Limited. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In the UK this material may only be distributed to institutional and professional customers and is not intended for private customers. It is not to be distributed or passed on, directly or indirectly, to any other person. HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is regulated by Comisión Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreño, S.A. is regulated by Superintendencia del Sistema Financiero (SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones Financieras (SIBOIF).

Any recommendations contained in it are intended for the professional investors to whom it is distributed. This material is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of HSBC only and are subject to change without notice. The decision and responsibility on whether or not to invest must be taken by the reader. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment).

HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of any companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform banking or underwriting services for or relating to those companies. This material may not be further distributed in whole or in part for any purpose. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient.
(070905)

In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments).

© Copyright 2015, The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 157/06/2014, MICA (P) 171/04/2014 and MICA (P) 041/01/2015
446610

Disclaimer

This document is issued in Asia by The Hongkong and Shanghai Banking Corporation Limited, in United States by HSBC Securities (USA), Inc. and in Europe by HSBC Bank plc (collectively HSBC) and is provided to you for information purposes only. HSBC makes no representation or warranty (express or implied) of any nature nor is any responsibility of any kind accepted with respect to the completeness or accuracy of any information, projection, representation or warranty (expressed or implied) in, or omission from, this document. No liability is accepted whatsoever for any direct, indirect or consequential loss arising from the use of this document (except as required by FCA and PRA Rules for HSBC Bank plc). Any examples given are for the purposes of illustration only and neither reflects nor predicts actual transactions. This document does not constitute an offer or solicitation for, or advice that you should enter into, the purchase or sale of any security, commodity or other investment product or investment agreement, or any other contract, agreement or structure whatsoever and is intended for institutional customers only. The document is intended to be distributed in its entirety. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. Unless governing law permits otherwise, you must contact an HSBC Group member in your home jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this document. This document, which is not for public circulation, must not be copied, transferred or the content disclosed, to any third party and is not intended for use by any person other than the intended recipient or the intended recipient's professional advisers for the purposes of advising the intended recipient hereon. You are solely responsible for making your own independent appraisal of any transactions referred to in this document, and you should not rely on any information in this document as constituting investment advice. Neither HSBC nor its affiliates are responsible for providing you with legal, tax or other specialist advice and you should make your own arrangements in respect of this accordingly.

Copyright. The Hongkong and Shanghai Banking Corporation Limited 2014. ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. The use of this publication by HSBC Securities (USA), Inc. and HSBC Bank plc is with prior permission of the The Hongkong and Shanghai Banking Corporation Limited.

In relation to materials issued by HSBC Bank plc:

This is a 'financial promotion' within the scope of the rules of the FCA and PRA.

HSBC Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Registered in England No 14259 Registered Office: 8 Canada Square, London, E14 5HQ, United Kingdom Member HSBC Group

This document is only intended for professional clients and eligible counterparties


Disclosure and disclaimer

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Peter Sullivan

Important Disclosures

This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.

Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.

The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.

Equities: Stock ratings and basis for financial analysis

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.

Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.

HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.

Credit: Basis for financial analysis

This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other considerations.

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.

Given these differences, HSBC has two principal aims in its credit research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a six-month time horizon; and 2) from time to time to identify trade ideas on a time horizon of up to three months, relating to specific instruments, which are predominantly derived from relative value considerations or driven by events and which may differ from our long-term credit opinion on an issuer. HSBC has assigned a fundamental recommendation structure only for its long-term investment opportunities, as described below.

HSBC believes an investor's decision to buy or sell a bond should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.

HSBC Global Research is not and does not hold itself out to be a Credit Rating Agency as defined under the Hong Kong Securities and Futures Ordinance.

