Transaction Services

May 2013

China Reforms: Are you prepared for the new opportunities?

Deborah Mur, Head of Sales, Treasury & Trade Solutions, China

Camille Liao, Treasury & Trade Solutions, Liquidity and Investments

Table of Contents

1. China Macro Economic Update 3

2. Leveraging Regulations and Reforms for Enhanced Centralization 6

3. Citi offshore RMB service offerings 17

1. China Macro Economic Update

Economic Data to Watch

4

2

3

1 Money Supply Import and Export

USD/CNY trend Industry Product / Retail Sales / GDP / CPI

Data Source: PBOC

Target M2 growth of 13%

Target Import and Export growth of 10%

Target CPI of 3.5

6.1393 at May 20, 2013

Data Source: Bloomberg and Citi

6.9743 on May 21, 2008

Forecast

5

Prevailing RMB Deposit and Loan Rate • The pace of interest rate liberalization has accelerated: PBOC announced two rate cuts in July, 2012. The second rate cut in

2012 also came with further liberalization on the loan and deposit rates. In our view, the government has shown its commitment to interest rate liberalization. Further relaxation on deposit rates and deregulation on loan-to-deposit ratios are likely next steps.

• Current RMB Deposit RateCiti China Offer PBOC Base Rate

Current Account 0.385% 0.35%

Call Deposit (7 days) 1.485% 1.35%

3 Months 2.86% 2.6%

6 Months 3.08% 2.8%

1 Year 3.30% 3.00%

• Current RMB Loan Rate

Lowest Limit PBOC Base Rate

Tenor <= 6months 3.92% 5.60%

6 months<Tenor<=1 year 4.20% 6.00%

1 year<Tenor<= 3 years 4.305% 6.15%

3 years<Tenor<=5 years 4.48% 6.40%

Tenor >5 years 4.585% 6.55%

5

2. Leveraging Regulations and Reforms for Enhanced Centralization

Deregulation Milestones- Recent Developments To encourage the internationalization of the RMB and to support Shanghai & Beijing to become

international financial centers, both PBOC (Central Bank) and SAFE (the core regulator for FCY) each began a series of deregulation reform projects.

PBOC

New regulations and reform projects of PBOC (People’s Bank of China, the central bank) Simplification of RMB cross-border trade settlement RMB cross-border lending (pilot scheme) No quota limitation on RMB financial guarantee Cross-border intercompany netting (pilot scheme)

New regulations and reform projects of SAFE (State Administration of Foreign Exchange) Simplification of FCY cross-border trade settlement FCY Cross-border Liquidity Management (pilot scheme): physical cash pooling and cross-border intercompany netting

Jan 2012 Apr 2012 Jul 2012 Oct 2012

SAFE

SAFE released the regulation to simplify FCY XB Settlement

SAFE approved 1st batch of pilot clients for XB cash pooling.

Simplification RMB XB settlement started in Shanghai, Citi is the one of pilot banks.

PBOC SH asked Citi to nominate pilot names of RMB XB lending

Citi CN was invited by SAFE to discuss regulatory framework of FCY XB cash pooling, and FCY POBO/ROBO

Citi is asked by SAFE to nominate 2nd batch of pilot clients.

SAFE expands the scope of FCY cross-border lending

Citi CN was invited by PBOC to discuss regulatory framework of PBOC reform projects

Milestones

PBOC specified that RMB financial guarantee is no longer subject to banks’ guarantee quota

Dec2012

Citi executed 1st RMB XB lending transaction in SH (new)

Jan2013 Feb2013 Mar2013 Apr2013

RMB Netting pilot run starts in SH (new)

RMB XB lending expands to Guangzhou and Zhejiang

Simplification RMB XB settlement expanded to more cities (new)

7

What is your top priority in response to the recent regulation developments in China?

