East Meets West: China's Door Is Open, but Who Is Ready To

EAST MEETS WEST: CHINA’S DOOR IS OPEN, BUT WHO IS READY TO STEP IN?

TUESDAY 23 MAY 2017 13.00-15.15

Haitong Securities HAITONG

East Meets West: THE STATE OF THE MARKET Miranda Carr, Senior China Strategist +44 20 7426 4222 [email protected] Haitong Securities (UK) Limited

23 May 2017

NOT FOR DISTRIBUTION TO ANY US PERSON OR TO ANY PERSON OR ADDRESS IN THE UNITED STATES OF AMERICA

THE STATE vs THE MARKET

• Chinese securities markets are currently in a tricky half-way house between state control and market pricing • This follows the move to a ‘market-based’ economy outlined in November 2013 under the new administration which has since seen sporadic implementation • Experimentation with market pricing has been seen, but often reined back in – as we are seeing currently in financial sector

MARKET LIBERALISATION… …FOLLOWED BY CONTROL

Equities Margin trading allowed National Team supports market

Money markets Wholesale bank financing (inc. NCDs) and new PBOC’s increasing use of targeted monetary policy tools and investment channels encouraged clampdown on off-balance sheet financing Commodities Slowing housing market and introduction of Supply-side reform and curbs on commodities futures trading commodities futures Currency CNH market and RMB internationalisation Capital controls reimposed and direct market intervention

Bond markets Local govt bonds issued, quasi-municipal bonds lose PBOC intervention to smooth corrections but intervention still state backing, wholesale bank financing, and opening untested to foreign investors

• All adds up to limited volatility which clouds the risk and can lead to mispricing of securities • Risk of sudden corrections becomes higher owing to external or unexpected events • Government backing in the bond market is being gradually reduced. However, this is leading to greater uncertainty and new questions over how to price risk in a state-directed market.

Source for all charts: Haitong Research, PBOC, Bloomberg HAITONG RESEARCH 3 LIBERALISATION vs CONTROL

Initial stage of financial liberalisation in tandem Second stage of financial liberalisation in tandem with interest rate liberalisation/monetary with interest rate cuts, RRR cuts, and promotion loosening of futures/margin trading • Equity market promoted • All forms of bond issuance Regulation of WMPs, see a boom owing to lower • Corporate bond market • Shadow banking • Margin trading propels money market funds, and yields/new products liberalised and WMP deregulated equity market, while issuance sees a boom tighter monetary policy futures trading boosts sees dip in all forms of commodities • Interbank trading liberalised, particularly SM- 140.0% products and securities sized financial insts.

90.0%

growth

yoy 40.0% Rolling Rolling -10.0%

-60.0%

Jul-2014 Jul-2012 Jul-2013 Jul-2015 Jul-2016

Jan-2015 Jan-2013 Jan-2014 Jan-2016 Jan-2017

Sep-2013 Sep-2016 Sep-2012 Sep-2014 Sep-2015

Nov-2012 Nov-2015 Nov-2013 Nov-2014 Nov-2016

Mar-2013 Mar-2014 Mar-2017 Mar-2012 Mar-2015 Mar-2016

May-2012 May-2015 May-2016 May-2013 May-2014

Claims on Other Fis Entrusted IB Turnover Bond Issuance Corp. Bonds A Share Accounts Futures Trading

Source: Haitong Research HAITONG RESEARCH 4 EQUITIES: THE NATIONAL STABILISATION TEAM

THE STATE THE MARKET The Blue Chip vs Offshore Indices Volatility lowest since stock market opened in 1992

1.6 Banks & brokerages Volatility at all-time 48 1.5 supported low 1.4 43 1.3 38 1.2 33 1.1 28 1 23 0.9 0.8 18 0.7 13 0.6 8

CSI 300 HSCEI CH Nasdaq CSI 300 HSCEI CH Nasdaq

• Since mid-2015, the National Team has effectively stabilised the blue-chip end of the stock market, leading to 180-day volatility on the Shanghai Comp falling to 9.9% - an all-time low and below any other EM index. • At the same time, Chinese stocks traded on Nasdaq have been far more volatile, with the FTSE China N Share index 1-year volatility at 20.6 and 3- year at 26.6. • Similarly, ChiNext index 180-day volatility is at 16.0, while the small-cap index has dropped 7.5% this year vs a 3.5% CSI 300 gain. • The National Team remains in place as a key market stabilisation tool, with banks, brokerages and central SOEs supported by National Team members. • Limits downside, but can also introduce fundamental mis-pricing and limit upside in individual securities. 5 Source for both charts: Bloomberg HAITONG RESEARCH COMMODITIES: SUPPLY-SIDE REFORM

THE STATE THE MARKET Steel, Iron Ore, Cement and Coal Prices – Copper, Chemicals, & Paper Prices – The SSR Set The Private Set

60% 60% 50% 50% 40% 40% Steel Copper 30% 30% 20% Aluminium 20% Methanol

10% 10% LLDPE Coal

0% 0% yoy yoy growth yoy yoy growth Pulp -10% Cement -10% -20% -20% Paper -30% -30%

-40% -40%

01/15 03/15 07/15 11/15 01/16 03/16 05/16 07/16 11/16 01/17 03/17 07/17 05/15 09/15 09/16 05/17

01/15 03/15 07/15 09/15 11/15 03/16 07/16 09/16 11/16 01/17 05/17 07/17 05/15 01/16 05/16 03/17

• Instead of using direct state pricing, intervention in the commodity markets took the form of supply-side reform – a market-based mechanism to change a fundamentally state-owned sector. • Steel prices rose 54%, coal 32%, and cement 19% before coming back down to reality – steel prices down 20% since the peak and coal down 10%. • The lack of a demand-side response to this stimulus was shown by the more limited price increases in non-SSR commodities, including chemicals, paper and plasterboard – all of which should have seen more pronounced price hikes if genuine growth had been achieved. • Now coal prices are being actively directed to remain at around RMB550 per ton, while steel prices are being supported. • The beneficial effects of this (lower bankruptcies, a breathing space for structural reform, etc) mean that intervention will continue (another supply cut announcement?) and distort market pricing over the short to mid-term. 6 Source for both charts: Wind HAITONG RESEARCH MONEY MARKETS: MICRO-MANAGEMENT

THE STATE THE MARKET PBOC Monetary Policy Tools – Commercial Banks Yield – Micro Management Market Management 5.5 Repo 14D 7.00 5.0 6.50 Repo 28D 6.00 4.5 RR 7D 5.50 RR 14D 4.0 5.00 RR 28D 4.50 3.5 SLF O/N 4.00 SLF 1M 3.50 3.0 SLO 3.00 2.5 MLF 3M 2.50

MLF 6M

06/13 08/13 10/13 04/14 06/14 10/14 12/14 02/15 06/15 08/15 10/15 04/16 06/16 08/16 12/16 04/17 02/14 08/14 04/15 12/15 02/16 10/16 02/17 2.0 12/13 MLF 1Y

AAA AAA- AA+ AA AA-

06/13 09/13 12/13 03/14 06/14 09/14 12/14 03/16 06/16 12/16 03/17 03/15 06/15 09/15 12/15 09/16

• After experiments with market pricing in 2013-15 which brought unintended consequences, the PBOC is following a much more accommodative, but far more interventionist, stance than previously. • After allowing record amounts of liquidity into the system in the run up to Nov 2016, it is now selectively reducing overall liquidity through targeted monetary policy tools, replacing OMOs that supply general market liquidity with medium-term lending facilities to major institutions. • Interest rate guidance now taking place through increases to the Medium and Short-Term Lending Facilities – raising the former by 20bp in January and both by 10bp in March. • Regulation is also playing its part with off-balance sheet financing and wealth management products being limited, particularly for small- to medium-sized banks and institutions.

