Factsheet: Asian Local Bond Index (ALBI)-Fixed …

1 5 December 2013 Fixed Income Asia abc Global Research Factsheet: Asian Local bond Index (ALBI). The hsbc Asian Local bond Index (ALBI) tracks the total return 1 performance of liquid bonds, denominated in Local currencies, in China, Hong Kong, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand Non-government bond issues, which account for more than half of the ALBI in terms of total number of issues, are included in our China offshore, Hong Kong SAR, Malaysia, Singapore and Thailand sub-indices The Index constituents' selection criteria for each country and country weightings for the ALBI are set to balance the desire for liquidity and stability Louisa Lam While each individual Local bond Index is designed to serve Analyst the needs of both domestic and external investors, the ALBI. The Hongkong and Shanghai Banking Corporation Limited is created to serve the needs of the latter investor base for a + 852 2822 4527 regional benchmark Index for domestic bond markets and to assist their global asset allocation decisions Kelly Fu Credit Associate The Hongkong and Shanghai Banking Local domestic capital markets continue to generate robust interest, both domestically and Corporation Limited internationally.

2 We have witnessed strong growth in this segment of the market, as + 852 3941 7066. evidenced by the growth of liquidity and strength. Understanding the important role that debt capital markets play, governments in the region have continued to push forward with Zhi Ming Zhang Head of China Research the development of Local currency debt markets. Therefore, it is not surprising that there is The Hongkong and Shanghai Banking a growing need from onshore and offshore investors for a robust benchmark Index . Corporation Limited +852 2822 4523 Consequently, we continue to see a growing investor base that tracks our ALBI on a regular basis. Since the inception of the ALBI, not only has the investor base that follows View hsbc Global Research at: this Index grown, but the size of the Index has grown as well. Issuer of The Hongkong and The ALBI tracks the US dollar total return performance of liquid domestic bonds, report Shanghai Banking Corporation Limited denominated in Local currencies, in China, Hong Kong, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand.

3 It complements our Asian Dollar bond Disclaimer &. Index (ADBI), which tracks the performance of liquid external debt in Asia ex Japan. Disclosures. This report must be read with the disclosures and _____. the analyst certifications in 1 Total return defined as the sum of Local currency capital and accrual returns plus FX returns, stated in USD. the Disclosure appendix, and with the Disclaimer, that form part of it. Fixed Income Asia abc 5 December 2013. 1. ALBI versus ADBI , relative performance over one year as of 2 December 2013. ALBI ( Local currency return) ALBI (USD return) ADBI (USD return) Difference in USD %. China Onshore China Offshore Hong Kong SAR India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Mongolia Sri Lanka Pakistan Total (in USD)* * The overall ALBI is measured in USD. Source: hsbc . At the moment, many aspects of Asian Local and external debt markets are distinctly different. The difference ranges from type of issuer, tenor of issue, liquidity, tax treatment, ease of transaction, ease and risk of currency conversion, and difference in investment base, all of which contribute to the difference in the risk/reward profile of the two markets.

4 Table 1 summarises the differences in performance between the ALBI and ADBI over a one-year horizon. The sizeable difference suggests the uniqueness of Asian Local bonds and that the efficiency frontier would be expanded by adding Asian Local currency denominated bonds into a global bond portfolio. Barring capital restrictions, the significant difference in total returns also suggests lack of onshore/offshore cross-market activity. The ALBI is calculated daily, based on the weighted returns of each individual Local Index . The selection criteria for each Local Index constituent are determined according to the current market infrastructure and secondary market activities in each Local centre (see below for more details on each Local sub- Index ). 2. Fixed Income Asia abc 5 December 2013. The determination of country weightings for the ALBI. An ideal Index should be broadly representative, liquid (replicable) and stable. Although the quality of an Index is ultimately determined by the quality of the underlying securities and market structures, Index construction rules do affect the quality of an Index .

5 A majority of the Local bond markets represented by the ALBI are in their infancy. Therefore, the need for balancing representativeness, liquidity and stability is challenging but important. For example, passively managed funds and insurance companies would put more weight on the stability of Index composition, while actively managed funds and securities houses care more about liquidity in terms of low transaction costs and speedy execution, for both current and future investments. The weightings of individual bonds in each Local Index are determined by their market capitalisation. However, their respective country weightings in the ALBI, which are reviewed annually by hsbc , affect their final weightings in the ALBI. Because the Local bond market structures vary so dramatically across each country, standard metrics, such as total market size or market capitalisation of each Local Index , fail to provide an approximation of investment opportunities readily available to international investors.