Rating definitions for long-term investment opportunities

Stock ratings

HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 25 March 2014, the distribution of all ratings published is as follows:

Overweight (Buy) 45% (33% of these provided with Investment Banking Services)
Neutral (Hold) 38% (30% of these provided with Investment Banking Services)
Underweight (Sell) 17% (30% of these provided with Investment Banking Services)

Definitions for fundamental credit recommendations

Overweight: The credits of the issuer are expected to outperform those of other issuers in the sector over the next six months
Neutral: The credits of the issuer are expected to perform in line with those of other issuers in the sector over the next six months
Underweight: The credits of the issuer are expected to underperform those of other issuers in the sector over the next six months prior to 1 July 2007, HSBC applied a recommendation structure in Europe that ranked euro- and sterling-denominated bonds and CDS relative to the relevant iBoxx/iTraxx indices over a 3-month horizon.

Distribution of fundamental credit opinions

As of 24 March 2014, the distribution of all credit opinions published is as follows:

All Covered Companies Companies where HSBC has provided Investment Banking in the past 12 months

Count Percentage Count Percentage
Overweight 191 27 112 59
Neutral 399 55 172 43
Underweight 129 18 34 26
Source: HSBC

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research

Additional disclosures

  1. This report is dated as at 26 March 2014.
  2. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

* Legal entities as at 8 August 2012
‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR

Issuer of report
The Hongkong and Shanghai Banking Corporation Limited
Level 19, 1 Queen's Road Central
Hong Kong SAR
Telephone: +852 2843 9111
Telex: 75100 CAPEL HX
Fax: +852 2801 4138
Website: www.research.hsbc.com

The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) has issued this research material. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. This material is distributed in the United Kingdom by HSBC Bank plc. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient.

This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.

This material is distributed in Japan by HSBC Securities (Japan) Limited. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In the UK this material may only be distributed to institutional and professional customers and is not intended for private customers. It is not to be distributed or passed on, directly or indirectly, to any other person. HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is regulated by Comisión Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreño, S.A. is regulated by Superintendencia del Sistema Financiero (SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones Financieras (SIBOIF).

Any recommendations contained in it are intended for the professional investors to whom it is distributed. This material is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of HSBC only and are subject to change without notice. The decision and responsibility on whether or not to invest must be taken by the reader. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of any companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform banking or underwriting services for or relating to those companies. This material may not be further distributed in whole or in part for any purpose. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. (070905)

In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments).

© Copyright 2014, The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 118/04/2013, MICA (P) 068/04/2013 and MICA (P) 077/01/2014 [410015]


Disclaimer

Analyst Certification

Each analyst whose name appears as author of an individual chapter or individual chapters of this report certifies that the views about the subject security(ies) or issuer(s) or any other views or forecasts expressed in the chapter(s) of which (s)he is author accurately reflect his/her personal views and that no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendation(s) or view(s) contained therein: Zhi Ming Zhang

Important disclosures

Equities: Stock ratings and basis for financial analysis

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.

Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.

HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.

Credit: Basis for financial analysis

This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other considerations.

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.

Given these differences, HSBC has two principal aims in its credit research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a six-month time horizon; and 2) from time to time to identify trade ideas on a time horizon of up to three months, relating to specific instruments, which are predominantly derived from relative value considerations or driven by events and which may differ from our long-term credit opinion on an issuer. HSBC has assigned a fundamental recommendation structure only for its long-term investment opportunities, as described below.

HSBC believes an investor's decision to buy or sell a bond should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.

HSBC Global Research is not and does not hold itself out to be a Credit Rating Agency as defined under the Hong Kong Securities and Futures Ordinance.

Rating definitions for long-term investment opportunities

Stock ratings

HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 19 March 2014, the distribution of all ratings published is as follows:

Overweight (Buy) 44% (33% of these provided with Investment Banking Services)
Neutral (Hold) 38% (31% of these provided with Investment Banking Services)
Underweight (Sell) 18% (30% of these provided with Investment Banking Services)

Definitions for fundamental credit recommendations

Overweight: The credits of the issuer are expected to outperform those of other issuers in the sector over the next six months
Neutral: The credits of the issuer are expected to perform in line with those of other issuers in the sector over the next six months
Underweight: The credits of the issuer are expected to underperform those of other issuers in the sector over the next six months

Prior to 1 July 2007, HSBC applied a recommendation structure in Europe that ranked euro- and sterling-denominated bonds and CDS relative to the relevant iBoxx/iTraxx indices over a 3-month horizon.

