84019669 standard chartered growing up

l Global Research l

Important disclosures can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank 2012 research.standardchartered.com

Contents

Focus – Loosening, but steady does it 2

CNH market – Shifting sands, expanding universe 7

FX – USD-CNH repricing on higher CNH returns 13

Credit – Dim Sum bonds – A maturing market 17

Economics – Angels, demons and investment

proxies 21

Appendix 25

CNH premium to onshore CNY

Sources: Bloomberg, Standard Chartered Research

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

Key strategies

Now Target Stop-loss

Credit

Buy CNPCCH 2.55% 13 100.25 101.00 99.25

FX

Long USD in 6M USD-CNY NDF

6.2893 6.40 6.20

Long 1Y USD-CNH put spread (ATMF and 22-delta strikes)

Eddie Cheung, +852 3983 8566

[email protected]

Kelvin Lau, +852 3983 8565

[email protected]

Lan Shen, +86 21 6168 5019

[email protected]

Robert Minikin, +852 3983 8567

[email protected]

Sandeep Tharian, +44 20 7885 5171

[email protected]

Stephen Green, +852 3983 8556

[email protected]

Wei Li, +86 21 6168 5017

[email protected]

The Renminbi Insider | 06:30 GMT 15 February 2012

Growing up

Highlights

China‟s economy is still slowing, and policy makers are signalling an increasing

willingness to loosen policy. We have already seen marginal improvements, such

as the steady fall in the draft discount borrowing rate and the upturn in (real)

credit growth. Small moves to support the real-estate market are also happening.

We continue to look for five reserve requirement cuts in 2012, but no interest rate

cuts. Growth in Q1 will be weak, but a mild U-shaped recovery is likely to begin in

mid-Q2.

The return of the CNH premium will rekindle CNH deposit growth in Hong Kong in

2012. Tighter CNH liquidity, which has pushed up deposit rates, has also

triggered regulatory moves to help banks. London now looks set to build its own

CNH infrastructure, in co-operation with Hong Kong. Competition with Shanghai

is not imminent, but should be welcomed.

We look for a 1.4% appreciation in the CNY against the USD in 2012. Rising CNH

deposit rates have pushed up USD-CNH forwards as interest rate differentials

play a greater role. We believe longer USD-CNH forwards offer an attractive

place for corporates to hedge USD receivables and CNY payables. Relative value

investors should hold USD-CNY NDF steepeners.

We estimate that investments in Dim Sum corporate bonds could reach CNH

350-400bn by end-2012, and that new issuance will be around CNY 180bn. New

supply will be easily absorbed. We recommend that investors rotate into the

higher-quality, more liquid single-A and strong BBB names.

The Renminbi Insider

15 February 2012 2

Focus – Loosening, but steady does it

Gradual loosening is now happening; the falling draft discount rate

is evidence of this

Growth will be weak in Q1 and early Q2, but we look for a better H2

Deleveraging in the real-estate and infrastructure sectors will drag

on

Are monetary conditions in China really being loosened? We think so, though it is

happening extremely gradually. In this section, we examine how the People‟s Bank of

China (PBoC) and other parts of the government slowed down the economy in 2010-

11 and can now gradually reverse course to support growth in 2012. Premier Wen‟s

comments last weekend that policy will be “micro-adjusted” in Q1, partly because

orders have deteriorated in up- and downstream industries, are another significant

signpost of this shift. There is still some economic pain to come in H1, but policy will

be supportive in 2012.

1. The PBoC drove up banks‟ cost of funding in 2011 through aggressive

sterilisation operations. The collapse in FX inflows (and thus exogenous money

supply) in Q4-2011 drove funding costs higher.

2. After a year of higher credit costs, and restrictions on real-estate and

infrastructure lending, demand growth slowed significantly from Q3-2011. Some

deleveraging has happened. Inflation has fallen dramatically. The economic

picture is clouded by the Lunar New Year holiday, which causes all manner of

data distortions, but we believe overall demand continues to contract mildly.

3. The PBoC has begun to react. Funding costs have peaked. Base money is now

growing again. The PBoC has scaled back its sterilisation activities. Borrowing

costs are falling, gradually.

4. Regulatory guidance has also eased: banks have been allowed to roll over

infrastructure-related loans and are encouraged to lend to first-time apartment

buyers and builders of ordinary apartments.

5. The easing so far has been gradual. However, it will continue, and we expect

demand growth to pick up in Q2. The infrastructure and real-estate sectors will

still face a tough year, though.

Chart 1: Credit growth slowed dramatically in 2010-11 but has now turned

Cement production and real credit growth, % y/y

Sources: CEIC, Standard Chartered Research

Real credit growth

Cement

-10%

0%

10%

20%

30%

40%

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12


[email protected]

Wei Li, +86 21 6168 5017

[email protected]

Lan Shen, +86 21 6168 5019

[email protected]


15 February 2012 3

Cooling the economy meant restricting credit, driving up funding costs

2010 and 2011 were all about higher funding costs and quantitative restrictions on

lending. Chart 1 shows the precipitous deceleration in credit growth, which really

began to bite in 2011. The PBoC enforced an unofficial CNY 7.5trn credit quota, and

unlike in 2010, regulators‟ efforts to curb non-bank credit growth proved effective.

Infrastructure and real-estate lending were especially squeezed via administrative

rules. The economy began deleveraging in 2011.

Partly as a result of quantitative restrictions, banks‟ funding costs also rose

significantly in 2011. Chart 2 shows the winning rate at the commercial banks‟

auction for Ministry of Finance (MoF) deposits. Budgetary funds are mostly held in

the Treasury Single Account (TSA) at the PBoC, though local governments and other

governments hold an enormous amount of cash outside of the TSA in commercial

bank accounts too. The MoF would like to earn some interest on its funds, as the

PBoC reportedly does not pay anything; so for the past few years, it has been

auctioning off some funds to banks for three- to nine-month periods.

These auction rates are therefore a good indicator of banks‟ marginal cost of funds.

Costs for six-month money had risen to nearly 7% by early 2011 from 1-2% in 2008.

This increase of 500-600bps far exceeds the 125bps increase in official deposit rates

during the same period. These rates mirror rates paid on wealth management

deposits, which have ballooned in scale in the last two years (see On the Ground,

14 September 2010, ‘China – How to prevent a housing bubble’). Both of these

new forms of bank liabilities tell us about marginal funding costs for the banks. These

costs are important to track as the credit quota is loosened.

Overall demand in the economy reacted to higher funding costs, and to all the

restrictions put in place in the real-estate and infrastructure sectors. Chart 3 shows

the slowdown in air travel in 2010-11, while Chart 4 shows the deceleration in cement

and steel production.

Chart 2: Banks’ marginal cost of funds rose, is now stable

Auction rates for MoF deposits at commercial banks, % p.a.

Chart 3: Slower, but still in the air

Air travel, passenger trips, % y/y

Sources: CEIC, Standard Chartered Research Sources: CEIC, Standard Chartered Research

9-month

6-month

3-month

0

1

2

3

4

5

6

7

8

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

Local

Regional

International

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Banks’ funding costs were pushed

up aggressively in 2010-11, and are

peaking now


15 February 2012 4

We think China is still slowing, despite Lunar New Year data effect

The Lunar New Year is playing havoc with the January-February statistics, including

the official manufacturing PMI numbers (which we show in Chart 5). The index hit

50.5 in January, the month when most factories in China were closed for the holidays,

suggesting a m/m expansion. The data needs to be seasonally adjusted for the Lunar

New Year, and the official PMI series shows evidence of better seasonal adjustment

since 2008. But we remain sceptical about the adjustment in January. The

Markit/HSBC manufacturing PMI for January was 48.8; the seasonal adjustment

method used for this data is probably better than for the official PMI, and the recent

history of this series suggests an ongoing contraction since July 2011 (with the

exception of an above-50 print in October). We may have to wait for the official PMI

for March for a more reliable gauge of where we are in the cycle, but we think Q1 will

be weak overall. The services-sector PMIs have also weakened, suggesting that the

slowdown is now also affecting urban consumption.

Inflation has fallen, and February data will highlight that trend

Despite the higher-than-expected January number, inflation pressures have fallen

meaningfully, and the authorities are increasingly dovish in their outlook. CPI inflation

came in at 4.5% y/y in January (Chart 6), significantly above the market consensus of

4.0%. Food and services prices surged during the Lunar New Year holiday. Chart 7

shows this holiday-induced ebb and flow in prices for food. In 2011, the holiday fell

on 3 February, just after the turn of the month. Services prices peaked in January

2011, as migrant workers usually leave their jobs early or demand higher pay to stay

as the holiday approaches. Food prices peaked in February 2011 as the food-

focused family celebrations kicked in. (Both of these effects usually hit in the same

month, as they did in January 2012.) As a result, the y/y CPI inflation number for

January 2012 was hit by a surge in food inflation to 10.5% from 9.1% in December,

while the impact on services prices was more muted.

