Diversification and yield pick-up in the Chinese Onshore Fixed Income market · 2017. 4. 3. · Chinese Onshore Fixed Income market. Not for redistribution March 2017 . Bond Market

Diversification and yield pick-up in the Chinese Onshore Fixed Income market

Not for redistribution March 2017

Bond Market Overview

Investment Case FTSE China Onshore Sovereign and Policy Bank Bond 1-10 years Index

Corporate Overview

Fullgoal Asset Management 4

Fullgoal Introduction (1/2)

Fullgoal’s philosophy relies on in-depth research, bottom-up stock selection, best utilizing investment managers’ advantages and realizing long-term return

In a Nutshell AUM

Legacy

Stability

Fully licensed

Equity Fixed Income Quantitative

• Multiple investment strategies

• Good long term investment records

• Good investment records of both on- and offshore

• Leader in long-term bond funds’ AUM

• Persisting good Sharpe ratio record

• Development of interest and credit bonds investment

• Comprehensive investment styles & product lines

• Leading investment record in the industry

• Industry leader

Source: Fullgoal Fund Management Co., Ltd, data as of December 31, 2016

Established in 1999 one of the 10 oldest

fund managers in China

Institutional client-focused c. 50% of AUMs with stable

investor base

Excellent compliance as Fullgoal has never

been involved in Chinese fund industry scandals

Experienced team 340 employees of which 121

investment professionals with average of +7 years experience

within Fullgoal

Asset management with Type 1, 4 and 9 by

the Securities and Futures Commission in

Hong Kong

Foreign investment quota Licensed by the China Securities Regulatory

Commission to act as RQFII and QFII

46% 44% 41% 43%

54% 56% 59% 57%

2013 2014 2015 2016

Retail Institutional(in USD billions)

Investment Strategies

Client Mix

-

10

20

30

40

50

60

70

2012 2013 2014 2015 2016


Shandong International Trust Corporation

Number of Investment and Research Personnel

Average Industry Experience

Average Years at Fullgoal

Equity Investment: Fundamental Active 24 10 6

Equity Investment: Quantitative & Index 13 5 5

Equity Investment: Global 4 8 5

Equity Research 24 9 4

Fixed Income Investment and Research 34 6 4

* excluding money market fund and short term bond funds; Source: Fullgoal Fund Management Co., Ltd, China Galaxy Security Fund Research Center, data as of June 30, 2016

Long-term Mutual Fund Market Share Non-mutual Fund Business Growth

Shareholding Structure Number of Employees

¥0.2 ¥1.0 ¥3.7 ¥8.0 ¥13.2 ¥23.1

¥35.7

¥79.7

¥145.0

¥181.6

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(in billions)

¥227

¥193 ¥186 ¥182 ¥173 ¥149

¥126 ¥119 ¥114 ¥108

Total AUM* (in billions)

27.8%

27.8% 27.8%

16.7%

Fullgoal Introduction (2/2)

Fullgoal’s stable investment and research team coupled with its stable shareholding structure and active asset management expertise positions it as a leader in China

Haitong Securities

Shenwan Hongyuan Securities

$0.02 $0.14 $0.54 $1.20 $2.08 $3.70

$5.88

$12.88

$22.48

$26.22

$34

$29 $28 $28 $26 $23

$19 $18 $17 $16

Bond Market Overview


- China Interbank Bond Market has grown into the 3rd largest bond market following the US and Japan

- Total outstanding amount: RMB 43.06 trillion (by end of 2015)

- Daily trading volume: RMB 350-500 billion

- Number of market players: 10,018 (by end of 2015)

- Primary market issue amount: RMB 21 trillion in 2015

Market Size Snapshot

China’s Onshore Bond Market Overview

Source: Chinabond, SCH

Market Monthly Turnover by Tenors (RMB bn)

< 1Y 3,699 38.4%

1-3Y 1,951 20.3%

3-5Y 1,609 16.7%

5-7Y 759 7.9%

7-10Y 1,383 14.4%

>10Y 230 2.4%


Term Structure


Source: WIND, as of February 28, 2017

Market Monthly Turnover by Coupon (RMB bn)

