China: An Equity Strategist’s Diary Shadow banking monitor 24, financial system vulnerable to A-share losses

Investment Strategy 27 July 2015

Equity Strategy Leverage, inflated collateral & unclear risk responsibility China

We estimate that margin outstanding, only from the seven channels that we can estimate reasonably, easily exceeds Rmb3.7tr. Assuming an average 1x leverage, it means that at least David Cui >> Strategist Rmb7.5tr market positions are being carried on margin, equivalent to some 13% of A-share’s Merrill Lynch (Singapore) +65 6678 0411 market cap and 34% of its free float. Meanwhile, A-shares ex. banks are still trading at 36.6x [email protected] 12M trailing PER. We believe that the government will struggle to hold up the market beyond Tracy Tian, CFA >> a few months, unless it is prepared to let go some of its other policy objectives including Strategist Merrill Lynch (Hong Kong) RMB credibility (The A-share market may see another leg down within months, Jul 20). When +852 2161 7632 [email protected] the market ultimately settles at a level that can be sustained on fundamental reasons, we expect that the balance sheet of most financial institutions (FIs) may get impaired and the Katherine Tai >> Strategist financial system may wobble, due to high contagion risk. Merrill Lynch (Hong Kong) +852 3508 7524 [email protected] Leverage means relentless selling pressure The seven channels mentioned above are margin financing (MF), stock collateralized lending (SCL), umbrella trust (UT), stock benefits swap (SBS), structured mutual fund (SMF), P2P and offline private fund matching (Table 1). There are a few other difficult–to-estimate channels, such as banks’ corporate/personal loans that ended up in stocks, brokers’ proprietary desk and funds’ subsidiaries. We suspect that the size of these may be Rmb1-2tr. In addition, China Securities Finance Corp. (CSFC) might have borrowed Rmb1.5tr from banks & PBoC to buy stocks. All the leveraged positions may want to unwind at certain point given the inflated collateral value, in our view. Additional selling pressure may come from hedge funds with compulsory winding-down clauses, when the market heads lower. Balance sheet damage & contagion risk It seems to us that A-shares ex. banks could at least halve, which would only bring down their average PER to just below 20x, before any reasonable case about valuation support could be made. This means that most leveraged positions may suffer from losses ultimately, likely in Rmb trillions. On the other hand, the capital base of brokers and trusts, who are the first loss takers behind investors, is only Rmb1.6tr (Table 2). Banks’ capital may suffer greatly as well once the equity of the other FIs is depleted – banks provide or channel most of the leverage Table of contents: directly or indirectly. The risk is that the unwinding of the leverage will be disorderly – due to • WMP – P13 implicit guarantees behind most shadow banking financial products, investors could easily panic if they suffer from meaningful capital losses, by our assessment. The key risk to our • Trust – P21 view is that the government may be prepared to take on substantially all the leverage, in which case, we expect RMB or growth to come under pressure. • Corporate (LGFV) bond – Shadow banking update P26 Since our last publication in late-Apr, shadow banking activities continued to slow. Total • Price signals – P35 social financing balance growth slowed to 9.2%YoY in Jun, vs +11% in May, +11.8% in Apr and +13.6% in Mar. Correspondingly, sales of WMPs, trusts, and corporate bonds, especially • Shadow banking related LGFV bonds, all showed various degrees of weakness. Given a sizeable portion of shadow news – P39 banking lending likely went to fund stock investment during the covered period, the trend implied a tougher environment for real business borrowers compared to earlier in the year. • Links to our previous reports on shadow banking – P67

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The Seven quantifiable leverage channels Table 1 summarizes the key figures of the seven leverage channels that we can put some reasonable estimates on. The size of these channels is roughly Rmb3.7tr.

Table 1: Key figures of the seven leverage channels Common interest Size cost for borrowers Leverage channel (Rmb bn) As of Sources; basis of estimates Common leverage (p.a.) Main funding sources Margin Financing (MF) 1,455 July 23 China Securities Finance Corp. 1x 8-9% Bank WMP, broker (own fund + TAM) Stock Collateralized Lending (SCL) 901 July 22 Wind; We assume a 40% average 0.3-0.5x 5-13% Broker (own fund + TAM), bank loan-to-asset value loan, trust Umbrella Trust (UT) 621 1H China Trust Industry Associations; 2-3x 9-10% Bank WMP, broker TAM, fund We assume 1) 80% of stock related TAMC, P2P, offline private fund trust AUM increase since mid-14 is matching firms, HNWIs, for UT; and 2) 2Q15 increase in such corporations AUM = 1Q15's. Stock Benefits Swap (SBS) 123 1Q Securities Association of China 2-4x 8-10% Broker (own fund + TAM), bank WMP Structured Mutual Fund (SMF) 473 1H Fund Industry Association 2x 8-9% Retail P2P 20 1Q Securities Times article on March 3x 18-20% Retail 9th, citing local experts' estimate Offline Private Fund Matching 150 1Q As above 2-10x 15-20% Retail & HNWIs Subtotal 3,743 Source: Various news, BofA Merrill Lynch Global Market

Margin Financing (MF): Rmb1,455bn This is the most transparent part of the leverage in the stock market with CSFC announcing the outstanding balance on a daily basis. The balance peaked on Jun 18th at Rmb2,267bn and has since declined to Rmb1,455bn by July 23rd (Chart 1 & 2).

Chart 1: Margin purchase as % of daily turnover Chart 2: Margin trading balance as % of A-share market cap 24% 2,400 5% Margin trading outstanding, Rmb bn (rhs) Margin purchase as % of daily turnover (lhs) 20% 2,000 4%

16% 1,600 3% 12% 1,200 2% 8% 800

1% 4% 400

0% 0 0% Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-13 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Apr-12 Oct-14 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Jan-11 Jun-11 Mar-10 Mar-15 Feb-13 Nov-11 Dec-13 Aug-10 Sep-12 May-14 Source: WIND, BofA Merrill Lynch Global Market Source: WIND, BofA Merrill Lynch Global Market

This is likely the safest part of the leverage as well because the government has kept a fairly tight control over the leverage ratio – for example, brokers will call for additional margin if an account’s Collateral Maintenance Ratio, defined roughly as market value/margin financing, falls below 130% (Margin call - it's what we don't know that matters, Jun 30). That said, we don’t believe that the leverage here is completely safe because 1) average entry level for MF

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positions can be quite high judging from the large size of the daily buying activities financed by margins, often in hundreds of billions of Rmb; and 2) the government had allowed brokers to loosen margin requirements in recent weeks as part of its efforts to stabilize the market (Table 1, The A-share market may see another leg down within months, July 20).

MF is largely funded by banks via bank wealth management product (WMP) and brokers via their own funds and their Targeted Asset Management programs (TAM) – Exhibit 1. Although the government forbids banks to directly lend for stock purchase, it allows banks to do so indirectly via WMP because, in theory, banks do not bear losses if WMP loses money (more on this latter), and buyers of WMP are supposed to be reasonably sophisticated.

Exhibit 1: How MF is funded

Source: BofA Merrill Lynch Global Market

CSRC limits a broker’s MF balance outstanding to 4x of its net equity. Stock Collateralized Lending (SCL): approx. Rmb900bn Holders of listed stocks can go to brokers, banks and trust companies to obtain a loan, using the stocks as collateral. Although in theory the borrowers can use the obtained funds for many purposes, we suspect that in recent times most of them used the funds to invest in the stock market, sometimes by buying the very stocks they used as collaterals to drive up their prices. It appears to us that potential margin calls from this lending source is one of the main reasons why, at the height of the A-share market crash, close to half of the A-share companies had their stocks suspended from trading (Chart 1, The A-share market may see another leg down within months, July 20).

Based on data from Wind, we calculate that the outstanding value of stocks being collateralized, based on the value on the date of collateralization, reached Rmb2,253bn by July 22, up from Rmb1,475bn at the end of June 2014. Please note that the actual total collateralized value is most likely higher because only major shareholders, i.e. the ones who own more than 5% of a listed company’s stocks, are obliged to disclose their stock collateralization activities. Moreover, anecdotally, it appears some major shareholders failed to disclose their activities publically. Approximately ¾ of the stocks being pledged for such loans had a market cap less than US$2bn at the time of collateralization and about half, less than US$1bn.

The loan-to-value (LTV) ratio varies across lenders (in general, banks are more cautious than brokers) and is also dependent upon the types of stocks being pledged. According to an article by Securities Times on March 9th, 2015, the typical LTV for mainboard listed stocks is 50%; for GEM board stocks, 40-50%; for ChiNext stocks, 30-45%. In Table 1, we used 40% to estimate the loans outstanding.

Since late 2012 when brokers were allowed to provide SCL, they have fast become the dominant player in this space due to some natural advantages – they understand the stock market better than most and they have close relationships with listed companies and their major shareholders. Based on Wind, by now, approximately 60% of pledged stock value is with brokers, 20% with banks and 12% with trust companies.

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Umbrella Trust (UT): approx. Rmb600bn UT allows the senior tranche investors (the more risk-averse ones) to lend to the junior tranche investors who buy stocks. Usually, the senior tranche investors will get a fixed return of 8-9% p.a., and the trust companies will get a 1% fee. Leverage of the junior tranche is normally capped at 3x with a cut-loss clause. For more details, please see Umbrella Trust: another form of leverage for A-share fever, by Winnie Wu.

Most of the funds for the senior tranche come from bank WMP, broker TAM, Targeted Asset Management Company (TAMC, aka funds’ subsidiaries), and trust companies’ other clients including P2P, offline fund matching firms, high net-worth private individuals and corporations (Exhibit 2).

Exhibit 2: How UT is funded

Source: BofA Merrill Lynch Global Market

The emergence of online risk-control platforms like HOMS has greatly accelerated the adoption of UT. Historically, much of the private lending for stock investment was conducted offline, between lenders and borrowers on an ad hoc basis. This made it difficult for the lenders to control risk and the common practice used to be: a lender set up a brokerage account and granted the borrower access to the account so he/she could trade under the lender’s careful watch. Systems like HOMS make risk control much easier from the lenders’ perspective: they can set up numerous accounts under an umbrella trust, enable custodian function, monitor portfolio performance in real time and implement automatic margin call warning and cut-lost arrangements. According to CSRC, as of late June, the most popular systems are HOMS (Rmb440bn in AUM), Minchuang (Rmb36bn) and 10jqka (Rmb6bn). Stock Benefit Swap (SBS): approx. Rmb500bn SBS is often referred to as institutions’ margin financing facility. The essence of the transaction is for brokers to buy stocks or stock indices in the secondary market (sometimes IPOs, placements, commodities or other financial instruments), using their own resources and then swap the floating return for a fixed return with an institution, such as a fund, a corporation, an insurer or a major shareholder in a listed company. To mitigate risks, brokers normally require the counterparties to put up margins and also sign a cut-loss agreement. Exhibit 3 illustrates how such a deal might work in practice for both lenders and borrowers.

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Exhibit t3: An example of Stock Benefit Swap (SBS) workflow

Source: Various news flow, BofA Merrill Lynch Global Research

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The business commenced in 2013 and so far more than 20 brokers are approved to conduct it. According to the Securities Association of China, the outstanding balance of this business was Rmb123bn as of March 2015. The balance was higher at Rmb169bn in March 2014. We are not sure about the reason behind the decline – it could be related to the temporary weakness in the market around Feb/March this year. If this is the case, the balance could be significantly higher by June. Structured Mutual Fund (SMF): Rmb473bn SMF commenced in in 2007. The structure of SMF is similar to UT with the senior tranche providing financing for a fixed return and the junior tranche taking on leverage to invest in the market. Buyers of both tranches tend to be retail.

According to Fund Industry Association, 38 mutual fund management companies had set up 117 stock-focused SMFs by June 2015, with an outstanding AUM of Rmb473bn. These funds can invest in the mainboard, GEM board and ChiNext, depending on their mandate. CSRC caps the junior tranche’s leverage at 2x when the fund is initiated, and 6x during its operation. By June 22, the average leverage is at about1.9x. P2P & offline fund matching service: approx. Rmb200bn During previous rounds of market rallies, fund matching service tended to be the key form of unofficial leverage. The service has been prevalent in Jiangsu and Zhejiang where there is significant private wealth. With the financial deregulation in recent years and the flourishing of many readily available forms of leverage as mentioned previously, the relative importance of private fund matching service has diminished a great deal.

Nevertheless, the absolute size is probably still meaningful, particularly after the introduction of platforms like HOMS that has made risk control by lenders easier. Data here is murky. Some local experts estimate the scale at about Rmb200bn, including the online portion, which sounds about right to us.

A fairly new phenomenon is the online fund matching service, mostly P2P (Shadow banking monitor 23: P2P, unchecked, Apr 24). Local media reported that there are more than 60 P2P platforms specializing in fund matching for stock investing and many were set up in the past 6 months. The entry barrier is quite low: a website’s software and hardware cost is around Rmb0.5mn and regulation is light. These platforms mainly cater to small lenders and borrowers with loan size around Rmb2-30k per deal and duration ranging from 2-30 days. In contrast, the deal size for offline fund matching is typically over Rmb1mn. Other difficult-to-quantify leverage channels There are at least three other leverage channels that we find difficult to quantify: bank loan, broker’s proprietary book and funds’ TAMC.

Although banks are not allowed to grant loans to fund stock purchase, there are many ways around the restriction when the market is hot and desire to speculate in the market is strong. It’s very difficult for banks to check how their corporate loans are used, especially for largely companies with treasury operations – end of the day, money is fungible. The same applies to personal loans. As chart 3 shows, consumer loans tend to increase sharply when the market is buoyant. The only exception appears to be between late 2011 and mid-2014. During this period, the stock market did poorly but consumer loans were strong. We suspect that a major reason is tight liquidity for many SMEs whose loans are often classified under personal loans.

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Chart 3: Net increase in consumer loans vs. stock market performance 7,000 400 Rmb bn 350 6,000 300 5,000 250 4,000 200

3,000 150 100 2,000 50 1,000 0 0 -50 Jul-14 Jul-09 Jan-12 Jan-07 Jun-12 Jun-07 Apr-13 Apr-08 Oct-10 Feb-14 Feb-09 Sep-13 Dec-14 Sep-08 Dec-09 Mar-11 Aug-11 Nov-12 Nov-07 May-15 May-10

SHCOMP (LHS) New consumer loan (RHS)

Source: CEIC, BofA Merrill Lynch Global Research

Total Rmb loans outstanding reached Rmb88.8tr by June 2015, including about Rmb4tr consumer loans ex. mortgage. Rmb1tr is equivalent to 1.1% of total Rmb loans outstanding. Based on anecdotes we have come across and the fact that many manufacturers, especially private ones, have been struggling to make decent returns in their core businesses in recent years, we would be surprised if less than 1.1% of loans ultimately ended up in the stock market (A-share rally & the #1 romantic comedy, Dec 8). Banks are clearly concerned. We have seen some cases whereby banks have become very vigilant on credit card balances overdue post the market crash.

Brokers’ on-balance-sheet assets amounted to Rmb8.27tr as of June 2015, 6.4x of their equity base. Brokers issue bonds and borrow in the inter-bank market, among other ways, to expand their balance sheet (Shadow banking monitor 21: how to funnel money to stocks, 11 Dec 2014). We assume that a sizeable portion of their assets is used to buy stocks via their proprietary desks before the market crash. Assuming that the ratio is 10%, it would imply Rmb827bn of leveraged stock positions held by brokers. After the crash, the government had ordered major brokers not to cut the net stock position on their book until SHCOMP is above 4,500. In addition, there are also local media reports that CSFC had lent brokers Rmb260bn so their proprietary books can buy more stocks. As a result, we believe that it’s reasonable to assume that brokers have leveraged exposure in the hundreds of billions.

Finally, we have noticed the TAMC’s AUM has risen from just over Rmb2tr in mid-2014 , when the A-share market started to rally, to Rmb6.1tr by 1H15 (Chart 4). It’s difficult to trace where this money has ultimately ended up with but we suspect that a decent portion might have gone into stocks given investors’ desire for yield and the generally poor returns elsewhere in recent quarters.

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Chart 4: AUM of TAMCs has surged

7 Rmb tn 6

5

4

3

2

1

0 Jul-13 Jul-14 Jun-15 Mar-15 Dec-14 Jun-13 Mar-14 Nov-13 Dec-13 Sep-13 Source: Various media, BofA Merrill Lynch Global Research

Some of TAMC’s money has gone through leverage channels like MF and UT so accounted for elsewhere. But we are fairly certain that this is not the full picture as far as stock related leverage is concerned. Given the large size of TAMC and the recent surge in AUM, we suspect that another couple of hundreds of billions of RMB leverage could have easily funded stock purchases.

So far, we have left insurers out of the picture as we have little visibility. Nevertheless, we wouldn’t be surprised if they are involved somehow given their desire for yield and channel fees (Shadow banking monitor 20, new “kid” in town, 17 Oct 2014). It’s our impression that brokers, funds and insurers have been competing fiercely to act as bank WMP’s channels.

There are a couple of other potential channels that we are not sure of at this stage – they are adding leverage to the system clearly but we are not certain if they are part of existing channels such as UT. Anyhow, their sizes so far are likely small.

One is the leveraged Employee Stock Option Program (ESOP) run by listed companies. The size of such program is approximately Rmb 32bn by now, based on the 154 leveraged ESOPs that we have identified. The structure is similar to UT’s, with the senior tranche contributed by the listco or its major shareholder, and the junior tranche by management/employees. Leverage in this program is not regulated and at the discretion of the listcos and employees. Among the cases we have identified, the average leverage is around 2x but we saw a case where it went to 24x.

Another is lending to listcos’ major shareholders and executives to buy their own company’s stocks, a practice explicitly encouraged by the government post the market crash. It appears that the leverage, about 1-2x, largely goes through the bank WMP/broker TAM channel but we are not sure whether UT will be involved. It’s still early days for this program and we doubt that demand for such leverage will be strong.

Other potential selling pressure It may come from at least another two sources: 1) CSFC; and 2) privately raised funds with compulsory winding-down clause.

The balance sheet of CSFC, the vehicle the government has been using to stabilize the market after the crash, is unclear. Local media has reported that it had drawn down

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Rmb1.3tr from an Rmb2tr credit line provided by banks; the PBoC had also lent CSFC at least Rmb120bn and might have subscribed to Rmb80bn of its bonds. In turn, CSFC had used the fund to buy A-shares directly or indirectly by lending to brokers to fund their proprietary desks (as discussed earlier), and subscribing to ETFs and mutual funds. The equity base of CSFC, after the increase on July 3rd (most likely funded by PBoC), is only Rmb100bn while it may be carrying Rmb1tr+ stock positions by now (the size is likely still rising by the day based on our assessment). So unless the government will treat CSFC as another bad bank and allows it to carry the losses “indefinitely”, at certain point, CSFC may sell to reduce its stock exposure. An “indefinite” holding period is certainly possible – it’s how the government had dealt with the last round of bad debts in the banking system, i.e., by shifting them to bad banks and never crystalizing the losses. But even under such a scenario, there may be unintended consequences. For example, these loans to fund stock purchases have expanded RMB supply. Unless the government sterilizes elsewhere, particularly if the government has to buy Rmb trillions more stocks in the market going forward, property bubble risk may rise and RMB may come under pressure. If it sterilizes, real business may suffer from less available credit as a result. Obviously the ideal scenario is if CSFC ultimately sells the stocks on its book at a profit, similar to what the US government managed to do with its capital injection into a few banks. However, we judge this outcome unlikely given the highly inflated valuation we mentioned on the front page of the report.