Distribution of fundamental credit opinions

As of 18 March 2014, the distribution of all credit opinions published is as follows:

All Covered Companies Companies where HSBC has provided Investment Banking in the past 12 months

Count Percentage Count Percentage

Overweight 190 26 112 59
Neutral 399 56 170 43
Underweight 130 18 34 26
Source: HSBC

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures

  1. This report is dated as at 20 March 2014.
  2. All market data included in this report are dated as at close 17 March 2014, unless otherwise indicated in the report.
  3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

* Legal entities as at 8 August 2012
‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR

Issuer of report
The Hongkong and Shanghai Banking Corporation Limited
Level 19, 1 Queen's Road Central
Hong Kong SAR
Telephone: +852 2843 9111
Telex: 75100 CAPEL HX
Fax: +852 2801 4138
Website: www.research.hsbc.com

The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) has issued this research material. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. This material is distributed in the United Kingdom by HSBC Bank plc. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient.

This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.

This material is distributed in Japan by HSBC Securities (Japan) Limited. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In the UK this material may only be distributed to institutional and professional customers and is not intended for private customers. It is not to be distributed or passed on, directly or indirectly, to any other person. HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is regulated by Comisión Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreño, S.A. is regulated by Superintendencia del Sistema Financiero (SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones Financieras (SIBOIF).

Any recommendations contained in it are intended for the professional investors to whom it is distributed. This material is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of HSBC only and are subject to change without notice. The decision and responsibility on whether or not to invest must be taken by the reader. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of any companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform banking or underwriting services for or relating to those companies. This material may not be further distributed in whole or in part for any purpose. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. (070905)

In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments).

© Copyright 2014, The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 118/04/2013, MICA (P) 068/04/2013 and MICA (P) 077/01/2014


Disclaimer

Analyst Certification

Each analyst whose name appears as author of an individual chapter or individual chapters of this report certifies that the views about the subject security(ies) or issuer(s) or any other views or forecasts expressed in the chapter(s) of which (s)he is author accurately reflect his/her personal views and that no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendation(s) or view(s) contained therein: Hongbin Qu

Important Disclosures

This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.

Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.

The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures

  1. This report is dated as at 19 March 2014.
  2. All market data included in this report are dated as at close 12 March 2014, unless otherwise indicated in the report.
  3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

* Legal entities as at 8 August 2012
‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR

Issuer of report
The Hongkong and Shanghai Banking Corporation Limited

Level 19, 1 Queen's Road Central
Hong Kong SAR
Telephone: +852 2843 9111
Telex: 75100 CAPEL HX
Fax: +852 2801 4138
Website: www.research.hsbc.com

The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) has issued this research material. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. This material is distributed in the United Kingdom by HSBC Bank plc. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient.

This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.

This material is distributed in Japan by HSBC Securities (Japan) Limited. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In the UK this material may only be distributed to institutional and professional customers and is not intended for private customers. It is not to be distributed or passed on, directly or indirectly, to any other person. HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is regulated by Comisión Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreño, S.A. is regulated by Superintendencia del Sistema Financiero (SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones Financieras (SIBOIF).

Any recommendations contained in it are intended for the professional investors to whom it is distributed. This material is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of HSBC only and are subject to change without notice. The decision and responsibility on whether or not to invest must be taken by the reader. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment).

HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of any companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform banking or underwriting services for or relating to those companies. This material may not be further distributed in whole or in part for any purpose. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. (070905)

In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments).

© Copyright 2014, The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 118/04/2013, MICA (P) 068/04/2013 and MICA (P) 077/01/2014 [408381]


Disclosure and disclaimer

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Hongbin Qu

Important Disclosures

This document has been prepared and is being distributed by the Research Department of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.

Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.

The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.research.hsbc.com.