Poll Choices

Mobilise surplus cash from China by cross border lending

Re-invoice inter-company and third party flows with China into RMB

Establish SSC to further centralise the payments and collections in China

Include China flow into global netting system

Results

36%

12%

4%

46%

Simplification of Cross-border Trade Settlement in FCY

Before After

& & or or

Who qualifies The simplified requirement is applicable to all

companies in good standing with SAFE regulators (all companies rated as category A)

Company could be downgrade to B or C by SAFE and removed from this simplification arrangement

Benefits Facilitates centralized foreign currency payment

processing

Reduces discrepancies and improves efficiency

Contract/ PO InvoiceCustoms Slip

Contract/ PO InvoiceCustoms Slip

Pain Points

Company spends time and effort preparing supporting documents

Settlement delays occur due to discrepancies from supporting documents

Payment for Trade Transaction

Collection for Trade Transaction

Check Supporting Documents

Verification

PVA AC Settlement AC

PVA AC Settlement AC

Supporting DocumentsSupporting Documents

Scope: applicable to goods transactions only country-wide

9

Simplification of Cross-border Trade Settlement in RMBScope: The pilot began in Shanghai and Guangzhou and gradually expanded to more area in China

Province/City Transaction Type Remarks

Shanghai All Pilot clients need to be filed with PBOC

Guangzhou Goods only A contract is required for transactions with advance payment; custom slips are required when a transaction exceeds a company’s pay/receive quota

Beijing All Supporting documentation is required for some companies, but a 3-day deferral is allowed

Tianjin All N/AJiangsu Goods only Limited to companies registered in

Jiangsu province

Liaoning Goods only N/A

Guizhou All Not eligible for companies established less than 2 years

Shenzhen All Company group or entity opened account with the settlement bank over half year. Bank will sample check supporting documents afterward.

Sichuan All N/A

Key Features All companies in good standing with

PBOC are eligible

All goods transactions are eligible, but services are excluded in some provinces/cities

A cross-border RMB description form (PBOC format) serves as the payment/receipt instruction, no supporting documents are required to initiate payment instructions.

Requirements by Province/ City for RMB Cross-border Settlement Simplification is specified in left Table

10

SAFE Reform Project: FCY Cross-border Cash Pooling (Physical)

Who Qualifies?

• Multinational corporations with a treasury center in Beijing or Shanghai, or that have a treasury center in China with a functional treasury entity in Shanghai

Benefits

• Removes the current strict movement of cross-border FCY control on the cross-border funding movements

• Allows companies to include their Chinese entities in regional/global cash pooling

Key Features

• Special Accounts (Overseas Funding Concentration Account and Domestic Funding Concentration Account) are opened for overseas and domestic cash concentration

• Quota: (Approved by SAFE on a one-off basis)– Cross-border borrowing quota = the sum of existing

quotas for cross-border borrowing for all participating entities minus utilized quota

– Cross border lending quota = 30% of shareholder equity of all participating entities minus unpaid dividends to overseas investors for the last financial year, plus profit reinvested domestically

– FX quota needs to be approved by SAFE

• Outstanding entrustment loans under domestic FCY cash pooling arrangements can be repaid by selling RMB and buying FCY

EL = Entrustment loan

Overseas Funding Concentration

Account China

China

Overseas

Domestic Funding Concentration

AccountChina

EL Sub AC1China

Capital AC 1China

EL Sub AC 2China

Capital AC 2China

Current AC 1China

Current AC 2China

RMB Cash Pool

FX Quota

EL Repaymentvia Sell RMB

Buy FCY

Global LM Header Account

Overseas Funding

Concentration

Cross Border Lending/Borrowing

Quota

Cross Border Lending/

Borrowing

11

PBOC Reform Project: RMB Cross-border Intercompany Loans

Who Qualifies?Three Types of On-shore Lenders Are Allowed

The pilot project enables companies in China tolend to their overseas parent company or affiliatesthrough an intercompany loan.

