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.

2 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. 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.

3 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.

4 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 %.

5 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. Table 1 summarises the differences in performance between the ALBI and ADBI over a one-year horizon.

6 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 ).

7 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 . 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.

8 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. 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.

9 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.

10 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. 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.