China - Rising Foreign Demand Amid Deleveraging
China - Rising Foreign Demand Amid Deleveraging
We estimate 2017 real GDP at 6.8%, and Q3 and Q4 growth at 6.7% and 6.6% respectively, slowing from 6.9% in H1
Official GDP versus Bloomberg estimate based on high frequency data (%)
Local governments have largely set similar targets in 2017 vs 2016: 20 similar, 5 higher, 6 lower
In H1, 20 local governments achieved or exceeded growth targets, 11 grew slower than their targets
Local government nominal GDP (CNY tn), and 2016 actual real GDP vs target, %
12 Nominal GDP (CNY tn, 2016) 2016 actual (%) 2017 target (%) Q2-17 GDP (%)
10
-2
-4
Anhui
Guizhou
Jilin
Qinghai
Tibet
Shandong
Zhejiang
Hebei
Xinjiang
Ningxia
Guangdong
Henan
Sichuan
Hubei
Jiangxi
Chongqing
Yunnan
Shanxi
Jiangsu
Hunan
Fujian
Gansu
Guangxi
Shanghai
Shaanxi
Hainan
Beijing
Liaoning
Tianjin
Inner Mongolia
Heilongjiang
Source: Wind, Local Government, Standard Chartered Research 4
Investment has some downside, but consumption should be resilient
FAI new starts are up 2.2% YTD, % y/y Retail sales, real vs. nominal, % y/y
50% 19
40% 17 Nominal retail
15 sales growth
30%
13
20%
11
10% Real retail
9
sales growth
0% 7
-10% 5
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 2012 2013 2014 2015 2016 2017
Infrastructure FAI has been very strong, % y/y Retail sales breakdown, % y/y
Petroleum
Cosmetics
Furniture
Food, Beverag
Daily Use
Communication
Automobile
Clothing, Shoes
Household
Medicine
Gold, Silver and
Construction &
0
Goods
Electric
Decoration
Appliance
Jewelry
-10
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Capital outflow pressure has declined, but not ODI was down 46% and FDI down 27% in H1
diminished, CNY bn FDI and ODI, YTD, USD bn
50 Monthly estimated capital outflows 0 180
ODI FDI
12M rolling total
160
-200
0
140
-400 120
-50
100
-600
80
-100
-800 60
40
-150
-1,000
20
-200 -1,200 0
May-
May-
Aug-
Apr-16
Apr-17
Jun-16
Feb-16
Mar-16
Jul-16
Feb-17
Mar-17
Jun-17
Jul-17
Sep-16
Oct-16
Dec-16
Nov-16
Jan-17
Oct-15
Oct-16
Apr-15
Apr-16
Apr-17
Jan-15
Jan-16
Jan-17
Jul-15
Jul-16
Jul-17
FCY+CNY
106
15
104
13
13.0 102
12.2
11 100
CFETS
RMB Index
FCY 98
9 8.8
96
7
6.8 94
5 92
2011
2015-Q1
2016-Q1
2017-Q1
2015-Q2
2015-Q3
2015-Q4
2016-Q2
2016-Q3
2016-Q4
2007
2005
2006
2008
2009
2010
2012
2013
2014
Oct-15
Oct-16
Apr-15
Apr-16
Apr-17
Jun-15
Aug-15
Feb-15
Feb-16
Jun-16
Aug-16
Feb-17
Jun-17
Aug-17
Dec-16
Dec-14
Dec-15
Source: CEIC, CFETS, Bloomberg, Standard Chartered Research 7
PBoC unwound USD reserve requirement on long FCY-CNY forward trades
Effective 11 September 2017, onshore FCY-CNY On-offshore DF curves may converge further
FX forward trades will no longer be subject to On-offshore DF point, and the curve with the USD
USD-denominated reserve requirements reserve charges (pips), as of 19 September 2017
The following types of trades will be exempted from 1,600
reserve requirements: CNY DF CNH DF CNY DF + 300pips
Corporates RHS FX flows via onshore banks 1,400
Foreign investors RHS FX flows via offshore banks
Other transactions of a similar nature 1,200
YTD-2017 issuance is up 5% from the same Outstanding bond market grew 11% in Jan-Aug
period last year; 2017 supply to rise only 2-5% 2017, slower than 23% CAGR in 2011-16
from last years CNY 37-38tn CNY tn
Gross issuance by type, CNY tn 80
40 CGBs LGBs PBoC Bills NCDs PFBs Credits
CGB Local govt PBoC bills
70
35 NCD Policy bank Credits
60 24
30
50
25
40 13
20
30 8
15
10 20
14
5 10
13
0 0
2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 Aug-
YTD* 2017
* As if 19 Sep 2017
10
Source: Wind, Standard Chartered Research
Primary demand showing renewed weakness
Demand for CGBs has declined again Demand for PFBs weakened in August
Historical bid-to-cover ratio for CGB auctions (x) Historical bid-to-cover ratio for PFB auctions (x)