7 Source for both charts: Wind HAITONG RESEARCH CURRENCY: 7.0?

THE STATE THE MARKET PBOC Set-Rate, CNY and CNH – HK RMB Deposits and SWIFT Usage – Defending the Line In Retreat 2.0% 3.0 1,200 1.5% 1.0% 2.5 1,000

0.5% 2.0 800 0.0% 1.5 600

-0.5% RMBbn -1.0% 1.0 400 % % above PBOC rate -1.5% 0.5 200 -2.0% % of total global payments

-2.5% 0.0 0

05/12 09/12 01/13 05/13 09/13 01/14 09/14 01/15 05/15 09/15 01/16 05/16 05/17 01/12 05/14 09/16 01/17

01/14 03/14 05/14 07/14 09/14 11/14 05/15 07/15 09/15 11/15 01/16 03/16 05/16 07/16 09/16 11/16 01/17 03/17 01/15 03/15 05/17

CNY vs PBOC rate CNH vs PBOC rate % of SWIFT HK RMB Deposits

• The impressive array of tools (direct CNH market intervention, multinationals not allowed to repatriate profits, the M&A freeze, limiting the use of Unionpay cards, preventing the purchase of HK insurance products, only allowing banks to exchange money if they brought in as much as they sent out, delaying overseas transactions, ordering SOEs to repatriate overseas funds/convert US$ into RMB, etc, etc) used to defend the currency through the Dec 2016/Jan 2017 key outflow period has shown where the PBOC’s red line is – defending the RMB is more important than internationalisation. • Although steps may be taken to loosen some of these controls in the short term (eg the banks now being allowed to send out more forex than they get in), this is no guarantee that next rate hike/Jan 2018, things will be any better, unless there is a large-scale depreciation of the RMB. • This should limit the downside to the RMB to 3-5% pa, rather than 5-10% (or more), but at the expense of trading and investment in the currency.

8 Source for both charts: Wind HAITONG RESEARCH BOND MARKET: LOOSENING CONTROL

THE STATE THE MARKET Defaults – Carefully Managed Overcapacity Sector Maturity 10000

Baoding Tianwei Dongbei Special 130 8000 2,500 China City 80 6000 1,500

Shanshui 30 4000 Erzhong Dalian Machine 500 IM Berun

Sichuan Coal Shanxi Hua Yu RMBbn RMBm IM Nailun Huasheng Jiangquan Chaori/GCL Evergreen Yurun Foods -20 2000 -500 Dongfei Mazouli Cloud Live 0 -70 Wuhan Guoyu Logistics -1,500 Yabang Inv. NewStar Sichua Shengda Ziba Hongda Zhuhai Zhongfu -2000 Guangxi Non-Ferrous

-120 -2,500

01/14 06/14 04/15 09/15 02/16 07/16 05/17 10/17 03/18 08/18 11/14 12/16 01/19

Jan/14

Jun/14 Jun/16 Jun/15

Apr/14

Sep/14 Sep/15 Sep/16

Dec/15 Dec/14 Dec/16

Mar/16 Mar/15 Mar/17 Size of bubble: total amount of bonds issued. Red: Ultimate parent is Central SOE. Dark Blue: Ultimate parent is Local Issuance Redemption Net Financing (Annual Total) SOE. Light Blue: Private company (some with state shareholders).

• After the market was tested by the first few defaults in 2015, particularly in the iron & steel, building materials and coal sectors, there was concern that a wave of defaults would follow in 2016. Q2 and Q3 16 were the peak period for bond maturities in these sectors, but owing to SSR- induced commodity price increases, these have now been staved off. • Instead, defaults are being allowed on a slow, but steady basis – a carefully managed process, but very gradual move, towards market pricing. The number of defaults this year has reached a record high, but many of these companies are in multiple default. • The main area where they are occurring is Liaoning, where the government has limited capacity to support companies, while others are chiefly due to management issues. • More importantly, many of the companies are still operating, despite defaults – indicating that creditors have little control over the assets of any state-owned entity. HAITONG RESEARCH 9 Source for both charts: Haitong, Bloomberg, Wind BOND MARKET: LOOSENING CONTROL

THE STATE THE MARKET Local Government Bonds – Quasi-Municipal Bonds – All Equal In the Eyes of the State Set Free?

3.7 5.5 Quarter-end squeeze compounds existing risk 3.5 5.0

3.3 4.5 Notice issued removing 49bp difference state-backing from LGFPs

3.1 4.0 % % yield 2.9 % yield 3.5 2.7 3.0 2.5

2.5

JILIN

TIBET

HEBEI

HUBEI

ANHUI

FUJIAN

GANSU

HENAN

SHANXI

DALIAN

BEIJING

HUNAN

TIANJIN

JIANGXI

HAINAN

XIAMEN

NINGBO

NINGXIA

JIANGSU

YUNNAN

QINGHAI

SHAANXI

SICHUAN

XINJIANG

GUANGXI

GUIZHOU

ZHEJIANG

QINGDAO

LIAONING

04/15 06/15 10/15 12/15 02/16 04/16 06/16 08/16 10/16 02/15 08/15 12/16 02/17 04/17

SHANGHAI

SHANDONG

CHONGQING

INNER MONG GUANGDONG

HEILONGJIANG 3M 1Y 5Y • The biggest change in the domestic bond market has been the issuance of up to RMB15trn of local government bonds – taking this asset class from almost zero to 35% of total issuance last year. This year will be lower but still around 25% of the total in 2017. • Although this marks an important step in recognising government-backed debt as fiscal debt, not corporate, the pricing of these have nothing to do with the riskiness of individual provinces, but on liquidity in the local markets (as is often the case in Chinese markets) – Xinjiang and Guizhou issued 10-years at 2.82% and 3.07% last year respectively, vs Beijing at 3.39% and Dalian at 3.46%. • Instead, it is the quasi-municipal bonds which are being faced with market forces for the first time – instead of being a state-backed playground for cash flow negative companies, their state backing was removed in Nov 2016 and the sector as a whole has corrected by 5-6%. • At the moment, however, none has defaulted, but many are now trading above corporate bond levels. Will they be let go? Unlikely we think. Will there be a few carefully managed defaults? Most probably. Is this going to create the next bond market correction (as it should do)? Probably not, in our view, owing to ongoing state backing. 10 Source for both charts: Wind HAITONG RESEARCH PRICING IN THE STATE FACTOR

THE STATE vs MARKET PRICING We see three problems for international investors in trying to assess the market impact of the state: • First, trying to assess the impact on the companies from varying levels of state control – a complex and often fraught task. • Is a quasi-municipal company still going to backed by local government, even though this has been disallowed? Are steel companies going to see further SSR announcements to support pricing? When is a local SOE out of favour and when is it not? • Second, trying to determine the market distortion caused by state intervention. • When prices rise, this is often taken to be due to market forces (Western financial press the worst examples of this), but when it is down to state intervention, then prices may not be supported in the long term, as we have seen for SSR commodities. • Third, state intervention is opaque, difficult to forecast, and ever-changing, requiring constant monitoring. • This makes it almost impossible for anyone without inside knowledge to accurately predict and price Chinese securities.