Fixed Rated 6,872 71.4%

Floating Rated 374 3.9%

Zero Coupon 2,385 24.8%

2.40 2.60 2.64 2.65 2.71

2.90 3.00 3.19 3.29

3.74 3.76 3.80

2.58 2.71 2.92

3.08 3.37

3.85 3.98 4.11 4.07 4.27 4.30 4.30

3.47

3.86 3.88 3.90 3.97 4.16

4.34 4.40 4.49 4.62 4.73 4.88

0

1

2

3

4

5

6

0 0.25 0.5 0.75 1 3 5 7 10 15 20 30

Treasuries Policy Banks AAA Corps

years

%


Share of different bond markets


Source: ChinaBond, Shanghai Clearing House by end of 2015

Market Type Outstanding (RMB billion) Percentage

Interbank 43,062 94.89%

Exchange 1,452 3.20%

OTC 664 1.46%

Others 204 0.45%


China’s Onshore Bond Market Structure

Source: ChinaBond, Asia Development Bank

Interbank Market

OTC Market

Exchange Market

Market Type

China FX Trading System (CFFTS)

SZSE / SSE

Order Matching

Shanghai Clearing House (SHCH)

China Central Depository & Clearing Co Ltd. (CCDC)

China Securities Depository and Clearing (CSDCC)

Central Counter Party Bond Settlement

PBOC

Commercial banks

Cash Settlement


- 2016 February announcement → liberalization of the China Interbank Bond Market

removal of prior approval and quota restrictions

simple investment filing process

ability to trade certain OTC derivatives for hedging purposes*

no lock-up period to repatriate investment principal

daily repatriation possible**

possible scope for long-oriented hedge funds to participate**

eligibility assessed by settlement agent

CIMB Scheme

Changing Market Accessibility

*Ability to engage in other types of trading, such as bond lending, bond forwards, or interest rate swap for hedging purposes

**Ratio of RMB to FCY should be maintained within +/-10% when capital remitted out of the market. The first such remittance does not need to follow the requirement, however it may not exceed 110% of the cumulative inward remittance in RMB or foreign currency

Chinese Onshore Bond Investment Case


- China bonds currently offer an attractive yield premium compared to those in developed markets of similar credit rating

Yield Pick-up


Source: Bloomberg, as of February 28, 2017

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

1M 3M 6M 1Y 3Y 5Y 7Y

US Treasury Actives Curve Japan Sovereign Curve China Sovereign Curve Germany Sovereign Curve France Sovereign Curve

%


- Onshore fixed income performance

Compared with developed markets


Source: WIND, as of February 28, 2017 Source: WIND, as of February 28, 2017

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2010

-12-

31

2011

-03-

31

2011

-06-

30

2011

-09-

30

2011

-12-

31

2012

-03-

31

2012

-06-

30

2012

-09-

30

2012

-12-

31

2013

-03-

31

2013

-06-

30

2013

-09-

30

2013

-12-

31

2014

-03-

31

2014

-06-

30

2014

-09-

30

2014

-12-

31

2015

-03-

31

2015

-06-

30

2015

-09-

30

2015

-12-

31

2016

-03-

31

2016

-06-

30

2016

-09-

30

2016

-12-

31

1 Yr Government Bond 10 Yr Governmnet Bond

0

1

2

3

4

5

6

7

8

2011

-01-

10

2011

-05-

10

2011

-09-

10

2012

-01-

10

2012

-05-

10

2012

-09-

10

2013

-01-

10

2013

-05-

10

2013

-09-

10

2014

-01-

10

2014

-05-

10

2014

-09-

10

2015

-01-

10

2015

-05-

10

2015

-09-

10

2016

-01-

10

2016

-05-

10

2016

-09-

10

2017

-01-

10

AAA medium note: 3 Yr AA+ medium note: 3 Yr AA medium note: 3 Yr


Return correlation between RMB onshore corporate bonds and major global asset classes over the past 10 years

Low Correlation


Source: Bloomberg, Manulife Asset Management, as of April 30, 2016 Source: Bloomberg, Manulife Asset Management, as of May 31, 2016