February will see a reversal of these effects, with CPI inflation – especially for food –

falling. Important food prices have already fallen since the New Year. Indeed, looking

at historical m/m food price increases during the Lunar New Year month, January

2012 saw the smallest gains since 2006 (1.5%, compared with an average of 3.9%

between 2006 and 2010). If the historical pattern holds, y/y food inflation should fall

to 8.8% in February from 10.5% in January, and overall CPI inflation should slow to

3.8% y/y. The National Development and Reform Commission (NDRC) published a

Chart 4: Less steel and cement growth

Production, % y/y

Chart 5: PMIs have probably fallen below 50

Official and Markit/HSBC manufacturing PMIs


Crude steel

Cement

-20%

-10%

0%

10%

20%

30%

40%

50%


Official

Markit/HSBC

35

40

45

50

55

60

65


The Lunar New Year has played

havoc with the January data; we will

need to see February’s data to get a

sense of how weak the economy

really is

CPI inflation should fall to 3.8% y/y

in February, rekindling hopes of

more loosening


15 February 2012 5

note on its website in which it argued, like, us, that the January uptick was mostly

driven by increased New Year demand for food, and partly driven by bad weather.

Critically, upstream producer prices are flirting with deflation, rising only 0.7% y/y in

January. We maintain our call that CPI inflation will average 2% in 2012.

The discount rate is falling gradually, suggesting some loosening

As a result of weaker demand and lower inflation, credit conditions are set to

normalise. Rates in the interbank market reflect both FX inflows and PBoC open-

market (sterilisation) operations. Many small banks borrow at these levels. The cost

of short-term trade financing is now also falling, albeit very gradually. Chart 8 shows

the discount rate, at which banks discount bank-issued drafts presented to them by

corporates wanting cash. This is a critical financing rate for SMEs, which often rely

on drafts to pay their bills. It is also the best indicator of marginal financing costs

outside of traditional loans. Things got very tight in Q3-2011 as banks reduced their

issuance of drafts; in Q4, banks often refused to discount them at all. In H2-2011, the

bank regulator moved to stop banks from on-selling their discounted drafts to trust

companies (which were packaging them up in wealth management products), and

asked banks to hold reserves against the deposits they took when they issued a draft

to a client. The discount rate is still historically high, but since the Lunar New Year

holidays, it has fallen from 8.5% to 7.2% (as of 9 February), and continues to fall.

An additional liquidity driver is exogenous money supply, which picked up again in

January. China‟s base money growth in the last few years has resulted from the

PBoC printing Chinese yuan (CNY) to pay for US dollars presented by commercial

banks. The dollars go into the FX reserves, and the newly printed CNY goes into the

economy (after some 80% has been sterilised). The pace of liquidity creation

depends on the speed of this FX inflow-induced printing. Chart 9 shows the m/m

growth in the stock of these FX purchases.

In Q4-2011, the pace of FX purchase growth collapsed – an effect mirrored in the

stagnation of the FX reserves (On the Ground, 16 December 2011, ‘China – The

suddenly weak Renminbi’). Since mid-December, though, we have seen the

recovery of net USD selling by onshore banks and corporates, the return of mild CNY

appreciation expectations, and a return to moderate FX reserve growth. We believe

January saw a recovery in FX purchases, with some CNY 200bn (USD 32bn) of

buying by the PBoC. We expect the PBoC to want to maintain moderate appreciation

Chart 6: A holiday-induced rebound in CPI inflation

CPI inflation, y/y and m/m SAAR 3mma, %

Chart 7: February to see a reversal of New Year effect

Food inflation, m/m SAAR, %


-10%

-5%

0%

5%

10%

15%


CPI, y/y %

CPI, m/m SAAR, 3mma, %

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2009 2010 2011 2012

Month after

CNY month

The draft discount rate should

continue to fall from its peaks,

easing funding costs for SMEs


15 February 2012 6

expectations – if there is one thing the central bank fears more than FX inflows, it is

FX outflows. As a result of this, as well as our expectations of current and capital

account surpluses in 2012 (albeit smaller than in 2011), we think exogenous money

supply growth should be supportive of liquidity.

Credit growth has picked up on a y/y basis

Credit growth has turned a corner – and this is as reliable an indicator as we are

likely to find of an imminent pick-up in investment activity (for more details, see the

economics piece in this issue of The Renminbi Insider). Chart 1 shows the upturn in

credit growth (adjusted for inflation) and cement production. While it is not an

aggressive pick-up, it should be enough to stabilise the economy‟s slowdown in Q2.

January loan growth was equivalent to 12% y/y in real terms, continuing its uptick.

We expect new loans in February to be CNY 900bn to CNY 1trn in size.

Q1 still feels fragile, but policy loosening will continue at the margin

The February data should allow us to compare January/February 2012 with 2011,

and may provide some clues about the direction of the economy. We believe the

manufacturing sector is still contracting or flat, and that the services sector is slowing.

The residential real-estate and infrastructure sectors are suffering severe cash-flow

stresses, and though loans are being rolled over, rising payables must be causing

pain. Deleveraging in these sectors has some way to go, and will likely drag on.

Recognition of the problems now seems to be filtering through to the State Council

leadership. Last weekend, Premier Wen noted that “companies upstream and

downstream are facing difficulties”. He then said stated, “We need to meet problems

early, move with speed, and… micro-adjust policy in Q1”. This was the first time

Premier Wen has put a timetable on policy „micro-adjustment‟. We interpret this as a

dovish signal.

We expect the Q1 data to be pretty ugly, though official y/y GDP growth will stay above

8%. Premier Wen may well announce a 7.5% growth target at the National People‟s

Congress meeting in March, but we maintain our call of 8.1% for the year. The fall in

CPI inflation and policy loosening at the margin – whether monetary, fiscal or

administrative in nature – should reassure the market and set the stage for moderately

faster growth momentum in H2. But 2012 is shaping up to be a tough year.

Chart 8: SME funding costs are gradually falling

Discount rate, % weighted average

Chart 9: Base money growth slowed, then sped up in

January (FX purchases, m/m %, 3mma)


0

2

4

6

8

10

12

14

16

18

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

-1%

0%

1%

2%

3%

4%



15 February 2012 7

CNH market – Shifting sands, expanding universe

Stalling deposits are just part of the ever-shifting CNH landscape

Increasing CNH’s global relevance is key to sustaining momentum

Competition from Shanghai is neither imminent nor a bad thing

Making sense of a changing CNH market

The CNH market has its fair share of sceptics. The market turbulence that triggered

sharp sell-offs in CNH and Dim Sum bonds in September 2011 unveiled flaws in the

system, especially in the CNY trade settlement conversion arrangement. However,

the biggest flaw was the then-common perception that CNH should always trade at a

stable premium to onshore CNY. The authorities have since taken measures to

strengthen the market. Sentiment, however, has been slow to recover.

Just when the CNH premium finally returned in early January, two pieces of news

rekindled doubts about the market. First, the 6.2% m/m drop in CNH deposits in

Hong Kong in December triggered talk of stagnation. Second, China‟s latest plan to

turn Shanghai into a financial centre with international CNY trading, clearing and

pricing capabilities by 2015 fuelled talk that Hong Kong would eventually be

marginalised. We believe both concerns are way overdone. CNH deposits are just

one part of the CNH market, and Hong Kong will benefit from the expansion of the

CNH market to other centres.

In this section, we deconstruct the recent drop in CNH deposits in Hong Kong and

look at its broader implications. We then look at how the Renminbi is set to make

further inroads in Japan and the West. Finally, we dispel the myth that Shanghai is

on its way to marginalising Hong Kong as the offshore Renminbi centre.

What creates (and drains) CNH deposits?

A wide range of factors affect Renminbi deposit levels in Hong Kong; we show them

in Table 1. Some have a bigger impact than others; some cause month-to-month

changes, while others effect change over time. Since the beginning of Q4-2011, CNH

deposit growth has stagnated.

The structural reasons for this include (but are not limited to):

Reduced CNY appreciation expectations, which have discouraged investment

demand and retail conversion

Ongoing cross-border remittances from Dim Sum issuers

The creation and expansion of other recycling channels, including CNH FDI

Most importantly, the continued rebalancing of CNY trade settlement flows as

more Chinese exporters convert to CNY invoicing

The reversal of CNH deposits in December was probably also partly associated with

the loss of the CNH premium over CNY. This caused a change in the behaviour of

both exporters and importers.

Kelvin Lau, +852 3983 8565

[email protected]

The focus on stalling deposit

growth misses the still-exciting big

picture of the CNH market

The structural shift in the CNY trade

settlement mix, exacerbated by

short-term factors, has changed the

CNH deposit outlook


15 February 2012 8

The exporters. The CNH discount created the incentive for mainland exporters to buy

CNH offshore via their offshore subsidiaries before making cross-border transfers back

into the mainland under the CNY trade settlement scheme. (Before, when the CNH was

in premium, they had less incentive to move away from receiving and converting USD

receipts onshore to using the offshore market.) Such corporate-related buying of

„cheaper‟ offshore CNH was evident throughout Q4-2011, after the CNH moved into

discount in late September. However, given that it takes time for trading firms to convert

their invoices, the market impact likely reached a pinnacle in December. In our view,

this boost to CNH-denominated mainland exports also helps to explain the still-strong

overall CNH trade remittances reported by the Hong Kong Monetary Authority (HKMA)

for December (Chart 2). So, corporates are not backing out of CNY trade settlement,

but the mix of the types of corporates using the scheme has changed.

Table 1: What goes in and out of the CNH deposit pool

Key factors affecting CNH deposits in Hong Kong

Key channels Effect on CNH deposit level

in Hong Kong Impact Remarks

CNY trade settlement

+ Mainland importer pays overseas seller

HIGH

Over 80% of China's CNY trade settlement is done with Hong Kong; in Q4-2011 alone, Hong Kong handled CNY 585bn worth of Renminbi cross-border trade settlement remittances. Impact on CNH deposits is primarily a function of the relative size of the opposing CNY trade settlement flows. Any small change on one or both sides could result in large swings on a net basis. The mainland‟s CNY export/import mix dropped from 1:9 in 2010 to 1:5 in Q1-2011, 1:2.9 in Q2, and 1:1.7 in Q3. Hypothetically, based on Hong Kong's CNY trade settlement size in Q4-2011, a further drop in the ratio to, say, 1:1, during the quarter would have meant a loss of CNY 150bn in CNH deposits.