3Y 5Y 10Y average 3Y 5Y 10Y average
5.0 5.0
4.5 4.5
4.0 4.0
3.5 3.5
3.0 3.0
2.5 2.5
2.0 2.0
1.5 1.5
May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17
Chinas future policy rate framework The Average money market rates have risen 50bps
interest rate corridor (%) for banks and 7D repo fixing is up 100bps YTD
SLF OMO MLF ERR DR07 (monthly average) FR07 (monthly average)
3.0 3.8
MLF rates:
2.5
3M*: 2.90% 3.4
OMO reverse repo rates: 6M: 3.05%
2.0 7D: 2.45% 1Y: 3.20% 3.0
14D: 2.60%
1.5 28D: 2.75%
2.6
1.0
2.2
0.5 ERR: 0.72%
1.8
0.0
ON 7D 14D 28D 3M 6M 1Y
PBoC has boosted liquidity injections since June Cost of PBoCs facilities has risen again
Outstanding PBoC liquidity facilities (CNY bn) Average cost of PBoC facilities (1MMV, %)
9000 3.10
SLF MLF PSL OMO
3.07
8000 3.05 3.04
7000
3.00
3.00
6000
2.95
5000
2.90
4000
2.85
3000
2.80
2000
1000 2.75
0 2.70
Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17
Outstanding repo position reaches a record high, but leverage ratio seems to have peaked
Leverage ratio is calculated as outstanding bonds/(outstanding bonds outstanding repo)
Left: Historical leverage ratio (x); right: Historical outstanding repo (CNY tn)
1.50 1.14 5.0
Exchange leverage (3MMA) Interbank repo outstanding (3MMA)
Interbank leverage (3MMA, RHS) Exchange repo outstanding (3MMA)
4.5
1.45
1.13
4.0
1.40 3.5
1.12
3.0
1.35
1.11 2.5
1.30
2.0
1.10
1.25 1.5
1.0
1.09
1.20
0.5
After adjusting for a 25% corporate income tax, CGBs are now yielding higher than benchmark loan
rates. As of Q2-2017, 36% of loans are priced at or below benchmark rates, and 51% are priced at or
below 1.1x benchmark loan rates
8.0 8.0
1Y CGB 10Y CGB
PBoC benchmark lending rate (1Y) PBoC benchmark lending rate (1-3 & 1-5Y)*
7.0 1Y CGB (tax adjusted) 7.0 10Y CGB (tax adjusted)
6.0 6.0
5.0 5.0
4.0 4.0
3.0 3.0
2.0 2.0
1.0 1.0
0.0 0.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
For onshore investors, CGBs are the highest- For foreign investors, CGBs yield higher than
yielding top-tier onshore bonds after tax PFBs but lower than NCDs and credits after tax
Tax-adjusted yield for domestic financial investors (%) Tax-adjusted yield for foreign investors in CIBM (%)
4.0 4.5
CGB
AAA credit
3.5 NCD AAA credit 4.0 NCD
CGB
3.0 PFB 3.5
PFB
2.5 3.0
2.0 2.5
3M 6M 9M 1Y 3Y 5Y 7Y 10Y 3M 6M 9M 1Y 3Y 5Y 7Y 10Y
As of 19 Sep 2017 Note: Table shows only taxes imposed by China on institutional investors; individual investors are exempt from VAT, but personal income 16
tax is applicable; foreign investors may still be subject to additional tax charged locally; Source: Bloomberg, MoF, Standard Chartered Research
New types of LGB project bonds have been introduced
MoF is encouraging local governments to issue bonds to finance public projects that generate stable
income; two types have been introduced, one backed by land reserves and the other by toll roads
The first batch of land reserve project bonds of CNY 9bn was issued by the Beijing municipal government on 14 July
The first toll road project bond of CNY 63bn was issued by the Guangdong municipal government on 11 August
As of 19 September 2017, 14 municipal governments or cities had issued CNY 153bn of land reserve project bonds, and 5
municipal governments or cities had issued CNY 25bn of toll road project bonds
Characteristics of land reserve project bonds and toll road project bonds
Latest level
2.45 2.81 3.44 2.94 3.33 2.88 3.54
(19 September)
Terms 7 day 2-7 days 2-7 days 2-7 days 2-7 days 2-7 days 4-7 days
Transactions between
Only transactions
Primary dealers for Only transactions all financial institutions, Only transactions
All institutions trading between deposit-
Counterparty OMOs (48 financial between depository including banks between deposit- taking Same as R007
in interbank market taking
institutions in 2017) institutions and non-bank financial institutions