6 For example, the size of the Hong Kong SAR bond market and the market capitalisation of the Hong Kong SAR Index are small relative to the tradable amount available to most international investors in comparison with other countries. China provides an opposite case in which the Local bond market is virtually closed to external investors, yet the size of its bond market dwarfs most of the others. hsbc sets the country weightings for the ALBI to provide a bond portfolio that defines the market of developing Asian Local currency bonds available to international investors. The weightings of each, subject to annual review, are derived based on the following factors: Total size of each domestic debt market and the total market capitalisation of each country Index . Liquidity of the secondary bond market in each country, measured by bid-offer spreads, daily turnovers, and availability of price quotes. Accessibility to foreign investors in terms of currency convertibility, withholding taxes, ease of setting up and operating foreign-owned investment funds, ease of repatriating of funds and profits.

7 Development of infrastructure conducive for fixed-income investments and trading, such as availability of domestic benchmark yield curves, interest rate derivative products (swaps and futures) and the availability of reliable credit rating systems for non-government issues. As of 2 December 2013, the country weightings are as follows: 2. ALBI country weights as of 2 December 2013. Country Weight, %. China Onshore China Offshore Hong Kong SAR India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Source: hsbc . 3. Fixed Income Asia abc 5 December 2013. FX rates FX spot rates are captured at around 17:30-18:00 HKT during Index valuation, sourced from Reuters and Bloomberg based on details indicated in the table below. 3. Data source of FX spot rates applied for ALBI. Currency FX Data Source Ticker CNH Reuters BGCHKCNY. CNY Reuters BGCNDF1. HKD Bloomberg USDHKD F020. IDR Reuters IDR=. INR Reuters BGCHDF1. KRW Reuters BGCNDF1.

8 MYR Reuters BGCNDF2. PHP Reuters BGCNDF1. SGD Bloomberg USDSGD F020. THB Bloomberg USDTHB F020. TWD Reuters BGCNDF1. Source: hsbc . Rules of construction and calculation methodology for the ALBI. The tables below summarise the construction rules and calculation methodology for the ALBI. We also provide summarised characteristics of each domestic bond market. 4. Index computation methodology Return calculation Total return, including price changes, and accrued and re-invested coupon payments. Each country sub- Index is first calculated after closing of each market. The ALBI is calculated as the cumulative value of the sum of the weighted daily total return of each sub- Index , measured in US dollar, relative to 100. Index base 29 December 2000 = 100. Weightings Weightings of individual bonds within each Local Index are determined by their market capitalisation. Country weightings are determined and reviewed annually by hsbc that represent a Local bond portfolio replicable in practice by external investors Additions and withdrawals Re-balancing of the composition of the each sub- Index and the ALBI are made on the first business day of each month Pricing and availability hsbc traders at each Local centre provide bond pricing at market close on every business day.

9 In case one of the Local markets is closed, its daily total return is set to be its daily accrual in calculating the ALBI on that day Statistics available Total return, yield, modified duration, average life, market capitalisation, average clean price, average coupon Source: hsbc . 5. Constituent selection criteria Markets China Onshore, China Offshore, Hong Kong SAR, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. Currency Respective domestic currencies. The composite ALBI Index is calculated based on the daily return of each sub-country Index in US dollars Coupon type Fixed rate only bond types Government, quasi-government and corporate bonds Credit ratings Restrictions based on individual country Issue size Minimum issue size is required and it varies across country Maturity Minimum of one year remaining to maturity Source: hsbc . 4. Fixed Income Asia abc 5 December 2013. 6. Constituent selection criteria by country Country Issuer Type Minimum amount Outstanding (LLC) Minimum credit rating _____Pricing source_____.

10 Breakdown Govt Non-govt for non-govt Govt Non-Govt China Onshore Sovereign CNY10bn CHBK. China Offshore All CNY500m CNY500m No restriction hsbc hsbc . Hong Kong All HKD300m HKD300m Single-A or equiv. HKMA hsbc . India Sovereign INR50bn NDSI. Indonesia Sovereign IDR2trn IDMA. South Korea Sovereign KRW1trn KSDY. Malaysia All MYR2bn MYR500m A- or above by BIDS BIDS. RAM/Moody's/S&P. Philippines Sovereign PHP3bn PDEX. Singapore All SGD300m No restriction MAS hsbc . Thailand All THB20bn THB15bn A- or above by TRIS TBDC TBDC. Taiwan Sovereign TWD30bn TOTC. Source: hsbc . 7. ALBI performance since inception, 29 December 2000 to 02 December 2013. Total return, % Average YTM, % Average tenor, yrs Modified duration Market cap USD bn Weightings ALBI* 1, China Onshore China Offshore** Hong Kong** India Indonesia** Korea Malaysia Philippines Singapore Taiwan Thailand * USD return, sub-indices are based on Local currency returns **Hong Kong sector since Dec 1993; Indonesia sector since Nov 2003; China offshore sector since Dec 2010.