1 Foreign MNC Single Entity • Registered in Shanghai

2 Foreign MNC Pool header • Registered in Shanghai

• Regional HQ/Investment Company

3 Local Company

Pool header • Registered in Shanghai

Benefits

• Facilitates improved liquidity across group companies

• Enables more efficient use of RMB within the group and freer flow of funds

• Can be managed effectively through a centralized treasury or finance centre

Entity ARMB

OverseasChina

Entity B

Key Features

Account Maintenance

• One account with a designatedbank should be used for cross-border RMB loan, including drawdown, repayment

Lending Quota

• The quota (Q =ａ*E*P) will be approved on a revolving basis and reviewed each year by PBOC (“Q” as quota; “E” as Equity; “P” as the weighted percentage of RMB in all its operating currencies; “ａ” as the adjusted variance managed by PBOC, initially set at 100%)

Funding Source

• The surplus cash flow from applicants, excluding funding from debt and overdraft facilities

• If the source is from a group’s RMB cash pool, no funding from the RMB special account or foreign debt account should be included

Interest Rate • Decided by the on-shore lender and off-shore borrower according to arm’s length rule

• All tax requirements to be observed

LendingTenor

• Decided by the on-shore lender andoff-shore borrower

• The tenor arrangement should be clarified in the cross-border lending agreement

Funding Usage

• Decided by the on-shore lender and off-shore borrower and clarified in the cross-border lending agreement

• It is encouraged, mainly for working capital purposes, that this fund is used for further RMB settlement transactions

12

RMB Financial Guarantee

Onshore Entity

China

RMB Deposit

RMB Financing

Citi CN

OverseasEntity

Overseas

Financial GuaranteeRMB 100

mmCiti Overseas

(i.e. HK/SG/LND)

ConsiderationsCredit extension is subject

to standard credit review and due diligence

X-currency dilution to be considered

Thin capitalization rule may apply

(Consolidated) Balance Sheet may not be optimized

BeforePain Points Both FCY

and RMB financial guarantee is subject to bank’s cross-border guarantee quota

No quota limitation on RMB financial guarantee, but foreign currency financial guarantee is still subject to bank’s Guarantee quota Who qualifies All companies registered in China Purpose of offshore finance is limited for normal business operations

Benefits Offers MNCs an opportunity to take advantage of excess cash in China to support group funding

needs offshore

After

1) Company’s onshore entity places RMB deposit with Citi China2) Citi China issues RMB Financial Guarantee to Citi Overseas Office as

security3) Citi overseas branch provides credit facility to overseas entities

13

RMB Cross Border Cash Pooling Structure (Future)• Cross-border RMB Pooling will be one of the next developments in the RMB Internationalization strategy

(subject to PBOC approval)• MNCs have two options to include China entities into regional/global liquidity management structures• RMB offshore pooling or MNCP structures can be set up in London or Hong Kong.

Cross-border RMB Physical PoolingMulti-Currency Notional Pooling (MCNP)

RMB Header AC

RMB Header AC

USD Header AC

MCNP

China

Overseas

JPY Header AC

No Overdraft

Accounts in China

RMB AC RMB AC RMB AC

China

Overseas

RMB AC RMB AC RMB AC

Onshore RMB Header AC

14

Offshore RMB Header AC

Cross-Border Intercompany Netting Solution I – RMB In 2010, Citi filed with PBOC Shanghai allowing on-shore company settle directly with off-shore netting center under gross in and gross out model.

Border

OverseasEntity D

OverseasEntity E

OverseasEntity F

On-shore Entity A

+8(13)

On-shore Entity B

(5)+10

Off-shore Netting Center

Gross In & Gross Out

Key Points

Currency RMB

Qualification Accounts opened in Shanghai

Scope Trade in both Goods & Services

Model Gross-in & Gross-out

One Time Submission

Master agreement for netting arrangement - Entity participation list - The function of treasury centre

Indemnity Letter for the transaction nature

Supporting Documents

Follow current RMB x-border supporting documents requirement in Shanghai.

Approval Citi received special approval from PBOC

15

Cross-border Intercompany Netting Solution II – RMB On shore leading company settles with off-shore Netting Center via a “pass through” Citi China internal account.

OverseasEntity D

OverseasEntity E

OverseasEntity F

On-shore Entity A

+10(13)

On-shore Entity B

On-shore Entity C

Citibank ShanghaiInternal Account

(8) (5)+10

Off-shore Netting Center

BorderGross In / Gross Out payments

Key Points

Currency RMB

Qualification All companies in China

Scope Trade in both Goods & Services

Model Gross-in & Gross-out

One Time Submission

Tripartite agreement: Offshore Treasury Center, Onshore company , and Citi.