institutions
institutions (NBFIs)
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17
Nominal yields of LIBOR and USTs (in USD After-swap yields of CGBs and CDBs in USD
terms, %) and CGBs and CDBs (in CNY terms, %) terms, compared with LIBOR and USTs (%)
Libor UST CGB CDB Libor UST CGB (after swap) CDB (after swap)
5.0 3.0
4.5
4.0 2.5
3.5
3.61 3.62
3.48
3.0 2.0 2.13
3.03 2.03
2.5 1.75 1.92 1.86 1.89
2.0 1.5
1.33
1.5
1.0 1.0
0.5
0.0 0.5
3M 6M 1Y 3Y 5Y 7Y 10Y 3M 6M 1Y 3Y 5Y 7Y 10Y
Bond Connect registered strong trading volume of CNY 7.05bn on the first day
However, trading volume in subsequent days of trading may have declined owing to technical issues
Data from Shanghai Clear (SHC, the settlement agent for NCD/CP/SCP/MTN bonds) suggests that trading volume,
especially of NCDs, has picked up materially since August
CCDC (the settlement agent for CGB/PFB/Enterprises bonds) has not released any data after the first day of trading
Weekly turnover rose to CNY 14.9bn in September Number of trades per week has risen over 80
Bond Connect turnover through SHCH (CNY bn) # of Bond Connect trades through SHCH
16 90
NCD SCP CP MTN Panda NCD SCP CP MTN Panda
14 80
12 70
60
10
50
8
40
6
30
4
20
2 10
0 0
3-Jul 10-Jul 17-Jul 24-Jul 31-Jul 7-Aug 14-Aug21-Aug28-Aug 4-Sep 11-Sep 3-Jul 10-Jul 17-Jul 24-Jul 31-Jul 7-Aug 14-Aug21-Aug28-Aug 4-Sep 11-Sep
Monthly change in foreign purchases of onshore 696 foreign investors/products have entered Chinas
interbank bonds by type (CNY bn)* onshore interbank bond market by August 2017,
including 62 public-sector investors and 278 private-
100
CGBs PFBs Other interbank bonds Exchange traded bonds sector investors. The breakdown:
80
62 public-sector investors (CB, SWF, Multilaterals)
117 banks
60 109 asset managers/funds
40 23 insurance companies
27 institutional brokerages
20
2 others
0
Foreign investors bought 15% of net CGB issuance in 2016
-20 Annual net purchases of CGB, % of total net issuance
Banks Funds Insurance Special Foreign investors
-40 members
140%
120%
-60 100% 15%
80% 13%
60%
-80 40%
20% 66%
-100 0%
-20%
Oct-15
Apr-16
Oct-16
Apr-17
Jan-16
Jan-17
Mar-16
Feb-16
Jun-16
Feb-17
Mar-17
Jun-17
Sep-16
Jul-15
Sep-15
Dec-15
Jul-16
Dec-16
Jul-17
Nov-15
Nov-16
Aug-15
Aug-16
Aug-17
May-16
May-17
2007
2015
2001
2002
2003
2004
2005
2006
2008
2009
2010
2012
2013
2014
2016
2011
* Exchange traded bonds data as of Q2-2017 Source: Wind, CDC, PBoC, CFETS, Standard Chartered Research 24
Foreign holdings of onshore bonds reached a new high in Q2
Foreign holdings of onshore bonds rebounded to Foreign ownership by type of bonds (% of total)
CNY 892bn in Q2 from CNY 853bn in Q1 (CNY bn)
1000 CGB PFB 4.0% Overall market size CGB
PFB Others 3.91%
Other interbank bonds Exchange-traded bonds
900
50 3.5%
53 47
800 86
71 72 3.0%
95 65
700 103
100 173 2.5%
600 307
185 154 305 291 2.43%
500 95 111 2.0%
2014-12
2015-06
2015-12
2016-06
2016-12
2017-03
2017-06
2015-12
2017-06
2014-06
2014-12
2015-06
2016-06
2016-12
2017-07
2017-08
*Exchange data as of June 2017; Assume foreign holding of exchange-traded bonds remains the same level in July & August
25
Source: PBoC, Wind, Standard Chartered Research
CNY assets to account for over 1% of 2017 world reserves
Currency breakdown of the worlds allocated reserves Reserve allocation in CNY may reach the allocation
According to COFER data as of Q1-2017 levels of CAD and AUD in a couple of years
Historical share of allocated reserves (%)
CHF Others
CAD0.2% 2% 4.0%
AUD
2%
2%
3.5% GBP
GBP
CNY JPY 4% 3.0% JPY
1% 5%
2.5%
2.0%
CNY
EUR CAD
19% 1.5%
USD
65% AUD
1.0%
0.5%
CHF
0.0%
Q4 2015
Q2 2016
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Q3 2015
Q1 2016
Q3 2016
Q4 2016
Q1 2017
Q2 2017
Q4 2017
Q2 2018
Q1 2018
Q4 2018
Q1 2019
Q2 2019
Source: IMF, Standard Chartered Research 26