Additional disclosures

  1. This report is dated as at 02 November 2015.
  2. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC’s analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC’s Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

Legal entities as at 30 May 2014:
‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch

Issuer of report
The Hongkong and Shanghai Banking Corporation Limited

Level 19, 1 Queen's Road Central
Hong Kong SAR
Telephone: +852 2843 9111
Fax: +852 2801 4138
Website: www.research.hsbc.com

The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) has issued this research material. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. This material is distributed in the United Kingdom by HSBC Bank plc. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient.

This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.

This material is distributed in Japan by HSBC Securities (Japan) Limited. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch (“HBAP SLS”) or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch (“HBAP SEL”) for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a “Hongkong and Shanghai Banking Corporation Limited, Singapore Branch” representative in respect of any matters arising from, or in connection with this report. In the UK this material may only be distributed to institutional and professional customers and is not intended for private customers. It is not to be distributed or passed on, directly or indirectly, to any other person. HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is regulated by Comisión Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreño, S.A. is regulated by Superintendencia del Sistema Financiero (SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones Financieras (SIBOIF).

Any recommendations contained in it are intended for the professional investors to whom it is distributed. This material is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of HSBC only and are subject to change without notice. The decision and responsibility on whether or not to invest must be taken by the reader. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment).

HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of any companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform banking or underwriting services for or relating to those companies. This material may not be further distributed in whole or in part for any purpose. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. (070905)

In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments).

© Copyright 2015, The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 073/06/2015 , MICA (P) 136/02/2015 and MICA (P) 041/01/2015 [484136]

RMB Website -Terms and Conditions

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Disclosure and disclaimer

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Qu Hongbin

Important Disclosures

This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.

Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.

The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures

1 This report is dated as at 31 March 2016.

2 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

Legal entities as at 30 May 2014

'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt SAE, Cairo; 'CN' HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; 'US' HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch

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The Hongkong and Shanghai Banking Corporation Limited
Level 19, 1 Queen's Road Central
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Telephone: +852 2843 9111
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Website: www.research.hsbc.com

The Hongkong and Shanghai Banking Corporation Limited ("HSBC") has issued this research material. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. This material is distributed in the United Kingdom by HSBC Bank plc. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its "wholesale" customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient.

This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.

This material is distributed in Japan by HSBC Securities (Japan) Limited. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act ("FSCMA"). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) ("SFA") and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In the UK this material may only be distributed to institutional and professional customers and is not intended for private customers. It is not to be distributed or passed on, directly or indirectly, to any other person. HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión Nacional Bancaria y de Valores (CNBV).

Any recommendations contained in it are intended for the professional investors to whom it is distributed. This material is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified;

HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of HSBC only and are subject to change without notice. The decision and responsibility on whether or not to invest must be taken by the reader. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of any companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform banking or underwriting services for or relating to those companies. This material may not be further distributed in whole or in part for any purpose. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. (070905)

In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed "Commentary" in Canada although other affiliate jurisdictions may term "Commentary" as either "macro-research" or "research"), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments).

© Copyright 2016, The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 073/06/2015 and MICA (P) 021/01/2016

Disclosure and disclaimer

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Zhi Ming Zhang

Important disclosures

Credit: Basis for financial analysis

This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other considerations.

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.

Given these differences, HSBC has two principal aims in its credit research: 1) in corporate credit to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies and in the case of covered bonds to identify long-term investment opportunities based on country-specific ideas or themes that may affect the performance of these bonds, in both cases on a six-month time horizon; and 2) from time to time to identify trade ideas on a time horizon of up to three months, relating to specific instruments, which are predominantly derived from relative value considerations or driven by events and which may differ from our long-term credit opinion on an issuer. HSBC has assigned a fundamental recommendation structure only for its long-term investment opportunities, as described below.

HSBC believes an investor's decision to buy or sell a bond should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.

HSBC Global Research is not and does not hold itself out to be a Credit Rating Agency as defined under the Hong Kong Securities and Futures Ordinance.