Entity participation list Authorization letter of Treasury/Netting

Centre/Leading Company function Indemnity Letter for the transaction nature

Contract & Invoices

The “pass through” structure shall be indicated on both contract and invoices.

Supporting Documents

Follows current RMB x-border supporting document requirements in each city.

Account EOD zero balance; no overdraft permitted

Approval First case requires filing with PBOC SH

16

3. Citi Offshore RMB Services

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

EURUSDGBP JPY AUDCAD CHFHKDSEKSGDCNY

TradePayments

RMB Internationalization Still in Early Stage

A currency is considered “international” when it is used as a unit of account (e.g., corporate invoices), a medium of exchange (to settle cross-border trade) and store of value (deposits and as reserve currency)

Three practical measures :- Share in the international payments- Share in the foreign exchange market- “Third-party” or non-residents usage

Foreign Exchange Market

Source: SWIFT (2011), BIS Survey of Foreign Exchange and Derivatives Activity

% of World Payments and World Trade by CurrencyWorld Reserve Assets

1. USD (62%)2. Euro (24%)3. GBP (4%)4. JPY (4%)5. CHF (1%)6. AUD (new)7. CAD (new)

Sept. 2012 - IMF asked members to include AUD and CAD to the list of official reserve currencies (multi-currency reserve)

Rank Currency FX GDP

1 USD 45.5% 23.3%

2 EUR 16.9% 19.4%

3 JPY 6.8% 8.7%

4 GBP 5.8% 3.6%

5 AUD 3.7% 2.0%

6 CHF 2.9% 0.8%

7 CAD 2.4% 2.5%

8 SGD 1.6% 0.4%

9 HKD 1.2% 0.4%

10 KRW 1.0% 1.6%

14 CNY 0.9% 9.5%

Currency Composition

International Payments Market

Trade Currency?Investment Currency?Reserve Currency?

China’s currency isunderutilized vs. itsimportance in tradeCNY’s share in world payments: 0.5%China’s share in world trade: 10%

18

Offshore RMB Developments• RMB ranked No.13 as a world payment currency, overtakes Russian Rouble in Jan 2013, accounting for 0.74% in March 2013.

• UK has become an important offshore RMB centre: UK has surpassed Singapore since June 2012 and become the No. 1 in RMB payments with China and Hong Kong. This is supported by the strong trade flow between China and Europe

• During Jan-Jun 2012, spot RMB forex in London grew to an average daily volume of US$ 1.7 billion, a 150% increase compared to 2011. Trade services in London grew to ¥2.2 billion, a 390% increase compared to the six month average for 2011. The London RMB transaction volume continues to grow in the second half of 2012

• Bank of England (BoE) has just setup a reciprocal three-year sterling-renminbi swap line with the People’s Bank of China (PBoC). By April 2013, 20 countries have established swap lines with China

Important Offshore RMB Centers

TOP 10 Offshore corridors with China and Hong Kong

Countries Weight in Jan-12

Weight in Jan-13

UK 24.8% 30.8%

Singapore 33.7% 23.1%

France 6.0% 7.0%

Australia 3.9% 5.8%

Luxembourg 4.0% 4.2%

US 7.5% 4.1%

Taiwan 1.9% 3.6%

Germany 2.9% 3.5%

Japan 2.8% 2.7%

Macau 1.3% 2.3%

Offshore RMB Centres andShare in Payments Value

79.0%Hong Kong

5.1%UK

3.8%Singapore

0.6%Taiwan

Source: SWIFT 2013.

19

What is your status in using RMB?

Poll Choices

Have started re-invoicing RMB for intercompany and third party flows with China

Have started re-invoicing RMB for intercompany flows with China

Plan to change the invoice for intercompany flows and third party flows with China into RMB in the next 12 months

Plan to change the invoice for intercompany flows with China in RMB only in the next 12 months

No plans to invoice flows with China in RMB in the next 12 months

Results

33%

23%

30%

6%

6%

Your needs and our solutions• Citi is dedicated to support our customers in RMB

business. Our current services include:

– RMB Business Current Accounts and Term Deposits

– RMB payment and collections – RMB trade related services, including• L/C issuance and re-issuance• L/C advising• L/C confirmation• L/C discounting

– Foreign exchange transactions and hedging solutions

– RMB cross border target balancing account– RMB Multi-currency notional pooling– RMB netting solutions

21

• Corporate adopt RMB in cross border settlements can achieve treasury efficiencies by:

– Centralising FX into treasury centre and take FX management out of subsidiaries to enhance controls and achieve efficiency in FX management; eliminate FX risk as RMB is the functional currency of Chinese corporate.