Potential index inclusion and impact
We expect USD 220-240bn of potential passive inflows to be driven by inclusion in global bond indices
Bloomberg-Barclays announced the inclusion of China onshore bonds in two newly created indices since 1 March 2017
(1) The Global Aggregate + China Index (China weighting: 4.9%)
(2) The EM LCY Government + China Index (China weighting: 38.2%, or 10% if capped)
Citibank has included China onshore bonds in a number of parallel indices since February 2018
(1) Emerging Markets Government Bond Index (EMGBI) (China weighting: 52.45%, or 10% if capped)
(2) Asian Government Bond Index (AGBI) (China weighting: 56.56%, or 20% if capped)
(3) Asia Pacific Government Bond Index (APGBI) (China weighting: 47.33%)
(4) WGBI-extended (China weighting: 5.03%)
Major global index families that are most relevant for inclusion of China bonds
Bloomberg Barclays Global JP Morgan Government Bond- World Government Bond Index**
Aggregate Index Emerging Market Index (GBI-EM) (WGBI)
Tracking AUM USD 2tn USD 200bn c. USD 2tn
Expect potential inflows USD 100-110bn USD 20bn USD 100-110bn
Investment-grade sovereign and
Instruments Investment-grade government bonds Investment-grade sovereign bonds
corporate bonds
Potential weighting on China
5-5.5%* 10% (capped) 5-5.5%
inclusion
Bloomberg ticker LEGATRUU Index JPMX SBWGU Index
Source: Standard Chartered Research
*Note: Current China weighting in the Global Aggregate+China index is 4.9%, including only CGB and PFBs. Credit bonds may be added in the future 27
**Note: London Stock Exchange (LSE) completed the acquisition of Citis yield book and indices on 1 September 2017
Financial-market deleveraging progresses
Deleveraging aims to narrow credit growth-nominal GDP gap
China debt/GDP has risen to 264% of GDP in 2016 M2 growth has slid to a historical low, but credit
from 248% in 2015, % of GDP growth remains high at above 14% and above
nominal GDP growth, %
300 18
Households Non-financial corporations
Financial institutions Central government
Local government Revised TSF
250 16
32
36
37
31 28 14
200 29 27
26 27 22
26 22 27
21
21 27 GDP
17 21 20 18 19 12
150 19
19 23 19
26
27 10
100 124 137
115 115 M2
103 105 107
99
8
84
50
33 36 39 45 6
23 27 28 30
18
0
2008 2009 2010 2011 2012 2013 2014 2015 2016
Note: Revised TSF adds back credit extension under local-government debt swaps; Source: Wind, CEIC, Standard Chartered Research 29
3Cs have released a series of tightening regulations since March
MPA has been effective since the start of 2016. It aims to improve counter-cyclical measures by
capturing a broader range of credit growth and implementing an assessment system
The assessment is based on a banks situation in seven areas, measured by 14 key indicators
Areas of assessment Indicators and their respective weightings
1 Capital and leverage CAR (80%), leverage (20%), loss-absorbing ability (regulator to add)
Broad credit (60%, within range of M2 target 20%), entrust loans (5%), inter-
2 Assets and liabilities
bank liabilities (25%, required to be <33% of total liabilities)
Liquidity coverage ratio (LCR, 40%), net stable funding ratio (NSFR, 40%),
3 Liquidity
compliance with RRR system (20%)
4 Pricing activities Pricing of interest rates(100%)
5 Asset quality NPL ratio (50%), provision coverage ratio (PCR, 50%)
6 Foreign debt Risk-weighted foreign debt (100%)
7 Credit policy Credit policy implementation (70%), central bank fund deployment (30%)
Banks are placed under three categories (A, B and C) based on the above assessment. Banks with higher
scores enjoy higher interest rates for their reserves with the central bank
Reserve rate adjusted under different circumstances
Categories Period of strong macro- Extreme
Normal situation prudential control situation
A (incentive policy) scored over 90 in 7 all fields x1.1 x1.2 x1.3