– Mainland exporter receives overseas payment

Dim Sum bond issuance

– Remittance of funds raised back to mainland *

MEDIUM

Dim Sum bond issuance and the CNH FDI scheme complement each other. Total Dim Sum issuance was around CNY 170bn in 2011 (an average of CNY 43bn per quarter); from its official launch in October until mid-December, 74 cases of CNH FDI had been approved, for a total investment amount of CNY 16.5bn. CNH FDI / ODI

+ CNY leaving mainland via ODI *

MEDIUM

– CNH entering mainland via FDI *

Retail conversion and remittance

+ Retail buying of Renminbi via clearing bank

LOW to MEDIUM

Retail CNH deposits, which were the main channel for creating CNH deposits prior to the introduction of CNY trade settlement scheme, now account for less than 30% of the total. The shift in Hong Kong households‟ deposit mix to CNH has clearly been overwhelmed by CNH deposits, created via the 10% of China's total trade flows that are denominated in Renminbi.

– Retail selling of Renminbi via clearing bank

– Retail Renminbi remitted to mainland *

R-QFII – CNH collected and

invested back into mainland *

LOW

An initial overall quota of only CNY 20bn (the same size as the most recent sovereign Dim Sum issuance), shared among 21 qualified institutions; unlike via trade settlement, there are limited cross-border flows once quotas are filled.

Banks invest in onshore bonds

– Idle CNH deposits deployed back into mainland *

LOW Similar to RQFII, limited to qualified trade settlement banks in Hong Kong under a quota system.

* The reverse also applies for cross-border repatriation of money originally invested /placed/borrowed Source: Standard Chartered Research


15 February 2012 9

The importers. Under normal circumstances, a CNH premium would allow mainland

importers to buy more USD via their Hong Kong subsidiaries before paying their

overseas suppliers. Such selling of Renminbi in the offshore market adds to the

offshore CNH deposit pool. However, when a CNH discount emerges, importers

have an incentive to use the trade settlement conversion channel via the clearing

bank, since this allows them to buy USD offshore at the (higher) onshore CNY price

for eligible trades denominated in Renminbi. The quota for this conversion channel

was reinstated and expanded in Q4 and stayed open throughout the quarter, allowing

a lot of CNY selling at the onshore (rather than the lower CNH) price. This shift in

behaviour has a big impact on overall CNH liquidity in Hong Kong, because when

this quota is used, the trade settlement banks square their positions with the clearing

bank, and the clearing bank then squares with the People‟s Bank of China (PBoC). In

this case, the Renminbi, rather than being added to the offshore deposit pool, is

channelled back into the mainland. This is another way in which the quota system

distorts the CNH market (we discussed other distortions in the previous issue of The

Renminbi Insider, 21 November 2011, ‘Rebuilding after the storm’).

The good news is that since early January, the CNH has again been trading „rich‟ to

onshore CNY. An obvious reason for this was that exporters were buying CNH,

driving the CNH back towards the onshore rate. The return of the premium also

means that Renminbi coming from mainland importers stays in Hong Kong; thus, the

premium should help create a floor for CNH deposits for now. Market forces should

also help to create a new equilibrium, mainly by pushing CNH interest rates higher as

a result of new channels for using CNH, and also via rising competition for CNH

deposits among banks. It is also clear to us that the CNH market is entering another

new phase in 2012, just as 2011 was different to 2010.

From too much CNH liquidity to too little

Banks in Hong Kong spent much of H1-2011 fretting over having too few outlets

to manage big CNH deposits. Since then, however, CNY trade flows have

become more balanced, CNH lending has exploded (higher USD interest rates

make borrowing CNH more attractive), and more CNH has been „recycled‟ back

into the mainland (via strong Dim Sum issuance, new quotas for cross-border

investment, etc.).

Chart 1: Change in trade settlement slows deposit

growth…

CNH deposits in Hong Kong (CNY bn)

Chart 2: … despite strong overall momentum

Cross-border CNY trade remittances in Hong Kong (CNY bn)

Sources: Bloomberg, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research

-60

-40

-20

0

20

40

60

80

0

100

200

300

400

500

600

700

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

0

50

100

150

200

250

300

Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

Return of CNH premium and market

adjustments should help stabilise

CNH deposits for now

Monthly changes (RHS)

CNH deposits outstanding


15 February 2012 10

None of this has killed the CNH market; it has merely changed the dynamics. For one,

CNH deposit rates are set to climb further given still-strong CNH loan demand. This

will also compensate depositors for lower Renminbi appreciation expectations. For

the same reason, the cost of issuing Dim Sum bonds could rise.

Tighter CNH liquidity has also helped to trigger some relaxation of policy for banks in

Hong Kong. On 17 January, the HKMA announced two such changes for banks

operating Renminbi businesses in Hong Kong:

Renminbi risk management limit: Banks in Hong Kong are required to

maintain reserves of 25% of their respective CNH deposit bases. Two new

items can now be included in the ratio: sovereign Dim Sum bonds issued by

China‟s Ministry of Finance (MoF) and holdings of CNY bonds in the mainland

interbank bond market (through the quota system). Originally, only Renminbi

cash, the settlement account balance with the clearing bank, and the balance

maintained in the Fiduciary Account (through the clearing bank with the PBoC)

were included.

Expanding the list of eligible reserve items gives banks more flexibility in

managing their CNH liquidity. More CNH becomes lendable, and banks can earn

more on their reserves (the clearing bank and the Fiduciary Account only pay

0.629% on balances, compared with more than 1% for a MoF bond). Moreover,

expanding the use of Dim Sum bonds (currently, only those issued by the MoF

are eligible, but quasi-sovereign and financial institution bonds will hopefully be

included in the future) increases incentives for financial institutions to hold them.

A separate and more recent relaxation of HKMA rules on Hong Kong banks‟

statutory liquidity ratio, or SLR (the proportion of banks' Renminbi liquefiable

assets that can be counted towards satisfying the SLR was increased) should

result in a similar boost in demand for CNH assets.

Renminbi net open position (NOP): Banks in Hong Kong previously needed to

maintain a Renminbi NOP of +/-10%; the HKMA raised this ratio to 20%. The

NOP is defined as the ratio between the difference of on-balance-sheet

Renminbi assets and liabilities against the bank‟s CNH balance sheet (total

Renminbi assets or liabilities, whichever are larger). While banks have been

managing their NOPs through CNH FX swaps for some time, the additional

„headroom‟ for CNH exposure provided by this adjustment should still be

welcomed, especially for banks in Hong Kong with smaller CNH deposit bases.

Looking ahead, we believe that policy makers will focus on both promoting CNH

deposit creation in Hong Kong and further encouraging the development of the CNH

markets. For example, we look for policies aimed at expanding CNH overseas direct

investment (ODI) from China as a means of boosting CNH liquidity.

But with so many moving parts, forecasting CNH deposits is not straightforward.

While the re-emergence of the CNH premium should support inflows, our original

forecast of CNY 900bn in deposits by end-2012 now looks ambitious. Barring further

major policy relaxation, end-2012 deposits of CNY 700-800bn look more realistic.

CNH interest rates are set to climb

further and prompt more policy

responses in 2012

We now see CNH deposits coming

in at CNY 700bn-800bn by end-2012


15 February 2012 11

The expanding CNH universe

Following a policy-induced „big bang‟ in mid-2010, when the CNH market sprang to

life, the CNH universe has been expanding since. While more balanced trade flows

mean that fewer „surplus‟ CNH deposits are now generated, with some 10% of

China‟s total trade now denominated in CNH, demand for buying, selling, hedging

and investing in Renminbi offshore has only risen. The CNH market thrives on rising

two-way trade settlement and investment flows, while growing interest from offshore

corporates and investors adds to the market‟s depth and breath. Now that the Hong

Kong CNH market is growing nicely, the next question is how to make the Renminbi

relevant to the rest of the world. The current market infrastructure only needs to be

tweaked to facilitate such expansion. It is already capable of bringing CNH to every

corner of the world, through a bank system branching out from Hong Kong or from

onshore agent banks. But more can be done.

Two recent breakthroughs, in particular, are important in bringing offshore markets

closer together in their use of CNH:

China-Japan co-operation: The PBoC announced on 25 December that China

and Japan would collaborate in promoting the use of their currencies in bilateral

trade and financial transactions. Tokyo said it planned to start investing in

China‟s sovereign debt (some USD 10bn to start), which would make Japan the

first developed economy to hold CNY bonds as reserve assets. The

arrangement envisions creating a direct trading market for the CNY and

Japanese yen (JPY); encouraging Japanese corporates to make direct Renminbi

investments in the mainland; allowing Japanese companies to issue Renminbi

bonds; and promoting trade settlement in both currencies.

Hong Kong-London co-operation: On 16 January, the HKMA and the UK

Treasury announced that a forum would be set up to promote offshore CNY

market development between the two international financial centres.

Representatives from five private-sector banks (including Standard Chartered)

from both sides will participate. The focus will be on the joint development of

clearing and settlement systems, on improving CNH liquidity overseas, and on

developing more CNH products.