Definitions for fundamental credit and covered bond recommendations

Overweight: For corporate credit, the credits of the issuer are expected to outperform those of other issuers in the sector over the next six months. For covered bonds, the bonds issued in this country are expected to outperform those of the other countries in our coverage over the next six months.

Neutral: For corporate credit, the credits of the issuer are expected to perform in line with those of other issuers in the sector over the next six months. For covered bonds, the bonds issued in this country are expected to perform in line with those of the other countries in our coverage over the next six months.

Underweight: For corporate credit, the credits of the issuer are expected to underperform those of other issuers in the sector over the next six months. For covered bonds, the bonds issued in this country are expected to underperform those of other countries in our coverage over the next six months.

Distribution of fundamental credit and covered bond opinions

As of 31 March 2016, the distribution of all credit opinions published is as follows:

All Covered Companies
Companies where HSBC has provided Investment Banking in the past 12 months
Count Percentage Count Percentage
Overweight 70 24 15 21
Neutral 163 57 53 33
Underweight 54 19 10 19
Source: HSBC

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities.

This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as such, this report should not be construed as an inducement to transact in any sanctioned securities.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures

1 This report is dated as at 05 April 2016.

2 All market data included in this report are dated as at close 01 April 2016, unless otherwise indicated in the report.

3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

Legal entities as at 30 May 2014

‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch

Issuer of report

The Hongkong and Shanghai Banking Corporation Limited
Level 19, 1 Queen's Road Central
Hong Kong SAR
Telephone: +852 2843 9111
Fax: +852 2801 4138
Website: www.research.hsbc.com

The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) has issued this research material. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. This material is distributed in the United Kingdom by HSBC Bank plc. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient.

This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.

This material is distributed in Japan by HSBC Securities (Japan) Limited. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In the UK this material may only be distributed to institutional and professional customers and is not intended for private customers. It is not to be distributed or passed on, directly or indirectly, to any other person. HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión Nacional Bancaria y de Valores (CNBV).

Any recommendations contained in it are intended for the professional investors to whom it is distributed. This material is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of HSBC only and are subject to change without notice. The decision and responsibility on whether or not to invest must be taken by the reader. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of any companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform banking or underwriting services for or relating to those companies. This material may not be further distributed in whole or in part for any purpose. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. (070905)

In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments).

©Copyright 2016, The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 073/06/2015 and MICA (P) 021/01/2016

Disclosure and disclaimer

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Wai-shin Chan

Important Disclosures

This document has been prepared and is being distributed by the Research Department of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.

Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.

The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures

1 This report is dated as at 18 March 2016.

2 All market data included in this report are dated as at close 17 March 2016, unless otherwise indicated in the report.

3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

Legal entities as at 30 May 2014

'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt SAE, Cairo; 'CN' HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; 'US' HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch

Issuer of report

The Hongkong and Shanghai Banking Corporation Limited
Level 19, 1 Queen's Road Central
Hong Kong SAR
Telephone: +852 2843 9111
Fax: +852 2596 0200
Website: www.research.hsbc.com

This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) in the conduct of its Hong Kong regulated business for the information of its institutional and professional investor (as defined by Securities and Future Ordinance (Chapter 571)) customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. All enquires by recipients in Hong Kong must be directed to your HSBC contact in Hong Kong. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment).

HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies.

HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report.

In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a “Hongkong and Shanghai Banking Corporation Limited, Singapore Branch” representative in respect of any matters arising from, or in connection with this report. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.

In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. It may not be further distributed in whole or in part for any purpose. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch (“HBAP SLS”) for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea.

In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments).

©Copyright 2016, The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 073/06/2015 and MICA (P) 021/01/2016

Disclosure and disclaimer

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Andre de Silva

Important Disclosures

This document has been prepared and is being distributed by the Research Department of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.

Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.