B (natural policy) all others x1.0 x1.0 x1.0
C (restraint policy) failing (<60) 1 or 4; or failing two out of 2 3 5 6 7 x0.9 x0.8 x0.7
Loans priced at or below benchmark were 12ppt Average loan rates rebounded 40bps in H1-2017
lower, while 1.3x or above 10ppt higher in H1 Average loan rate by type (%)
Loan rates versus PBoC benchmark rate (% of total)
All loans Corporate loans
8.0 Bill Financing Mortgage loans
below benchmark at benchmark
above benchmark (1,1.5] above benchmark (>1.5) 7.5
100
90 7.0
80 6.5
70 6.0
60
5.5
50
5.0
40
4.5
30
4.0
20
10 3.5
0 3.0
Q2-14
Q4-15
Q1-13
Q2-13
Q3-13
Q4-13
Q1-14
Q3-14
Q4-14
Q1-15
Q2-15
Q3-15
Q1-16
Q2-16
Q3-16
Q4-16
Q1-17
Q2-17
Q4-14
Q1-15
Q2-15
Q3-15
Q4-15
Q1-16
Q2-16
Q3-16
Q4-16
Q1-17
Q2-17
Loans rates trending in line with rates of bonds Private lending and P2P rates have declined
and bills, % %
7.0 20 Wenzhou lending rate P2P rate
Average loan rate
6.5 Discount bill rate (RHS)
AAA corp bond issuance rate (RHS) 18
6.0
5.5 16
5.0
14
4.5
12
4.0
3.5 10
3.0
8
2.5
2.0 6
2015-07
2015-01
2015-03
2015-05
2015-09
2016-01
2016-03
2016-05
2016-07
2016-09
2017-01
2017-03
2017-05
2017-07
2016-11
2015-11
2017-03
2015-01
2015-03
2015-05
2015-07
2015-09
2016-01
2016-03
2016-05
2016-07
2016-09
2017-01
2017-05
2017-07
2015-11
2016-11
Source: Wind, Standard Chartered Research 33
Net issuance from corporates has slid to a record low
Corporate credit net issuance is down sharply Bond funding cost has surpassed that of loans in
Annual gross and net issuance (CNY bn) Q2 before returning to April levels
AAA-rated bond issue rate vs average loan rate (%)
Credit gross issuance Credit net issuance
10,000 9,519 8
Weighted average loan rate
1Y AAA average issuance rate
9,000
3Y AAA average issuance rate
7
8,000
7,000 6
6,000 5,549
5
5,000
3,806
4,000 4
3,000
3
2,000
1,126
1,000 2
Mar-14
Mar-13
Mar-15
Mar-16
Mar-17
Nov-13
Nov-14
Nov-15
Nov-16
Jul-17
Jul-13
Jul-14
Jul-15
Jul-16
0
2010 2011 2012 2013 2014 2015 2016 1-8 2017
Interbank funding back to June 2016 level WMP growth has been slowing
WMP funding source (CNY tn) Historical outstanding of WMPs (CNY tn) and growth
rate (%)
35 35 60%
Retails Institutions WMPs outstanding 56.46%
Private banking Interbank
y/y (RHS)
30 30
50%
6 4 25 41.90%
25
4 40%
20
20
30%
15
15
20%
10
10
10%
5
8.07%
5
0 0%
Jul-14
Mar-13
Jul-13
Mar-14
Mar-15
Jul-15
Mar-16
Jul-16
Mar-17
Nov-14
Nov-13
Nov-15
Nov-16
0
Jun-14 Jan-15 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17
Note: Only Interbank and aggregate market size are available in June 2017; Source: CBRC, Wind, Standard Chartered Research 35
Asset management sector has grown at 59% CAGR in 2014-16
Fast growing WMP and asset management c.70% of asset management sector has close
industry, AUM, CNY tn relationships with banks external mandates, %
Banks external mandate may have risen beyond
Asset management industry WMP
CNY 20tn
CAGR = 59%
60
51.8
Private
50 equities
19% Public funds
Futures
CAGR = 39% funds 21%
40 38.2 0.5%
29.50
30
23.50
20.5
20
15.02
Private funds
Securities 27%
10 33%
0
2014 2015 2016
First q/q AUM decline in Q2-2017 Among mutual funds, only money-market funds
AUM breakdown of asset mgmt industry (CNY tn) are growing, up 37% YTD as of August
AUM breakdown of mutual funds (CNY bn)
Mutual funds Funds segregated account
60 6,000
Securities asset management Futures asset management
Private equity
50 5,000 Money-market
funds
40 4,000
Equity and
30 3,000 hybrid funds
20 2,000
Bond funds
10 Closed-end
1,000 funds
0 QDII
0
Mar-15
Mar-17
Jun-15
Mar-16
Jun-16
Jun-17
Dec-14
Sep-15
Dec-15
Sep-16
Dec-16
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Sep-13
Sep-14
Sep-15
Sep-16
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Source: Wind, Standard Chartered Research 37
Money-market funds have been an exception