Interestingly, this new arrangement is set to be driven by Hong Kong – and its

private sector – rather than by mainland China. This indicates that Hong Kong

will be critical in extending the CNH‟s market reach by utilising its well-

established CNH financial infrastructure, liquidity and expertise. In turn, London

is well positioned to maximise its time-zone1 advantage, its proximity to China‟s

biggest export market (Europe), and its deep markets. We see London

developing its own CNH-related financial infrastructure and regulatory framework;

and over time becoming a complementary hub for CNY trade settlement and

building its own CNH market. We believe this would be a win-win result for both

London and Hong Kong.

1 The importance of expanding time-zone coverage is reflected in the HKMA‟s recent decision to extend its Renminbi real-time gross settlement (RTGS) service by

five hours (covering the period from 8:30-23:30, rather than 8:30-18:30) starting at end-June 2012. The idea is to cover European and US working hours in order to reduce cross-border settlement risk and attract European and US banks to use Hong Kong‟s Renminbi settlement services.

The long-term outlook remains

promising as the CNH becomes

more relevant and accessible

globally


15 February 2012 12

Shanghai: Friend or foe?

In late January, China‟s National Development and Reform Commission (NDRC) and

the Shanghai municipal government released a blueprint for developing Shanghai

into an international financial centre. The original goal of achieving this by 2020 is still

intact; this blueprint is an action plan for 2012-15. It includes the opening up of local

markets to more foreign investors, measures to increase market size and the number

of financial professionals, and the expansion of Shanghai‟s capital-raising capabilities.

The most eye-catching part of the plan is the commitment to making Shanghai a

global Renminbi trading, pricing and clearing centre by 2015.

Some see this as a threat to Hong Kong‟s leading role in the CNH market. But for this

part of its plan to work, Shanghai needs to replicate what Hong Kong offers (by

carving out an offshore market onshore in Shanghai), or China needs to liberalise its

capital account enough to substantially accelerate onshore-offshore market

convergence. Otherwise, Shanghai‟s new CNH clearing capability will be no different

from the current „agent bank‟ arrangement. More trade settlement flows may end up

going through Shanghai, but substantial ring-fencing means that a wider range of

CNH products and services would still have to be provided offshore. In terms of

becoming a pricing hub, as long as there is not full cross-border Renminbi fungibility,

the onshore and offshore markets will continue to be driven by different dynamics.

We believe that the idea of carving out an „offshore market‟ in Shanghai lacks

sufficient high-level support within China‟s government, at least for now. We have

also long argued that China‟s capital account liberalisation is likely to be a very

gradual process. In our view, the current approach of internationalising the Renminbi

via a liberal current account, plus selective and controlled capital account relaxation,

is proving effective and is still the way forward.

By the time Shanghai becomes truly competitive, whether on CNH alone or with a

fully convertible Renminbi, the currency‟s global penetration will be so great that the

pie will be more than big enough for two international financial centres to share. Hong

Kong‟s competitiveness will continue to be derived from its sound rule of law, its high

concentration of international financial institutions and professionals, and its well-

established regional and international financial linkages. Moreover, we believe that

the more space Shanghai gets to develop CNY markets, the more space Hong Kong

will also get.

Shanghai’s aspirations need not,

and will not, come at the expense of

Hong Kong


15 February 2012 13

FX – USD-CNH repricing on higher CNH returns

Rise in CNH returns triggers upswing in USD-CNH forwards

Longer USD-CNH forwards now offer attractive context for corporate

hedging of USD receivables, CNY payables

Relative value investors should hold USD-CNY NDF steepeners

CNY forward analytics

CNH returns rise amid broader loan restraint

While the launch of an official „fix‟ for CNH funding rates may be some way off, in

early January Hong Kong‟s Treasury Market Association (TMA) began publishing

interbank offered rates in CNH from three contributing banks, including Standard

Chartered Bank. These published rates are testimony to the substantial improvement

in CNH returns over the past nine months. Offered rates rise from 2.6% at 3M to

3.1% at 1Y, well above the „base‟ net interest rate paid by the CNH clearing bank (at

a mere 0.629%). The rise in the cost of CNH funding reflects both prospects for a

broader range of uses for CNH and, more immediately, the impact of global market

volatility on Hong Kong financial markets.

China‟s Vice Premier Li Keqiang signalled during his visit to Hong Kong last August

that Hong Kong would play a key role as a bridge between mainland China and the

global financial system. This would give CNY sourced in Hong Kong a range of uses,

from financing FDI into the mainland to investment in equities through the „R-QFII‟

route. To the extent that Hong Kong funding acts a substitute for onshore funding,

this favours the convergence of CNH funding rates with those onshore.

Just as important in the short term, however, has been the impact of global financial-

market turbulence. HKD deposits contracted on a y/y basis in September 2011 in a

dynamic similar to that in late 2008 (see Chart 1), likely reflecting rising risk aversion.

In contrast, HKD loan growth had been healthy for much of the year (rising 16.6% y/y

in Q2), which created the potential for a „crunch‟ for banks caught between shrinking

deposits and buoyant credit growth (Chart 1). Banks‟ efforts to contain loan growth in

other currencies sparked a rapid expansion of their CNH loan books. As CNH slipped

into a discount to the onshore CNY, this also stalled the upswing in CNH deposits in

Hong Kong, and thus the supply of CNH liquidity from the mainland.

Chart 1: HKD loan and deposit growth (% y/y)

2008-style HKD deposit decline y/y helped boost funding rates

Chart 2: 2Y forwards on three curves – USD-CNY NDF,

USD-CNH and USD-HKD

Sources: Bloomberg, Standard Chartered Research Sources: Standard Chartered Research, Bloomberg

HK deposits

HKD loans

-20

-10

0

10

20

30

40

50

Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11

7.71

7.73

7.75

7.77

7.79

6.15

6.25

6.35

6.45

6.55

Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12

USD-HKD 2Y (RHS)

USD-CNH 2Y

USD-CNY NDF 2Y (RHS)

Robert Minikin, +852 3983 8567

[email protected]

Eddie Cheung, +852 3983 8566

[email protected]

Newly published CNH interbank

offered rates are well above the

clearing bank’s net interest rate

Prospective mainland capital

account liberalisation has helped to

lift returns

Weaker deposit growth in HKD and

CNH has also played a role


15 February 2012 14

The launch of the TMA CNH published offered rates was a signal of a maturing

interbank market in which banks are now comfortable indicating public lending rates.

This has reinforced the power of interest rate differentials as a driver of the USD-

CNH forward curve. Banks can now buy USD-CNH in the deliverable forwards,

hedge the resulting transaction with a spot sale of USD-CNH, and then carry the

CNH received as a deposit asset until the maturity date of the forward trade. Amid

broader balance-sheet stresses, the USD-CNH swap market also became a potential

source of local funding to complement funding in other currencies. As a result, the

repricing of the longer-dated forwards (such as the 2Y) in USD-CNH has closely

tracked that in other local markets such as the HKD 2Y forward (see Chart 2).

CNH forward, spot and option market pricing issues

The USD-CNH forward curve is caught between two attractors: the forward interest

rate parity (FIRP) curve and expectations of future CNY (and CNH) appreciation. So

is the upward adjustment in the USD-CNH forward curve to FIRP complete? CNH

interbank offered and funding rates are still not the same, so the precise FIRP curve

will differ between institutions. Based on average TMA rates, the gap with USD

HIBOR stretches out from 1% overnight to 1.9% at the 1Y deposit. The implied

forward points (at 305 pips and 1,215 pips, respectively) are well above actual USD-

CNH forward pips (at 134 pips and 427 pips), suggesting that the convergence with

FIRP is arguably incomplete. Nevertheless, USD-CNH is now being priced much

closer to the FIRP than consensus forecasts for the USD-CNY trajectory (Chart 3).

The new power of interest rate differentials to price the USD-CNH forward curve has

implications for both relative value investors and corporate hedgers. Wide gaps

between consensus projections for CNY gains and the USD-CNH forward curve will

likely become the new norm, as they are in fully deliverable currencies. Local liquidity

and return dynamics in CNH and USD are set to play a key role in driving USD-CNH

forward pricing, rather than swings in CNY appreciation expectations alone. For

multinational corporations with forward CNY payables/USD receivables, the upswing

in USD-CNH forwards is simply reinforcing the attractiveness of hedging in this

market rather than in the non-deliverable forwards (NDFs). In the wake of the USD-

CNH forward curve repricing, the 2Y forward (at 6.406) is a full 7.6% above our USD-

CNY forecast trajectory at that point (around 5.95).