– Achieving cost saving in FX transactions by eliminating USD as the intermediary currency.

– Receiving more favourable trade terms (including potential discounts) from suppliers in China when pricing in RMB

– Accessing to more clients and business opportunities in China, especially small and medium-sized company which prefer to settle in RMB

Citi ranked the 2nd best offshore RMB service provider in offshore RMB poll in 2013.

RMB Flows into LondonEuropean/US EntitiesChina Entities

MASTER A/CCompany ACiti LondonUSD

Company ACiti LondonAUD

Company ACiti LondonGBP

AU SubCiti AUAUD

Company ACiti LondonEUR

Singapore SubCiti SGUSD

China HQ co.Citi SHCNY

Company ACiti LondonCNH

China Sub 1Citi SHCNY

China Sub 2Citi BJCNY

Hong Kong SubCiti HKCNH

Singapore SubCiti SGCNH

RMB account in London• Pre-funding for payments, cut-off at

4pm D-1 (GMT)• Pre-advising for collections: cut-off

at 4pm D-1(GMT)

RMB accounts in MCP in London• Positive balance only• Entities in approved jurisdictions

Multi-Currency Notional Pool

China cross border RMB sweep (subject to regulatory approvals)

China domestic RMB sweep (no approvals required)

Cross border RMB sweep req’ no regulatory approvals

Trade and other flows

22

RMB, CNY and CNHRMB: Short form of Renminbi, the name of the Chinese Currency

CNY: Generally refers to RMB onshore. However, it is the only currency code recognized by SWIFT

CNH: Generally refers to RMB offshore

• Before RMB internationalization, RMB can only be used within China (onshore), and the currency code is CNY. However, withthe offshore RMB market develops, a currency code CNH is created to refer to offshore RMB (mainly in Hong Kong, that iswhy CNH)

• From fund transfer perspective, CNY is the only currency code recognized by SWIFT. So when customer opens account, doing fund transfer, issuing L/Cs, regardless in China or outside China, the currency code for RMB is always CNY

• From FX trading perspective, there are 2 codes in trading system, CNH and CNY, The reason is China has FX regulations, the CNY trading (onshore) is subject to FX regulations while CNH trading (offshore market) does not subject to regulations. Previously, the pricing is different due to the different supply and demand in these two separated markets. So the trading system needs to have 2 codes to distinguish the trading. However, with the arbitrage activity and the internationalization of RMB, the FX rate difference between CNH and CNY is very minimal now

• As CNY is traded on shore, so in overseas market, the CNY is not deliverable. But in offshore, CNH is deliverable

• Summary: In London, the RMB is CNH (offshore RMB), but the accounts and payments are denominated in CNY (SWIFT requirement). Normally, customers trade CNH with FX team and the FX proceeds can be debited or credited from/into customers’ CNY accounts in London, or the FX proceeds can be sent to beneficiaries in China and other countries

23

© 2013 Citigroup Inc. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world..

Citi believes that sustainability is good business practice. We work closely with our clients, peer financial institutions, NGOs and other partners to finance solutions to climate change, develop industry standards, reduce ourown environmental footprint, and engage with stakeholders to advance shared learning and solutions. Highlights of Citi’s unique role in promoting sustainability include: (a) releasing in 2007 a Climate Change PositionStatement, the first US financial institution to do so; (b) targeting $50 billion over 10 years to address global climate change: includes significant increases in investment and financing of renewable energy, clean technology,and other carbon-emission reduction activities; (c) committing to an absolute reduction in GHG emissions of all Citi owned and leased properties around the world by 10% by 2011; (d) purchasing more than 234,000 MWh ofcarbon neutral power for our operations over the last three years; (e) establishing in 2008 the Carbon Principles; a framework for banks and their U.S. power clients to evaluate and address carbon risks in the financing ofelectric power projects; (f) producing equity research related to climate issues that helps to inform investors on risks and opportunities associated with the issue; and (g) engaging with a broad range of stakeholders on theissue of climate change to help advance understanding and solutions.Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks.