The price of state intervention currently impacts equities and bonds in two different ways, however – one good, one bad. • For equities, state intervention is almost like a put option on SOEs – most will continue to be given preferential market access, be supported by either central and local governments, have low costs of funding and may benefit from preferential policies. They may occasionally have to do ‘national duty’ (ie cope with price controls), but generally see limited downside over the long term. • This means that Banks (+4.4% relative over the past year, supported by National Team buying), Insurers (+15.0%), Construction/1B1R (+33.8%) and Mining stocks (+17.1%, SSR supported) have all outperformed over the last year. • For bonds, however, state intervention is becoming the opposite – we are currently going through a period where 100% state backing is slowly being removed, leading to greater risk in the bond market overall but this will be unevenly spread. Defaults should rise, but only in some areas, spreads will likely widen, but the state will still actively contain risks and try to smooth over market volatility and distortions. • This conversely makes investing in some state-backed bonds riskier than private companies given the inability to accurately price government risk without in-depth knowledge. At least with private companies you know that cash flows are king, even if security over assets is questionable. We currently believe that high-quality private sector corporate bonds, policy banks and longer-dated government bonds represent the safer option for bond investors, with short-dated issues bearing the brunt of the current regulatory squeeze

HAITONG RESEARCH 11 Important disclosures

Macro-economic Disclaimer

This macro-economic presentation, prepared by a group company, is issued and approved by Haitong Securities (UK) Limited (“Haitong”) and is intended solely for release by Haitong to Investment Professionals and High Net Worth Companies etc. within the meaning of articles 19 and 49 of the FSMA 2000 Financial Promotions Order 2001. Other persons should not act upon the content and Haitong will not provide any services to, or undertake any transactions with, any other persons on the basis of the communications. Not intended for retail customer use.

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HAITONG RESEARCH 12 Half Water & Half Flame ----2H17 China Economy Outlook

Dr. JIANG Chao

Chief Economist, Macro and Fixed Income Research SAC Certificate No. S0850513010002 May 17, 2017

Tel.: +86 21 2321 2042 Email: [email protected]

NOT FOR DISTRIBUTION TO ANY US PERSON OR TO ANY PERSON OR ADDRESS IN THE UNITED STATES OF AMERICA

Outline

1. China Economy to recover in short term; indicators to decline from peak 2. Monetary policy is tightening; financial de-leveraging is ongoing 3. Monetary assets are best choices for short-term investment; grasp future opportunities

14 Please read the disclaimers following this report Aggregate indicators dropped from peak

According to the National Bureau Statistics of China, in 1Q17 the GDP growth rate reached 6.9%, the highest over the past 18 months. The growth rate of industrial added output jumped to 7.6% in March and dropped to 6.5% in April.

China’s real GDP growth rate Industrial added output growth rate

7.4 12 RealGDP GDP实际增速 growth rate Industrial added output 7.2 10 工业增加值增速growth rate 7.0 8 6.8 6 6.6 4 6.4

6.2 2

6.0 0 15/3 15/6 15/9 15/12 16/3 16/6 16/9 16/12 17/3 13/1 13/7 14/1 14/7 15/1 15/7 16/1 16/7 17/1

Source: Wind and Haitong Securities 15 Please read the disclaimers following this report Industrial profits improve in the short-term

The operations of industrial enterprises also improved remarkably in 2016. In 1Q17, the growth rate of industrial enterprises revenue was higher than 10%. The growth rate of profit remained above 20%.

Growth rate in revenue and profit of industrial enterprises

35 30 Profit工业企业利润增速 growth rate 25 Revenue工业企业收入增速 growth rate 20 15 10 5 0 -5 -10 -15 14/2 14/8 15/2 15/8 16/2 16/8 17/2

Source: Wind and Haitong Securities 16 Please read the disclaimers following this report Growth in industrial goods output: generally topped out and retreated

Except for cement, in March and April, power generation, iron & steel, metals and automobile output generally topped out and retreated.

Growth in outputs of major industrial goods

14 16年12月产量增速 17年2月产量增速 12 Growth rate in Dec, 16 Growth rate in Feb, 17 10 17Growth年3月产量增速 rate in Mar, 17 17Growth年4月产量增速 rate in Apr, 17 8 6 4 2 0 Power 10 Non-Ferrous -2 Crude Steel Cement Automobile Generation发电量粗钢水泥十种有色金属Metals 汽车

Source: Wind and Haitong Securities 17 Please read the disclaimers following this report Inventory topped out

In April, the manufacturing PMI from both official sources and Caixin.net declined sharply, indicating it has already peaked. The raw material inventory level picked up to 5-year high. Given the downward trend of the economy of China over the long-term, the inventory level of raw materials is unlikely to go up further. The purchasing price of raw materials topped out, indicating the end of re-stocking.

China’s official and Caixin.net manufacturing PMI Raw material inventory and purchasing price sub- indices

53 Caixin财新制造业 manufacturingPMI CFLP中采制造业 manufacturingPMI PMI 52 80 52 Raw中国 materialPMI原材料库存指数 inventory sub - PMI 51 70 index购进价格指数（右轴） 51 50 Purchasing price sub-index 49 60 50 (Right) 48 50 49 47 40 48 46 45 30 47 14/1 14/7 15/1 15/7 16/1 16/7 17/1 44 20 12/1 13/1 14/1 15/1 16/1 17/1

Source: Wind and Haitong Securities 18 Please read the disclaimers following this report Commodity price topped out and fell

Commodity prices have topped out and dropped since 2017. Crude oil price has lingered around USD50/bbl. Steel and copper prices plunged recently, indicating a decrease in demand for commodities.

LME copper price and rebar futures price WTI crude oil price and coal price

6,500 4,000 WTI原油价格 crude oil price LME copper price LME铜价 60 山西优混煤平仓价（右轴）Premium blended coal FOB price in Shanxi 800 6,000 3,500 (right) Rebar螺纹钢（右轴） futures price 55 750 700 (right) 50 5,500 3,000 650 45 600 40 550 5,000 2,500 35 500 450 30 4,500 2,000 400 25 350 20 300

4,000 1,500 16/1 16/4 16/7 16/10 17/1 17/4

16/1 16/2 16/3 16/4 16/5 16/6 16/7 16/8 16/9 17/1 17/2 17/3 17/4

16/10 16/11 16/12

Source: Wind and Haitong Securities 19 Please read the disclaimers following this report Inflation looks about to go down

This round of inflation was triggered by the surge in commodity prices. However, supply went up significantly following the price surge, while demand is curbed by de-leveraging. The shortage of supply has been reversed. In April, the PPI growth rate dropped MoM for the first time over the latest 10 months, suggesting inflation has peaked and is about to go down.