Chart 3: The ’FIRP’ USD-CNH forward curve, market

forwards and the consensus trajectory for USD-CNY

Chart 4: USD-CNY, USD-CNY onshore and USD-CNY NDF

forward curves to 1Y forward


6.10

6.15

6.20

6.25

6.30

6.35

6.40

6.45

0.00 0.25 0.50 0.75 1.00

Years forward

Forward interest rate parity (FIRP)

USD-CNH forward

Consensus USD-CNY forecast trajectory

6.250

6.275

6.300

6.325

6.350

0.00 0.25 0.50 0.75 1.00

Years forward

USD-CNH

USD-CNY NDF

USD-CNY onshore

More functional CNH interbank

market has boosted role of interest

rate parity in USD-CNH forwards

USD-CNH forwards are still priced

below forward interest rate parity,

but well above consensus forecasts

for USD-CNY

Upswing in USD-CNH forwards

substantially boosts attractiveness

of context for corporate hedging of

USD receivables


15 February 2012 15

Alongside the impact on forward pricing, the broadening of the potential range of uses

for CNH and the rise in CNH interbank returns have played a key role in increasing the

CNH premium against CNY. CNH has traded consistently at a premium to CNY since 6

January 2012, and the median premium since then – at 0.22% – is actually higher than

the median over the lifetime of the market as a whole (the median from October 2010 to

date is 0.16%). The positive premium reflects both CNY appreciation expectations and

the CNH‟s carry characteristics, so it is reasonable that a broader improvement in the

return on CNH deposits has revived the CNH premium. However, the powerful risk

appetite revival of early 2012 is vulnerable to reversal, and we project that CNH will

trade at par with CNY onshore until mid-2012 (amid weaker risk appetite), before a

sustained CNH premium (of around 150 pips, or 0.24%) re-emerges in H2. The deeper,

more stable spot market for USD-CNH in recent months is particularly reassuring for

potential corporate users of the deliverable markets for hedging purposes, and has also

improved USD-CNH option-market liquidity.

CNY outlook and corporate strategy

We are making a modest adjustment to our USD-CNY forecast profile, trimming our

USD-CNY projection for end-Q1-2012 to 6.33 from 6.36 given the more general

scaling back of our expectations of USD strength in Asia (for more details, see FX

Alert – Asian currencies, 7 February 2012, ‘Two-way Asian FX volatility in H1,

appreciation in H2’). Our (unchanged) mid-year forecast of 6.31 is not far from

current spot, and trend appreciation in the CNY against the US dollar re-emerges in

our forecasts only in H2, when we expect an improving global growth outlook and

broader USD weakness. We put the CNY‟s net appreciation for 2012 at only 1.4%,

although the faster pace of CNY gains in H2-2012 should extend into 2013. Indeed,

the case for medium-term CNY appreciation remains intact given China‟s persistent

trade and current surpluses, alongside healthy total factor productivity gains.

Against this backdrop, multinational corporates with USD receivables and CNY

payables beyond six months forward should hedge these on the USD-CNH forward

curve (or, less attractively, in the USD-CNY NDFs). USD-CNH option volatilities are

also typically above those in the USD-CNY NDFs, and USD-CNH calls trade at a

premium to puts (see Chart 7). Against this backdrop, these corporates should also

consider strategies that sell USD upside through longer-expiry USD-CNH calls. The

2Y 35-delta USD-CNH call returns a premium of 1.78% (at 5.25 implied volatility) and

has a strike of 6.58, 10.6% above our 2Y USD-CNY projection.

Chart 5: CNH premium to onshore CNY Chart 6: USD-CNH and USD-CNY onshore forwards, USD-

CNY NDFs alongside our forecasts for USD-CNY


-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12

5.90

6.00

6.10

6.20

6.30

6.40

6.50

0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00

Years forward

USD-CNH

USD-CNY NDF

USD-CNY onshore

USD-CNY Forecasts

Improved CNH returns have revived

the CNH premium to CNY, while

CNH option-market liquidity has

improved markedly

A stronger CNY under current

circumstances both meets an

internal need and enhances external

market stability

A stronger CNY under current

circumstances both meets an

internal need and enhances external

market stability


15 February 2012 16

Relative value in USD-CNY forwards

The rise in CNH returns and the resulting upswing in USD-CNH forwards have a

broader relevance. Over time, multinational corporates will likely switch from hedging

in the USD-CNY NDFs to the USD-CNH forwards, while relative value investors will

look to exploit CNH forward cheapness by selling USD-CNH and buying USD-CNY in

the NDFs. Over time, these forces should prompt at least partial convergence of the

twin offshore forward curves, following the sharp divergence seen in early 2012

(Chart 8 shows the gap between selected USD-CNH forward points and those in the

USD-CNY NDF). Given that H1-2012 will likely see little net CNY appreciation and

that USD-AXJ may head higher (before retreating in H2), we expect any

convergence in the coming months to be through a stronger USD in the NDFs than

through a weaker USD in the CNH forwards. Given this, the Standard Chartered FX

Trading Portfolio is long USD in the USD-CNY 6M NDFs, while periodically hedging

out any near-term CNY appreciation risks around major events such as Chinese Vice

President Xi Jinping‟s visit to Washington this week.

The forward cheapness of CNH compared to our forecast trajectory for CNY also

suggests value in USD-CNH put spreads as a „buy and hold‟ strategy given the

recent substantial improvement in USD-CNH option-market liquidity. The following

option strategy buys the ATMF USD-CNH put and sells the 22-delta put, where the

strike lies very close to our USD-CNH forecast trajectory one year out.

Trade idea: Buy 1Y USD-CNH put spread

Spot reference: 6.2950

Buy 1Y ATMF (6.3415) USD-CNH put at 4.15% vol

Premium paid: 1.62% of notional

Sell 1Y 22-delta (6.1850) USD-CNH put at 3.25% vol

Premium received: 0.40%

Net cost of 1.22%, strikes are 2.53% apart

Chart 7: ATMF implied option volatilities and 25-delta risk

reversals in USD-CNH and USD-CNY options (%)

Chart 8: Gap between 3M, 6M and 12M forwards in USD-

CNH and USD-CNY NDFs (pips)


0

1

2

3

4

5

0.00 0.50 1.00 1.50 2.00

Expiry in years

USD-CNH ATMF

USD-CNH 25D RR

USD-CNY ATMF

USD-CNY 25D RR

-100

100

300

500

700

900

1,100


1Y

6M

3M

USD-CNH and USD-CNY NDF

convergence in the coming months

will likely come through a stronger

USD in the NDFs

USD-CNH 1Y put spreads offer

value for relative value investors


15 February 2012 17

Credit – Dim Sum bonds – A maturing market

Demand for Dim sum bonds remains strong; both Chinese and

international issuers continue to tap the markets

CNH deposit growth slows as currency appreciation expectations

moderate

A shift in demand-supply dynamics will improve credit differentiation

in the Dim Sum bond space

Dim Sum hunger should remain strong

The Dim Sum bond market suffered a period of volatility in Q3 and Q4-2011

alongside other risk assets. Overall risk appetite has made a strong comeback this

year, but the CNH bond market – especially the high-yield (HY) segment – continues

to lag. Market liquidity at times of stress has become a primary concern. Investors

realise that CNH appreciation is not a one-way bet, and this has weakened one of

Dim Sum‟s main attractions. The shift in the CNH forward curve to upward-sloping

from downward-sloping in mid-2011 (shown in Chart 9 at the end of this section) is

indicative of this change. The onshore CNY forward curve, in contrast, continues to

indicate marginal appreciation, as Chart 10 shows. The CNH bond space is

undergoing a paradigm shift as it evolves into a more mature market with a better

balance between demand and supply.

We believe the outlook for Dim Sum bond issuance in 2012 is positive for a variety

of reasons. First, there is still a mismatch between demand for and supply of

assets in the CNH market. Total CNH deposits in Hong Kong were CNH 588bn at

the end of 2011, against CNH 220bn of outstanding bonds (representing 37% of

the deposit base). In our view, as the focus on CNY currency appreciation is

reduced, we expect a higher proportion of deposits to be deployed in higher-

yielding corporate Dim Sum bonds, (around 50-55%, in our view). While deposit

growth has slowed sharply, we estimate end-2012 deposits at CNH 700-800bn.

Assuming that 50-55% of this amount is used for investments in corporate bonds,

the Dim Sum bond base could reach CNH 350-400bn by end-2012. Thus, new

supply will easily be absorbed, in our view.

Chart 1: CD issuance spiked in 2011

Dim Sum bond issuance since 2007 by collateral (CNY bn)

Chart 2: CNH premium has been volatile

CNH, CNY currency rates and premium


CD

Others

0

50

100

150

200

250

2007 2008 2009 2010 2011 2012 YTD

CNY minus CNH (RHS)

CNY

CNH

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

6.0

6.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

6.9

Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11

Sandeep Tharian, +44 20 7885 5171

[email protected]

CNH bond markets have lagged

USD bond markets in the rally since

early 2012 as the CNY appreciation

story moderates


15 February 2012 18

Second, CNH issuers, to the extent that they are permitted to remit funds back to the

mainland, will continue to be attracted by the lower rates prevailing in the CNH

market relative to the higher CNY onshore rates available on a variety of debt

instruments. Thus, as long as onshore liquidity in China continues to be tight,

Chinese corporates will have a strong need to issue in the Dim Sum bond markets.

Heavy CD issuance by a number of banks in 2011 testifies to the importance of this

cost advantage (Chart 1).

Third, we expect some traditional issuers in the USD bond space (both Asian and

others) to tap the liquidity provided by the Dim Sum bond space. This is in line with

the trend seen in other local-currency bond markets, such as THB, MYR and SGD.

Dim Sum supply likely close to 2011 record highs

We expect healthy Dim Sum bond supply of around CNY 170-180bn in 2012. This

would be only slightly lower than record supply of CNY 190bn in 2011. Year-to-date,

supply has already hit CNY 22bn. While offshore issuance yields have been slowly

creeping up, they are still attractive enough for higher-quality issuers to tap the

offshore market rather than raise funds onshore. The demand side should remain

strong, as many international investors appear keen to ride the CNY appreciation

story via Dim Sum bonds rather than outright instruments. With the counterparty risk

of such instruments perceived as more or less the same as the credit risk (especially

by higher-quality credits and financial institutions), investors may prefer Dim Sum

bonds for improved yield, along with currency appreciation. As an example, the total

return from holding the BCHINA CNH 1Y bond (implied yield plus currency

appreciation) would be considerably higher than investing in a currency instrument

with BCHINA as the counterparty.