Another potential selling pressure may come from privately raised funds, i.e. the onshore hedge funds, with winding-down clause. In recent weeks, several high-profile private funds had been forced to liquidate, as their fund NAV declined to a level below the agreed liquidation threshold. By July 15th, some 300 registered private funds (2% of the total) reported NAV below Rmb0.8/share, a common-used liquidation level. Under normal market conditions, investors in the funds often agree not to liquidate. However, during the recent market turmoil, many investors were less lenient. We believe that broker TAM and funds’ TAMC are heavy investors in these funds.

As of May 2015, total AUM of equity hedge funds amounted to Rmb1,147bn, up from Rmb894bn in early Feb (A-share fund flows analysis, Jun 8).

Contagion risk We believe contagion risk of any major stock-related losses in the financial system is high because of high leverage of the FIs, and more important, low transparency and the reliance on implicit guarantees in the market.

To start with, the capital base of the key FIs relative to their assets is thin (Table 2). This is especially so if we take into account their potential off-balance sheet liabilities.

Table 2: Asset to equity ratio of key FIs On-BS Asset to Assets under On/off-BS assets Latest Assets, Equities, equity ratio management, to equity ratio reporting Rmb bn Rmb bn (x) Rmb bn * (x) period Banks 178,776 12,977 13.8 180,000 27.6 1Q15 Insurers 10,159 1,326 7.7 na 7.7 2014 Brokers 8,270 1,300 6.4 10,230 14.2 1H15 Trust cos na 329 na 14,410 43.7 1Q15 Total 197,205 15,932 12.4 204,640 25.2 Source: CEIC, CTA, BofA Merrill Lynch Global Market * Banks' refer to bank WMP as of May 2015; broker's refers to broker TAM

This high leverage by itself is not alarming in the sense that it is the natural order of the financial business globally. However, there are a few factors in China that make the financial system particularly vulnerable to major losses in our view, although it appears more stable in times of small losses.

China: An Equity Strategist’s Diary | 27 July 2015 9

One is that most of the FIs are intertwined via direct equity stake, product distribution and channeling, i.e. cross-fertilization of products (Shadow banking monitor 22: web of connections, Jan 15). When losses are small, the companies tend to cross subsidize each other to cover up losses, sometimes encouraged by the government (banks typically have the strongest bargaining power during the process). This has helped to stabilize the market over the past few years but greatly strengthened the public perception of implicit guarantees behind many financial products, including bank WMP, broker TAM, funds’ TAMC, trust and bond. However, when the losses are major and when some FIs are unwilling or unable to foot the bill, the psychological shock to the market can be severe.

Unless the government is prepared to shoulder the ultimate stock-market related losses by itself, via CSFC or other vehicles, various financial products funding the leverage may suffer from trillions of Rmb losses when the dust finally settles, by our estimate. Given the particularly-thin capital base of the front line FIs, including brokers, trusts and TAMCs, we suspect that it’s a matter of time before banks may have to face the music - bank WMP is by far the largest indirect leverage provider. Banks can decide, voluntarily or forced by the potential of social unrest, to take the losses on their book, which means their capital base would suffer severely. If they decide to pass on the losses to WMP buyers, we expect the shadow banking sector to wobble. We believe that the natural reaction of WMP buyers is to stop buying, given that they have been buying based on implicit guarantees and have little visibility as to which products are supported given the low transparency in the financial system. That effectively would be a bank-run in China’s shadow banking sector because bank WMP is by far the largest “depositor” in the shadow bank.

It’s possible that banks may take the losses on their books without explicitly acknowledging it, i.e. not marking to the market. In this case, we expect them to be much more cautious granting loans going forward as they would know their balance sheets are weak – that’s how the Japanese banks behaved post the bust of the property bubble.

Whichever way we look at this, what just happened in the A-share market will likely have profound impact on China’s economy and financial system one way or another, by our assessment.

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Shadow Banking Update Table 3: An overview of China's shadow banking financing % of bank 4Q14 loans growth (Rmb bn) 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 (4Q14) yoy Rmb bank loans 54,553 57,013 59,408 61,275 62,757 65,511 67,836 70,036 71,649 74,662 77,387 79,332 81,430 85,036 88,020 100.0% 13.7% Key shadow banking categories Wealth management products* 4,570 5,290 6,010 6,730 7,100 8,200 9,080 9,918 10,240 12,200 12,650 13,825 15,000 NA NA 18.4% 46.5% Trust ** 4,811 5,302 5,538 6,320 7,471 8,731 9,455 10,131 10,907 11,727 12,478 12,948 13,980 14,410 NA 17.2% 28.2% Corporate bonds 5,242 5,638 6,069 6,803 7,497 8,254 8,714 9,030 9,308 9,695 10,604 11,174 11,690 12,071 12,619 14.4% 25.6% - LGFV bonds 1,009 1,138 1,291 1,518 1,829 2,092 2,314 2,423 2,599 2,888 3,051 3,935 4,185 4,221 4,158 5.1% 61.0% * Wealth management products channel funds to financial products including trust and corporate bond. Source: China Trustee Association, CBRC, Wind, BofA Merrill Lynch Global Research

Table 4: Total Social Financing (TSF) monthly increase (Rmb bn) Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 TSF 1967 274 958 1136 681 1146 1695 2047 1356 1241 1056 1220 1860 Loan in Local Currency 1079 385 703 857 548 853 697 1471 1144 992 805 851 1328 Loan in Foreign Currency 36 -17 -20 -51 -72 -3 54 21 -15 0 -27 8 56 Entrusted Loan 262 122 175 161 138 127 455 83 130 111 34 32 141 Trust Loan 120 -16 -52 -33 -22 -31 210 5 4 -8 -5 -19 54 Banker's Acceptance Bill 145 -416 -112 -141 -241 -67 61 195 -59 -91 -7 95 -102 Net Corporate Bond Financing 263 143 193 234 259 181 76 182 67 132 159 153 236 Non-Financial Enterprise Equity 15 33 22 61 28 38 66 53 54 64 60 58 136 Financing Source: CEIC, BofA Merrill Lynch Global Research

Table 5: Total Social Financing (TSF) (monthly) (%YoY) Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 TSF bal growth, %YoY 17.1 17.1 16.2 15.8 15.4 15.2 15.4 14.5 14.8 13.8 13.2 12.8 12.5 RMB loan, %YoY 13.5 13.5 13.3 13.3 13.2 13.4 13.7 13.6 14.2 13.9 13.8 13.6 13.7 FX loan, %YoY 19.0 19.0 19.7 14.6 12.0 11.5 11.4 6.7 2.1 (1.8) (3.1) (2.4) (1.8) Entrusted loan, %YoY 48.3 48.3 43.8 41.2 39.3 35.5 36.7 30.4 30.7 28.0 26.0 23.2 21.0 Trust loan, %YoY 21.5 21.5 17.0 13.4 11.9 8.9 10.7 8.4 6.9 4.5 3.6 3.0 1.7 Bankers’ acceptance bills, %YoY 12.5 12.5 5.8 3.8 0.8 (0.3) (1.9) (5.7) (4.7) (8.8) (9.9) (8.5) (11.5) Corp bonds, %YoY 22.7 22.7 23.1 23.8 25.1 25.2 25.6 27.0 26.4 24.5 21.6 19.7 19.0 Non-fin enterprise equity 9.3 9.3 9.5 11.0 11.6 12.2 12.9 13.0 14.0 14.7 14.5 15.6 18.9 financing, %YoY Source: CEIC, BofA Merrill Lynch Global Research

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PBOC officially announce total social financing (TSF) balance on Feb 10 for the first time. Its balance growth has been declining in the past four months (+12.5% in Jun-15 vs +12.8% in May-15) marking the lowest YoY growth since May 2006.

Chart 5: Total Social Financing (TSF) balance growth YoY% (monthly) % % 30 120

100

20 80

60

10 40

20

0 0 Jun-12 Jun-13 Jun-14 Jun-15 Mar-12 Mar-13 Mar-14 Mar-15 Dec-12 Dec-13 Dec-14 Sep-12 Sep-13 Sep-14

TSF bal growth, %YoY Trust loan, %YoY (rhs) Corp bonds, %YoY (rhs)

Source: CEIC, BofA Merrill Lynch Global Research

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WMP

WMP issuance growth in number slumped to +7.7% YoY by the week of Jun 28 from +44.6% YoY by the week of Apr 26 on a 4-week trailing basis.

Chart 6: The number of WMPs issued (trailing four weeks YoY growth) 2,000 100% Unit 1,800 90% 1,600 80% 1,400 70% 1,200 60% 1,000 50% 800 40% 600 30% 400 20% 200 10% - 0% 5-4-2014 7-6-2014 9-7-2014 2-1-2015 4-5-2015 6-7-2015 4-13-2014 5-25-2014 6-15-2014 7-27-2014 8-17-2014 9-28-2014 11-9-2014 1-11-2015 2-22-2015 3-15-2015 4-26-2015 5-17-2015 6-28-2015 The number of WMPs issued 10-19-2014 11-30-2014 12-21-2014 Trailing four weeks YoY growth

Source: Wind, BofA Merrill Lynch Global Research

During Apr 19 – Jun 28, number of WMPs sold with a yield <=2% p.a. reached 272, yield of 2-3% p.a. at 274, yield pf 3-5% p.a. at 5,668, and yield >=5% p.a. at 9,739.

Chart 7: The number of WMPs issued, broken down by expected returns (weekly) 2,000 Unit 1,800 1,600 1,400 1,200 1,000 800 600 400 200 - 5-4-2014 7-6-2014 9-7-2014 2-1-2015 4-5-2015 6-7-2015 4-13-2014 5-25-2014 6-15-2014 7-27-2014 8-17-2014 9-28-2014 11-9-2014 1-11-2015 2-22-2015 3-15-2015 4-26-2015 5-17-2015 6-28-2015 <=2% 2-3% 3-5% 10-19-2014 5-8% 11-30-2014 12-21-2014 >8% Unknown

Source: Wind, BofA Merrill Lynch Global Research

China: An Equity Strategist’s Diary | 27 July 2015 13

The percentage of WMPs sold with a yield of 3-5% p.a. had a clear increase since early April.

Chart 8: Percentage of the number of WMPs issued, broken down by expected returns (weekly)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1-4-2015 2-1-2015 3-1-2015 6-7-2015 6-8-2014 7-6-2014 8-3-2014 1-18-2015 2-15-2015 3-15-2015 3-29-2015 4-12-2015 4-26-2015 5-10-2015 5-24-2015 6-21-2015 4-13-2014 4-27-2014 5-11-2014 5-25-2014 6-22-2014 7-20-2014 8-17-2014 8-31-2014 9-14-2014 9-28-2014 11-9-2014 12-7-2014 10-12-2014 10-26-2014 11-23-2014 12-21-2014 <=2% 2-3% 3-5% 5-8% >8% Unknown

Source: Wind, BofA Merrill Lynch Global Research

Average return of WMPs remained relatively stable

Chart 9: Banks' Wealth Management Product Weighted Average Rate of Return (BWMPR) 6

5 %

4

3

2

1

0 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14

Source: CEIC, BofA Merrill Lynch Global Research

14 China: An Equity Strategist’s Diary | 27 July 2015

Percentage of WMPs invested in stocks raised slightly to 7% during week of Jun 28 from 5% in weekly of Apr 12.

Chart 10: Percentage of WMPs issued that invested in various asset classes (weekly) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 5-4-2014 7-6-2014 9-7-2014 2-1-2015 4-5-2015 6-7-2015 4-13-2014 5-25-2014 6-15-2014 7-27-2014 8-17-2014 9-28-2014 11-9-2014 1-11-2015 2-22-2015 3-15-2015 4-26-2015 5-17-2015 6-28-2015 Stocks 10-19-2014 11-30-2014 12-21-2014 Bonds Rates Bills Others Bills, credits, currencies, & commodities

Source: Wind, BofA Merrill Lynch Global Research

During Jun 7 -Jun 28 (4 weeks), 3,523 WMPs were sold with duration <3 months vs. 2,103 >3 months, while during previous 4 weeks, 3,804 < 3 months vs. 2,167 >3 months.

Chart 11: The number of WMPs issued, broken down by durations (weekly) 2,000 Unit 1,800 1,600 1,400 1,200 1,000 800 600 400 200 - 5-4-2014 7-6-2014 9-7-2014 2-1-2015 4-5-2015 6-7-2015 4-13-2014 5-25-2014 6-15-2014 7-27-2014 8-17-2014 9-28-2014 11-9-2014 1-11-2015 2-22-2015 3-15-2015 4-26-2015 5-17-2015 6-28-2015 10-19-2014 11-30-2014 12-21-2014 <1M 1-3M 3-6M 6-12M 12-24M >24M Unknown

Source: Wind, BofA Merrill Lynch Global Research

China: An Equity Strategist’s Diary | 27 July 2015 15

During the period, percentage of WMPs sold with durations <3 months stayed stable around 65%.

Chart 12: Percentage of the number of WMPs issued, broken down by durations (weekly)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 5-4-2014 7-6-2014 9-7-2014 2-1-2015 4-5-2015 6-7-2015 4-13-2014 5-25-2014 6-15-2014 7-27-2014 8-17-2014 9-28-2014 11-9-2014 1-11-2015 2-22-2015 3-15-2015 4-26-2015 5-17-2015 6-28-2015

<1M 1-3M 10-19-2014 11-30-2014 3-6M 12-21-2014 6-12M

Source: Wind, BofA Merrill Lynch Global Research

During Jun 21 –Jul 12 (4 weeks), rural commercial bank issued 50% less WMPs than previous 4 weeks, followed by city commercial banks with a growth rate of -12% sequentially.

Chart 13: The number of WMPs issued, broken down by issuing institutions (weekly) 2000 Unit 1800 1600 1400 1200 1000 800 600 400 200 0 5-4-2014 7-6-2014 9-7-2014 2-1-2015 4-5-2015 6-7-2015 4-13-2014 5-25-2014 6-15-2014 7-27-2014 8-17-2014 9-28-2014 11-9-2014 1-11-2015 2-22-2015 3-15-2015 4-26-2015 5-17-2015 6-28-2015 10-19-2014 11-30-2014 12-21-2014 4 large SOE bank Joint-stock bank City commercial bank Rural commercial bank Others

Source: Wind, BofA Merrill Lynch Global Research

16 China: An Equity Strategist’s Diary | 27 July 2015

Shares of 4 large SOE banks, Joint-stock banks and city commercial banks increased back to the previous level after decline in May.

Chart 14: Percentage of WMPs issued, broken down by issuing institutions (weekly)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 5-4-2014 7-6-2014 9-7-2014 2-1-2015 4-5-2015 6-7-2015 4-13-2014 5-25-2014 6-15-2014 7-27-2014 8-17-2014 9-28-2014 11-9-2014 1-11-2015 2-22-2015 3-15-2015 4-26-2015 5-17-2015 6-28-2015 10-19-2014 11-30-2014 12-21-2014 4 large SOE bank Joint-stock bank City commercial bank Rural commercial bank Others

Source: Wind, BofA Merrill Lynch Global Research

Growth of matured WMPs declined to 119% YoY by week of Jul 5, from 145% YoY by week of Jun 14.

Chart 15: The number of WMPs matured (weekly) 2,000 Unit 180% 1,800 160% 1,600 140% 1,400 120% 1,200 100% 1,000 80% 800 60% 600 400 40% 200 20% 0 0% 6-1-2014 8-3-2014 2-8-2015 3-1-2015 5-3-2015 7-5-2015 3-30-2014 4-20-2014 5-11-2014 6-22-2014 7-13-2014 8-24-2014 9-14-2014 10-5-2014 12-7-2014 1-18-2015 3-22-2015 4-12-2015 5-24-2015 6-14-2015 10-26-2014 11-16-2014 12-28-2014 The number of WMPs matured Trailing four weeks YoY growth

Source: Wind, BofA Merrill Lynch Global Research

China: An Equity Strategist’s Diary | 27 July 2015 17

During Jun 14 – Jul 5 (4 weeks), number of WMPs coming due dropped to1,091 with actual yields > 5 % p.a. from 1,462 in previous 4 weeks.

Chart 16: The number of WMPs matured, broken down by actual returns (weekly) Unit 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 - 6-1-2014 8-3-2014 2-8-2015 3-1-2015 5-3-2015 7-5-2015 3-30-2014 4-20-2014 5-11-2014 6-22-2014 7-13-2014 8-24-2014 9-14-2014 10-5-2014 12-7-2014 1-18-2015 3-22-2015 4-12-2015 5-24-2015 6-14-2015 10-26-2014 11-16-2014 12-28-2014 <0% 0-2% 2-3% 3-5% 5-8% >8% Unknown

Source: Wind, BofA Merrill Lynch Global Research

Over the period, a significant percentage of WMPs matured did not disclose their yields. This could be due to data lag.

Chart 17: Percentage of the number of WMPs matured, broken down by actual returns (weekly)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 6-1-2014 8-3-2014 2-8-2015 3-1-2015 5-3-2015 7-5-2015 3-30-2014 4-20-2014 5-11-2014 6-22-2014 7-13-2014 8-24-2014 9-14-2014 10-5-2014 12-7-2014 1-18-2015 3-22-2015 4-12-2015 5-24-2015 6-14-2015 <0% 0-2% 2-3% 3-5%10-26-2014 11-16-2014 5-8% 12-28-2014 >8% Unknown

Source: Wind, BofA Merrill Lynch Global Research

18 China: An Equity Strategist’s Diary | 27 July 2015

Over the period, percentages of matured WMPS invested in interests declined while those invested in stocks and bonds increased slightly.