CPI and PPI forecast

4.0 CPI growth 7.0 3.5 CPI走势 5.0 3.0 PPIPPI growth走势（右轴） (right) 3.0 2.5 1.0 2.0

1.5 -1.0

1.0 -3.0

0.5 -5.0

0.0 -7.0 16/1 16/4 16/7 16/10 17/1 17/4 17/7 17/10

Source: Wind and Haitong Securities 20 Please read the disclaimers following this report Outline

1. Economy to recover in the short term; indicators to decline from peak 2. Monetary policy is tightening; financial de-leveraging is ongoing 3. Monetary assets are best choices for short-term investment; grasp future opportunities

21 Please read the disclaimers following this report Monetary policy continues to tighten; “interest rate hike” cycle starts

Both the economy and inflation have shown signs of peaking. Given past experience, monetary policy was usually loose under such circumstances. However in 2017, despite the falling CPI, the interest rate has kept rising. The PBOC has raised the reverse repo rate twice, actually kicking off an interest rate hike cycle in the financial market.

Average R007 R007 and 7D reverse repo bidding rate

4 4 Average回购利率 R007R007 均值 R007 7D7 reverse天逆回购招标利率 repo bidding 3.5 China’s CPI growth 3.6 3 中国CPI rate

2.5 3.2 2

1.5 2.8

1 2.4 0.5

0 2 15/3 15/9 16/3 16/9 17/3 15/12 16/3 16/6 16/9 16/12 17/3

Source: Wind and Haitong Securities 22 Please read the disclaimers following this report The U.S. accelerates its interest rate hikes

The U.S. has accelerated its interest rate hikes since the beginning of 2017. The Fed raised interest rate once a year during the past two years but did so as early as in March this year. Given the performance of the futures market, we expect that the Fed will further raise interest rates twice in 2017 and the probability of an interest rate hike in June is above 80%.

The U.S. target federal funds rate (%) The futures market implies the probability of future interest rate hikes of the U.S.

2 100% Probability of the U.S. Fed raising interest美联储再次加息概率（ rate further (May 55)月 5日） 95% 联邦基金目标利率 90% 1.5 Target federal funds 85% rate 80%

1 75% 70% 65% 0.5 60% 55% 50% 0 17/5 17/7 17/9 17/11 18/1 15 16 17

Source: Wind and Haitong Securities 23 Please read the disclaimers following this report Interest rate was raised to stabilize RMB exchange rate

During the past two years, China maintained low interest rates, while the U.S. raised its interest rate, resulting in a widening interest rate spread and RMB depreciation. Now, in order to narrow the trade surplus against the U.S., China must raise interest rates and RMB is hard to depreciate further. Therefore, the ongoing round of monetary tightening also aims to stabilize the RMB exchange rate. That’s why the PBOC raised the interest rate in March.

1Y treasury yield spread between China and the US, USD/RMB exchange rate

5 6.0 1Y中美 treasury1年期国债利差 yield spread between the US and China 4 USD/RMB人民币兑美元汇率（右轴） exchange rate (right) 3 6.5 2 7.0 1 0 7.5 -1

-2 8.0 -3 -4 8.5 06/1 07/1 08/1 09/1 10/1 11/1 12/1 13/1 14/1 15/1 16/1 17/1

Source: Wind and Haitong Securities 24 Please read the disclaimers following this report M2 growth seems to have declined

M2 growth was 11.3% in 2016, but dropped to a historical low of 10.5% in Mar 2017. Nonetheless, the slowing M2 growth can hardly explain the housing price surge in 2016. Which indicator can accurately depict the real movement of the money supply in China?

China’s M2 growth 70-cities housing price

MoM growth in 70-cities housing 统计局70城市房价环比（右） 30 price published by the NBSC (right) 16 YoY70城市房价同比 growth in 70-cities housing 4 25 M2增速 price M2 growth 12 3

20 8 2

15 4 1

0 0 10 -4 -1 5 -8 -2 0 10/1 11/1 12/1 13/1 14/1 15/1 16/1 17/1 00 02 04 06 08 10 12 14 16

Source: Wind and Haitong Securities 25 Please read the disclaimers following this report Commercial banks became investment banks

What is M2? M2 includes all bank deposits according to the PBOC’s definition, while the saving and loan business is the traditional business of commercial banks. However, banks are subject to many constraints, such as the 20% reserve requirement rate. The money multiplier is subject to a 5X cap. In addition, the CBRC imposes strict regional restrictions on smaller banks, prohibiting them from taking cross-regional deposits; hence, they cannot achieve fast development. In terms of loans, banks are subject to strict constraints with respect to the capital adequacy ratio. Therefore, commercial banks have started to vigorously develop non-loan & saving business, making themselves investment banks.

Commercial banks are transformed into investment banks

RRR, No RRR, Interbank regional restriction Deposit M2 no regional restrictions

lending

banks

Investment banksInvestment Commercial Capital Capital adequacy Loans Interbank adequacy ratio investing ratio expanded by 4 times

Source: Wind and Haitong Securities 26 Please read the disclaimers following this report Money supply grows in another way

From the balance sheets of banks, we can see that China’s banking sector has undergone drastic changes during the past few years. Both the deposits and loans traditional commercial banking business grew at a relatively low rate of around 12%, while other businesses all grew at a rate of around 20% As a result, the overall growth of the banks assets and liabilities reached as high as 16%.

Chinese banks’ liabilities structure in 2016

Amount Proportion Growth Total liabilities of banks 230 100.0% 15.7% M2 (deposit) 148 64.3% 11.5% Non-M2 liabilities 82 35.7% 24.1% Total assets of banks 230 100.0% 15.7% Loans 107 46.5% 13.5% Non-loans 123 53.6% 17.7%

Source: Wind and Haitong Securities 27 Please read the disclaimers following this report The financial sector is excessively prosperous

With the exception of the banking segment, all financial sub-sectors expanded at a rate higher than 20% in 2016. The size of: 1) Trust industry went up by 24% YoY to RMB20tn 2) Insurance industry went up by 24% YoY to RMB16tn 3) Wealth management products of bank went up by 28% YoY to RMB30tn 4) Mutual and private funds went up by 30% YoY to RMB34tn 5) Securities firms asset management subsidiaries went up by 50% YoY to RMB18tn

Scale (RMB tn) of non-bank financial sector at the end of 2016 and growth 60 (%) Growth 50 Scale16年末规模 16年末增速

0 Trust Insurance Wealth Mutual & Securities 信托保险银行理财公私募基金券商 Management Private Firms Asset Products of Funds Management Bank Subsidiary

Source: Wind and Haitong Securities 28 Please read the disclaimers following this report M2 does not reflect actual money supply; money is severely oversupplied

Therefore, the growth rate of China’s entire financial sector reached as high as 20% in 2016. Even if some of the data were calculated repeatedly, the growth rate would not be lower than 16%, the growth rate of on-balance-sheet assets of banks. The sector growth rate was much higher than the M2 growth of 11.6% as well as the M2 growth target of 13%. The sector growth rate was also much higher than the required GDP and CPI growth of 10%.