The People’s Bank of China monetary policy versus major central banks

Return correlation to onshore RMB corporate bonds


Foreign Exchange


Source: Bloomberg, as of February 28, 2017

0.12

0.125

0.13

0.135

0.14

0.145

0.15

0.155

0.16

91

92

93

94

95

96

97

98

99

100

3/4/

2016

3/18

/20

16

4/1/

2016

4/15

/20

16

4/29

/20

16

5/13

/20

16

5/27

/20

16

6/10

/20

16

6/24

/20

16

7/8/

2016

7/22

/20

16

8/5/

2016

8/19

/20

16

9/2/

2016

9/16

/20

16

9/30

/20

16

10/1

4/20

16

10/2

8/20

16

11/1

1/20

16

11/2

5/20

16

12/9

/20

16

12/2

3/20

16

CNY against CFETS (left axis) CNY against USD (right axis) CNY against EUR (right axis)

Navigating China’s Onshore Bond Market


- Research practice

- Different rating systems between local and international rating agencies

- Local rating standards are still developing under the still-evolving corporate transparency culture of the country

- Limited materials available in English

Challenges



- Recent opening up of CIBM grants easier access for investors resulting in more foreign capital inflow

- Possible inclusion of China bonds in international indices

- China may become the top emerging market with the largest foreign ownership of local bonds

- Low correlation to other major global asset classes offering diversification benefits within a broad portfolio

- Negative correlation to the China A-share market with different investor profiles

- SDR inclusion of RMB in October 2016

Opportunities



- Policy risk

- Plausible RMB depreciation

- Liquidity or execution risk

- Credit rating differentiation

Risks


FTSE China Onshore Bond Index Series


FTSE China Onshore Bond Index Series

FTSE China Onshore Sovereign

Bond Index

0-10 years 1-10 years

1-4 years 4-7 years 7-10 years

FTSE China Onshore Policy

Bank Bond Index



FTSE China Onshore Sovereign

and Policy Bank Bond Index



FTSE China Onshore Bond Index Series family tree

Source: FTSE Russell, as of May 2015


FTSE China Onshore Sovereign and Policy Bank Bond 1-10 years Index

Source: FTSE Russell, as of February 28, 2017

42.70%

29.26%

16.59%

11.44%

Index Issuers (%)

China's Central Government China Development Bank

Agricultural Development Bank of China Export-Import Bank of China

47.00%

32.48%

20.52%

Index Time to Maturity (%)

[1 years, 4 years) [4 years, 7 years) [7 years, 10 years)


This presentation is intended only for the use of our clients and prospects. Neither this presentation nor any of its contents may be reproduced or published for any other purpose without prior written consent of Fullgoal Asset Management (HK) Limited (“Fullgoal HK”).

All the investment strategy illustrated in this presentation was made on a preliminary basis only, no representation or warranty is made as to the efficacy of any particular strategy or the actual results that may be achieved.

The information in this presentation reflects prevailing market conditions and our judgment as of this date, which are subject to change. In preparing this presentation, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. We consider the information in this presentation to be reliable, but we do not represent that it is complete or accurate. Fullgoal HK, its affiliates, directors, officers or employees accept no liability for any errors or omissions relating to information available in this presentation, and will not be liable for any damages or costs arising out of or in any way connected with the use of the information provided in this presentation.

Investment involves risks. Past performance is not indicative of future results, future returns are not guaranteed. Investor may be subject to substantial losses, and a loss of original capital may occur. An investment is not a deposit and is not ensured by Fullgoal HK or any of its affiliates.

This Fund has not been authorized by the Hong Kong Securities and Futures Commission (“SFC”) to be marketed to the general public in Hong Kong; and this document has not been reviewed by the SFC. You are advised to exercise caution in relation to the offer of this Fund. If you are in doubt about the content of this document, you should obtain independent professional advice. Investors should not invest in the Fund solely based on the information provided in this document. Before acting on any information in this presentation, you should consider whether any investment, security or strategy is suitable for your particular circumstances and, if necessary, seek independent professional advice.

Any information given or representation made by any dealer, salesman or other person and (in either case) not contained herein should be regarded as unauthorized. Accordingly, no person receiving a copy of this presentation may treat the same as constituting an invitation to him/her to purchase or subscribe for the participating shares of the Fund.

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Diversification and yield pick-up in the Chinese Onshore Fixed Income market · 2017. 4. 3. · Chinese Onshore Fixed Income market. Not for redistribution March 2017 . Bond Market