Chart 18: Percentage of WMPs matured that invested in various asset classes (weekly)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 6-1-2014 8-3-2014 2-8-2015 3-1-2015 5-3-2015 7-5-2015 3-30-2014 4-20-2014 5-11-2014 6-22-2014 7-13-2014 8-24-2014 9-14-2014 10-5-2014 12-7-2014 1-18-2015 3-22-2015 4-12-2015 5-24-2015 6-14-2015 10-26-2014 11-16-2014 12-28-2014 Stocks Bonds Interests Bills, credits, currencies & commoditoes Others

Source: Wind, BofA Merrill Lynch Global Research

Table 6: Top Bank WMP issuers’ actual return vs. promised return (T12M) Actual return > promised Actual return = promised Actual return < promised No return data return return return as % of as % of as % of as % of as % of as % of as % of as % of Total # bank's market # bank's market # bank's market # bank's market number of total total total total total total total total products Total 110 0 29,680 39 35 0 45,352 60 75,177 Bank of Communications - - - 1,978 26 7 - - - 5,627 74 12 7,605 China Construction Bank 19 0 17 3,150 53 11 5 0 14 2,766 47 6 5,940 China Minsheng Bank 2 0 2 1,201 31 4 2 0 6 2,688 69 6 3,893 China Merchants Bank 3 0 3 2,700 73 9 - - - 995 27 2 3,698 Bank of China ------3,685 100 8 3,685 Ping An Bank 6 0 5 1,169 37 4 - - - 2,024 63 4 3,199 Guangdong Development Bank - - - 1,646 53 6 1 0 3 1,468 47 3 3,115 Bank of Nanjing 9 0 8 2,250 90 8 6 0 17 231 9 1 2,496 Agricultural Bank of China - - - 218 14 1 - - - 1,348 86 3 1,566 Commercial Bank of China ------1,464 100 3 1,464 Industrial Bank - - - 731 58 2 - - - 535 42 1 1,266 Bohai Bank - - - 1,073 99 4 - - - 7 1 0 1,080 Shanghai Pudong Development ------1,059 100 2 1,059 Bank CITIC Bank 1 0 1 755 72 3 - - - 298 28 1 1,054 Bank of Shanghai 1 0 1 881 90 3 2 0 6 100 10 0 984 China Postal Savings Bank 4 0 4 850 96 3 3 0 9 27 3 0 884 Jiangsu Bank ------874 100 2 874 GD Shunde Rural Commercial 3 0 3 574 72 2 - - - 216 27 0 793 Bank Hangzhou Bank - - - 341 44 1 - - - 429 56 1 770 Dongguan Bank - - - 625 83 2 - - - 125 17 0 750 Bank of Ningbo ------692 100 2 692 Bank of Beijing ------655 100 1 655 Qingdao Bank - - - 297 56 1 1 0 3 232 44 1 530 Jinzhou Bank 2 0 2 442 85 1 - - - 76 15 0 520 Guangdong Nan Yue Bank - - - 278 53 1 1 0 3 241 46 1 520 China Everbright Bank - - - 236 45 1 - - - 284 55 1 520 Baoshang Bank 1 0 1 174 34 1 - - - 335 66 1 510

China: An Equity Strategist’s Diary | 27 July 2015 19

Table 6: Top Bank WMP issuers’ actual return vs. promised return (T12M) Actual return > promised Actual return = promised Actual return < promised No return data return return return as % of as % of as % of as % of as % of as % of as % of as % of Total # bank's market # bank's market # bank's market # bank's market number of total total total total total total total total products Huishang Bank - - - 313 61 1 - - - 197 39 0 510 Shanghai Rural Commercial Bank - - - 338 68 1 - - - 161 32 0 499 Hebei Bank - - - 288 58 1 - - - 205 42 0 493 China Resources Bank - - - 267 63 1 - - - 159 37 0 426 Beijing Rural Commercial Bank - - - 3 1 0 - - - 417 99 1 420 Guangzhou Rural Commercial - - - 26 6 0 - - - 386 94 1 412 Bank Bank of Wenzhou - - - 66 16 0 - - - 342 84 1 408 Hankou Bank ------399 100 1 399 Ruifeng Bank - - - 13 3 0 - - - 376 97 1 389 Harbin Bank - - - 127 34 0 - - - 248 66 1 375 Nanyang Commercial Bank - - - 144 40 0 2 1 6 218 60 0 364 Longjiang Bank - - - 276 78 1 - - - 77 22 0 353 Suzhou Bank - - - 51 14 0 - - - 302 86 1 353 Huaxia Bank ------349 100 1 349 Xiamen Rural Commercial Bank - - - 227 70 1 - - - 97 30 0 324 Zhejiang Chouzhou Commercial - - - 149 46 1 2 1 6 170 53 0 321 Bank Zhejiang bank ------319 100 1 319 Dalian Bank - - - 108 34 0 - - - 208 66 0 316 Tianjin Rural Commercial Bank - - - 8 3 0 - - - 302 97 1 310 Shengjing Bank - - - 222 72 1 - - - 85 28 0 307 Ningbo Yinzhou Rural - - - 226 75 1 - - - 74 25 0 300 Commercial Bank Chongqing Bank 2 1 2 268 90 1 - - - 27 9 0 297 Bank of Tianjin ------296 100 1 296 Source: Wind, BofA Merrill Lynch Global Research

20 China: An Equity Strategist’s Diary | 27 July 2015

Trust Chart 19 & 20 are based on data supplied by Wind, which covers about half of the collective trust market, which in turn, represents about a quarter of the total trust market in AUM (as reported by the Trust Industry Association). Despite the fairly limited scope of the data, we believe it’s still meaningful for trend watching, especially as a gauge of investors’ risk appetite. In addition, collective trust is generally considered more risky than single trust which largely represents the rest of the trust market.

Total collective trust amount dropped over Jun 20 -Jul 11 (4 weeks) -25% sequentially.

Chart 19: Adjusted number of trusts issued and the total amount raised (weekly)

35,000 Rmb mn The number of trusts issued (adjusted/ unit) Unit 600 30,000 Total amount raised (adjusted/ Rmb mn) 500 25,000 400 20,000 300 15,000 200 10,000 5,000 100 0 0 2008-05-18 2008-08-31 2008-12-14 2009-03-29 2009-07-12 2009-10-25 2010-02-07 2010-05-23 2010-09-05 2010-12-19 2011-04-03 2011-07-17 2011-10-30 2012-02-12 2012-05-27 2012-09-09 2012-12-23 2013-04-07 2013-07-21 2013-11-03 2014-02-16 2014-06-01 2014-09-14 2014-12-28 2015-04-12

Source: Wind, BofA Merrill Lynch Global Research

After adjusting for data lag, trailing four week growth of trust amount raised declined to 23% by week of Jul 11 from 46% by week of Jun 20.

Chart 20: The number of trusts issued and the total amount raised – trailing four weeks YoY growth (adjusted for data lag) Total amount raised trailing four weeks YoY growth (adjusted) 300% The number of trusts issued trailing four weeks YoY growth (adjusted) 250% 200% 150% 100% 50% 0% -50% -100%

2014-03-09 2014-03-30 2014-04-20 2014-05-11 2014-06-01 2014-06-22 2014-07-13 2014-08-03 2014-08-24 2014-09-14 2014-10-05 2014-10-26 2014-11-16 2014-12-07 2014-12-28 2015-01-18 2015-02-08 2015-03-01 2015-03-22 2015-04-12 2015-05-03 2015-05-24 2015-06-14 2015-07-05 Source: Wind, BofA Merrill Lynch Global Research

China: An Equity Strategist’s Diary | 27 July 2015 21

Table 7: The amount of trusts outstanding (quarterly) Change in the as % past 12 of 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 months total Fixed assets, equity and profits Fixed Assets 187 200 208 228 238 252 262 287 299 306 320 359 367 69 Capital Assets 37 41 43 47 44 48 47 53 43 44 43 53 46 3 Loan 28 30 29 31 33 34 32 32 40 38 39 38 38 -2 Investment 105 110 114 130 140 140 154 170 62 201 191 239 258 195 Owner's Equity 170 181 189 203 215 225 236 256 268 275 288 320 329 61 Paid-in Capital 87 91 93 98 100 101 105 112 114 119 129 139 140 25 Loss compensation reserve 5 5 5 6 7 7 7 9 10 10 10 12 12 3 Retained Earnings 44 49 55 61 65 73 79 85 91 93 94 98 104 14 Operating Income 11 26 40 64 15 35 54 83 18 40 61 95 23 5 Interest Income 1 2 4 5 1 3 4 6 2 3 5 6 1 0 Trust related business Income 5 18 29 47 12 27 40 61 14 28 42 65 13 -1 Investment Income 1 4 6 9 2 5 8 13 2 7 12 20 7 5 Total Profiots 8 19 29 44 11 26 39 57 13 29 43 64 17 4 Per Capita Profits (Rmb mn) 1 1 2 3 1 2 2 3 1 1 2 3 1 0

Trust assets (by source) Assembled Funds Trust 1,500 1,588 1,699 1,883 2,095 2,210 2,359 2,715 2,928 3,290 3,771 4,292 4,793 1,865 70% Single funds Trust 3,603 3,681 4,264 5,102 6,094 6,697 7,222 7,593 8,149 8,485 8,418 8,748 8,662 513 19% Assets Management Trust 199 269 356 486 542 548 551 599 651 704 759 939 954 304 11% Total 5,302 5,538 6,320 7,471 8,731 9,455 10,131 10,907 11,728 12,478 12,948 13,980 14,410 2,682 100%

Trust assets (by function) Financing 2,632 2,721 3,098 3,651 4,259 4,588 4,878 5,209 5,154 5,071 4,909 4,704 4,514 -640 -24% Investment 2,007 2,093 2,320 2,678 2,948 3,114 3,310 3,549 3,809 4,120 4,484 4,712 5,118 1,310 49% Management 663 724 903 1,142 1,525 1,753 1,943 2,149 2,766 3,288 3,555 4,564 4,778 2,012 75% Total 5,302 5,538 6,320 7,471 8,731 9,455 10,131 10,907 11,728 12,478 12,948 13,980 14,410 2,682 100%

Capital trust (by use of fund) Loan 1,906 2,097 2,442 2,999 3,796 4,215 4,622 4,858 5,134 5,273 5,172 5,271 5,318 184 8% Transactional Financial Asset 386 439 525 659 762 802 873 938 1,015 1,177 1,385 1,658 1,990 974 41% Available for Sale & Held to Maturity 895 844 1,011 1,225 1,421 1,547 1,732 1,909 2,116 2,398 2,512 2,812 3,052 936 39% Long Term Equity Investment 673 671 690 692 712 769 825 938 1,021 1,041 1,065 1,105 1,103 81 3% Leasing 9 13 13 14 12 11 10 10 9 8 7 6 6 -3 0% Redemptory For Sale 92 121 149 146 160 175 167 189 297 286 327 380 412 115 5% Due from the Industry 590 564 568 542 541 677 708 702 828 890 960 1,020 781 -47 -2% Others 552 522 567 708 786 711 644 765 657 701 762 788 794 137 6% Total 5,102 5,269 5,964 6,985 8,189 8,907 9,581 10,309 11,077 11,774 12,189 13,040 13,455 2,378 100%

Capital trust (by investment) Basic Industries 1,115 1,192 1,392 1,650 2,111 2,391 2,488 2,603 2,745 2,720 2,658 2,769 2,792 46 2% Industrial & Commercial 1,101 1,285 1,494 1,861 2,272 2,619 2,826 2,900 3,085 3,222 3,147 3,133 3,161 76 3% Property 687 675 677 688 770 812 894 1,034 1,152 1,262 1,265 1,309 1,336 184 8% Financial Institutions 708 636 656 713 772 951 1,090 1,237 1,446 1,640 1,918 2,268 2,119 673 28% Bond 251 313 448 533 576 616 663 688 818 952 1,107 1,155 1,265 447 19% Stocks 183 182 185 213 257 255 303 303 314 341 430 552 777 463 19% Capital market fund 25 36 41 60 77 59 67 76 104 116 130 142 186 82 3% Others 1,032 950 1,071 1,266 1,354 1,203 1,250 1,467 1,413 1,523 1,534 1,712 1,820 407 17% Total 5,102 5,269 5,964 6,985 8,189 8,907 9,581 10,309 11,077 11,774 12,189 13,040 13,455 2,378 100%

Featured business Bank-trust Co-operation 1,793 1,769 1,841 2,030 2,113 2,085 2,168 2,185 2,470 2,672 2,903 3,096 3,042 572 67% Government-trust Co-operation 251 325 390 502 655 804 824 961 1,075 1,108 1,102 1,185 1,218 143 17% PE Funds Co-operation 180 202 219 257 271 255 263 254 261 279 287 333 381 119 14% PE 41 41 36 41 42 46 45 50 53 60 62 61 63 10 1% RIETS 37 41 39 30 26 18 16 14 13 12 12 12 12 -1 0% QDII 1 2 5 7 7 7 8 7 8 10 10 14 19 11 1% Total 2,303 2,380 2,531 2,867 3,112 3,215 3,323 3,472 3,881 4,140 4,377 4,701 4,735 853 100% Source: Wind, BofA Merrill Lynch Global Research

22 China: An Equity Strategist’s Diary | 27 July 2015

Based on the assumption of a 2-years average duration of trust products, the amount of trusts coming due will peak in Dec 2015, and then fell down gradually

Chart 21: Amount of trust products coming due each month

120 Rmb bn

100

80

60

40

20

0 Jul-15 Jul-10 Oct-16 Oct-11 Apr-14 Apr-09 Jan-13 Jun-13 Jan-08 Jun-08 Mar-17 Mar-12 Feb-15 Feb-10 Dec-15 Dec-10 Nov-13 Nov-08 Aug-12 Sep-14 Sep-09 May-16 May-11 Source: Wind, BofA Merrill Lynch Global Research

Chart 22: Amount of trust products coming due each month (ex. interest payment)

250

200

150

100

Total Total Size (RMB Bn) 50

-

Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- 14 14 14 14 14 14 14 14 14 15 15 15 15 15 15 15 15 15 15 15 15 16 16 16 16 16 16 16 Others 4.8 10. 23. 6.6 17. 19. - 19. 7.6 0.4 - 7.5 32. 22. 31. 53. - 10. 24. - - - 20. 17. 44. 13. - 26. Basic Industry 27. - 26. 34. 51. - - 28. 35. - 17. 39. - 33. - 31. 18. - 62. - 10. 23. - 38. 27. 25. 21. 20. Com - 13. - - 26. 19. 15. 29. 28. - 13. 16. 32. 6.4 - 15. 25. - 12. 28. 13. - 12. 27. - 0.2 - - Property 16. 12. - 37. - - 34. 24. 12. 32. 41. - 114 - 40. - 79. 28. 78. - 67. 19. 25. 45. 13. 35. 17. - Finance 118 - - 7.8 - 12. - 49. 15. 34. 31. - - - 54. - 10. 15. 40. 14. 54. 64. 30. 6.7 - - - -

Source: Use-Trust Studio, BofA Merrill Lynch Global Research

China: An Equity Strategist’s Diary | 27 July 2015 23

Unless otherwise stated, for the rest of the “Trust” section, the data is from Hexun. Again it covers only part of the collective trust market. Due to a relatively small sample base and often significant data lag, the data may sometimes present a misleading picture.

Table 8: Amount of trusts issued, broken down by industries (monthly) Size (Rmb mn) Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Industrials and commercials 12,937 8,700 7,130 7,135 8,812 4,032 6,888 6,088 8,041 6,437 1,457 2,188 3,668 2,310 2,505 Infrastructure 8,898 15,806 20,592 16,451 17,975 15,569 15,665 20,131 28,084 16,081 9,456 19,542 16,786 19,096 20,812 Financials Property 19,448 33,421 18,904 15,452 12,492 4,499 5,799 7,918 13,487 10,756 6,614 11,317 7,127 7,110 9,897 Subtotal 41,283 57,927 46,627 39,038 39,279 24,101 28,353 34,138 49,612 33,275 17,527 33,047 27,581 28,517 33,214 Source: Hexun, BofA Merrill Lynch Global Research

Chart 23: Amount of trusts issued, broken down by industries (weekly)

25,000 Rmb mn

20,000

15,000

10,000

5,000

0 2014-W7 2015-W3 2015-W7 2014-W11 2014-W15 2014-W19 2014-W23 2014-W27 2014-W31 2014-W35 2014-W39 2014-W43 2014-W47 2014-W51 2015-W11 2015-W15 2015-W19 2015-W23 2015-W27

Industrials and commercials Infrastructure Financials Property

Note: The X axis is for the number of a week in a year Data may be significantly revised due to serious data lag Source: Hexun, BofA Merrill Lynch Global Research

Table 9: Expected returns of trusts issued, broken down by industries (monthly) Monthly avg yield (pa %) 4-2013 5-2014 6-2014 7-2014 8-2014 9-2014 10-2014 11-2014 12-2014 1-2015 2-2015 3-2015 4-2015 5-2015 6-2015 Manufacturing & distribution 9.1 9.6 9.6 9.6 9.6 9.6 9.5 9.9 9.8 9.6 9.3 9.1 9.4 9.4 9.6 Infrastructure 9.8 10.1 10.0 10.0 9.9 10.0 9.8 10.0 10.0 10.0 10.0 10.1 10.1 10.1 10.2 Financial investment Property 10.4 10.4 10.1 10.2 10.0 10.2 10.7 10.5 10.2 10.2 10.2 10.2 10.1 10.1 10.0 Bank lending rate ( 3 years) 6.4 6.4 6.4 6.4 6.4 6.4 6.4 6.0 6.0 6.0 6.0 5.8 5.8 5.5 5.3 Source: Hexun, BofA Merrill Lynch Global Research

24 China: An Equity Strategist’s Diary | 27 July 2015

Based on Hexun’s data, the expected return for property dropped to 10.7% p.a. by week of Jul 5 from 9.7% p.a. by week of Apr 12, while that of industrials increased to 9.5% p.a. from 9.0% p.a. during the same period.

Chart 24: Expected returns of trusts issued, broken down by industries (weekly) p.a. % 12 11 10 9 8 7 6 5 2014-W2 2014-W7 2015-W5 2013-W35 2013-W40 2013-W45 2013-W50 2014-W12 2014-W17 2014-W22 2014-W27 2014-W32 2014-W37 2014-W42 2014-W47 2014-W52 2015-W10 2015-W15 2015-W20 2015-W25

Industrials and commercials Infrastructure Financials Property

Source: Hexun, BofA Merrill Lynch Global Research Data may be significantly revised due to serious data lag

Chart 25: Durations of trusts issued, broken down by industries (weekly) 45 Month 40

35

30

25

20

15

10

5 2014-W2 2014-W7 2015-W5 2013-W35 2013-W40 2013-W45 2013-W50 2014-W12 2014-W17 2014-W22 2014-W27 2014-W32 2014-W37 2014-W42 2014-W47 2014-W52 2015-W10 2015-W15 2015-W20 2015-W25

Industrials and commercials Infrastructure Property

Source: Hexun, BofA Merrill Lynch Global Research Data may be significantly revised due to serious data lag

China: An Equity Strategist’s Diary | 27 July 2015 25

Corporate bond

In the past 7 weeks, corporate bonds issued amounted to Rmb717bn, -8.9% sequentially.