In our view, there are three broad classes of investors in Dim Sum bonds:

1. Outright investors in CNH credits, who consider the CNH to be a pure „local

currency‟ against which they are benchmarked, with little consideration for the

CNH as a currency play. This group includes banks with CNH liquidity,

corporates holding CNH liquidity from their business proceeds, or real money

funds with retail/institutional CNH money.

2. International investors who are interested in CNH appreciation prospects and

can invest in Dim Sum bonds on an outright/unhedged basis. This investor class

includes currency-focused hedge funds and private banking clients.

Chart 3: CNH FX rate is affected by market volatility

CNH FX rate vs. VIX Index

Chart 4: Dim Sum bonds sell off more

Dim Sum bond yield vs. JACI yield (%)

Sources: Bloomberg, Standard Chartered Research *Bank of China indices used for Dim Sum bonds;

Sources: Bloomberg, Standard Chartered Research

CNH

VIX (RHS)

0

10

20

30

40

50

60

6.0

6.2

6.4

6.6

6.8

Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11

Dim Sum index

JACI

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12

We expect healthy Dim Sum bond

supply of around CNY 170-180bn in

2012

We expect increased

disintermediation in the CNH space

as investors look for higher carry

returns on their CNH savings


15 February 2012 19

3. Investors who look at relative value in USD and CNH paper and choose to hold

Dim Sum bonds purely on an asset-swapped basis, because they offer relative

value versus comparable USD paper. Such investors include global real money

funds and hedge funds that are credit-focused rather than currency-focused.

In 2012, we could see an increase in international investors wanting to play the

appreciation trend through CNH bonds. However, this will be contingent on an

improvement in overall macro sentiment and an easing of concerns about a hard

landing in China. We do not expect a hard landing – we forecast 8.1% GDP growth in

2012, followed by 8.7% in 2013, and expect stronger macro data in H2-2012 to allay

such fears. We also expect the CNY to continue its appreciation trend in H2-2012

after being relatively flat in H1, acting as another supportive factor.

Credit differentiation developed in late 2011

The evolution of the yield differential between onshore and offshore bonds shows a

clear trend of credit differentiation among various classes of CNH bonds:

1. Sovereign/supranational/policy bank issuers that have issued bonds in the CNH

market

2. HG issuers (including multinationals) rated in the single-A to BBB category

(excluding the highly rated China sovereign but including quasi-sovereign issuers)

3. Sub-investment-grade issuers rated in the BB to single-B range.

These credit classes were trading at relatively tight yields to each other in 2010 and early

2011 as investors bet „en masse‟ on the CNH bond market. Towards the latter half of

2011, investors started to differentiate between CNH bonds based on their credit quality.

Sovereign CNH bonds, while volatile, continue to be well supported by CNH bond yields

that are lower than onshore CNY yields (shown in Chart 5). The extent of the

convergence between onshore (CNY) and offshore (CNH) corporate yields increases as

one goes down the rating spectrum, with the trend being most pronounced in the HY

sector. Offshore HY corporate bond yields started to underperform their onshore

counterparts as early as end-June 2011, and are currently higher than onshore yields

(Chart 8). This may have reflected idiosyncratic issues plaguing the Chinese HY

corporate space. Given that international investors (who are involved in the USD and

CNH space rather than onshore) reacted more strongly to such news, offshore HY

corporate bonds tended to underperform comparable onshore bonds.

Chart 5: Sovereign bonds trade tight in offshore market

Sovereign offshore vs. onshore bond yields (%)

Chart 6: Multinationals issue in CNH for access to the

currency rather than attractive yields

Multinational CNH vs. USD bond yields (%)


CGB 15 onshore

CGB 15 offshore

0

1

2

3

4


MCD 13 USD

MCD 13 CNH

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5


A better balance between demand

and supply in the Dim Sum bond

space is likely to lead to better

credit differentiation


15 February 2012 20

Dim Sum bond yields to converge slowly with onshore bond yields

The credit differentiation seen in H2-2011 could continue well into 2012 as global risk

appetite goes through multiple risk-on/risk-off cycles. Liquidity may be the key driver

of CNH yields in 2012. As the CNH market matures and the demand/supply balance

normalises, arbitrage opportunities between onshore (CNY) and offshore (CNH)

bonds will tend to disappear, resulting in the convergence of offshore and onshore

bond yields. This yield convergence could be slower for higher-quality CNH bonds

such as the sovereign or single-A/strong BBB corporates, as they enjoy marginal

investor demand. HY corporate CNH bond yields, which are currently wider than

those of comparable onshore bonds, could remain at elevated levels and susceptible

to further widening of 130-150bps, especially if macro conditions worsen.

We recommend that CNH investors rotate into higher-quality, more liquid, lower-

duration, single-A and strong BBB corporate names and remain Neutral to marginally

Underweight the HY corporate sector. Given the lower duration of CNH instruments,

total return losses from yield/spread widening should be fairly limited, especially if the

mild currency appreciation trend continues.

Chart 7: HG corporate bonds have been stable

HG corporates offshore vs. onshore bond yields (%)

Chart 8: Offshore HY rates remain elevated

HY corporates offshore vs. onshore bond yields (%)


CNPCCH 14 onshore

CNPCCH 14 offshore

2

3

4

5

6

7

Sep-11 Oct-11 Nov-11 Nov-11 Dec-11 Jan-12 Jan-12

SHASHU 14 offshore

SHASHU 14 onshore

5

6

7

8

9

10

11

Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12

Chart 9: CNH forward curve is upward-sloping

Comparison of CNH forward rates on selected dates

Chart 10: CNY forward curve still indicates appreciation

Comparison of CNY forward rates on selected dates


5-Jul-11

9-Feb-12

6.2

6.3

6.4

6.5

1M 2M 3M 6M 9M 12M

5-Jul-11

9-Feb-12

6.1

6.2

6.3

6.4

6.5

1M 2M 3M 6M 9M 12M


15 February 2012 21

Economics – Angels, demons and investment

proxies

After a heroic search, we have yet to find a decent leading indicator

of investment activity

Wheel-loader sales growth lags investment, while cement production

is coincidental

Credit growth is what we are left with

Given that investment makes up half of China‟s economy, it would be nice to have

a leading indicator or two to tell us where investment is going over the next three

months. Unfortunately, after following one tantalising clue after another, we are

still left with credit growth as the only leading indicator of investment. And it is far

from perfect.

Wheel-loaders to the rescue?

Wheel-loader and excavator sales growth initially seemed like a promising idea. Such

machines are used to dig holes and move earth and gravel, and are therefore

essential for building roads, real-estate projects and mines. Surely companies would

buy lots of them when they saw a wave of new investment on the horizon? Alas, no –

as Chart 1 shows, wheel-loader and excavator sales lag real investment growth (as

measured by quarterly real fixed asset investment numbers, which themselves have

some issues). There are a number of possible explanations for this. Companies

probably increase use of their existing equipment to meet a pick-up in activity; only

when they are maxed out do they invest in new machines. Financing may also play a

role – it is common for local manufacturers to finance these purchases, so the

availability of financing (which is affected by overall monetary conditions) probably

affects sales too. Also, many households have reportedly invested in such machinery

as a store of wealth. They believe a few years of renting it out will cover the cost and

pay a better return than a bank account deposit (and the entry barrier is lowered if

they are getting financing).

Chart 1: Wheel-loaders lag, rather than lead, official investment growth

Real fixed asset investment growth and wheel-loader and excavator sales, % y/y


Wheel-loader and excavator sales

(LHS) Real FAI

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5



[email protected]

Ben Hartwright, +852 3983 8507

[email protected]

Juntung Wu, +852 3983 8505

[email protected]


15 February 2012 22

Cement production is better

We then looked at cement production growth, which we have highlighted before (On

the Ground, 17 January 2011, ‘China – What is the economy really doing, and

where is it going?’). As Chart 2 shows, cement production growth is at least

coincidental with real investment growth. Incremental production growth can come

quickly from idled plants being restarted. We like cement more than steel production

as an investment proxy – it is difficult to store and transport, so it should respond

quickly to changes in underlying demand. Steel inventories, in contrast, can be built

up and drawn down (and are difficult to track).

Both cement and steel production growth are looking weak. Cement production grew

7% y/y in Q4-2011, and crude steel production grew 3%, as Chart 3 shows. We

expect the downturn to have continued in Q1-2012.

Chart 2: Cement production tracks investment growth

Real fixed asset investment growth and cement production, % y/y


Chart 3: Cement and steel indicate that investment growth continues to weaken

Crude steel and cement production, % y/y, 3mma


Cement, 3mma

Real FAI

-20%

-10%

0%

10%

20%

30%

40%

50%


Crude steel

Cement

-20%

-10%

0%

10%

20%

30%

40%

50%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


15 February 2012 23

Then there are projects under construction

What about projects under construction as a leading indicator of demand? Again, this

sounds like a good idea: once a project is approved and started, there should be a

lead-in phase before spending really ramps up. A new wave of recently appointed

officials are arriving in local governments and will want to start projects to prove their

growth-enhancing abilities. Indeed, growth in the number of projects perked up in Q4.

However, as Chart 4 shows, growth in projects more or less tracks real investment

growth. Thus, there is very limited leading information here.