Money is actually severely oversupplied (%)

0 目标实际增速增速目标银行资产增速金融资产总增速 GDP+CPIGDP+CPI Real M2M2 growth M2M2 growth Growth in banks’ Growth in total assets financial assets target target Source: Wind and Haitong Securities 29 Please read the disclaimers following this report Money supply grows at a rate much higher than needed by the economy

In 2016, China’s banking system alone created assets of RMB30tn, RMB25tn of which were loans to the real economy, but they contributed only RMB5.5tn to GDP.

Incremental governmental financing, incremental social financing and incremental GDP [RMB100m]

300000 Combined新增政府及社会融资总量 amount of 新增Incremental GDP incremental governmental GDP 250000 financing and incremental social financing

200000

150000

100000

50000

0 02 04 06 08 10 12 14 16 Source: Wind and Haitong Securities 30 Please read the disclaimers following this report Money oversupply is the source of bubbles

From the monetary perspective, the housing price surge was the result of the shadow banking boom, leading to money oversupply. The banks lend money to real estate developers through loans, non-standard assets and bond subscriptions, to help them acquire land. On the other hand, the banks lend housing mortgage loans to residents. The money lent out can be created from the interbank market continuously, inflating the housing bubbles. In 2016, real estate development loans, bonds, trusts, mortgage loans, housing provident fund loans and PSL together amounted to RMB10tn. Growth in the real estate financing sector exceeded 50% in both 2015 and 2016, which was also responsible for the housing price surge.

Growth in various real estate financing (%) Growth in housing price in Beijing, Shanghai and Shenzhen (%) 10 9 20142014 年 20152015 年 2016 年 60 8 Shenzhen Beijing 7 50 深圳房价涨幅北京房价涨幅上海房价涨幅 Shanghai 6 40 5 4 30 3 20

10 1 0

0 PSL

loans

-10 fund loans fund

Bond + trust + Bond -20 PBOC’s

term mortgage term 10 11 12 13 14 15 16

real estate sector estate real

Housing provident provident Housing

Development loans Development

Long Total financing in the the in financing Total

Source: Wind and Haitong Securities 31 Please read the disclaimers following this report Financial leverage is a dangerous game

Borrowing from the financial market replaces deposits as the dominant liabilities of banks. The financial system of China faces a huge risk. In the past, deposits were a major part of liabilities of Chinese banks and remained stable; therefore, even though half of the assets of banks became nonperforming debts in 1998, China’s financial market would not collapse as long as people were confident in the government and did not withdraw simultaneously. However in 2016, non-deposit liabilities of China’s financial sector exceeded GDP in total. The non-deposit liabilities of small and medium-sized banks were almost 1/3 of total liabilities. The duration of interbank certificate of deposits is usually less than 3 months. Financial institutions cannot survive without daily financing. A financial crisis would be triggered if they are not able to borrow money.

Liabilities structure of small and medium-sized banks Chinese banks’ non-deposit liabilities/GDP (%) Depository liabilities to resident and对居民企业等存款性负债 corporate sectors Liabilities to PBOC Liabilities to small and 对中央银行负债 medium对中小型银行负债-sized banks 1.4 Liabilities to other financial institutions对其他金融机构负债 Bond债券发行 issuance Non-deposit liabilities within the 1.2 100% financial金融业非存款负债 sector/GDP /GDP 1 80% 0.8

0.6 60% 0.4

0.2 40%

0 20%

0% Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Source: Wind and Haitong Securities 32 Please read the disclaimers following this report Financial de-leveraging is necessary

The largest risk in the domestic market is a real estate bubble, which originated from surging financial leverage. Thus, financial de-leveraging is necessary to suppress the housing market bubble. Along with regulations released by the CBRC and the increasingly stringent MPA assessment by the PBOC, regulators are decisive in financial de-leveraging. The core of financial de-leveraging is to suppress the balance sheet expansion of commercial banks. One approach is to reduce bank liabilities. The most direct method is to include inter-bank CDs as part of inter-bank liabilities for assessment. All the inter-bank liabilities shall not exceed 1/3 of the total liabilities, which means the end of fast development of smaller banks.

Two ways of financial de-leverage

Constraints on the Add inter-bank CDs into expansion of bank inter-bank liabilities for liabilities assessment

Financial de-leverage

Constraints on the expansion of bank assets

Source: WIND, Haitong Research 33 Please read the disclaimers following this report MPA Assessment: Lower Growth Rate of Financing

Another approach is to suppress the assets expansion. From 2017, off balance sheet bank wealth management (BWM) is officially included in the MPA assessment. The core requirement of the MPA assessment is that the general asset growth rate cannot exceed the target growth rate of social financing set at 12% by the PBOC, otherwise banks will be penalised. The CBRC will “look through” the investments of bank. Banks are no longer able to avoid the CBRC’s restraints through inter- bank investments. The Capital adequacy ratio becomes the tough restraint of the assets growth. The era of 50% annual growth rate of smaller banks is close to the end. Commercial banks face slower incremental growth and may even have to shrink their existing balance sheets.

Growth rate of total assets of financial institutions, M2 growth rate & target growth rate of social financing

金融机构总资产增速Growth rate of total assets 广义货币Broad moneyM2增速 M2 社融增速目标Target growth rate of of financial institutions growth rate social financing 25

0 11/1 13/1 15/1 17/1

Source: WIND, Haitong Research 34 Please read the disclaimers following this report Housing loans are curbed and the mortgage rate goes up

The current housing market is similar to the stock market in 2015, backed up by financial leverage. The stock market crash in 2015 was a result of de-leveraging quickly, while current policies aim at de-leveraging slowly with a growing impact. According to the officials of PBOC, in 2017 the housing loans will drop from 45% to below 30% as a % of total credit loans. In 2016, the amount of housing loans were RMB 6tn in total. It will be down by RMB 2tn to RMB 4tn in 2017. At present, 50% of liabilities for many banks are from the inter-bank market. The inter-bank CD rate has risen from 3% in 2016 to above 4%, indicating that the rates of incremental housing loans and corporate loans are highly likely to go up continuously.

Housing loans as % of real economy loans Mortgage rate and 1-year inter-bank CD rate (%)

120% Percentage of housing loans in real 房贷占实体经济贷款的比例economy loans 100% 9.0 6

5.5 80% 8.0 5 60% 7.0 4.5

40% 6.0 4 银行住房贷款平均利率 20% Average rate of bank housing 3.5 5.0 股份制银行loans 1年存单利率（右轴） 1Y CD rate of JS banks (right) 3 0% 4.0 12/1 12/7 13/1 13/7 14/1 14/7 15/1 15/7 16/1 16/7 17/1 2.5 3.0 2 10/12 11/12 12/12 13/12 14/12 15/12 16/12 17/12

Source: WIND, Haitong Research 35 Please read the disclaimers following this report The winter of real estate will come soon

In our view, given the financial de-leverage policies in 2017, the largest risk brought by a tightened monetary supply lies in the real estate market. With the rise of mortgage rates and control over incremental housing loans, the growth rate of housing loans will drop significantly, leading to the decline of both housing sales and prices.