Chart 26: The number of corp. bonds issued and the total amount raised (weekly) Unit Rmb bn 180 250 No of issurances (x) (LHS) 160 Issurance amount (Rmb bn) (RHS) 140 200

120 150 100

80 100 60

40 50 20

0 0 6/8/2012 8/3/2012 7/5/2013 6/6/2014 8/1/2014 5/8/2015 7/3/2015 2/17/2012 4/13/2012 9/28/2012 1/18/2013 3/15/2013 5/10/2013 8/30/2013 2/14/2014 4/11/2014 9/26/2014 1/16/2015 3/13/2015 10/28/2011 12/23/2011 11/23/2012 10/25/2013 12/20/2013 11/21/2014 * Our corporate bond statistic includes enterprise bond, corporate bonds, MTN, STFB, and ABS Source: Wind, BofA Merrill Lynch Global Research

On a four-week trailing YoY basis, growth of both amount issued and number issued saw recovery in June after slipping into the negative in March.

Chart 27: The number of corp. bonds issued and the total amount raised – trailing four weeks YoY growth (weekly) 400% No of issurances trailing four weeks YoY growth Issurance amount trailing four weeks YoY growth 300%

200%

100%

0%

-100% 6/8/2012 8/3/2012 7/5/2013 6/6/2014 8/1/2014 5/8/2015 7/3/2015 2/17/2012 4/13/2012 9/28/2012 1/18/2013 3/15/2013 5/10/2013 8/30/2013 2/14/2014 4/11/2014 9/26/2014 1/16/2015 3/13/2015

10/28/2011 12/23/2011 11/23/2012 10/25/2013 12/20/2013 11/21/2014 * Our corporate bond statistic includes enterprise bond, corporate bonds, MTN, STFB, and ABS Source: Wind, BofA Merrill Lynch Global Research

26 China: An Equity Strategist’s Diary | 27 July 2015

The balance of corporate bonds remained a growing trend.

Chart 28: Total amount of corp. bonds outstanding (weekly)

12,000 Corporate bond outstanding (Rmb bn)

10,000

8,000

6,000

4,000

2,000

0 1/2/2015 3/9/2012 8/3/2012 4/5/2013 5/2/2014 8/8/2014 2/20/2015 4/10/2015 5/29/2015 12/2/2011 1/20/2012 4/27/2012 6/15/2012 9/21/2012 11/9/2012 2/15/2013 5/24/2013 7/12/2013 8/30/2013 12/6/2013 1/24/2014 3/14/2014 6/20/2014 9/26/2014 10/14/2011 12/28/2012 10/18/2013 11/14/2014 * Our corporate bond statistic includes enterprise bond, corporate bonds, MTN, STFB, and ABS Source: Wind, BofA Merrill Lynch Global Research

Overall, maturing bond amounts keep increasing, and the next repayment peak will be in Mar-May 2015..

Chart 29: Amount of corporate bond matured excluding interest (monthly)

400 Rmb bn 350

300

250

200

150

100

50

0 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

Corporate bond Maturity amount (Rmb bn)

* Our corporate bond statistic includes enterprise bond, corporate bonds, MTN, STFB, and ABS Source: Wind, BofA Merrill Lynch Global Research

China: An Equity Strategist’s Diary | 27 July 2015 27

Table 10: Outstanding corporate bonds by industry groups Industry group 2006 2007 2008 2009 2010 2011 2012 2013 2014 7/17/2015 Consumer Discretionary 13.1 23.8 33.4 77.9 125.9 184.5 273.4 344.3 396.4 441.1 Automobiles & Components 4.5 9.5 9.0 33.3 45.8 58.7 83.4 105.4 98.8 115.5 Consumer Durables & Apparel 1.7 5.7 7.7 9.0 18.9 42.4 53.1 64.5 68.9 69.3 Consumer Services Ⅱ 2.3 1.0 8.0 14.3 22.6 33.1 43.2 50.6 69.6 88.7 Media Ⅱ 0.7 0.5 1.9 2.8 5.2 9.5 16.7 26.1 31.3 36.2 Retailing 4.0 7.1 6.9 18.5 33.4 40.9 77.1 97.6 127.8 131.5 Consumer Staples 3.4 5.6 3.6 12.1 23.1 37.2 68.8 90.0 121.7 152.5 Food & Staples Retailing Ⅱ 0.9 4.1 2.0 2.9 3.5 7.1 11.4 13.4 20.0 23.9 Food, Beverage & Tobacco 2.5 1.5 1.6 8.9 19.3 29.8 56.9 75.0 99.4 127.0 Household & Personal Products - - - 0.3 0.3 0.3 0.5 1.5 2.3 1.6 Energy 55.6 81.7 136.9 426.8 532.1 659.4 930.7 1,028.7 1,074.0 1,185.5 Energy Ⅱ 55.6 81.7 136.9 426.8 532.1 659.4 930.7 1,028.7 1,074.0 1,185.5 Financials 23.4 42.5 69.0 250.1 327.6 425.0 614.8 768.6 1,310.3 1,624.8 Banks 0.3 0.9 0.9 0.9 0.9 0.9 1.8 2.4 207.7 317.9 Diversified Financials 14.7 24.5 38.3 161.5 231.7 316.4 468.6 602.0 775.5 841.7 Real Estate 8.4 17.0 29.8 87.6 94.9 107.7 144.4 164.1 327.2 465.1 Health Care 2.5 2.7 2.7 3.5 8.5 27.3 43.5 62.6 62.6 70.1 Health Care Equipment & Services - - - - - 5.0 5.4 10.6 10.5 11.0 Pharmaceuticals, Biotechnology & Life Sciences 2.5 2.7 2.7 3.5 8.5 22.3 38.1 52.0 52.1 59.1 Industrials 172.0 228.7 368.3 724.4 1,152.2 1,566.0 2,377.6 2,983.8 3,898.8 4,233.9 Capital Goods 100.8 122.3 227.7 411.8 697.4 1,017.3 1,640.4 2,089.2 2,790.8 3,027.0 Commercial & Professional Services 1.8 1.5 1.9 1.5 1.5 7.0 23.7 34.4 36.4 44.9 Transportation 69.4 104.9 138.7 311.1 453.3 541.7 713.5 860.3 1,071.5 1,162.0 Information Technology 2.0 2.2 1.7 6.7 12.3 27.7 49.6 63.8 83.5 95.9 Semiconductors & Semiconductor Equipment Ⅱ - - 0.1 - 1.3 8.7 10.5 16.0 16.1 16.5 Software & Services - - - 0.0 0.6 1.4 2.4 4.3 3.7 3.4 Technology Hardware & Equipment 2.0 2.2 1.6 6.6 10.4 17.6 36.6 43.5 63.7 75.9 Materials 51.8 68.4 121.7 193.2 348.6 516.9 674.1 801.2 922.5 1,035.4 Materials Ⅱ 51.8 68.4 121.7 193.2 348.6 516.9 674.1 801.2 922.5 1,035.4 Telecommunication Services 53.0 35.8 58.8 68.8 106.8 122.2 110.4 64.6 53.6 45.6 Telecommunication Services Ⅱ 53.0 35.8 58.8 68.8 106.8 122.2 110.4 64.6 53.6 45.6 Utilities 122.4 180.5 322.8 485.6 633.6 856.8 1,052.0 1,189.9 1,277.8 1,327.5 Utilities Ⅱ 122.4 180.5 322.8 485.6 633.6 856.8 1,052.0 1,189.9 1,277.8 1,327.5 Others (unclassified) ------2.4 2.4 Total 499.2 671.7 1,118.8 2,248.9 3,270.5 4,423.0 6,194.9 7,397.5 9,202.4 10,213.5 * The statistic includes enterprise bond, corporate bonds, MTN, STFB, and ABS * Numbers are adjusted to avoid double-counting caused by cross market issuance Source: Wind, BofA Merrill Lynch Global Research

28 China: An Equity Strategist’s Diary | 27 July 2015

In Jun 2015, corporate bond transaction volume in interbank market rose to 37% YoY from 9% in Mar 2015.

Chart 30: Interbank corporate bonds transaction volume (monthly)

7,000 300% Rmb bn 6,000 250%

200% 5,000 150% 4,000 100% 3,000 50% 2,000 0%

1,000 -50%

- -100% Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14

Interbank corporate bonds transaction volume (LHS) YoY% (RHS)

Source: CCDC, BofA Merrill Lynch Global Research *Interbank transactions include: Spot, Repo, Outright Repo *Corporate bonds include: Enterprise (coporate) bonds, middle-term notes, short-term financing bonds, asset-backed securities

Number of corporate bonds with credit ratings or outlooks downgraded jumped in June to 138 from 31 in March.

Chart 31: Number of credit bonds with their credit ratings or outlooks downgraded

Unit Number of bonds with corporate credit ratings or outlooks (主体评级) cut 200

180

160

140

120

100

80

60

40

20

0 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14

Source: Wind, BofA Merrill Lynch Global Research

China: An Equity Strategist’s Diary | 27 July 2015 29

Number of borrowers with credit ratings or outlooks cut surged significantly to 40 in June from 6 in March.

Chart 32: Number of borrowers with their credit ratings or outlooks downgraded

Unit Number of borrowers with credit rating or outlooks cut 70

60

50

40

30

20

10

0 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14

Source: Wind, BofA Merrill Lynch Global Research

Both number and amount of LGFV bond issuance declined during Jun 16-Jul 17 (4 weeks) sequentially.

Chart 33: The number of LGFV bonds issued and the total amount raised (weekly)

Unit Rmb bn 100 120 90 100 80 70 80 60 50 60 40 40 30 20 20 10 0 0 2/3/2012 1/4/2013 3/1/2013 1/2/2015 12/9/2011 3/30/2012 5/25/2012 7/20/2012 9/14/2012 11/9/2012 4/26/2013 6/21/2013 8/16/2013 12/6/2013 1/31/2014 3/28/2014 5/23/2014 7/18/2014 9/12/2014 11/7/2014 2/27/2015 4/24/2015 6/19/2015 10/14/2011 10/11/2013 No of issurances (x) (LHS) Issurance amount (Rmb bn) (RHS)

Source: Wind, BofA Merrill Lynch Global Research

30 China: An Equity Strategist’s Diary | 27 July 2015

YoY growths of LGFV bond issuance remained sluggish in 2Q15.

Chart 34: The number of LGFV bonds issued and the total amount raised – trailing four weeks YoY growth 1200%

1000%

800%

600%

400%

200%

0%

-200% 6/8/2012 8/3/2012 7/5/2013 6/6/2014 8/1/2014 5/8/2015 7/3/2015 2/17/2012 4/13/2012 9/28/2012 1/18/2013 3/15/2013 5/10/2013 8/30/2013 2/14/2014 4/11/2014 9/26/2014 1/16/2015 3/13/2015 10/28/2011 12/23/2011 11/23/2012 10/25/2013 12/20/2013 11/21/2014

No of issurances trailing four weeks YoY growth Issurance amount trailing four weeks YoY growth

Source: Wind, BofA Merrill Lynch Global Research

Since peaking in Nov-14, LGFV bonds’ share of corporate bond market has been declining gradually. Latest figure stood at 44% as of Jun-15.

Chart 35: LGFV bond outstanding as % of total corporate bond outstanding

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Jul-14 Jul-13 Jul-12 Jul-11 Jul-10 Jul-09 Jul-08 Jul-07 Mar-15 Mar-14 Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 Mar-08 Nov-14 Nov-13 Nov-12 Nov-11 Nov-10 Nov-09 Nov-08 Nov-07

LGFV bond as % of corprate bond

* Our corporate bond statistic includes enterprise bond, corporate bonds, MTN, STFB, and ABS Source: Wind, BofA Merrill Lynch Global Research

China: An Equity Strategist’s Diary | 27 July 2015 31

Trailing 3-months LGFV bond issuance’ share of corporate bond issuance rebounded to 26% in Jun-15 after bottoming at 18% in Mar-15.

Chart 36: LGFV bond issuance amount as % of total corporate bond issuance

60%

50%

40%

30%

20%

10%

0% Jul-14 Jul-13 Jul-12 Jul-11 Jul-10 Jul-09 Jul-08 Jul-07 Mar-15 Mar-14 Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 Mar-08 Nov-14 Nov-13 Nov-12 Nov-11 Nov-10 Nov-09 Nov-08 Nov-07

LGFV bond issuance amount as % of corporate bond issuance (T3M)

* Our corporate bond statistic includes enterprise bond, corporate bonds, MTN, STFB, and ABS Source: Wind, BofA Merrill Lynch Global Research

Local govt bond (MOF) outstanding rose drastically from Rmb1.2tr in May-15 to Rmb1.9tr in Jun-15.

Chart 37: Total amount of LGFV bonds outstanding (including MoF backed bonds) -monthly

5,000 LGFV bond outstanding (Rmb bn) 4,500 Local govt bond (MOF) outstanding (Rmb bn) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14

Source: CEIC, Wind, BofA Merrill Lynch Global Research

32 China: An Equity Strategist’s Diary | 27 July 2015

Table 11: LGFV bonds outstanding by provinces and municipal cities (yearly & as of Jul 15, 2015) (Rmb bn) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 7/15/2015 Beijing 5 8 12 17 17 64 90 142 187 216 262 259 Qinghai - - - - 1 2 2 4 19 28 47 49 Tianjin - 2 5 9 10 27 48 62 103 179 268 287 Jiangsu 4 14 11 20 31 68 101 139 270 376 596 620 Chongqing 2 3 6 8 13 23 33 47 81 126 201 209 Shanghai 8 14 18 25 40 81 83 91 116 141 157 160 Zhejiang 1 5 7 15 19 41 54 73 132 170 256 272 Anhui - - 5 5 8 25 39 47 85 112 164 176 Gansu - - 1 1 - 12 12 22 34 52 71 73 Hunan - - 2 3 3 12 30 39 74 119 185 203 Fujian - 2 3 8 6 11 16 23 60 96 145 162 Shaanxi - - - 1 5 7 14 24 49 77 120 126 Jiangxi - 1 2 2 4 9 16 24 46 75 107 113 Guangxi - 1 1 2 2 5 13 18 43 55 94 101 Hubei - 1 3 5 5 8 12 18 52 91 158 163 Yunnan - - - - 3 4 17 19 32 54 105 121 Liaoning - - - 1 1 4 14 25 56 86 144 149 Sichuan - 2 4 2 5 10 25 38 78 113 173 187 Inner Mongolia - - - 1 2 4 11 17 30 41 57 61 Shandong - - 2 3 4 12 15 31 63 97 192 207 Guangdong - 5 4 5 11 25 42 62 96 141 213 214 Heilongjiang - - - - - 4 5 11 27 37 48 49 Guizhou ------4 6 27 39 73 81 Hebei - - 2 3 3 6 8 15 29 41 78 83 Xinjiang - - - 0 0 0 4 6 25 41 67 73 Jilin - - 1 1 2 3 4 9 15 20 29 30 Shanxi - - - - - 2 4 9 24 37 55 59 Ningxia - - - 1 1 1 2 4 4 5 8 8 Henan 1 1 4 6 6 9 10 17 44 76 110 110 Hainan ------2 2 5 10 9 Tibet ------Total 21 58 88 144 198 478 729 1,044 1,905 2,745 4,194 4,415 Source: Wind, BofA Merrill Lynch Global Research

Table 12: LGFV bonds outstanding by provinces and municipal cities (yearly & as of Jul 15, 2015, YoY growth) (YoY%) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 07/15/15 Beijing 67% 53% 49% 0% 274% 41% 58% 32% 15% 22% 12% Qinghai - - - - 80% 33% 75% 355% 48% 67% 38% Tianjin - 113% 82% 9% 179% 80% 29% 67% 73% 50% 23% Jiangsu 214% -21% 88% 54% 120% 49% 38% 95% 39% 59% 21% Chongqing 113% 94% 32% 60% 75% 42% 45% 71% 55% 60% 22% Shanghai 67% 28% 37% 62% 103% 3% 10% 28% 21% 11% 10% Zhejiang 286% 28% 119% 26% 118% 31% 35% 80% 29% 50% 24% Anhui - - 18% 49% 210% 58% 21% 82% 31% 46% 18% Gansu - - 80% -100% - 0% 81% 53% 51% 37% 9% Hunan - - 40% 0% 346% 142% 31% 87% 62% 55% 23% Fujian - 40% 175% -25% 81% 54% 41% 163% 60% 50% 32% Shaanxi - - - 246% 48% 111% 73% 103% 56% 57% 21% Jiangxi - 75% 31% 52% 163% 71% 55% 91% 62% 42% 16% Guangxi - 0% 100% 0% 163% 145% 39% 138% 30% 69% 21% Hubei - 150% 84% 0% 74% 49% 50% 191% 75% 74% 19% Yunnan - - - - 27% 334% 13% 72% 67% 95% 30% Liaoning - - - 0% 617% 234% 76% 124% 53% 67% 20% Sichuan - 75% -36% 102% 118% 155% 52% 103% 46% 53% 26% Inner Mongolia - - - 188% 83% 157% 53% 85% 33% 41% 22% Shandong - - 100% 27% 203% 34% 102% 104% 54% 98% 30% Guangdong - -22% 53% 96% 136% 69% 48% 56% 46% 52% 16% Heilongjiang - - - - - 23% 100% 148% 39% 29% 9% Guizhou ------47% 327% 46% 86% 37% Hebei - - 120% 0% 76% 43% 75% 102% 38% 92% 31% Xinjiang - - - 0% 0% 1321% 44% 328% 67% 64% 16% Jilin - - 0% 125% 67% 33% 133% 66% 31% 43% 28% Shanxi - - - - - 100% 134% 158% 53% 50% 13%

China: An Equity Strategist’s Diary | 27 July 2015 33

Table 12: LGFV bonds outstanding by provinces and municipal cities (yearly & as of Jul 15, 2015, YoY growth) (YoY%) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 07/15/15 Ningxia - - - 0% 0% 188% 65% 0% 26% 69% 0% Henan 0% 300% 50% 0% 48% 17% 60% 164% 72% 46% 11% Hainan ------0% 220% 102% 9% Tibet ------Total 177% 50% 64% 38% 141% 53% 43% 83% 44% 53% 21% Source: Wind, BofA Merrill Lynch Global Research