AUM of MMFs were up nearly 40% from Jan-Jul 2017 Bonds usually account for 30-40% of MMFs asset
Historical outstanding money-market funds (CNY bn) allocation, Historical holdings of MMFs by type (CNY bn)
7,000 6,000
Bonds Cash Others
5,000
4,000
6,000
3,000
2,000
5,000 1,000
0
2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
4,000
1,000
1,000
500
0
0 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017
2012 2013 2014 2015 2016 Jul-2017 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Banks outsourced fund management could total Upcoming redemptions of outsourcing positions
over CNY 15tn after removing duplications may be heavy, %
AUM (CNY tn) % of funding Funds from Forecast of AUM redemptions in private funds and
CNY tn 10 Sep Q2 End- from banks banks assets managed by securities (CNY tn)
2017 2017 2016 (end-2016) (end-2016) 8 Low case High case
Public funds 11.2 10.1 9.2 n.a.
6.95
7
Subsidiaries of
funds 8.2 8.6 10.5 63% 6.42
() 6
Separately
managed accounts
4.9 5.1 58% 2.73 5 4.66
of funds
() 6.5 4.24
Social security and 4
1.4 1.3 n.a. 3.40 3.53
annuity funds
Asset management
3
businesses of
17.7 18.1 17.3 73%* 12.68
security companies
() 2 1.69
1.31
Futures companies 0.2 0.2 0.3 n.a.
1 0.66
Private equity 10.3 9.5 7.9 n.a.
0
Total 54.1 52.8 51.8 21.83
Q2 2017 Q3 2017 Q4 2017 Q1 2018
Note: * Funding from banks accounts for 86% of funds for the management accounts (), which in turn accounts for 85% of total
39
assets managed by security companies. Source: China asset management association, Wind, Standard Chartered Research
NCD supply remains strong despite intensive regulatory tightening
Negotiable certificates of deposit (NCDs) have emerged as an important class of onshore bonds
Outstanding NCDs reached CNY 8.3tn as of 8 September, accounting for 11.7% of the onshore bond market
Supply started to pick up strongly since 2015 when most commercial banks were given approval to issue NCDs
Since then, NCDs have become a key instrument for mid-to-small sized banks to boost their balance sheets, leading to a
material increase in structural leverage in Chinas financial system
NCDs have experienced exponential growth NCD rates have fallen below WMP yields (%)
since their introduction in 2013
Historical outstanding of NCDs (CNY bn)
9,000 8,402 6.0
8,000 3M NCD rate (%) WMP yield (%, 3MMV)
5.5
7,000 6,272
6,000 5.0
5,000 4.5
4,000
3,021 4.0
3,000
3.5
2,000
1,000 600 3.0
34
0 2.5
2013 2014 2015 2016 Aug 2017 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17
NCD net issuance has declined, but stayed September redemptions the highest on record
positive, Monthly issuance and outstanding (CNY bn) Monthly NCD maturities by type (CNY bn)
Gross issuance Redemption State-owned banks Joint-stock banks
Net issuance Outstanding(RHS, CNY tn) Urban commercial banks Rural commercial banks
2500 9.0 2,500
2000 8.0
2,000
1500 7.0
1000 6.0
1,500
500 5.0
0 4.0 1,000
-500 3.0
500
-1000 2.0
-1500 1.0
0
May-
May-
Mar-16
Jul-16
Mar-17
Jul-17
Sep-16
Sep-17
Nov-16
Nov-17
Jan-16
Jan-17
-2000 0.0
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17
Since the start of 2017, Chinas authorities have 35 banks have asset sizes larger than CNY 500bn as of
hinted at re-classifying NCDs as interbank end-2016. Eight of 28 that have data available have
liabilities to reduce interbank leverage. More interbank liabilities + NCD ratios beyond 33% as of Q2,
and only three have been reducing NCD positions faster
tightening was announced in July and August. than interbank liabilities (Green bar denotes banks that
Including NCDs in the MPA from Q1-2018 reduce NCDs faster than interbank liabilities)
0% 10% 20% 30% 40% 50%
The PBoC announced in its Q2-2017 monetary policy
report that banks with asset size larger than CNY 500bn Baoshang bank
Jinzhou bank
will need to include their NCD positions in their interbank Hangzhou bank