And finally, credit growth

And so we come (again) to credit. Investment projects around the country are

extremely credit-constrained right now. The Ministry of Railways is only slowing

paying its suppliers; real-estate developers are delaying payments for materials and

delaying land lease payments to local governments; road companies around the

country are struggling with rising payables too. Local government investment

Chart 4: Project growth more or less tracks investment

Projects under construction and real fixed asset investment, % y/y


Chart 5: Real credit growth has picked up

Cement production and real credit growth, % y/y


Projects under construction, 3mma

Real FAI

0.0

0.1

0.2

0.3

0.4

0.5

-20%

-10%

0%

10%

20%

30%

40%

50%


Real credit growth

Cement

-10%

0%

10%

20%

30%

40%



15 February 2012 24

vehicles (LGIVs) are having their loans rolled over, limiting the amount of new funds

that banks can lend out. At a State Council meeting last week, Premier Wen made a

point of saying that it was important for key projects to get financing. We surmise that

the financing squeeze has to be serious and national in scale for Premier Wen to talk

about it.

In Chart 5, we show that credit growth is probably the best leading indicator out there

for investment activity. It shows cement production growth (which we take as a proxy

for investment growth, and for which we have longer-run data) against loan growth

(adjusted for inflation). We note that credit growth has recently picked up a little from

its trough, a signal that very mild credit easing is happening, even without aggressive

cuts in the required reserve ratio. If historical patterns hold, we should see a

moderate pick-up in cement production and investment growth in Q2-2012.


15 February 2012 25

Appendix

The CNH timeline

2003-2007

December 2003: The HKMA announced the beginning of CNY business on a trial basis in Hong Kong.

Initial development of the offshore market was extremely limited, basically confined to the build-up of CNY

in low-yielding retail bank deposits and the provision of restricted personal CNY services.

June 2007: The PBoC and National Development and Reform Commission (NDRC) announced that

financial entities incorporated in China were allowed to issue CNY bonds in Hong Kong, subject to

approval. This was the first step towards creating more uses for CNY funds in Hong Kong.

December 2008: China signed its first bilateral currency swap arrangement with South Korea. Shortly

after, the PBoC and the HKMA signed a currency swap agreement to provide CNY liquidity of up to CNY

200bn for a renewable three-year term. The number of swap participants has since increased to eight

counterparties.

June 2009: The PBoC launched the pilot scheme for CNY settlement of cross-border trade between

Shanghai and four cities in Guangdong province on the one hand, and Hong Kong and Macau on the

other. This scheme allowed CNY conversion within selected cities between the onshore and offshore

markets for trade-related transactions.

September 2009: China‟s Ministry of Finance launched two tranches of CNY bonds (CNY 6bn in total) to

retail and institutional investors in Hong Kong. This was the first CNY-denominated sovereign offering

outside of the mainland.

2008-2009

2010

February 2010: The HKMA issued a clarification that participating banks could develop CNY business

based on regulatory requirements and market conditions in Hong Kong, as long as these businesses do

not entail the flow of CNY funds back to the mainland.

June 2010: Six regulatory bodies in China released a joint circular, expanding the scope of the CNY

trade settlement pilot scheme to 20 mainland provinces on the one hand, and all overseas countries and

regions on the other.

July 2010: The PBoC and the HKMA signed a Supplementary Memorandum of Co-operation, which

broadened the scope of CNY holders to all corporates and differentiated between treatment of their trade-

and non-trade-related CNY conversions. Subsequently, the development of CNY financial products also

picked up.

August 2010: The PBoC announced that foreign central banks, CNY clearing banks, and cross-border

CNY trade-settlement-participating banks could take part in the interbank bond market in mainland China.

This is subject to a quota system, with specific limits to be approved by the PBoC.

August 2010: Standard Chartered Bank managed a CNY 200mn bond issuance for McDonald‟s

Corporation. This was the first issuance of a CNY-denominated bond by an overseas non-financial

corporation outside the mainland. This signified the emergence of a new funding channel for international

companies to raise working capital for their China operations.

October and December 2010: The depletion in late October of the trade-related conversion quota

granted to the clearing bank led to a revamp of the arrangement in December. Refinements included an

expanded quota and measures to discourage offshore CNY hoarding and speculation. Separately, the

PBoC expanded the list of Mainland Designated Enterprises in December.


15 February 2012 26

January 2011: The PBoC launched a pilot scheme for the settlement of overseas direct investments in

CNY (CNH ODI). Under the scheme, Hong Kong branches and correspondent banks of mainland banks

can obtain CNY funds from the mainland and finance these investments.

January 2011: The first CNY synthetic (straight) bond was issued in Hong Kong.

March 2011: HKEx announced plans for the H2-2011 roll-out of the „RMB Equity Trading Support Facility‟

(TSF) – back-up liquidity to facilitate the trading of CNH equities in the secondary market.

March 2011: The launch of the Fiduciary Account arrangement was announced (effective in April) to help

banks better manage their credit exposure to the clearing bank when using their CNY funds. The interest

rate paid by the PBoC to the clearing bank was cut to 0.72% from 0.99%. The clearing bank and most

banks in Hong Kong subsequently lowered their CNY deposit rates accordingly.

April 2011: The first CNH IPO was launched in Hong Kong.

June 2011: The PBoC announced a number of policy fine-tuning steps on 8 June, including the

alignment of treatment of trade-related FX conversion by participating banks with onshore agent banks

and with the clearing bank. For services trade settlement, FX conversion offshore can only enjoy the

offshore CNY (CNH) rate. Separately, the spot USD-CNH fixing was officially launched on 27 June.

July 2011: PBoC announced that it would stop handling new applications from onshore corporates for

cross-border CNY loans by offshore banks (shareholder loans and trade financing were not affected).

Separately, the HKMA relaxed treatment of CNH FX swaps under the 10% NOP rule.

August 2011: China‟s Vice Premier Li Keqiang visited Hong Kong and announced more than 30

concessions, including CNH FDI, R-QFII, and an explicit commitment to broadening and deepening

existing CNH markets. MOFCOM announced a consultation on new CNH FDI rules. The CNY trade

settlement scheme was officially expanded to the whole of China. The Ministry of Finance issued CNY

20bn worth of CNH bonds. The HKMA required banks to include lending in all currencies via CNY L/C

discounting in their NOP calculations.

September 2011: Global risk aversion caused CNH to weaken, leading to the exhaustion of the CNH

trade settlement conversion quota for Q3-2011. With the quota exhausted, CNH weakened further.

October 2011: The trade conversion quota was renewed and expanded for Q4. New CNH foreign direct

investment rules were formalised by MOFCOM and the PBoC.

November 2011: The HKMA issued a circular clarifying the eligibility criteria for firms tapping the trade

conversion quota, and increased documentation requirements.

December 2011: CSRC granted first batch of licences under R-QFII scheme. These were later approved

and granted a quota by SAFE. China and Japan agreed to collaborate in promoting the use of their

currencies in bilateral trade and financial transactions.

2011

2012

2011

January 2012: Hong Kong‟s three note-issuing banks began to publish Renminbi interbank offered rates.

HK Securities and Futures Commission approved 17 R-QFII products with a total investment quota of

CNY 17bn. The HKMA and UK Treasury announced the launch of a joint private-sector panel to enhance

co-operation between Hong Kong and London on the development of the offshore Renminbi business.

HKMA also announced adjustments to RMB risk management and net open position limits, easing CNH

funding.

February 2012: Rules on Hong Kong banks‟ statutory liquidity ratio were relaxed to increase the

proportion of banks' Renminbi liquefiable assets that can be counted towards the ratio.


15 February 2012 27

Dim Sum bond run

CNH government bonds

Issuer Sector Issue date Size

(CNY mn) Coupon Maturity Tenor

Indicative bid yield (%)

MoF CGB Sovereign 27-Oct-2009 2,500 2.70 27-Oct-2012 <1 1.05

MoF CGB Sovereign 20-Dec-2010 3,000 1.60 20-Dec-2012 <1 1.07

MoF CGB Sovereign 06-Sep-2011 5,000 1.60 06-Sep-2013 1 1.21

MoF CGB Sovereign 01-Dec-2010 2,000 1.00 01-Dec-2013 1 1.20

MoF CGB Sovereign 18-Aug-2011 6,000 0.60 18-Aug-2014 2 1.25

MoF CGB Sovereign 27-Oct-2009 500 3.30 27-Oct-2014 2 1.24






Supranationals




Asian Development Bank Supranational

bank 21-Aug-2010 1,200 2.85 21-Aug-2020 8 2.80

CNH bank bonds




Agricultural Development Bank China Policy bank 17-Jan-2012 2,100 3.00 17-Jan-2014 2 2.60

Agricultural Development Bank China Policy bank 17-Jan-2012 550 3.20 17-Jan-2015 3 2.86

Agricultural Development Bank China Policy bank 17-Jan-2012 350 3.50 17-Jan-2017 5 3.25

Bank of China Policy bank 30-Sep-2010 2,200 2.65 30-Sep-2012 <1 2.81

Bank of Communications HK FI bank 04-Mar-2011 1,000 1.00 04-Mar-2013 1 3.28

China Construction Bank HK FI bank 03-Jun-2011 1,000 1.05 03-Jun-2013 1 3.30

Exim Bank of China Policy bank 02-Dec-2010 4,000 2.65 02-Dec-2013 1 2.45

ICBC (Asia) FI bank 13-May-2011 400 1.10 13-May-2013 1 3.12

ICBC (Asia) FI bank 24-Sep-2010 1,000 2.25 24-Sep-2012 <1 2.83

China Development Bank Policy bank 16-Jan-2012 867 3.10 16-Jan-2015 3 2.96

China Development Bank Policy bank 16-Jan-2012 133 3.45 16-Jan-2017 5 3.35

China Development Bank Policy bank 19-Jan-2012 1,500 4.20 19-Jan-2027 15 4.15

CNH multinational bonds




America Movil Telecom 08-Feb-2012 1,000 3.50 08-Feb-2015 4 3.32

Caterpillar Financial Services Industrial 12-Jul-2011 2,300 1.35 12-Jul-2013 2 2.62