Table 13: LGFV bonds outstanding as % of local GDP by provinces and municipal cities (yearly & as of Apr 15, 2015, YoY growth) (%) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 07/15/15 Beijing 0.7% 1.1% 1.4% 1.7% 1.5% 5.3% 6.4% 8.7% 10.5% 10.9% 8.2% 8.1% Qinghai 0.0% 0.0% 0.0% 0.0% 1.0% 1.7% 1.8% 2.5% 10.1% 13.4% 13.4% 13.9% Tianjin 0.0% 0.6% 1.1% 1.7% 1.4% 3.5% 5.2% 5.5% 8.0% 12.4% 11.4% 12.2% Jiangsu 0.3% 0.7% 0.5% 0.8% 1.0% 2.0% 2.4% 2.8% 5.0% 6.4% 6.2% 6.4% Chongqing 0.5% 0.9% 1.6% 1.8% 2.3% 3.5% 4.1% 4.7% 7.1% 9.9% 9.5% 9.9% Shanghai 1.0% 1.5% 1.7% 2.0% 2.8% 5.4% 4.8% 4.7% 5.8% 6.5% 4.5% 4.6% Zhejiang 0.1% 0.4% 0.4% 0.8% 0.9% 1.8% 2.0% 2.3% 3.8% 4.5% 4.2% 4.5% Anhui 0.0% 0.0% 0.7% 0.7% 0.9% 2.4% 3.1% 3.1% 5.0% 5.9% 5.2% 5.6% Gansu 0.0% 0.0% 0.2% 0.3% 0.0% 3.6% 3.0% 4.4% 6.1% 8.3% 6.6% 6.8% Hunan 0.0% 0.0% 0.3% 0.3% 0.2% 1.0% 1.9% 2.0% 3.3% 4.9% 4.5% 5.0% Fujian 0.0% 0.3% 0.4% 0.8% 0.5% 0.9% 1.1% 1.3% 3.1% 4.4% 3.9% 4.4% Shaanxi 0.0% 0.0% 0.0% 0.2% 0.6% 0.8% 1.4% 1.9% 3.4% 4.8% 4.5% 4.7% Jiangxi 0.0% 0.2% 0.4% 0.4% 0.5% 1.2% 1.7% 2.1% 3.6% 5.2% 4.4% 4.7% Guangxi 0.0% 0.3% 0.2% 0.3% 0.3% 0.7% 1.3% 1.5% 3.3% 3.9% 3.9% 4.2% Hubei 0.0% 0.2% 0.3% 0.5% 0.4% 0.6% 0.7% 0.9% 2.3% 3.7% 3.9% 4.0% Yunnan 0.0% 0.0% 0.0% 0.0% 0.5% 0.6% 2.3% 2.1% 3.1% 4.6% 5.3% 6.1% Liaoning 0.0% 0.0% 0.0% 0.1% 0.0% 0.3% 0.8% 1.1% 2.3% 3.2% 3.3% 3.4% Sichuan 0.0% 0.3% 0.4% 0.2% 0.4% 0.7% 1.5% 1.8% 3.3% 4.3% 4.0% 4.3% Inner Mongolia 0.0% 0.0% 0.0% 0.1% 0.3% 0.4% 0.9% 1.1% 1.9% 2.4% 2.1% 2.2% Shandong 0.0% 0.0% 0.1% 0.1% 0.1% 0.3% 0.4% 0.7% 1.3% 1.8% 2.2% 2.3% Guangdong 0.0% 0.2% 0.1% 0.2% 0.3% 0.6% 0.9% 1.2% 1.7% 2.3% 2.1% 2.1% Heilongjiang 0.0% 0.0% 0.0% 0.0% 0.0% 0.5% 0.5% 0.9% 2.0% 2.6% 2.0% 2.0% Guizhou 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.9% 1.1% 3.9% 4.9% 5.2% 5.8% Hebei 0.0% 0.0% 0.1% 0.2% 0.2% 0.3% 0.4% 0.6% 1.1% 1.4% 1.8% 1.9% Xinjiang 0.0% 0.0% 0.0% 0.1% 0.1% 0.1% 0.7% 0.9% 3.3% 4.9% 4.5% 4.9% Jilin 0.0% 0.0% 0.2% 0.2% 0.3% 0.4% 0.5% 0.9% 1.3% 1.6% 1.3% 1.3% Shanxi 0.0% 0.0% 0.0% 0.0% 0.0% 0.3% 0.4% 0.8% 2.0% 2.9% 2.9% 3.0% Ningxia 0.0% 0.0% 0.0% 0.9% 0.7% 0.6% 1.4% 1.8% 1.6% 1.9% 1.9% 1.9% Henan 0.1% 0.1% 0.3% 0.4% 0.3% 0.5% 0.5% 0.6% 1.5% 2.3% 2.1% 2.1% Hainan 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.6% 0.5% 1.5% 1.9% 1.7% Tibet 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total 0.1% 0.3% 0.4% 0.5% 0.6% 1.3% 1.7% 2.0% 3.3% 4.4% 4.1% 4.3% * the latest data as of Jul 15 are based on 2014 GDP Source: Wind, CEIC, BofA Merrill Lynch Global Research

34 China: An Equity Strategist’s Diary | 27 July 2015

Price signals

7D repo rate has declined to 2.4% p.a. on Jul 20 from 3.02% p.a. on Jun 25.

Chart 38: 7D Repo Rate Fix % 12

10

8

6

4

2

0 Jul-12 Jul-13 Jul-14 Jul-15 Jan-13 Jan-14 Jan-15 Mar-13 Mar-14 Mar-15 Nov-12 Nov-13 Nov-14 Sep-12 Sep-13 Sep-14 May-12 May-13 May-14 May-15

Source: Bloomberg, BofA Merrill Lynch Global Research

Average bill discount rate dropped to 3.87% p.a. on Jul 20 from 4.47% p.a. on Jun 24.

Chart 39: Average banker's acceptance 6-month bill discounted rate % 14

12

10

8

6

4

2

0 Jul-13 Jul-14 Jul-15 Apr-13 Apr-14 Apr-15 Oct-13 Oct-14 Jan-13 Jun-13 Jan-14 Jun-14 Jan-15 Jun-15 Mar-13 Mar-14 Mar-15 Feb-13 Feb-14 Feb-15 Nov-13 Dec-13 Nov-14 Dec-14 Aug-13 Sep-13 Aug-14 Sep-14 May-13 May-14 May-15 Source: CEIC, BofA Merrill Lynch Global Research

China: An Equity Strategist’s Diary | 27 July 2015 35

Interbank repo transaction volume surged to Rmb2,041bn on Jul 17.

Chart 40: Interbank repo transaction volume

2,500 Rmb bn

2,000

1,500

1,000

500

- Jul-13 Jul-14 Jul-15 Jan-13 Jan-14 Jan-15 Mar-13 Mar-14 Mar-15 Nov-12 Nov-13 Nov-14 Sep-13 Sep-14 May-13 May-14 May-15 Source: CEIC, BofA Merrill Lynch Global Research

Credit spread between corporate bond and government bond has been edging down since the peak on Jun 29

Chart 41: 5yr AAA interbank corp bond rate 7 250 %

6

200 5

4 150

3

2 100 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Jun-13 Jun-14 Jun-15 Feb-13 Feb-14 Feb-15 Dec-12 Dec-13 Aug-13 Dec-14 Aug-14

Middle Term Note(AAA) Yield: Interbank: Spot: 5 year Treasury Bond Yield: Interbank: Spot Yield: 5 year Credit spread (RHS)

Source: CEIC, BofA Merrill Lynch Global Research

36 China: An Equity Strategist’s Diary | 27 July 2015

PBOC has cut 7D reverse repo rate for 7 times as of Jul 20 this year, yield lowered to 2.5% p.a. on Jun 30 from 2.7% p.a. on Jun 25 2014.

Chart 42: Market repo and PBoC reverse repo rate (%) 7 % 6 6 5 5 4 4 3 3 2 4/3/2014 6/6/2014 8/5/2014 2/4/2015 4/9/2015 6/9/2015 3/14/2014 4/25/2014 5/16/2014 6/26/2014 7/16/2014 8/25/2014 9/15/2014 10/9/2014 12/5/2014 1/15/2015 2/28/2015 3/19/2015 4/29/2015 5/20/2015 6/30/2015 7/20/2015 10/28/2014 11/17/2014 12/25/2014

Interbank 7D report rate PBOC 7D reverse repo rate PBOC 14D reverse repo rate PBOC 21D reverse repo rate

Source: CEIC, BofA Merrill Lynch Global Research

3M rate dipped to 3.5% p.a. on Jun 16 from 4.97% p.a. on Feb 27

Chart 43: MoF fiscal 3/6-month deposit auction yields % p.a. 8 7 6 5 4 3 2 1 0 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 May-10 May-11 May-12 May-13 May-14 May-15

CN: Central Treasury Cash Management: Time Deposit: Bid Rate: 3 Month CN: Central Treasury Cash Management: Time Deposit: Bid Rate: 6 Month

Source: CEIC, BofA Merrill Lynch Global Research

China: An Equity Strategist’s Diary | 27 July 2015 37

Off-shore bond market saw yields decreasing since Apr.

Chart 44: BofAML CNH Dim Sum bond effective yields 7

6

5

4

3

2

1 Jul-12 Jul-13 Jul-14 Jan-13 Jan-14 Jan-15 Mar-13 Mar-14 Mar-15 Nov-12 Nov-13 Nov-14 Sep-12 Sep-13 Sep-14 May-12 May-13 May-14 May-15 BofA Merrill Lynch Dim Sum Index - Corporate BofA Merrill Lynch Dim Sum Index - government BofA Merrill Lynch Dim Sum Index - policy bank

Source: BofA Merrill Lynch Global Research

38 China: An Equity Strategist’s Diary | 27 July 2015

Shadow banking related news

Shanghai Noon (27 Apr 2015, Mon)

A-shares: Leveraged trading has reached 25% of daily trading volume

 By unnamed manager from a private equity firm (Source: Money Weekly)

Small loan: Net new small loan saw sharp decline in 1Q15, +Rmb3.3bn, the lowest ever

 By PBOC on Apr 23 (Source: PBOC) Historical net new small loan: 2Q14 +Rmb36.7bn, 3Q14 +Rmb26.8bn, 4Q14 +Rmb34.2bn.

Enterprise Bonds: CCDC to overtake third party reviewing role from NDRC in enterprises bond sale applications Then NDRC will make final approval decision based on CCDC’s evaluations (Source: Xinhua)

Shanghai Noon (28 Apr 2015, Tues) Financial instability: Several property related trust products are on the edge of default

 Great Wall Xinsheng Trust: Two products are overdue. 1) Size at Rmb300mn, lent to a developer in Dalian; due on Apr 18; 2) Size at Rmb190mn, lent to a developer in Wuxi; investors only got 20% principle repaid

 AVI Trust: The borrower, a Shandong developer, was detained by police for illegal fund raising. The collateral has been frozen. 5 batches of trust products, total size at Rmb750mn, will come due starting 24 Dec 2016

 Western Trust: Rmb150mn, yield at 11% p.a. due on 15 Mar 2014. The borrower is a utility company in Inner Mongolia with a property subsidiary. The repayment is done, maybe at covered by the trust company. (Source: Daily Business News, 21st Century Business Herald)

Shanghai Noon (29 Apr 2015, Wednesday)

Liquidity: PBOC suspended open market operation (OMO) on Apr 28, 3 times in a row

 Zero liquidity injection and withdraw in the market on Apr 28

 The suspension is within market’ expectation. (Source: China Securities Journal)

Muni bond: MOF urged local governments to accelerate muni bonds issuance

 MOF issued a policy on Apr 28

 No supportive measures mentioned. (Source: Chinese Business News, WSJ.cn, China News)

Margin trading: CITIC Securities lowered the discount rate of collateral

 By CITIC Securities on Apr 28. Several smaller brokers have done so last week

 If a borrower use its stock holding as margin trading collateral, it will face a small loan if the stock 1) with PE>500x; 2) 120-trading day price up >+300%. (Source: Chinese Business News)

China: An Equity Strategist’s Diary | 27 July 2015 39

Banking/bond: CBRC may investigate the default risk of bonds underwritten by banks

 By people close to the situation on Apr 28

 For all types of bonds. (Source: Sina)

Financial instability: 11 ministries launched a joint campaign to crack down illegal fund raising; P2P is one of the focuses

 11 ministries will launch an investigation in Jun-Aug

 2014 saw the problem’s impact reached a historical high. 5 focuses: Investment products, P2P, rural co-op, property, PE/VC

 P2P: 1) The number of illegal cases +11x YoY, amount involved +16x YoY, the number of lenders +39x YoY in 2014; 2) PBOC warned on 3 types of P2Ps: cash pooling, insufficient due diligence and fake borrowers; Ponzi scheme. (Source: 21st Century Business Herald, Securities Times)

Shanghai Noon (30 Apr 2015, Thurs)

Financial instability/default: People’s Daily said bond default helps release system risk

 It published an editorial on Apr 29. (Source: People’s Daily)

Financial instability/P2P: A P2P obtained Rmb300mn loans from a rural co-op via employees’ personal borrowings

 The P2P, Wangyin Tianxia, is based in Shenzhen. The owners has absconded

 In June 2013, 15 of its employees obtained Rmb300mn loans from a rural co-op based in a county of Lanzhou (Gansu) (Source: Daily Business News)

Shanghai Noon (4 May 2015, Mon)

Liquidity: PBOC suspended open market operation (OMO) on Apr 30, 4 times in a row

 No liquidity injection or withdrawal this week. (Source: AAstocsk)

Financial instability: A company’s Rmb300mn bank loans become overdue; most of the company’s AR is from Shanxi local governments

 The company is a large private construction player in Shanxi. Its Rmb100mn loan and Rmb200mn bank bills with Minsheng have become overdue. (Source: Chinese Business Journal, Securities Market Weekly) The company almost defaulted on an Rmb400mn bond in July 2014, helped out by Shanxi provincial govt

Banking: CBRC issued a policy to restrict bank employees’ under-the-table WMP sales for other institutions

 By CBRC recently

 As the problem has significantly hurt banks. (Source: Guangzhou Daily)

40 China: An Equity Strategist’s Diary | 27 July 2015

Bond: China gave green light to 32 foreign financial institutions to enter the interbank bond market By Shanghai Clearing House on Apr 30  Including banks, insurers, QFIIs, and RQFIIs.  (Source: FX168)

Shanghai Noon (5 May 2015, Tuesday)

LGFV/muni bonds: PBOC may inject liquidity to banks to help muni bonds issuance via policy banks’ targeted refinancing to banks By people close to the situation  It will be a completely new tool, neither MLF or PSL, with a duration >10 years  Some banks may help China Dev Bank to do this.  (Source: Caiing) 28 Apr 2015, “Local government bond sales & Chinese QE”, http://research1.ml.com/C?q=EMvTdoNlwew

Margin trading: Several brokers raised margin By Haitong, Huatai & Tebon.  (Source: Shanghai Securities News, China Securities Journal)

Shanghai Noon (6 May 2015, Wednesday)

Liquidity: PBOC suspended OMO on May 5, 5th time in a row No net liquidity withdrawal or injection on Tue  Shibor: Overnight rate –5.5bps to 1.564% p.a., the lowest over past 5 years.  7D -2.2bps. (Source: Caiing)

A-share: Bond traders said market liquidity is ample and could not cause the Monday A-share fall By unnamed bond trader, citing SHIBOR rates going down  IPO subscription this week may lock up Rmb2.5tr.  (Source: Chinese Business News)

Margin trade: More brokers lowered collateral’s discount ratio Including Pingan Securities, China Merchants Securities, China Industrial  Securities, Cinda Securities, and Guangzhou Securities The industry association (an authoritative institution) required brokers to report  many details of their margin trading business; some view this as a tightening signal. (Source: 21st Century Business Herald)

Banking: CBRC has proposed to the State Council to remove the 75% requirement on L/D ratio By people close to the situation. Instead, L/D ratio will stay as a key indicator  for regulators CBRC is working on a draft revision of the laws of Commercial banks, trying to  finish it by the year end. (Source: Caiing)

China: An Equity Strategist’s Diary | 27 July 2015 41

Shanghai Noon (7 May 2015, Thursday)

Margin financing: The news that CSRC will cap the balance of margin trading is found as untrue Local media reported last night that ZHANG Yujun, vice chairman of CSRC, said  on May 6 that brokers’ margin trading balance will be capped at 4x of its net equity Denied by people close to the situation. The 4x cap is a proposal by China  Securities Finance Corporation, made at a May 6 meeting held by the industry association, attended by the vice chairman. (Source: Chinese Business News)

Financial instability/bond: Cloud Live paid back 35% principal to some investors, and the 2015 coupon By the company, for the defaulted Rmb422mn corporate bond (EJ1133457).  (Source: ifeng) News recap: the company (002306 CH) announced on Apr 6 that it will default coupon and principle of the bond due on Apr 7. It is the first corporate bond default case.

Financial instability/Bond: A Zhuhai listed SOE may default Rmb162mn part of a bond Announced by the underwriter on May 5. The company is Zhongfu (000659  CH) Details: The bond (EJ2136525)’s total size is Rmb590mn, due on May 28, yield  at 5.28% p.a.. (Source: 21st Century Business Herald)

Shanghai Noon (8 May 2015, Friday)

Liquidity: PBOC suspended OMO on May 7, three weeks in a row (Source: Shanghai Securities News)

Private funds: AUM of registered private funds reached Rmb2.88tr as of Apr end By Asset Mgmt Association of China, on May 7.  (Source: Securities Times) AUM: at Rmb2.38tr as of Feb 7, at Rmb2.79tr by Mar.

Liquidity: Rmb1.47trn IPO locked up funds will be released to the market today Next Mon will release another ~Rmb1trn locked up liquidity and more on next  Tues. (Source: Securities Times)

Financial instability/property: Some tier-3/4 cities property trust and asset mgmt. products face default risks Trust: issued by GreatWall Xinsheng Trust; the borrower, a developer in  Ningbo, unable to repay investors on time; product size at Rmb300mn, due in Aug 2015, yield at 8.5-9.3% p.a. Asset mgmt. product: issued by Xinhua Shandong Property Exchange;  borrowed by a developer in Jining; product size at Rmb35mn, due in Jan 2015, yield at 9.5-12.5% p.a. also failed to repay principles and interests on time. (Source: China Securities Journal)

42 China: An Equity Strategist’s Diary | 27 July 2015

Banking: Commercial banks’ NCD issuance size grew ~25X YoY in 4M15 4M15 NCD issued Rmb1.04trn vs 4M14: Rmb43bn and FY14 Rmb900bn.  (Source: Chinese Business News)

Shanghai Noon (11 May 2015, Monday)

Muni bonds: The issuance may start soon; PBOC and MOF may take multiple measures to help By people close to the situation  Possible measures: 1) >50% of bonds will be issued via private placement, so  as not to hurt market liquidity and borrowing costs; 2) muni bonds will be accepted as collateral for banks’ to receive treasury deposits from local govts, as 5 municipal govts have announced in Apr. (Source: Economic Information, Daily Business News)

Muni bonds: Existing debts’ principal repayment will be covered by muni bonds issuance proceeds, while their interests may not be repaid immediately By unnamed MOF official  Local govts may take new debts to cover the interest payment  (Source: Chinese Business Journal)

Muni bonds: MOF’s next step for local govts’ existing debts may be to securitize them By unnamed provincial branch of MOF; MOF and NPC are working on this  Next step: After LGFV debts become bonds or other standard assets, they can  become the underlying assets of ABS. (Source: Economic Watch, China Business Journal)

A-share: Mutual funds denied that CSRC has window-guided them to lower holdings of GEM stocks Denied by 20+ funds.  (Source: Securities Times)

Shanghai Noon (12 May 2015, Tues)

Monetary: 4 large SOE banks granted Rmb200bn new loans in Apr MNII cited unnamed officials. Apr total new loans may reach Rmb750bn.  (Source: Hexun) 4 SOE banks new loans: Mar-15: Rmb467bn, Feb-15: Rmb256bn, Jan-15: Rmb1.2trn; total new loans: Mar-15: Rmb1.18trn, Feb-15: Rmb1.02trn, Jan-15: Rmb1.47trn.