liabilities under the MPA from Q1-2018 Industrial bank
Tianjin bank
Bank of Shanghai
We expect a limited immediate impact, as nearly 85% of Jiangsu bank
all outstanding NCDs will mature by Q1-2018 SPDB
Ningbo bank
Bohai bank
Banks may either reduce NCDs or other interbank Huaxia bank
liabilities should the combined ratio exceed one-third Minsheng bank
Bank of Beijing
Xiamen bank
We expect most joint-stock banks to reduce other Huishang bank
interbank liabilities, such as repos, at a faster pace than Everbright bank
Pingan bank
NCDs, owing to the LCR requirement CITIC Bank
Bank of Nanjing
Chengdu rural commercial bank
Chongqing rural commercial bank
BOCOM
CMB
BOC
ICBC 33%
CCB
ABC
Postal savings bank
Following the MPA announcement, the PBoC has issued guidance to cap the NCD issuance tenor at
1Y. Meanwhile, CSRC has also tightened asset managers exposure to lower-rated NCDs
1) On 31 August, the PBoC announced that banks are not allowed to issue NCDs with tenors longer
than 1Y from 1 September
This regulation aims to close a potential loophole after the announcement of previous tightening measures
The immediate impact is likely to be limited, in our view, as NCDs of more than 1Y at the time of issuance accounted for
only 0.5% of all issuance since the start of 2016
2) On 1 September, the China Securities Regulatory Commission (CSRC) announced the following as
part of its revised liquidity management guidance for public mutual funds:
Money-market funds (MMFs) need to limit their exposure to assets rated below AAA; exposure to AA and below-rated
deposits and NCDs require special approval by the funds board of directors
If more than 50% of an MMF is owned by a single investor, 80% of its assets are required to be deployed in cash, CGBs,
PBoC bills, PFBs and other financial instruments that mature within five working days
If the top 10 holders share exceeds 50% of an MMF, the maximum duration of the portfolio cannot exceed 60 days and a
minimum 30% of the asset allocation is required to be in cash, CGBs, PBoC bills, PFBs and other assets that mature
within five working days
These may result in lower net issuance going forward and a widening of NCD spreads across different ratings. AA or
below-rated banks may face the greatest pressure
MMFs can only invest in AA+ or above-rated NCDs 1Y and below NCDs will be incorporated in MPA
NCD issuance rating breakdown (%) NCD issuance tenor breakdown (%)
A+ or below
100% 100% >1Y
AA-
90% AA 90% 1Y
9M
80% 80%
AA+
6M
70% 70%
60% 60%
50% 50%
3M
40% 40%
AAA
30% 30%
20% 20%
10% 10% 1M
0% 0%
Mar-17
Mar-17
Sep-16
Oct-16
Sep-16
Oct-16
Nov-16
Apr-17
Jan-17
Nov-16
Apr-17
Jan-17
Aug-17
Feb-17
May-17
Jun-17
Jul-17
Aug-17
Jun-17
Feb-17
May-17
Jul-17
Dec-16
Dec-16
Effective 8 September, onshore agent banks are no longer required to maintain segregated accounts
for reserve payments by offshore banks for their onshore deposits. This is effectively a removal of the
3M lock-up requirement for offshore banks onshore deposit reserves and a shift of the reserves
funding provider from offshore banks to onshore agent banks
Funding in the segregated accounts can be released back to offshore banks for clearing payments and other purposes
Offshore banks onshore Renminbi deposit reserve payments will be treated in the same way as other onshore deposits
Previously, reserve payments for offshore banks onshore deposits were required to be maintained in a segregated
account, with positions adjusted quarterly effectively a 3M funding lock-up.
No more ultra-flush CNH liquidity at quarter-end; no more negative tomorrow/next (T/N) CNH rates
The removal of the 3M lock-up means that banks no longer have an incentive to aggressively lend excess funding at
quarter-end, implying no more ultra-flush CNH liquidity at the end of the quarter.