15 February 2012 28

CNH corporate bonds




Beijing Enterprise Water Corporate 30-Jun-2011 1,000 3.75 30-Jun-2014 3 4.08

CNPC Corporate 19-Oct-2011 2,500 2.55 26-Oct-2013 1 2.46

China Power New Energy Corporate 29-Apr-2011 500 3.75 29-Apr-2014 3 7.23

Lafarge Shui On Cement Corporate 09-Nov-2011 1,500 9.00 14-Nov-2014 2 7.06

Eastern Air Overseas HK Corporate 08-Aug-2011 2,500 4.00 08-Aug-2014 3 4.32

Right Century Corporate 03-Jun-2011 3,000 1.85 03-Jun-2014 3 4.15

China Merchants Holdings (Hong Kong) Corporate 19-Nov-2010 700 2.90 19-Nov-2013 2 3.93

Lotte Shopping Corporate 09-Feb-2012 750 4.00 09-Feb-2015 3 4.00

Pacific Andres Res Dev Corporate 02-Jun-2011 600 6.50 02-Jun-2014 3 14.96

Road King Infrastructure Ltd. Corporate 25-Feb-2011 1,300 6.00 25-Feb-2014 2 15.82

Tsinlilen Group Corporate 10-Nov-2011 1,300 5.75 10-Nov-2014 2 6.15

Hai Chao Trading Co. Ltd. Corporate 04-Aug-2011 900 2.00 04-Aug-2014 3 4.59

Zhongsheng Group Corporate 21-Apr-2011 1,250 4.75 21-Apr-2014 3 9.67

*All data as of 8 February 2012; Sources: Bloomberg, Standard Chartered Research


15 February 2012 29

Product update – Latest CNH products available in Hong Kong

CNH product Available? Remarks

Spot Yes Daily CNH interbank liquidity of USD 1.1bn, compared to USD 10-15bn onshore.

Forward Yes There are now CNY DF (onshore), CNY NDF (offshore) and CNH DF curves (offshore).

FRA/CCS Yes for CCS There is no FRA CNH. Daily CCS turnover is now at USD 200-300mn, with trading in the 1-5Y; longer tenors are less liquid.

Money market Yes Interbank trading is growing. Tenors up to 1Y are traded, with most trading concentrated in the 1-6M. Banks‟ overseas entities are also gradually entering the market. Daily interbank CNH lending has been around CNH 2-3bn in recent weeks

CDs Yes CDs launched

IRS Yes The CNH 3M SHIBOR IRS is still quite illiquid, with daily turnover of up to CNH 100mn. The CNY NDIRS (USD) has daily liquidity of around CNY 1bn.

Structured products Yes Structured investments (linked to LIBOR) are available. USD-CNH FX hedges such as structured forwards for corporates are also available.

Bonds Yes Growing numbers of both regular and synthetic issues; daily turnover is CNH 100-200mn.

Source: Standard Chartered Research


15 February 2012 30

Key China views and projections

Central bank outlook

Current To end-2012 Next Forecast next change Last change

Benchmark rate (%) (bps) meeting Date Our forecast Date Action

China 1Y lending rate 6.56 0 NA Q1-2013 +25bps 06-Jul-11 +25bps

FICC-on-the-run

Spot 3M 3-12M Fundamentals Current trades

CNY 6.30 ↑ ↔ Mild CNY appreciation vs. USD to extend into medium term Buy USD-CNY 6M NDF Sell USD-CNY 3W NDF

10Y bond 3-6M 6M+ Fundamentals Current trades

China 3.49 ↑ ↑ Growth and inflation to slow down before rebounding in H2-2012 -

Forecasts – Economic

Real GDP growth (%) Inflation (yearly average %) Current account (% of GDP)

2011 2012 2013 2014 2011 2012 2013 2014 2011 2012 2013 2014

China 9.2 8.1 8.7 7.0 5.4 2.0 3.6 4.0 3.5 1.9 2.7 3.1

Forecasts – FX

End-period Period average

2012 2013 2012 2013 2014 2015 2016

Q1 Q2 Q3 Q4 Q1 Q2

USD-CNY 6.33 6.31 6.26 6.21 6.18 6.15 6.28 6.10 5.85 5.65 5.45

forward 6.31 6.31 6.32 6.32 6.33 6.33

USD-CNH 6.33 6.31 6.245 6.195 6.165 6.135

Forecasts – China rates

End-period Period average

2012 2012 2013 2014 2015 2016

Q1 Q2 Q3 Q4

Policy rate

1Y lending rate 6.56 6.56 6.56 6.56 6.56 7.31 (YE)

Bonds

2Y 3.00 3.00 3.10 3.30 3.10 3.40 3.60 3.60 3.60

10Y 3.50 3.50 3.70 3.90 3.65 3.85 4.00 4.00 4.00

Swaps

7-day repo 3.50 2.50 2.70 2.90 2.70 3.50 4.50 4.50 4.50

2Y 3.23 3.23 3.33 3.53 3.33 3.63 3.83 3.83 3.83

10Y 3.66 3.66 3.86 4.06 3.81 4.01 4.16 4.16 4.16

CNH market

2011

Apr May Jun Jul Aug Sep Oct Nov Dec

Remittances for Renminbi cross-border trade settlement (CNY bn)

Hong Kong 134.2 153.4 205.1 149.0 185.8 190.6 161.5 185.0 239.0

Apr-Jun 2011 Jul-Sep 2011 Oct-Dec 2011

China 597.3 583.4 N/A

Sources: HKMA, PBoC, Standard Chartered Research


15 February 2012 31

Key China views and projections (continued)

Chart 1: CNH deposit growth (CNY bn)

End-December CNH deposits: CNY 588.5bn

Chart 2: Our estimates of daily market turnover (USD mn)

End-January daily turnover in CNH spot: USD 1.1bn

Sources: HKMA, Standard Chartered Research Sources: Standard Chartered Research

Chart 3: China’s projected annual total CNY trade

settlement volume (USD bn)

Chart 4: China’s projected annual import value of goods

by settlement currency (USD bn)

Sources: PBoC, Standard Chartered Research Sources: PBoC, Standard Chartered Research

Time deposits

End 2012 Forecast

0

200

400

600

800

1,000

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Dec-12

Demand and savings deposits

0

500

1,000

1,500

2,000

2,500

3,000

Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

CNH swap

CNH spot

77

310

475

690

920

1,220

0

400

800

1,200

1,600

2009 - 2010 2011 2012 2013 2014 2015

188 270 371 472 593

1,528 1,668

1,819 2,003

2,204

0

1,000

2,000

3,000

2011 2012 2013 2014 2015

Imports settled in other currencies

Imports settled in CNY

Chart 5: Issuance of Dim Sum bonds since 2007 (CNY bn) Chart 6: Trade-weighted value of the CNY dipped in early

2012 but remains above June 2010 post-de-peg level

Sources: Bloomberg, Standard Chartered Research Sources: BIS, Standard Chartered Research

0

50

100

150

200

250

2007 2008 2009 2010 2011 2012 YTD

CNY NEER - Our Daily Estimate

BIS CNY NEER - Monthly

94

96

98

100

102

104

106

Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12


15 February 2012 32

Disclosures Appendix

Recommendations structure

Standard Chartered terminology Impact Definition

Issuer – Credit outlook

Positive Improve We expect the fundamental credit profile of the

issuer to <Impact> over the next 12 months Stable Remain stable

Negative Deteriorate

Apart from trade ideas described below, Standard Chartered Research no longer offers specific bond and CDS recommendations.

Any previously-offered recommendations on instruments are withdrawn forthwith and should not be relied upon.

Standard Chartered Research offers trade ideas with outright Buy or Sell recommendations on bonds as well as pair trade recommendations

among bonds and/or CDS. In Trading Recommendations/Ideas/Notes, the time horizon is dependent on prevailing market conditions and may

or may not include price targets.

Credit trend distribution (as at 13 February 2012)

Coverage total (IB%)

Positive 13 (15.4%)

Stable 168 (20.8%)

Negative 65 (15.4%)

Total (IB%) 246 (19.1%)

Credit trend history (past 12 months)

Company Date Credit outlook

Please see the individual company reports for other credit trend history

Regulatory Disclosure: Subject companies:

Standard Chartered Bank and/or its affiliates have received compensation for the provision of investment banking or financial advisory services within the past one

year: -


15 February 2012 33

Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and

attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.

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WE DO NOT OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR EXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS. © Copyright 2012 Standard Chartered Bank and its affiliates. All rights reserved. All copyrights subsisting and arising out of all materials, text, articles and information contained herein is the property of Standard Chartered Bank and/or its affiliates, and may not be reproduced, redistributed, amended, modified, adapted, transmitted in any way without the prior written permission of Standard Chartered Bank.

Document approved by

Robert Minikin

Senior FX Strategist

Data available as of

06:30 GMT 15 February 2012

Document is released at

06:30 GMT 15 February 2012

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