A-shares: Xinhua article said A-share rebound mainly driven by ample liquidity Xinhua published two articles last night  GEM up 6% on May 11 with PE surging above 100x for the first time; such high  valuation reflects strong anticipations on upcoming economic restructuring. (Source: Xinhua)

Trust: CTA will begin to issue ratings on trust companies CTA has issued a draft guidance to solicit feedbacks by May 14  Assessment to be based on capital strength, risk management, incremental  value & social responsibilities. (Source: Economic Information)

China: An Equity Strategist’s Diary | 27 July 2015 43

WMP: April WMPs issuance grew 13.8%MoM; average yield rose to 5.22% By Rong360, average duration fell to 4.5m (vs 5.1m in Mar)  Reasons for higher yield: 1) stock market rally; 2) new IPOs tightened short  term liquidity. (Source: Economic Information)

Financial instability/bond: One coal importer defaulted on the coupon of a US$0.3bn note, the 2nd company missing USD bond payment Announced by the borrower, Winsway (1733 HK), on May 8  Details: the note due on 8 Apr 2016, US$13mn coupon due on 8 Apr 2015;  Winsway has extended coupon due date for one month. (Source: Caiing) The 1st default company was Kaisa.

Financial instability: 2014 saw many cases of deposit missing cases, totaling Rmb1bn (Source: Securities Daily)

Shanghai Noon (13 May 2015, Wed)

Muni bonds: PBOC, MOF and CBRC issued a policy to allow muni bonds to be accepted as collaterals for SLF, MLF, PSL, and treasury cash; 1st batch of issuance will be done by Aug They issued a policy on May 8  Private vs. public placement: By unnamed bank official. It makes little  difference, as banks will be the main buyer anyway. (Source: Chinese Business News)

A-share/fund: CSRC might have ordered 3 mutual funds to slow down their purchase of GEM board stocks By people close to the situation  CSRC met with 3 funds on May 12. All of them have been aggressive buyers of  GEM board stocks CSRC’ message: Mutual funds should increase their stock holding gradually, so  as not to disrupt the market (Source: Securities Times) News recap: 20+ mutual funds denied on May 11 that CSRC has window-guided them to lower holdings of GEM stocks.

Financial instability/online banking: A central AMC started to securitize its assets and distribute online to retail investors Orient AMC sold Rmb2bn ABS products via Zhaocaibao, an online distribution  platform of Alibaba, in a single day (May 11) The ABS products: yield at 6.2-7.0 % p.a., duration at 1-2 years  Orient AMC plans to do more of this.  (Source: Chinese Business News)

Shanghai Noon (14 May 2015, Thurs)

Liquidity: Rmb1.05trn saving deposit decline in April might have been diverted to stock and housing market (Source: China Daily)

44 China: An Equity Strategist’s Diary | 27 July 2015

Liquidity: Shibor 1Y declined to 4-year’ low on May 13 Shibor 1Y -3bps to 4.3845% p.a. on May 13.  (Source: Xinhua08)

Muni bonds: Bond yields broadly declined on May 13 after Doc 102 announcement Recap: On May 8, PBOC, MOF and CBRC issued a policy to allow muni bonds to  be accepted as collaterals for SLF, MLF, PSL, and treasury cash By JIA Kang former MOF Research Head: Local debt swap doesn’t require huge  liquidity injection and should not be considered as QE. (Source: Caiing)

Financial deregulation: NPC Standing Committee may soon solicit public feedbacks on Securities Law 1st draft Recap: draft law was submitted to NPC for 1st reading on Apr 20  Revised Securities Law may be issued in 4Q15 the earliest.  (Source: Shanghai Securities News, 163.com)

ABS: State Council announced Rmb500bn ABS trial to support key infrastructure construction Premier Li held regular State Council meeting on May 13  ABS trial size: re-launched in 2011 at Rmb50bn and 2013 expanded to  Rmb400bn 4M15 ABS issuance totaled Rmb82bn similar to same period last year  Key infra sectors: social housing, water conservation, railway in central & west  region etc (Source: Xinhua, 21st Century Business Herald) A-shares/Fund: Involved mutual funds denied CSRC spoke to them on GEM stocks Two involved mutual funds, Harvest and E Fund denied on May 13  CSRC said it will respond to the news rumor at its weekly press conference on  May 15 (Source: Eastmoney, Beijing Times) News recap: media reported that CSRC might have window guided 3 mutual  funds to slow down GEM board stocks purchase.

Trust: Many trust companies continue to raise trust products’ expected returns in May Expected return by PuyiTrust: May 9.73% vs Apr 9.34%; Mar 9.32%; Feb  9.09% Why: to prevent clients diverting to invest in stock and property markets.  (Source: Shanghai Securities News)

Shanghai Noon (15 May 2015, Friday)

Liquidity: PBOC suspended OMO on May 14, pausing for 4 weeks straight No liquidity injection or withdrawal.  (Source: Shanghai Securities News)

Trust: Property trusts issuance size shrank 63.1%YoY in 4M15, accounting for 10.5% of total issuance By Use Trust  By industry official, quality of the property trusts issued this year tends to be  better given tighter risk control. (Source: Securities Daily)

China: An Equity Strategist’s Diary | 27 July 2015 45

Financial instability: One property LPP defaulted on its 4th tranche, and its 5th tranche also faces default risk Details: Issued by Goldstate Brilliance, lent to a shanty town restructure project  in Yunnan; total size at Rmb492mn in 5 tranches. The LPP’s 1st batch was reported defaulted in 2014. (Source: 21st Century Business Herald)

Shanghai Noon (18 May 2015, Monday)

Muni bonds: PBOC vice governor said the local govt debt swap is not part of QE By PAN Gongsheng, the vice governor, on May 15  PBOC will not inject certain amount of liquidity correspondingly  He said the private placement is a principle of the issuance.  (Source: Securities Times)

Muni bonds: MOF said there is no plan for more LGFV debt swap By SHI Yaobin, MOF vice minister on May 15, in response to media question on  more debt swap after Aug. (Source: Reuters) We haven’t noticed similar reports from local media.

Investment/LGFV: Banks are required to help LGFVs with the financing of existing projects MOF, PBOC and CBRC jointly issued a guideline recently  Highlights: 1) If a loan contract is signed before 2014YE and part of the loan  has been granted, the bank cannot suspend the contract; 2) if the loan is insufficient to complete the project, the local government should first resort to PPP, and then, muni bonds; 3) before the muni bonds issuance, local governments can use treasury cash for turnover. (Source: Xinhua, Chinese Business News)

Investment/LGFV: NDRC start to accept fiscal subsidy as the repayment source for project income bond NDRC published a new policy recently  Local experts expect the bond’s issuance to reach Rmb50-80bn in 2015.  (Source: Chinese Business News)

Interest rate deregulation: PBOC may allow banks to issue CDs to individuals and non-financial corporation starting this month By people close to the PBOC  Investment threshold: individual at Rmb300k, corporates at Rmb10mn.  (Source: Economic Watch, Beijing Business News)

ABS: The 1st batch of ABS may focus on car/property mortgage NAFMII issued two guidelines on May 15 on the ABS info disclosure; both of  which focus on the two areas. (Source: Chinese Business News)

Shanghai Noon (19 May 2015, Tuesday)

Muni bond: Jiangsu issued Rmb52bn muni bonds, yield only 2bps higher than treasury bonds’ Jiangsu issued the bonds on May 18, duration at 3-10 years. Subscription  coverage ratio is 1.7-1.9x

46 China: An Equity Strategist’s Diary | 27 July 2015

The yield was 5-9bps lower than expected.  (Source: China Securities Journal)

Financial instability: The issuer of a defaulted Rmb500mn property investment product is a central SOE’s subsidiary The issuer, Goldstate Brilliance, is subsidiary of Goldstate Securities, which is a  “core” subsidiary of Beijing Airports, an SOE under CAAC. (Source: 21st Century Business Herald) News recap: The LPP defaulted on its 4th tranche, and its 5th tranche also faces default risk.

Shadow banking: PBOC will require all non-bank lending institutions to obtain license By people close to the situation. PBOC is working on a policy draft.  (Source: Economic Information)

Shanghai Noon (20 May 2015, Wed)

Stimulus/LGFV: NDRC raised the cap on the number of LGFV’s enterprise bond issuance By people close to the situation, based on a recent NDRC policy  1) Previously: For the capital city of a province, its LGFVs can issue 2 enterprise  bonds every year; for other cities and counties, 1/year; 2) now: 4 for capital city, 2 for others. (Source: 21st Century Business Herald)

Stimulus/bond: NDRC may lower threshold for enterprise bond issuance, if the underlying projects are within the 7 key investment areas By people close to the situation, , based on a recent NDRC policy  The 7 areas: IT/energy transmission grids, elderly care, environment, clean-  energy, food and water facilities, transportation, and resources. (Source: Economic Information, Eastmoney)

Financial instability: A listco will probably default its Rmb592mn bond next week The bond will come due on May 28  The listco, Zhongfu (000659 CH), issued two announcement on May 16 and 19,  warned of potential default The bond’s trading has been suspended since May 2014.  (Source: 21st Century Business Herald)

Shadow banking: Jiangsu and Liaoning suspended operating of some high-risk small lenders; some provinces saw 30% of small lenders in trouble Jiangsu suspended/closed 54 small lenders; Liaoning, 40  30%: By MIN Luhao, the head of a small lender industry association, on May  18. (Source: Caiing)

Shanghai Noon (21 May 2015, Thurs)

Muni bonds: Some local governments are speeding up the issuance Shanxi and Inner Mongolia provincial governments urged underwriters to speed  up the process. (Source: Daily Business News)

China: An Equity Strategist’s Diary | 27 July 2015 47

A-share liquidity: Mutual funds’ AUM surged by 18.3% MoM in Apr By the industry association recently  Apr AUM size: Rmb6.2tr.  (Source: Economic Daily)

Shanghai Noon (26 May 2015, Tue)

Macro: NPC’ financial commission official said it is unwise to keep increase bank loans when leverage is already so high By WU Xiaoling, member of NPC’ financial commission, on May 23  Wu said China’ leverage of financial sector is very high now and banks should  not keep asking the PBoC to inject more liquidity. (Source: The Beijing News)

A-shares/Brokers: CSRC official urged brokers to strengthen risk management in margin financing & short selling business By CSRC spokesman ZHANG YuJun on May 22  Highlights: 1) margin finance clients must be classified; 2) worst-case-scenario  stress tests should be conducted on a regular basis. (Source: East Finance)

Financial instability/Trust: One Rmb500mn mining trust product defaulted on part of its principle payment Details: Issued by CITIC Trust; borrowed by a private coal & iron ore miner in  Shanxi; distributed by ICBC Linfen (Shanxi) branch; due on Mar 8 & Mar 31 for two tranches. (Source: Daily Business News)

Financial instability/bond: One Rmb590mn corporate bond defaulted The borrower, Zhongfu, a package company in Zhuhai, announced on May 25  Details: the bond (BBG ID: EJ2136525) will due on May 28; the borrower is  only able to repay Rmb148mn of the principle. (Source: Daily Business News)

Financial instability/bond: Tianwei rejected bondholders’ request to make its parentco guarantor The company announced on May 25  It also rejected to suspend all debt financing tools of its parentco and  subsidiaries. (Source: Securities Times, Economic Information) News recap: Baoding Tianwei defaulted Rmb85.5mnb coupon payment for MTN (BBG ID#: EI6473439 size at Rmb1.5bn, yield at 5.7% p.a., due on 21 Apr 2016)

Banking: Total assets +11.9% YoY in Apr By CBRC on May 25  Total assets at Rmb176tr, liabilities at Rmb163tr.  (Source: Caijing) Assets growth: Jan +13.9% YoY, Feb +12.5% YoY, Mar +11.9% YoY.

Banking: China has started revising related laws to remove loan-to-deposit ratio By WU Xiaoling, member of NPC’ financial commission, on May 24.  (Source: Daily Business News)

48 China: An Equity Strategist’s Diary | 27 July 2015

Banking: CBRC ordered another round of thorough inspections on banks’ non- standardize assets and off balance sheet businesses by June end By Caiing News on May 25  Aim is to access accuracy of audit accounting.  (Source: Securities Times)

Fund: China may issue detailed policies for mutual funds to invest in OTC market before year end By people close to the situation on May 22  Governor held a meeting with funds and brokers last week.  (Source: AAstocks)

Shanghai Noon (27 May 2015, Wed)

Bond: PBOC scrapped approval requirement for interbank bond trading PBOC issued a circular on May 26  But approval procedure for bond issuance remains unchanged.  (Source: PBOC)

Brokers: GF & Haitong Securities raised margin requirement for stock financing Announced on May 26: Haitong Securities raised margin requirement by 5%  from May 28 while GF raised require margin ratio to 0.75 from 0.7. (Source: East Finance)

Brokers: Nanjing Securities required investors’ margin trading and short selling assets of single stocks <=70% of their portfolio total mkt cap By Nanjing Securities on May 25  By people from Nanjing Securities, it is not the 1st broker to apply such ratio  requirement. (Source: Securities Times) Financial instability: CBRC local branches warned banks on risk of loans using commodities as collaterals (Source: Economic Information)

Shanghai Noon (28 May 2015, Thurs)

Muni Bonds: 6 provinces have published local bond issuance documents; targeted placement yield may be lower than public offering Hubei issued Rmb20bn local govt bond on May 27 with yield: 3Y at 2.85%, 5Y  at 3.15%, 7Y at 3.40%, 10Y at 3.45% p.a. vs. 3Y treasure bond at 2.87% p.a. Chongqing, Guangxi and Shandong will soon issue Rmb26.5bn, Rmb20bn, and  Rmb36bn local govt bonds respectively (Source: 21st Century Business Herald)

A-shares: Regulators are trying to gauge how much banks funding has been flowing into the stock market (Source: Shanghai Securities News)

Brokers: More securities firms tightened margin requirement ratio After Haitong & GF Securities move to raise margin requirements on May 26,  GuoSen Securities, ChangJiang Securities, Southwest Securities & China Merchant Securities also followed suits ytd. (Source: WallStreet.cn)

China: An Equity Strategist’s Diary | 27 July 2015 49

Funds: AMAC & Beijing municipal govt to crackdown PE firms’ illegal fundraising activities By AMAC on May 27, so far 6 funds have been penalized.  (Source: Economic Information, China Securities Journal)

Financial instability/P2P: NPL ratio of some P2P platforms has exceeded 20% Renmin University and Rong360 jointly issued a report recently.  (Source: Securities Times)

Shanghai Noon (29 May 2015, Fri)

Financial instability: People’s Daily warned 3 risks of over-developing financial sector People’s Daily issued an article on May 28  3 risks: 1) asset bubble burst will trigger long lasting financial crisis; 2)  insufficient supervision & regulation may weaken financial system; 3) real economy will suffer if liquidity not diverted into the real economy. (Source: China Daily)

A-shares: CBRC recent checks are on loans usage; not WMP investment in stocks Verified by several banks’ wealth mgt unit officials  2 highlights: 1) CBRC wants to check how much loans flowing into the real  economy; 2) the part that are difficult to control is actually personal credits. (Source: Securities Times)

Financials: Size of assets management products reached Rmb57.5tr in 2014, accounting for 40% of bank deposits China Banking Association published 2014 industry annual report on May 28  Coverages: mutual funds, brokers’ TAMCs, trusts, and bank WMPs etc  Investment: over Rmb10tr WMPs was invested to the real economy.  (Source: Economic Information) Growth: 2012 +58.3% YoY, 2013 +56.2% YoY, 2014 +64.4% YoY.

P2P: Transaction growth slowed to 13.7% QoQ in 1Q15 from 36.8% QoQ in 4Q14 By Xinhua and CASS’ research team on May 28.  (Source: China Securities Journal)

Shanghai Noon (3 Jun 2015, Wed)

Muni bond: MOF may grant another Rmb0.5-1tr quota for local govt debt swap By people close to the situation. No comment from MOF so far.  (Source: Eastmoney)

Financial instability: An Inner Mongolia company defaulted Rmb116mn property trust product, after it defaulted two bonds Details: Issued by Xinhua Trust, duration at 2 years, due on May 27  Xinhua Trust said it will liquidate the collateral  Two bonds: size at Rmb800mn & Rmb540mn respectively.  (Source: Economic Information, Economic Watch)

Shanghai Noon (3 Jun 2015, Wed)

50 China: An Equity Strategist’s Diary | 27 July 2015

A-share: Brokers’ margin trading size was 2.5x of their net equity, vs. a ceiling of 4x By Apr, brokers’ total margin trading size was Rmb1.5tr; their 2014YE net  equity was Rmb603.8bn Small/mid brokers suffer more due to their limited fund raising channel.  (Source: Chinese Business News)

Shanghai Noon (5 Jun 2015, Fri)

Muni bond: MOF has granted the 2nd batch of debt swap quota to local governments, quota at Rmb1tr By people close to the situation  Total local govt debt swap quota reached Rmb2tr, vs. Rmb1.9tr local govt debt  coming due in 2015. (Source: Economic Watch)

Brokerage/margin trading: Some brokers started to limit borrowers’ concentration in a single stock By Huatai Securites and Minzu Securities  Huatai’s policy: If a borrower’s maintenance margin is below 180%, the  borrower’s holding of any stock cannot exceed 40% of his/her total stock holding +cash (Source: Securities Times)

Shanghai Noon (8 Jun 2015, Mon)

Margin trading/broker: CSRC forbids any margin financing activities not provided by authorized brokers By ZHANG Xiaojun, CSRC spokesman, on Jun 5.  (Source: CSRC, Caiing)

Financial instability: ICBC and CITIC Trust argued over who should cover a defaulted Rmb500mn Shanxi steel trust product In 2012, Huye, a private steel smelter based in Shanxi, issued Rmb500mn trust  products, underwritten by CITIC Trust. The products came due on March 2015 ICBC collected fees at 3.5% p.a.; CITIC Trust, 1.9% p.a.  Since the due date, they have negotiated on the restructuring but did not reach  an agreement. CITIC Trust suggested 50/50 split; ICBC said it was not responsible. (Source: Daily Business News, 21st Century Business Herald, Chinese Business News, the Paper)

Financial instability: An Rmb506mn financial product defaulted; a fund’s subsidiary (TAMC) and ABC’s branch were penalized for their involvement In 2013, CICC set up a financial product, which invested in a HK privately  placed bond, and ultimately invested in an overseas oil field. PetroChina planned to purchase the filed, but cancelled the plan due to the anti-corruption investigation on it. The product defaulted The TAMC, ebCapital, served as the channel provider. Its business was  suspended for three months ABC: The deputy head of its Beijing branch was demoted, as the branch  distributed the product without notifying its supervisor. (Source: Daily Business News, 21st Century Business Herald)

China: An Equity Strategist’s Diary | 27 July 2015 51

No info on whether investors are repaid, or who covered the loss.