The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures

1 This report is dated as at 01 April 2016.

2 All market data included in this report are dated as at close 30 March 2016, unless otherwise indicated in the report.

3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

Legal entities as at 30 May 2014 UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch

Issuer of report
The Hongkong and Shanghai Banking Corporation Limited
Level 19, 1 Queen's Road Central
Hong Kong SAR
Telephone: +852 2843 9111
Fax: +852 2801 4138
Website: www.research.hsbc.com

The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) has issued this research material. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. This material is distributed in the United Kingdom by HSBC Bank plc. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient.

This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.

This material is distributed in Japan by HSBC Securities (Japan) Limited. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In the UK this material may only be distributed to institutional and professional customers and is not intended for private customers. It is not to be distributed or passed on, directly or indirectly, to any other person. HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión Nacional Bancaria y de Valores (CNBV).

Any recommendations contained in it are intended for the professional investors to whom it is distributed. This material is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of HSBC only and are subject to change without notice. The decision and responsibility on whether or not to invest must be taken by the reader. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of any companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform banking or underwriting services for or relating to those companies. This material may not be further distributed in whole or in part for any purpose. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. (070905)

In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments).

©Copyright 2016, The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 073/06/2015 and MICA (P) 021/01/2016

Disclosure and disclaimer

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: John Zhu

Important Disclosures

This document has been prepared and is being distributed by the Research Department of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.

Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.

The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures

1 This report is dated as at 18 March 2016.

2 All market data included in this report are dated as at close 17 March 2016, unless otherwise indicated in the report.

3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

Legal entities as at 30 May 2014

‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch

Issuer of report

The Hongkong and Shanghai Banking Corporation Limited
Level 19, 1 Queen's Road Central
Hong Kong SAR
Telephone: +852 2843 9111
Fax: +852 2801 4138
Website: www.research.hsbc.com

The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) has issued this research material. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. This material is distributed in the United Kingdom by HSBC Bank plc. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient.

This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.

This material is distributed in Japan by HSBC Securities (Japan) Limited. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In the UK this material may only be distributed to institutional and professional customers and is not intended for private customers. It is not to be distributed or passed on, directly or indirectly, to any other person. HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión Nacional Bancaria y de Valores (CNBV).

Any recommendations contained in it are intended for the professional investors to whom it is distributed. This material is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of HSBC only and are subject to change without notice. The decision and responsibility on whether or not to invest must be taken by the reader. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of any companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform banking or underwriting services for or relating to those companies. This material may not be further distributed in whole or in part for any purpose. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. (070905)

In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments).

©Copyright 2016, The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 073/06/2015 and MICA (P) 021/01/2016

Disclosure and disclaimer

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Steven Sun

Important disclosures

Equities: Stock ratings and basis for financial analysis

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating.

From 23rd March 2015 HSBC has assigned ratings on the following basis:

The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates).

Upside/Downside is the percentage difference between the target price and the share price.

Prior to this date, HSBC’s rating structure was applied on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months.

For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.

*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 31 March 2016, the distribution of all ratings published is as follows:

Buy 46% (26% of these provided with Investment Banking Services)
Hold 40% (28% of these provided with Investment Banking Services)
Sell 14% (19% of these provided with Investment Banking Services)

For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities.

This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as such, this report should not be construed as an inducement to transact in any sanctioned securities.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures

1 This report is dated as at 06 April 2016.

2 All market data included in this report are dated as at close 30 March 2016, unless otherwise indicated in the report.

3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

MSCI Disclaimer

The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an 'as is' basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates.

Legal entities as at 30 May 2014

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This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) in the conduct of its Hong Kong regulated business for the information of its institutional and professional investor (as defined by Securities and Future Ordinance (Chapter 571)) customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. All enquires by recipients in Hong Kong must be directed to your HSBC contact in Hong Kong. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies.

HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report.

In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.

In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. It may not be further distributed in whole or in part for any purpose. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose.

HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea.

In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments).

©Copyright 2016, The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 073/06/2015 and MICA (P) 021/01/2016.

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