efficiency, renewable energy and mitigation

IRS Circular 230 Disclosure: Citigroup Inc. and its affiliates do not provide tax or legal advice. Any discussion of tax matters in these materials (i) is not intended or written to be used, and cannot be used or relied upon, by you for the purpose of avoiding any tax penalties and (ii) may have been written in connection with the "promotion or marketing" of any transaction contemplated hereby ("Transaction"). Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor.In any instance where distribution of this communication is subject to the rules of the US Commodity Futures Trading Commission (“CFTC”), this communication constitutes an invitation to consider entering into a derivatives transaction under U.S. CFTC Regulations §§ 1.71 and 23.605, where applicable, but is not a binding offer to buy/sell any financial instrument.However, this is not a recommendation to enter into any swap with any counterparty or a recommendation of a trading strategy involving a swap. Prior to recommending a swap or a trading strategy involving a swap to you, Citigroup would need to undertake diligence in order to have a reasonable basis to believe that the recommended swap or swap trading strategy is suitable for you, obtain writtenrepresentations from you that you are exercising independent judgment in evaluating any such recommendation, and make certain disclosures to you. Furthermore, nothing in this pitch book is, or should be construed to be, an offer to enter into a swap. Any terms set forth herein are intended for discussion purposes only and are subject to the final terms as set forth in separate definitive written agreements. This presentation is not a commitment to lend, syndicate a financing, underwrite or purchase securities, or commit capital nor does it obligate us to enter into such a commitment, nor are we acting as a fiduciary to you. By accepting this presentation, subject to applicable law or regulation, you agree to keep confidential the information contained herein and the existence of and proposed terms for any Transaction.Prior to entering into any Transaction, you should determine, without reliance upon us or our affiliates, the economic risks and merits (and independently determine that you are able to assume these risks) as well as the legal, tax and accounting characterizations and consequences of any such Transaction. In this regard, by accepting this presentation, you acknowledge that (a) we are not in the business of providing (and you are not relying on us for) legal, tax or accounting advice, (b) there may be legal, tax or accounting risks associated with any Transaction, (c) you should receive (and rely on) separate and qualified legal, tax and accounting advice and (d) you should apprise senior management in your organization as to such legal, tax and accounting advice (and any risks associated with any Transaction) and our disclaimer as to these matters. By acceptance of these materials, you and we hereby agree that from the commencement of discussions with respect to any Transaction, and notwithstanding any other provision in this presentation, we hereby confirm that no participant in any Transaction shall be limited from disclosing the U.S. tax treatment or U.S. tax structure of such Transaction. We are required to obtain, verify and record certain information that identifies each entity that enters into a formal business relationship with us. We will ask for your complete name, street address, and taxpayer ID number. We may also request corporate formation documents, or other forms of identification, to verify information provided.Any prices or levels contained herein are preliminary and indicative only and do not represent bids or offers. These indications are provided solely for your information and consideration, are subject to change at any time without notice and are not intended as a solicitation with respect to the purchase or sale of any instrument. The information contained in this presentation may include results of analyses from a quantitative model which represent potential future events that may or may not be realized, and is not a complete analysis of every material fact representing any product. Any estimates included herein constitute our judgment as of the date hereof and are subject to change without any notice. We and/or our affiliates may make a market in these instruments for our customers and for our own account. Accordingly, we may have a position in any such instrument at any time.Although this material may contain publicly available information about Citi corporate bond research, fixed income strategy or economic and market analysis, Citi policy (i) prohibits employees from offering, directly or indirectly, a favorable or negative research opinion or offering to change an opinion as consideration or inducement for the receipt of business or for compensation; and (ii) prohibits analysts from being compensated for specific recommendations or views contained in research reports. So as to reduce the potential for conflicts of interest, as well as to reduce any appearance of conflicts of interest, Citi has enacted policies and procedures designed to limit communications between its investment banking and research personnel to specifically prescribed circumstances.