Financial instability/bond: A rating agency downgraded a Guangxi non-ferrous SOE’s Rmb1.3bn MTN due to default risk The due date is on Jun 13  The company also has other Rmb1.5bn bonds.  (Source: Wall street cn.com)

Shanghai Noon (9 June 2015, Tues)

Margin trading: Many brokers have suspended their unauthorized financing business By unnamed brokers.  (Source: Asdaq)

Banking: CBRC decentralized to its local branches the approval on city commercial banks’ onshore/offshore investment CBRC issued a policy recently.  (Source: Chinese Business News)

Shanghai Noon (10 June 2015, Wed)

Muni bond: Zhejiang and Hubei issued Rmb76.4bn muni bonds; yield of some even lower than treasury bonds On Jun 9, Zhejiang issued Rmb40bn bonds; Hubei at Rmb36.4bn. For both,  10% are at 1-year duration. (Source: Daily Business News) For both muni bonds, their 1-yr bond’s yield is 43bps higher than treasury bonds, but 3/5/7 year bonds’ yield is 10-37 bps lower.

Margin trading: Several brokers will completely shut down their access to HOMS, so as to close unauthorized margin financing By several unnamed brokers  The HOMS system provider has given up HOMS and is developing a new  system. (Source: Shanghai Securities News)

Shanghai Noon (11 June 2015, Thurs)

Muni bond: MOF has granted the 2nd batch of Rmb1tr local govt debt swap quota, and may grant the 3rd batch 2nd batch: by MOF recently  3rd batch: by people close to the situation.  (Source: MOF, Chinese Business News)

Online financials: China will publish the industry regulation in Jul at the earliest By people close to the situation recently.  (Source: 21st Century Business Herald) Shanghai Noon (12 June 2015, Fri)

52 China: An Equity Strategist’s Diary | 27 July 2015

Financial instability: A private fund raised Rmb89mn in the name of social housing project, but lent to a developer, which defaulted By unnamed investors recently  A Beijing fund, Zhongcai Dingsheng, raised the fund in mid 2013 at 11% p.a.,  and charged developers 20% p.a. The fund’s several other products are overdue, total amount at Rmb700mn  (Source: Daily Business News)

Shanghai Noon (15 June 2015, Mon)

Margin financing: Some banks further lowered their leverage cap from 2.5x to 1x By an unnamed broker  Last round: Some banks lowered the leverage form 3x to 2.5x in Apr/May.  (Source: Chinese Business Journal)

Margin financing: CSRC may revise the regulation significantly CSRC published on June 12 another version of a draft regulation revision  Highlights: 1) New: An individual must have min securities assets of Rmb0.5mn  over the past 20 trading. Previous: No requirement; some brokers set the threshold at Rmb0.2mn; 2) if a broker’s margin financing exceeds 4x of its net equity, it does not have to reduce the size, but cannot increase it any more Xinhua said CSRC is trying to stabilize the market.  (Source: Oriental Morning Post, Xinhua)

Financial instability: The Guangxi SOE will repay the Rmb1.3bn MTN on time The local SOE announced on Jun 11.  (Source: China Securities Journal) News recap: A rating agency downgraded a Guangxi non-ferrous SOE’s Rmb1.3bn MTN due to default risk.

Shanghai Noon (16 Jun 2015, Tues)

Financial instability: Ex-governor of ICBC said investors should not count on “implicit guarantee” from any financial institution In his Jun 13 speech  “If a financial product’s underlying assets do not provide sufficient cashflow for  repayment, investors have no rights to pursue the underwriter. Implicit guarantee requirement is unreasonable.” (Source: Caiing)

Bond market liquidity: The last two weeks saw 17 issuers cancelled/postponed a total of Rmb16.6bn bonds issuance Based on issuers’ announcements  Reasons: market volatility, insufficient subscription.  (Source: Shanghai Securities News)

Shanghai Noon (17 Jun 2015, Wed)

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Muni bonds: Xinjiang and Sichuan issued muni bonds, yield even lower than treasury bonds’ Xinjiang and Sichuan issued Rmb35.1bn and Rmb45bn local govt debts on Jun  16 respectively Yields: 3Y at 2.89%, 5Y at 3.26%, 7Y at 3.54%, 10Y (Xinjiang) at 3.61%, 10Y  (Sichuan) at 3.62%. p.a. (Source: China Securities Journal) Treasury bonds’ recent yields: 3Y at 2.91%, 5Y at 3.25%, 7Y at 3.55%, 10Y at 3.66% p.a.

Margin trading: CBRC Beijing branch started to investigate trust companies for their Umbrella Trust (UT) business By several unnamed trust companies  The trust company with the largest exposure has a UT balance of Rmb200bn.  (Source: China Securities Journal)

Margin trading: Some brokers have forced retail investors to liquidate their margin trading accounts, if the financing is from incompliance source By people close to the situation  Privately raised funds which have registered with CSRC are not affected.  (Source: Eastern.com)

Bond: PBOC will allow private fund to invest in the interbank bond market By people close to the situation  News recap: In early June, SHEX allowed qualified privately raised funds to  invest in SHEX bond market. (Source: Wall Street CN)

Brokerage: A broker covered Rmb0.5mn loss for an employee’s under-the-table asset management activity An unnamed broker’s Shanxi branch was involved  The employee managed a 78-year old elder’s assets without notifying the  broker, and caused Rmb0.7mn loss. The broker agreed to cover part of the loss. CSRC-Shanxi ruled that the broker has compliance issue. (Source: Shanghai Securities News)

Shanghai Noon (18 Jun 2015, Thurs)

Margin trading: Brokers have 12 days to meet two requirements, which may force small/mid brokers to reduce margin financing size The two requirements, Liquidity Coverage Ratio (LCR) and Net Stabilization  Fund Ratio (NSFR), must both reach 100% by this month end, according to China Securities Industry Association (an authoritative association working together with CSRC) in Feb 2014 Large brokers can easily meet the requirements.  (Source: Caiing)

Shanghai Noon (19 Jun 2015, Fri)

54 China: An Equity Strategist’s Diary | 27 July 2015

Bond: China may open up its Rmb6trn onshore bond market to foreign investors Reported by Reuters  Current bondholding by foreign investors: China <2% vs Korea 8% and Taiwan  6% (Source: Phoenix Finance, Reuters)

Bond: CBRC grants zero risk weight for banks to buy China Dev Bank’ financial bonds By China Dev Bank on Jun 18.  (Source: Wall Street CN)

Margin trading: CSRC is mulling tighter rules on brokers’ margin trading risk management control (Source: 21st Century Business Herald)

Financial instability: Gold state Brilliance defaulted on all 5 tranches of a property private fund product Details: the product lent to a village reconstruction project in Kunming; the last  tranche due on Jun 13. Both issuer and borrower were detained by the police as they embezzled Rmb590mn of another private fund product. (Source: Caiing)

Private fund: CSRC encourages private funds to develop mutual fund business By ZHANG Yujun, assistant of the governor, on Jun 18  CSRC will support the development of asset management sector.  (Source: Economic Information)

Shanghai Noon (22 Jun 2015, Mon)

A-shares: Unauthorized stock financing size might have reached Rmb500bn by mid Jun By an unnamed industry expert.  (Source: Daily Business News)

Shanghai Noon (23 Jun 2015, Tues)

A-share liquidity: The size of unauthorized stock financing may be Rmb500bn by mid Jun By an unnamed industry expert.  (Source: Daily Business News)

Shanghai Noon (24 Jun 2015, Wed)

Financial instability: A Henan investment company collapsed. 3,500+ rural households lost their Rmb203mn savings It occurred in Xiping county, Zhumadian, Henan  2 employees committed suicide.  (Source: Xinhua)

A-shares: Banks’ tightening of their stock market investment was self-driven, not ordered by regulators By unnamed officials from several large SOE banks and joint-stock banks 

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Banks are concerned about NPL risk given the market volatility.  (Source: Securities Times)

Shanghai Noon (25 Jun 2015, Thurs)

Stimulus/banking: China will remove the L/D ratio control, which may unleash Rmb6.6tr bank loans if banks raise their actual L/D level to 80% (now capped at 75%) At the Jun 24 meeting, the State Council passed the revision to China’s bank  laws, which will be submitted to NPC for approval. The effective date will be in July at the earliest Impact: 1) Banks will have less incentive to conduct channeling business; 2)  banks’ loan granting may not surge immediately, due to banks’ risk concern. (Source: 21st Century Business Herald, Economic Information, Chinese Business News)

Stimulus/LGFV: NDRC significantly loosened control over LGFVs’ enterprise bond issuance Measure 1: NDRC issued a circular on Jun 19, to allow LGFVs affiliated with  provincial governments to roll over no more than 40% of existing enterprise bonds. A qualified LGFV can issue new bonds for the roll-over. The proceeds must be used for bank loan repayment and working capital Measure 2: NDRC further lowered a threshold. As a result, almost all LGFVs will  no longer be restricted in the number of bond issuance per year. (Source: Chinese Business News) For Measure 2, the last loosening was on May 27.

Shanghai Noon (26 Jun 2015, Fri)

Financial instability: Yancheng (Jiangsu) saw another case of LGFV guarantor refusing to cover the repayment of a privately placed bond An Rmb300mn bond came due on Apr 24. A local LGFV (based in Sheyang  county, Yancheng, Jiangsu) guaranteed the repayment with its land asset, but refused to cover the loss Previous case: Back in Jan, 2 tranches (EJ7133089 & EJ7007598) of a bond,  totaling Rmb260mn, defaulted. A local LGFV (based in the same city) showed up in the prospectus as the guarantor, but now denied its involvement and refused to cover the repayment No comment from the municipal government.  (Source: Shanghai Securities News, 21st Century Business Herald)

Margin trading: Trust companies denied large scale forced liquidation of umbrella trusts (UT) accounts on Jun 25 By unnamed UT managers  But if market continues the sharp decline, more clients will receive margin calls.  (Source: China Securities Journal)

Banking: Asset YoY growth rebounded in May By CBRC on Jun 25. Assets +13.0% YoY in May, liabilities +12.5% YoY.  (Source: Sina)

Shanghai Noon (29 Jun 2015, Mon)

56 China: An Equity Strategist’s Diary | 27 July 2015

A-shares/Margin call: Some highly leveraged investors using unauthorized financing received margin calls last week; while margin financing & short selling are relatively safer By unnamed brokers, some individual investors need to put up more margins in  order to maintain the 130% requirement and to avoid forced liquidation On Jun 26 when SHCOMP plunged 7.4%, most investors with leverage ratio  above 1:3 got margin calls; while those with borrowing at 1:3 or were are nearing the threshold. (Source: Shanghai Securities News, Chinese Business News)

Banking: 40 private bank license applicants have filed an application CBRC issued a directive on boosting development of private banks on Jun 26.  (Source: Security Daily)

Shanghai Noon (30 Jun 2015, Tues)

LGFV: LGFV debts might have surged to Rmb17tr by 2014YE vs. Rmb12tr as of Jun 2013, up 46% By NAO on Jun 28 NPC meeting, based on the sample check on 9 provinces, 9  provincial capitals and 9 counties Jun 2013 nationwide level: Rmb12tr. The sample checked areas: Jun 2013-  Dec 2014: +46% Growth slowed down YTD: Dec 2014 – Mar 2015: +0.1% (counties’ -3.5%)  However, 1/3 of the 27 regions saw fiscal capacity down YoY in 2014, and  some could not repay debts on time (most haven’t issued muni bonds). (Source: Chinese Business News, Caijing)

A-share: CSRC said a drastic decline hurts market stability, and risk from unauthorized margin financing has declined significantly By CSRC, quoting China Securities Finance Corp (the clearing house), in Jun 29  noon The recent market decline resulted naturally from excessive growth, and is  market driven; but a drastic decline is not good 1) Unauthorized lending size down to Rmb440bn, vs. the previous estimate  Rmb1.5-2.0tr. On Jun 29, the selling size triggered by margin call was no more than Rmb4bn (Rmb2bn in the morning). 2) For authorized lending, the margin call resulted in only Rmb6mn sales in Jun 25-26. (Source: CSRC, ifeng)

Financial deregulation: China allows three private companies to set up trading platforms similar to NEEQ By people close to the situation. A detailed guideline may come out in 2H  3 companies: JD finance, PingAn Group’s Qianhai Financing, and Alibaba’s Ant  Finance Unlike NEEQ, the three platforms may allow individuals to subscribe via  Internet. (Source: Chinese Business News)

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Bond default: China Dev Bank might have helped the Guangxi SOE to avoid Rmb1.3bn MTN default By people close to the situation. No confirmation from the SOE.  (Source: China Enterprise News) News recap: A rating agency downgraded a Guangxi non-ferrous SOE’s Rmb1.3bn MTN due to default risk. The SOE later said it will repay the MTN on time.

Shanghai Noon (1 July 2015, Wed)

Margin trading: CSRC said existing unauthorized margin financing won’t be forced to liquidate By CSRC on Jun 30.  (Source: Wall Street CN)

Margin trading: Two brokers allowed higher leverage for using certain blue chips as collateral By Guotai Jun’an and Shenwan Hongyuan on Jun 30.  (Source: Daily Business News, Chinese Business News)

Bond: 4 companies cancelled their bond sales on Jun 30 For both short-term notes and mid-term notes, total size at Rmb1.9bn  Over the past 2 weeks, ~70 companies have suspended/cancelled bond sales,  due to poor market liquidity. (Source: China Securities Journal)

Shanghai Noon (2 July 2015, Thurs)

A-shares: Multiple measures announced to stabilize the market Measure 1: SHEX, SZEX & the clearing house will cut transaction fees by30%  effective on Aug 1 Measure 2: CSRC will grant brokers new financing channels, including: 1) All  brokers, not limited to the 20 ones, can issue short-term bonds; 2) brokers can securitize their beneficiary rights of margin financing Measure 3: No more requirement that a margin account will be liquidated if the  leverage ratio drops below 130%; brokers will have more liberty in such cases. (Source: Chinese Business News)

A-share: CSRC denied market rumors of official change and market manipulation by QFIIs By CSRC on Jul 1st  Speculation: 1) XIAO Gang, the chairman, will be replaced; 2) Certain  QFIIs/RQFIIs shorted index futures to crash the A-share market. (Source: Eastmoney, Securities Daily)

Bond: NDRC does not allow any default of enterprise bond this year By LIAN Weiliang, deputy head of NDRC, on Jun 29  By 2014YE, enterprise bond’s balance was close to Rmb4tr, .of which LGFV  accounted for >Rmb2tr. (Source: 21st Century Business Herald)

58 China: An Equity Strategist’s Diary | 27 July 2015

Financial instability/P2P: June saw more P2P absconded than those being set up, the 1st time By 01caijing, a consulting firm  The number of absconded platforms surged by 67% MoM in Jun.  (Source: Economic Information)

Financial instability: A listco might have allowed a subsidiary to go bankrupt, due to the subsidiary’s minority shareholder’ heavy involvement in private lending Announced by Lifan Ind (601777 SH), a motorcycle maker  The minority shareholders of a subsidiary borrowed heavily from shadow  banks, and the subsidiary acted as the guarantors for these borrowings. (Source: Daily Business News)

Shanghai Noon (3 July 2015, Fri)

Monetary: PBOC governor vows to prevent systematic or regional financial risks By Zhou XiaoChuan PBOC Head on Jul 2  Also, PBOC will keep improving framework for monetary policy control,  promote healthy economic devp, promote financial reform & speed up opening financial sector. (Source: PBOC)

A-share: CSRC will investigate and “strictly” punish manipulations By Zhang Xiaojun CSRC spokesman, CSRC will examine and audit potential  market manipulations especially those cross-market By Bloomberg, CSRC has conducted examination on recent stock index future  short selling activities. Also, local media reported that China Financial Futures Exchange ordered brokers to report active trading accounts before 3pm on Jul 2 Recap from Jul 1: CFFEX it checked index futures trading by 38 QFII investors  and 25 RQFII investors and it didn’t find “large scale” short selling activities in the market (Source: Chinese Business News, Securities Times) A-share: Some brokers loosened margin financing requirements on Jul 2 Lowered margin ratio: CITIC Securities, Guosen Securities, and Dongxing  Securities Margin financing duration extended: Changjiang Securities  Raised discount ratio of collaterals: Orient Securities  Guangzhou Securities did not force liquidation of margin accounts on Jul 2,  (Source: The Paper, Shanghai Securities News, China Securities Journal)

Financial instability: Many manufactures in Linyi (Shandong) defaulted debts as local govt suspended their operations over pollution concerns By local CBRC, ~Rmb100bn around 1/3 of local bank loans are related to  companies being suspended operations and this may trigger regional financial crisis. (Source: The Paper)

Funds: Privately raised funds AUM reached Rmb3.89tr by Jun 30 By AMAC  PRF size rose 35% from Rmb2.88tr as of Apr 15  (Source: Shanghai Securities News)

Shanghai Noon (6 July 2015, Mon)

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A-share: Numerous measures from multiple approaches to stabilize the market Key measures: 5 Jul 2015, “A-share market: the bazooka, half drawn”,  http://research1.ml.com/C?q=mXPEixex2H0 Government mouthpiece: Xinhua and People’s Daily both published articles  today to call for investors’ confidence Government fund: Huijin has bought Rmb12bn ETFs  Margin financing: 1) Multiple brokers lowered the threshold and loosened the  policy; 2) Short selling: 1) Several brokers suspended the business; 2) multiple  unauthorized margin financing institutions said their total funding size was no more than Rmb200bn, and denied their involvement in short selling Index futures: 1) The clearing house has suspended many shorting accounts;  2) the clearing house will make transaction fees progressive based on transaction volume; bigger volume, higher fee rate Market liquidity: 1) China may suspend Rmb5bn re-financing activities until  SHCOMP returns to 4,500; 2) CIRC required insurers to keep net buying of stocks; 3) 21 brokers will invest Rmb120bn (15% of their net assets by 1H15) in blue chips ETFs and would not reduce their proprietary book if SHCOMP stays below 4,500 ; 4) 94 mutual fund management companies vowed to stabilize the market Market discipline: 1) The police are investigating three media outlets for  spreading rumors; 2) The market will impose heavy penalty on cross-market manipulation. (Source: China Securities Journal, Shanghai Securities News, Daily Business News, 21st Century Business Herald, Chinese Business News, Chinese Business Journal, Oriental Morning Post, People’s Daily, Xinhua, Economic Watch, Caiing)

Financial instability/bond: An Rmb800mn enterprise bond threatens to default The bond: A steel maker in Zhejiang (Jiangsu) issued an Rmb600mn 6-yr  enterprise bond (BBG#: EJ3450156) in Aug 2012; redemption date on 31 Aug 2015 Default: The bond does not have a guarantor. The borrower has Rmb374mn  bank loans overdue. (Source: Beijing Business Today, 21st Century Business Herald) NDRC said last week that it doesn’t want to see any enterprise bond default this year.