Growth rate of housing loans and mortgage rate (%)

60 9.0 居民购房贷款增速Growth rate of 金融机构房贷利率Mortgage rate of financial(右轴 ) residential 50 institutions (right) housing loans 8.0

40 7.0 30 6.0 20

5.0 10

0 4.0 09/3 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3

Source: WIND, Haitong Research 36 Please read the disclaimers following this report Summary

1. Economy to recover in short term; indicators to decline from peak 2. Money policy is tightening; financial deleveraging is on-going 3. Monetary assets are the best choice for short-term investment; grasp future opportunities

37 Please read the disclaimers following this report Total financing volume dropped significantly YoY

According to our statistics, in March 2017, total social financing (including government financing) was RMB2.53tn, down by RMB650bn YoY, the largest drop since April 2015.

In April 2017, the social and government financing continued to go down YoY, leading to potential economic risk in the future.

The start of financial de-leverage (RMB100mn)

25000 政府加社会融资同比多增额YoY increment of social and government 20000 financing

15000

10000

5000

-5000

-10000 15/1 15/4 15/7 15/10 16/1 16/4 16/7 16/10 17/1 17/4

Source: WIND, Haitong Research 38 Please read the disclaimers following this report Economic growth tends to slow down after de-leverage

Money supply is important to the economy. Normally, a lag period of about one quarter exists from financing to its impact on economy. China’s economy in 2H17 may face the pressure of a downtrend risk.

Growth rate of total financing volume and power generation capacity (%)

20 28 发电量增速Growth rate of power generation 26 capacity 15 24 社会加政府融资增速（右轴）Growth rate of social and government financing 22 10 (right) 20 18 5 16

0 14 12 -5 10 11/1 12/1 13/1 14/1 15/1 16/1 17/1

Source: WIND, Haitong Research 39 Please read the disclaimers following this report Economic growth rate goes up in 1H17 and drops in 2H17

Generally speaking, we forecast that the economic growth rate for 1H17 faces limited downward pressure. Real estate sales have a lag transmission to investment; the inventory cycle is still active; the de-leverage impact is still not apparent. However, in 2H17, the inventory cycle will end; real estate investments will be likely to drop significantly; the effect of de- leveraging will transmit to the real economy. Until then, the slowdown risk of economic growth will increase.

Actual and forecast GDP growth rates (%)

Forecast 7.0 Actual GDPGDP实际增速 6.8 growth rate

6.6

6.4

6.2

6.0 16/3 16/6 16/9 16/12 17/3 17/6 17/9 17/12

Source: WIND, Haitong Research 40 Please read the disclaimers following this report The Investment Clock of Merrill Lynch stops

According to the classic Investment Clock, in 2016 China’s investment clock rotated fast. In 1H16, economic recession and deflation were the main topics. Bonds were the first choice. In 2H16, both commodity prices and the stock market rose, indicating an overheating economy in China. However, since 2017, cash yields went up significantly. The monetary fund yield is close to 4%, almost 100% higher than that in 2016, indicating the early stage of stagflation. The economy is about to slow down as a result of the tightening monetary policy by PBOC. We believe the Investment Clock will stop in the short term. An economic slowdown adversely affects both the stock and commodity market; a tightening monetary supply has a negative impact on the bond market. The Investment Clock Cash is the priority choice. Inflation rises

Inflation bottoms Recovery Overheat

Holding stocks, Holding Economic growth

followed by bonds slows down Output gap Output gap

commodities,

followed by stocks tops

bottoms recovers Output gapOutput Holding bonds, Holding cash, Economic growth growth Economic followed by cash followed by commodities

Reflation Stagflation

Inflation tops

Inflation falls

Source: WIND, Haitong Research 41 Please read the disclaimers following this report Hold cash in short term

Currently, it is controversial to hold cash among market participants. In our view, holding cash has the following advantages: 1) Does not purely hold cash in hand, but invests in monetary assets. The current monetary fund yield is 4%, much higher than the 2.5% of last year. 2) In 2017 the opportunity cost of holding cash looks limited. In the past, China’s actual money growth rate was close to 20% along with severe money oversupply. People had to convert cash into real estate and other assets, otherwise cash would depreciate passively. However, the PBOC now de-leverages to withdraw currency, leading to drop in housing prices and the stock market. Therefore, the opportunity cost of holding cash is going down significantly. 3) Holding cash is not beomg bearish on China, but to invest in high-quality assets given the market decline.

Monetary fund and 10Y treasury bond yields (%) 6

5 货币基金收益率Monetary fund 1010y年期国债收益率 treasury bond yield yield 4

0 15/1 15/7 16/1 16/7 17/1

Source: WIND, Haitong Research 42 Please read the disclaimers following this report Overseas recovery, made in China

1) Focus on Chinese companies with global competitiveness. Though the overseas economy recovers slowly, the trend is going up. The growth rate of China’s exports turned from negative to positive. Thus, we can focus on the Chinese manufacturing companies with global competitiveness, such as those in the household goods sector

Growth rate of China’s exports (%)

40 中国出口增速Growth rate of China’s 30 exports 20

-10

-20

-30 16/1 16/3 16/5 16/7 16/9 16/11 17/1 17/3

Source: WIND, Haitong Research 43 Please read the disclaimers following this report 2006/07: Wells Fargo reduced its size on its own initiative

2) “Placed in a rough sea, survival of the fittest” will occur in the financial sector. The banks that dramatically expanded may suffer. The banks that initiatively reduced their leverage benefitted in the long term. There is a striking contrast between Wells Fargo and Citibank before and after the U.S. financial crisis. Citibank has not recovered yet due to aggressive operations and high leverage before the crisis Wells Fargo initiatively reduced its business and compressed its leverage. Wells Fargo is the one that has recovered earliest from the crisis. Its stock price has hit new high.

Aggressive leveraging of Citibank and Bank of Chinese banks similar to Wells Fargo could be a America (x) focus Bank of New Bank of America York Mellon Citibank Bank of Citibank America美国银行花旗银行 JP摩根大通 Morgan Wells富国银行 Fargo HSBC JP Morgan Wells Fargo 26 Holdings

10 2002年 20032003 年 2004 2004 2005年 20062005 年 20072006 年 2007年

Source: WIND, Haitong Research 44 Please read the disclaimers following this report Chinese banks similar to Wells Fargo: which ones are shrinking their balance sheets?

According to the 2016 annual reports, the growth rates of Bank of China, ICBC, ABC, China Merchants Bank, Jiangsu Wuxi Rural Commercial Bank and Jiangsu Zhangjiagang Rural Commercial Bank are less than 10%. In 1Q17, China CITIC Bank began to shrink its balance sheet on its own initiative.