CNH liquidity may not loosen despite the release of reserves back to offshore banks
Better funding connectivity between on- and offshore markets may lead to further convergence of on- and offshore funding
costs
Current short-term funding rates are higher in the onshore market than in the CNH market (onshore 7-day repo fixing at
3.44%, and 1-week CNH HIBOR fixing at 3.33%, as of 19 Sep 2017)
Offshore banks may keep deposit reserve funding onshore until CNH rates are at par with or higher than onshore rates
Short-dated high-quality CNH assets are yielding lower than their onshore peers. This may also limit banks incentive to
bring onshore deposits back into the CNH market
Front-end CNH CGB yields are already lower than onshore, while long end still offers a premium
On-offshore CGB yield curve (offer yield, %), as of 12 September 2017
4.6
4.4
4.2
CNH CGB
4.0
3.6
3.4
3.2
1Y 2Y 3Y 4Y 5Y 7Y 10Y 15Y 20Y 30Y
Gross issuance of Panda bonds is picking up We cut gross issuance forecast to CNY 140-150bn
Dim Sum and Panda bond issuance (CNY bn) Historical & expected annual gross issuance, CNY bn
600 600
CNH bonds Formosa
Panda CD
500 500
Dim Sum
400 400
321
300 300
200 200
129
107
100 100
64
0 0
2009
2016
YTD
YTD
2008
2010
2012
2013
2014
2015
2012
2009
2010
2013
2014
2015
2016
2011
2011
2017F
2017F
*as of 19 Sep 2017; Source: Bloomberg, Standard Chartered Research 48
Outstanding market size to fall 26-25% in 2017
We expect the market size to shrink further in 2017 Outstanding market down 22% YTD*
Historical and expected outstanding market size (CNY bn)
Outstanding market size as of 19 September 2017: CNY 900
545bn, down 22% from end-2016 Formosa CD Dim Sum
800
300
200
100
Aug-17
2008
2009
2010
2012
2013
2014
2015
2016
2011
2017F
*as of 19 September 2017; Source: Bloomberg, Standard Chartered Research 49
Stock Connect programmes injecting CNH liquidity
First monthly CNH outflow since April 2016 CNH liquidity is likely to stay stable near-term
Net and cumulative liquidity change (CNY bn) Overnight CNH HIBOR rate and 1Y DF points
Net (northbound - southbound flows) O/N CNH HIBOR (%) 1Y CNH DF points (pips, RHS)
50 Cumulative (CNY bn, RHS) 150 80 4,000
40 100 70 3,500
30
50 60
20 3,000
0
10 50
2,500
0 -50
40
-10 -100 2,000
30
-20 -150
1,500
-30 20
-200
-40 1,000
10
-250
-50
0 500
-60 -300
Mar-16
Mar-17
Sep-15
Sep-16
Aug-15
Aug-16
Aug-17
Feb-15
May-15
Feb-16
May-16
Feb-17
May-17
Nov-14
Nov-15
Nov-16
Jan-15
Jan-16
Jan-17
Jul-15
Jul-16
May-15
May-16
May-17
Jul-17
Nov-14
Nov-15
Nov-16
Source: Bloomberg, Standard Chartered Research 50
ASW issuance accounts for the majority of bond issuance in 2017
Asset swap (ASW) issuers accounted for a majority 60%+ of total supply was ASW issuance in 2017 YTD*
of Dim Sum and Formosa bond issuance in 2016; we Monthly CNH bond issuance by type (CNY bn)
expect this trend to continue in 2017 ASW issuances Others Govt
20
ASW issuance is again likely to account for a majority of 15
2017 bond issuance. Out of a total CNY 110-120bn of
new bond issuance, we expect: 10
62 foreign central banks, international financial institutions and sovereign wealth funds are on the
CIBM; 18 names have been released by PBoC:
Name Entry date
1 Hong Kong Monetary Authority 1-Sep-10
2 Bank of Korea 1-Oct-10
3 Government of Singapore Investment Corporation Private Limited 1-Oct-10
4 World Bank 1-Oct-10
5 Bank for International Settlements -
6 National Bank of Belarus 28-Jan-11
7 Korea Investment Corporation 28-Jan-11
8 Bank of Lithuania 28-Jan-11
9 Asian Development Bank 28-Jan-11
10 Swiss National Bank 28-Jan-11
11 New Development Bank 28-Jan-11
12 International Bank for Reconstruction and Development 28-Jan-11
13 International Development Association 16-Mar-11
14 African Development Fund 16-Mar-11
15 African Development Bank 16-Mar-11
16 Arab Monetary Fund 16-Mar-11
17 National Bank of Slovakia 16-Mar-11
18 National Bank of Cambodia 16-Mar-11