Shanghai Noon (7 July 2015, Tues)

Financial instability: BOC tried to collect Rmb186mn loans before due date from a listed local SOE The SOE, Zhejiang Orient (600120 CH), is affiliated with Zhejiang provincial  government. As it broke certain loan agreement, the bank tried to collect the loan. (Source: Huaxia Times)

Shanghai Noon (8 July 2015, Wed)

Financial instability: 79 listcos might have received margin calls from banks, as their stocks, which have been used as loan collateral, have depreciated significantly By local media, most of these companies are ChiNext and SME board listcos  So far, about 600 listcos have vowed to help stabilize the market.  (Source: Modern Express)

60 China: An Equity Strategist’s Diary | 27 July 2015

Financial instability: Brokers confirmed that if a stock’s trading is suspended, its value as collateral will stay unchanged By several brokers, as long as the suspension does not exceed 30 calendar  days. (Source: Daily Business News, Chinese Business News)

Financial instability: Shenzhen’s secondary housing market saw price -8% WoW last week, due to the stock market’s decline By MOLR local. Sales volume +15% WoW  Primary market: volume -2% WoW, price +6% WoW  Reason, by Centaline.  (Source: Chinese Business News)

A-share liquidity: Several joint-stock banks resumed their funding to Umbrella Trust By several unnamed banks, but the leverage is lowered to 1x, vs. previous 3x  Borrowers have shown strong interests.  (Source: China Securities Journal)

Shanghai Noon (9 July 2015, Thurs)

A-share: Govt announced more supportive measures on Jul 8 PBOC: vowed to maintain market stability and avoid systematic financial risk. It  will provide ample liquidity to CSFC via interbank lending, financial bond, pledge financing, and relending facilities. CSRC & CSFC: 1) granted Rmb260bn credit quota to 21 brokers via stock  pledge; 2) by people close to the situation, CSFC is looking for >=Rmb500bn liquidity support from PBOC; 3) chairman said it has sufficient liquidity to stabilize the market; 4) to subscribe Rmb200bn active funds from 5 mutual funds to invest in small & mid cap stocks; 5) to intensify efforts to buy small to mid-cap stocks CIRC: to allow insurers to invest more in blue chips stocks  SASAC & MOF ordered central-owned SOEs and financial companies not to cut  holdings and all central owned SOEs soon echoed with SASAC’ instruction Huajin: vows not to reduce existing holdings and will continue to buy in ETFs.  (Source: Eastmoney, MOF, SASAC, Wall Street CN, Xinhua)

Broker/Internet: Alipay will offer stock trading functions via YueBao by July end Users can connect their brokerage accounts using Alipay, and trade stocks via  Yuebao. (Source: Shanghai Securities News)

Shanghai Noon (10 July 2015, Fri)

A-share: Regulators issued more measures to support market CSRC: 1) suspended reviews of IPOs & other refinancing from Jul 9; 2) asked  listco to choose 1 out of 5 measures (incl share buyback, employee incentive) to protect share px CBRC: 1) allowed banks to roll over matured loans pledged by stocks; 2)  encouraged banks to provide liquidity to CSFC & offer financing to companies to buy back shares CIRC: insurance asset mgmt. companies should not demand early repayment  from brokers for debt products on margin financing;

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Minister of Public Security & CSRC: to investigate malicious short selling  activities on Jul 9 SASAC: asked provincial SASACs to submit daily report if local SOEs’ increased  stock holdings starting Jul 9 CSFC: issued Rmb80bn short-term note in interbank market on Jul 9, yield at  4.5% p.a., duration at 3 months; and will purchase mutual fund products to stabilize liquidity (Source: Eastmoney, Chinese Business News, Xinhua, 21st Century Business)

Trust/property: Issuance size of property trust products down 56% YoY in 1H15 Property trust accounted for 8% of total trust issuance size, while securities  trust accounted for 31% in 1H15. (Source: Shanghai Securities News)

Shanghai Noon (13 July 2015, Mon)

A-share: More measures announced over the weekend to stabilize A-share market CSRC: instructed brokers to regulate external access to trading systems on Jul  12 Police: found clues of some trading cos might have manipulated stock futures  Cyberspace Admin: banned all advertisements illegally promoting unauthorized  margin loans. (Source: CSRC, Xinhua, CCTV)

Local govt debt: the government may soon provide Rmb200bn targeted loans to LGFVs to continue existing infrastructure construction projects (Source: East Finance)

A-share: Some banks raised leverage ratio for listcos’ stock pledging business Norm is 1:1x but some aggressive commercial banks will raise it to 1:1.5x-1:2x,  higher than margin financing business The purpose is to help major shareholders and senior managers to buy stocks  as instructed by the government By unnamed official from a joint stock bank: average yield is up to 7.2%-7.6%  Also, 21cbh reported that unauthorized margin financing size may be higher  than Rmb500bn as previously estimated by SAC. (Source: WallStreet.cn, 21cbh)

A-share/Margin financing: Some investors have recently re-started unauthorized borrowings By unauthorized fund providing companies, 20-30% investors raised margin  borrowing Some finance companies offered 0% interests for borrowers.  (Source: China Fund)

Margin financing: 8.8% household invested in the stock market; of which 3.5% participated in margin financing activities CHFS has recently published 2Q15 household equity investment report  Survey was conducted over Jun 15-Jul 2; with a sample base of 5,000  households. (Source: Hexun)

62 China: An Equity Strategist’s Diary | 27 July 2015

Trust: China Trust Security Fund Corp ordered trust companies to suspend payment of trust industry security fund in 2Q15 China Trust Security Fund Corp issued a circular on Jul 10, for securities trust  products only By people from trust company, benefit is minimal.  (Source: Securities Times)

Brokers: GF Securities lowers margin collateral ratio requirement for qualified clients to 120% from 130% (Source: Securities Times)

Online financials: PBOC may soon release a guideline By ZHANG Tao, PBOC official on Jul 12  PBOC, CBRC, CSRC, and CIRC will issue detailed rules on online payment, P2P,  crowd funding, and online insurance, respectively. (Source: Shanghai Securities News)

Shanghai Noon (14 July 2015, Tues)

Margin financing: CSRC probed a leading vendor of trading system for its possible facilitation of OTC margin financing; several large OTC margin financing lenders suspended business CSRC announced on Jul 13 that it is investigating Hundson Tech; the company  denied that its HOMS system caused the recent market volatility Suspension: announced by the lenders themselves.  (Source: Caiing, Chinese Business News)

Margin trading: Brokers’ margin trading & short selling balance stabilized on Jul 13 Margin trading balance: DoD flat at Rmb1,437bn  Short selling balance: +4% DoD to reach Rmb2.8bn  (Source: Wind) Banking: People’s Daily said to help small/micro companies’ financing, the government should rely on small lenders and private banks, instead of large banks It published an article on Jul 13, quoting local experts  Large banks, due to NPL concern, have been unwilling to lend despite the  central government’s targeted RRR cut & tax benefits. (Source: People’s Daily)

Brokerage/A-share liquidity: CSFC’ loans to brokers may come in batches; some brokers have received the 1st batch for their proprietary desk By people close to the situation  Some brokers reported that what they received is much smaller than what they  applied for, and thus believe the loans will come in batches. (Source: AAstocks)

Shanghai Noon (15 July 2015, Wed)

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A-share/unauthorized margin financing (MF): The clearing house will launch a comprehensive investigate into non-broker run MF; as a result, a large trust company suspended all its products related to margin financing Announced by China Securities Depositary and Clearing Corporation (CSDC) on  Jul 14 Investigation scope: Broker, trust, mutual fund & subsidiary, futures trading  company, private fund CSDC will try to see through product structure to identify the real trader  Suspension: By people from the unnamed large trust company. Reason: 1)  CSDC’s coming inspection; 2) the bulk of its related Rmb5bn products are HOMS based. (Source: 21st Century Business Herald)

Muni bond: MOF is considering to launch the 3rd batch of local govt debt swap, quota at Rmb1tr By people close to the situation. No decision has been made yet.  (Source: Sina)

Muni bonds: MOF published a detailed guideline on how muni bonds can be used as banks’ collateral to obtain treasury deposits By MOF on Jul 14.  (Source: Chinese Business News)

Trust: Some stock-related trust products have been terminated due to heavy loss Including products of PingAn Trust and Western Trust, for both Umbrella Trust  products and unleveraged products The loss range from 38.6% to 72.1%.  (Source: Jiemian)

Bond/opening up: Three groups of foreign institutions can invest in the onshore inter-bank bond market on a registration base PBOC issued a circular on Jul 14  Three groups: central bank, global financial institution, sovereignty fund  No more cap on size.  (Source: Daily Business News)

Shanghai Noon (16 July 2015, Thurs)

A-share: CBRC ordered inspections on how much trust funds has entered the stock market but did not halt related financing channel PingAn Securities denied CBRC has halted OTC financing business but new  business may face more stringent controls than before. (Source: East Finance)

A-share: Many OTC margin financing (MF) platforms suspended business By Wangdaizhijia, P2P MF transaction vol declined by 15% during Jun 1-Jul 5.  (Source: Yangcheng Evening)

Bond/opening up: PBOC may allow foreign FIs to issue Rmb bond onshore By people close to the situation. No comment from PBOC  Issuers no need to have registered entity in China. 

64 China: An Equity Strategist’s Diary | 27 July 2015

(Source: ifeng)

Fund: 5 brokers will start charging mutual funds bond pricing services (Source: China Securities Journal)

Fund: ~300 privately raised fund products are close to forced liquidation level (Source: China Securities Journal)

Property/bond: Developers have issued >Rmb45bn onshore bonds during Jul 1-15 to roll over old debts (Source: Netease)

Shanghai Noon (17 July 2015, Fri)

A-share/Brokers: CSRC requests brokers’ proprietary trading to maintain net purchase on daily basis On Jul 15 afternoon, state-backed funds bought blue chips & some small cap  stocks CSRC may allow brokers equity investment to exceed risk limit during special  period (Source: AAStock)

A-share: 3 major OTC financing systems suspended new margin lending business Hundsun’s HOM, Shanghai Mecrt and Hithink Flush announced on Jul 16  Hundsun: 1) suspend money transfer to existing account; 2) suspend zero  capital account. (Source: Eastmoney, Netease)

A-share/Trust: Several trust companies suspended new umbrella trust business By people from trusts.  (Source: China Securities Journal)

Shanghai Noon (20 July 2015, Mon)

Financial instability/bond: An LGFV fulfilled its guarantor duty to cover an Rmb300mn private placed bond The bond came on due on Apr 19  The local LGFV, affiliated with the government of Sheyang county (Yancheng  city, Jiangsu), covered both the principal and the coupon. (Source: Chinese Business News)

Banking/P2P: China published its first regulation on online financial business

 By PBOC and 9 other ministries on Jul 18

 Scope: 1) Online payment - to be regulated by PBOC; 2) lending, trust consumer financing – by CBRC; 3) sales of mutual fund – by CSRC; 4) insurance policy sales – by CIRC rd  P2P: 1) Platforms must pass on the fund it raised to a 3 party as a custodian; 2) Corporations may be allowed to lend. (Source: Daily Business News, 21st Century Business Herald, Economic Information, Chinese Business News)

China: An Equity Strategist’s Diary | 27 July 2015 65

P2P: Two owners of an absconded P2P platform were sentenced to 9 and 14 years in jail respectively

 The platform raised Rmb26mn and lost Rmb13mn of it. (Source: Daily Business News)

66 China: An Equity Strategist’s Diary | 27 July 2015

Links to our previous reports on shadow banking 15 Jan 2015, “Shadow banking monitor 22: web of connections”, http://research1.ml.com/C?q=B6uTxwbEX58

11 Dec 2014, “Shadow banking monitor 21: how to funnel money to stocks”, http://research1.ml.com/C?q=IHxEzM2MShk

17 Oct 2014, “Shadow banking monitor 20, new “kid” in town”, http://research1.ml.com/C?q=0kFOnLSqAL8

1 Aug 2014, “Shadow banking monitor 19, cracks on the peripheral”, http://research1.ml.com/C?q=d-0zqF-sg2s

24 Jun 2014, “Shadow banking monitor 18, the hidden defaults in trusts”, http://research1.ml.com/C?q=bG4Kwn9QZtI

29 Apr 2014, “Shadow banking monitor 17, calm on the surface”, http://research1.ml.com/C?q=Lv75gUZzt6E

26 Mar 2014, “Shadow banking monitor 16, unsettled times”, http://research1.ml.com/C?q=Ojf3QW5Qljs

21 Feb 2014, “Shadow banking monitor 15, shadow banking retreating”, http://research1.ml.com/C?q=uQQEwRORB9g

16 Jan 2014, “Shadow banking monitor 14, the battle of wills is now on”, http://research1.ml.com/C?q=Y8WorcjQ2jk

12 Dec 2013, “Shadow banking monitor 13, WMP yield at all time high”, http://research1.ml.com/C?q=RS!mQWQEpEE

13 Nov 2013, “Shadow banking monitor 12, MoF bond yield to 2008 level”, http://research1.ml.com/C?q=KFWmyCd6ASs

23 Oct 2013, “Shadow banking monitor No. 11, WMP yield ticking up”, http://research1.ml.com/C?q=rfTC4IbGEEA

25 Sep 2013, “Shadow banking monitor No. 10, what Cofco Trust tells”, http://research1.ml.com/C?q=5345bzouFfY

11 Sep 2013, “Shadow banking monitor No. 9, the curious case of Aug TSF”, http://research1.ml.com/C?q=vqnHiuQZVsA

26 Aug 2013, “Shadow banking monitor No. 8, banks pass on bond losses”, http://research1.ml.com/C?q=lv4JFBFF0hk

13 Aug 2013, “Shadow banking monitor No. 7, LGFV trust trouble”, http://research1.ml.com/C?q=n9xj-da!3n0

5 Aug 2013, “Shadow banking monitor No. 6, bond market & LGFV debt”, http://research1.ml.com/C?q=xmeB-WJGs84

29 Jul 2013, “Shadow banking update 5: interbank tightened again”, http://research1.ml.com/C?q=Vb9j-o!TTJA

22 Jul 2013, “Shadow banking update No. 4, bond yield on the rise”, http://research1.ml.com/C?q=tGhnrEXIZ20

15 Jul 2013,”Shadow banking update No. 3, trusts, the one to watch”, http://research1.ml.com/C?q=N3EsmMxVIiQ

8 Jul 2013, “Shadow banking update No. 2, warning signs in trust”, http://research1.ml.com/C?q=!Q92gf1vsH4

China: An Equity Strategist’s Diary | 27 July 2015 67

1 Jul 2013, “Shadow banking update, two signposts, issue No. 1”, http://research1.ml.com/C?q=OMTMc-cnkWc

20 Jun 2013, “Market to re-test 2011 low”, http://research1.ml.com/C?q=tN3xKAO9!WA

18 Jun 2013, “Besides Shibor, property price another critical thing to watch”, http://research1.ml.com/C?q=oTsMV8o5vCg

13 Jun 2013, “The sell-off is probably not over yet”, http://research1.ml.com/C?q=gC3Le!ShqGw

7 May 2013, “An interview with a bank WMP manager on risk control”, http://research1.ml.com/C?q=yq59jePgHa8

28 Mar 2013, ''New WMP rules, an important move in shadow banking'', http://research1.ml.com/C?q=eWqdzjXSahE

19 Mar 2013, ''Suntech CB, shadow banking pillars being chipped away'', http://research1.ml.com/C?q=F7!LgUNnqjk

6 Feb 2013, ''What to do as the market potentially runs out of steam'', http://research1.ml.com/C?q=5DxK7ZUHXI4

17 Jan 2013, ''Focusing on the trusts'', http://research1.ml.com/C?q=s-IRAbbH5FE

4 Jan 2013, ''Local government debt: more tightening measures'', http://research1.ml.com/C?q=9EeQjxjDwOY

20 Dec 2012, ''When banks turn cautious with lending'', http://research1.ml.com/C?q=r8SbfSSvz9w

10 Dec 2012, ''Huaxia WMP: the first real test case'', http://research1.ml.com/C?q=78QXCBafzv0

9 Dec 2012, ''APEC Year-Ahead 2013: Change of Leadership'', http://research1.ml.com/C?q=v2wP0CVUtk0

3 Dec 2012, ''Reform update 9: An univocal move to rein in local government debt'', http://research1.ml.com/C?q=BIguHdAbNO4

21 Nov 2012, ''Shadow banking: regulators are now wary'', http://research1.ml.com/C?q=3ZoKpZ-i!zM

31 Oct 2012, ''Local government debt piling up'', http://research1.ml.com/C?q=oGcigOKutUQ

25 Oct 2012, ''WMPs, China’s CDOs in the making?'', http://research1.ml.com/C?q=!o!QP4wARhE

14 Oct 2012, ''Signs of bad debts are mounting'', http://research1.ml.com/C?q=pEweAnIMZl4

06 Jul 2012, ''Shadow banking: risky business'', http://research1.ml.com/C?q=gPaNewwSNmU

16 Mar 2014, “Rmb trading band widening, market implications”, http://research1.ml.com/C?q=p4whUYLDiGM

16 Mar 2014, “The coming corporate bond defaults”, http://research1.ml.com/C?q=Kd2N4usydxI

4 Mar 2014, “Chaori bond, potentially the 1st default in the bond market”, http://research1.ml.com/C?q=CwQc!ZSby8s

68 China: An Equity Strategist’s Diary | 27 July 2015

18 Feb 2014, “The coming trust defaults”, http://research1.ml.com/C?q=vIEXJM6LwjQ

27 Jan 2014, “Trust default: the government may blink this time”, http://research1.ml.com/C?q=XMFj-4QngDc

12 Dec 2013, “2014 Year-Ahead: Still waiting for the other shoe to drop”, http://research1.ml.com/C?q=WpXWlHpQFjs

13 Oct 2013, “Reform update 17: Financial reform, a flurry of activities but in wrong areas”, http://research1.ml.com/C?q=KtpXUwpcVyA

9 Oct 2013, “Asset Management Plans & an unwinding of the WMPs”, http://research1.ml.com/C?q=8coQRqaHMGg

28 Aug 2013, “Tapering & the enemy within”, http://research1.ml.com/C?q=VF0g334HrbI

12 Aug 2013, “An interview with trust managers on risks”, http://research1.ml.com/C?q=pLuSinF2dQQ

12 Aug 2013, “Loan securitization = passing the buck?”, http://research1.ml.com/C?q=OodSAJ0f1QM

8 Aug 2013, “An interview with Wenzhou investors”, http://research1.ml.com/C?q=chvAmWnnwPI

China: An Equity Strategist’s Diary | 27 July 2015 69

Disclosures

Important Disclosures

FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a stock’s: (i) absolute total return potential and (ii) attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation). Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster* Buy ≥ 10% ≤ 70% Neutral ≥ 0% ≤ 30% Underperform N/A ≥ 20% * Ratings dispersions may vary from time to time where BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9 - pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock’s coverage cluster is included in the most recent BofA Merrill Lynch Comment referencing the stock.

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70 China: An Equity Strategist’s Diary | 27 July 2015

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