Growth rates of the assets of Chinese listed banks

Asset growth rate for 1Q2017 Asset growth rate for 2016 50 17年1季度资产增速 16年资产增速

-10

Bank

Citic

中国银行无锡银行招商银行工商银行张家港行农业银行吴江银行建设银行北京银行兴业银行江阴银行中信银行浦发银行华夏银行交通银行平安银行常熟银行上海银行宁波银行江苏银行光大银行民生银行杭州银行南京银行贵阳银行

Jiangyin Changshu Wuxi Bank Wuxi China of Bank CMB ICBC of Bank Zhangjiagang ABC Wujiang CCB Beijing of Bank Bank Industrial China SPD Bank Huaxia of Bank Communications Bank An Ping Shanghai of Bank Ningbo of Bank Jiangsu of Bank Everbright Minsheng Hangzhou of Bank Nanjing of Bank Guiyang of Bank

Source: WIND, Haitong Research 45 Please read the disclaimers following this report From industrial investment to service and consumption

In 2017, from a global perspective, the good -performing assets are mainly in two categories: 1) Consumption, e.g. home appliances, furniture, F&B, cosmetics, etc. 2) Service sector, e.g. social, education, e-commerce retail, courier service, tourism & resorts, insurance, etc. China’s economy of is transforming from industrial investments to service and consumption, which have bright prospects.

Performance of related Chinese stocks since 2016

Manufacturing Sector Service Sector Stock price gain Stock price gain Company Sector Company Sector 2017YTD 2017YTD Hikvision Digital Tomorrow Advancing Electronic computer 63% Education 83% Technology Life GoerTek Inc. Electronic computer 31% New Oriental Education 70% Robam Appliances Home appliances 49% JD Internet retail 59% Midea Group Home appliances 31% Alibaba Internet retail 37% Suofeiya Home Furniture 41% S.F. Holding Courier service 23% Appliances Kweichow Moutai F&B 24% Yonghui Superstores Retail 30% Wuliangye F&B 31% C-trip Tourism and resort 38% China International Lafang China Cosmetics 49% Tourism and resort 22% Travel Service Service Sector Huazhu Hotels Tourism and resort 45% momo Social 118% Ping An Insurance Insurance 15% New China Life Microblog Social 54% Insurance 14% Insurance Tencent Holdings Social, games 36% Source: WIND, Haitong Research 46 Please read the disclaimers following this report Analyst Undertakings and Research Team

Undertakings by the Analyst

JIANG Chao: Macro & Bond Research

I am conferred the Professional Quality of Securities Investment Consulting Industry by the Securities Association of China. I issue this Report independently and objectively with due diligence. This report is based on published information; however, the authenticity, accuracy or completeness of such information is not warranted. Based on my professional understanding, this report distinctly and accurately reflects my research opinions. I have never been, am not, and will not be compensated directly or indirectly in any form for the specific recommendations or opinions herein.

JIANG Chao Chief Economist SAC Certificate No.: S0850513010002 Tel.: +86 21 2321 2042 Email: [email protected] Important Disclosure

Haitong may also engage in securities transactions in a manner inconsistent with this document and with respect to financial instruments covered by this document.

This document is provided for informational purposes only. Haitong will not accept any responsibility for any loss resulting from the use of the information or opinions referred in this document.

Additional information is available upon request.

NOT FOR DISTRIBUTION TO ANY US PERSON OR TO ANY PERSON OR ADDRESS IN THE UNITED STATES OF AMERICA China Bond Market: Considerations for Bloomberg Barclays Index inclusion

49 Bloomberg Barclays Benchmark Index Coverage Bloomberg Barclays Benchmark Indices Global Aggregate Currency Eligibility and Coverage

Eligibility Criteria • To be considered as a candidate for inclusion in the Global Aggregate Index, a domestic market must exhibit the following characteristics: • Sovereign debt rating (both local and foreign currency) must be investment grade using the Bloomberg Barclays Indices credit quality classification methodology (middle of S&P, Moody and Fitch) • The currency must be freely tradable and convertible and not exposed to exchange controls that are designed to encumber the buying and selling of the national currency by foreign investors • There must be an established and liquid forward market for the local currency such that foreign market participants can hedge their exposure to core currencies

Currencies Currently Eligible for the Global Aggregate Index • There are currently 23 currencies eligible for Global Aggregate: • Americas: USD, CAD, MXN, CLP • EMEA: EUR, GBP, DKK, CHF, SEK, CZK, PLN, ZAR, ILS, NOK, RUB • Asia-Pacific: JPY, MYR, THB, SGD, AUD, NZD, KRW, HKD

51 Considerations for Inclusion in the Global Aggregate

Satisfied Criteria  Sovereign debt rating (long-term local currency) must be investment grade  Market Size

For Discussion  Is there an established and developed forward or non-deliverable forward (NDF) market?  Is CNY a freely tradable and convertible currency?  Market liquidity?  Capital controls?  Any other restrictions?

52 EM Local Currency Government Index + CNY

The EM Local Currency Government Index currently has 18 currencies.

CNY classified as EM under the Bloomberg Barclays definition: 1) IMF non-advanced and/or 2) World Bank low/middle income. CNY meets both of these definitions.

Only the Treasury component of the China Aggregate Index would be eligible for the EM Local Currency Government Index.

CNY is already a currency in the broader EM Local Currency Government Universal Index with a weight of 28.56%.

Inclusion of China Treasury bonds would make CNY the largest currency in the index.

% Mkt Value (28 April 2017) Currency EM Local Currency EM Local Currency Government Government + China Chinese Renminbi 0.00% 36.71% Korean Won 28.86% 18.26% Brazilian Real 12.81% 8.11% Mexican Peso 7.56% 4.79% Malaysia Ringgit 6.36% 4.02% Indonesia Rupiah 6.32% 4.00% Thai Baht 5.77% 3.65% 53 Global Aggregate + CNY

Global Aggregate Index currently has 23 currencies, with 16 having less than 1% weight in the index (currencies not displayed below have <1% weight in the index).

Based on the current landscape, the CNY Treasury and Policy bank bonds only are under discussion for ultimate inclusion in broader based indices such as the Global Aggregate

Policy banks are: Agricultural Development Bank of China, China Development Bank, Export Import Bank of China

Inclusion of China Treasury and Policy Bank bonds would make CNY 4th largest in index.

% Mkt Val (28 April 2017) Currency Global Agg + China Global Agg Tsy + Policy Banks United States Dollar 45.26% 42.96% European Euro 23.59% 22.39% Japanese Yen 17.27% 16.39% Chinese Renminbi 0.00% 5.08% Pounds Sterling 5.30% 5.04% Canadian Dollar 2.49% 2.37% Australian Dollar 1.34% 1.27%

54 Disclaimer

BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates (collectively, “Bloomberg”) or Bloomberg’s licensors own all proprietary rights in the BLOOMBERG BARCLAYS INDICES. Neither Bloomberg nor Barclays Bank PLC or Barclays Capital Inc. or their affiliates (collectively "Barclays") guarantee the timeliness, accuracy or completeness of any data or information relating to BLOOMBERG BARCLAYS INDICES or make any warranty, express or implied, as to the BLOOMBERG BARCLAYS INDICES or any data or values relating thereto or results to be obtained therefrom, and expressly disclaim all warranties of merchantability and fitness for a particular purpose with respect thereto. It is not possible to invest directly in an index. Back-tested performance is not actual performance. Past performance is not an indication of future results. To the maximum extent allowed by law, Bloomberg and its licensors, and their respective employees, contractors, agents, suppliers and vendors shall have no liability or responsibility whatsoever for any injury or damages - whether direct, indirect, consequential, incidental, punitive or otherwise - arising in connection with BLOOMBERG BARCLAYS INDICES or any data or values relating thereto - whether arising from their negligence or otherwise. This document constitutes the provision of factual information, rather than financial product advice. Nothing in the BLOOMBERG BARCLAYS INDICES shall constitute or be construed as an offering of financial instruments or as investment advice or investment recommendations (i.e., recommendations as to whether or not to “buy,” “sell,” “hold” or enter into any other transaction involving a specific interest) by Bloomberg or its affiliates or licensors or a recommendation as to an investment or other strategy. Data and other information available via the BLOOMBERG BARCLAYS INDICES should not be considered as information sufficient upon which to base an investment decision. All information provided by the BLOOMBERG BARCLAYS INDICES is impersonal and not tailored to the needs of any specific person, entity or group of persons. Bloomberg and its affiliates express no opinion on the future or expected value of any security or other interest and do not explicitly or implicitly recommend or suggest an investment strategy of any kind. In addition, Barclays is not the issuer or producer of the BLOOMBERG BARCLAYS INDICES and has no responsibilities, obligations or duties to investors in these indices. While Bloomberg may for itself execute transactions with Barclays in or relating to the BLOOMBERG BARCLAYS INDICES, investors in the BLOOMBERG BARCLAYS INDICES do not enter into any relationship with Barclays and Barclays does not sponsor, endorse, sell or promote, and Barclays makes no representation regarding the advisability or use of, the BLOOMBERG BARCLAYS INDICES or any data included therein. Customers should consider obtaining independent advice before making any financial decisions. ©2017 Bloomberg Finance L.P. All rights reserved.

55 Gateway to China Gain with HAITONG

China’s Capital Market -Constantly Opening up and Evolving EnteringJane Yuan, HeadChina of QFII Market Business, Haitong Securities

- Haitong Securities and QFII Services 2017.5

NOT FOR DISTRIBUTION TO ANY US PERSON OR TO ANY PERSON OR ADDRESS IN THE UNITED STATES OF AMERICA

Agenda

I. The 15 years of China’s capital market opening up

II. Investment Characteristics of QFII/RQFII

III. Evolution and Progress while Opening Up

IV. Appendix 1: Haitong Securities: A Pioneer in China’s Capital Market

V. Appendix 2: Stock Connect Vs. QFII/RQFII Scheme

57 The 15 years of China’s capital market opening up

The Process of Opening Up

CIBM opens up CIBM SH-London QFII QFLP RQFII SH-HK SZ-HK WOFE to 3 kinds of fully /Bond 2002 2011 2011 Connect Connect 2017 institutions * opens up Connect Dec Jan Dec 2014 Nov 2016 Dec Jan 2010 Aug 2016 Feb TBA

√ √ √ √ √ √ √ √ √ √ √ √

QDII RQDII QDLP/QDIE 2006 Apr 2014 Nov 2014 Dec

15 years in retrospect: As of March. 2017: •More participants have been welcomed •312 QFIIs (USD 90.26bn ) •More capital flows are exchanged cross-border •211 RQFIIs (RMB 541.41bn) •More instruments & vehicles are introduced •144 QDIIs (USD 89.99 bn) •Fewer unnecessary administrative approvals •…

* 3 kinds of foreign institutions firstly enter CIBM: Central banks/RMB clearing banks/Overseas RMB participating banks Source: CSRC, SAFE; as of March 29th 2017 58 *Original data in CNY: USD/CNY FX as of May 12th: 6.8948 The 15 years of China’s capital market opening up

The Evolution of QFII/RQFII Scheme

2002 2006 2012 2016

More long term investors are Operation history: Operation history: included: pension fund, endowment Insurers, 30 years; Funds, insurers, long term fund, sovereign fund etc. Securities Co., 30 years; investors 2 years; Operation history: Funds 5 years; Securities Co., 5 years; Qualification long term investors, 5 years; AUM or Asset requirement: Commercial banks 10 years; insurers and funds, 5 years; No less than USD 10 bn for all AUM: funds, insurers and long Securities Co., 30 years; investors types； term investors USD 500 mm; AUM: funds, insurers and long term Total assets rank top 100 for Securities Co., and commercial investors, USD 5 bn; commercial banks banks, USD 5 bn; Banks, securities Co., USD 10bn

Investment Vehicles are Investment Vehicles are expanded Investment Vehicles are Investment restriction: the limited to exchange listed A to security investment funds, expanded to CIBM categories, Investment limit for QFII/RQFII asset share, bonds; warrant, IPO, rights, private Index Futures; allocation is removed Management Foreign Ownership Limits: placement, etc. Foreign Ownership Limits: Single QFII FOL 10%; Single QFII FOL 10%; Total FOL for a single stock 20% Total FOL for a single stock 30%

Lock up period for repatriation Record management for base quota: base quota is between is 1 year. Different entities under the per quota granted, certain % of first USD 20 mm and USD 5 bn; 2 repatriation intervals must same Group can apply for a Quota batch of principal must be injected; Lock up period is 0-3 months be more than 3 months. separate license and quota; Management only realized accumulated gain can depending on different product Each repatriation should not profits can be repatriated after be repatriated. types; exceed 20% of total onshore filing for record to SAFE. asset. Principal can be repatriated on a daily basis Source: CSRC, SAFE 59 The 15 years of China’s capital market opening up

The Status Quo of Opening Up*

QFII/RQFII Mutual Market Access CIBM Access

 Daily quota for SH-HK Connect, SZ-HK Connect north As of end of March th As of March. 29 , 2017 bound is RMB 13 bn each  There are 475 foreign  312 QFIIs institutions with CIBM  Latest quota USD  There are 572 names in the Shanghai stock pool with a access 90.26bn total market cap of USD 4.06 tn, taking up 93% of the  221 RQFIIs total Shanghai Market Cap. Total trading volume of SH-  Foreign institutions  Latest quota RMB HK Connect in 2016 is USD 108.08 bn, taking up 0.59% outstanding custody 541.41bn of total A share trading volume of USD 18.35 tn in 2016. balance is USD 110.46 bn, 1.7% of total As of latest data  There are 901 names in the Shenzhen stock pool with custody balance in release a total market cap of USD2.34tn, taking up 71% of CIBM  the market cap of the total Shenzhen Market Cap. QFII holding of A  Foreign institutions’ share stock  Bond Connect between HK and mainland is expected trading volume takes amounts to USD to launch in 2017, date TBA up 6.37% of total cash 52.21 bn.* • North bound will be launched firstly trading volume in • Institutional investors might first participate CIBM for 2016 and (not confirmed by regulator) takes up 7.71% of • Non-exchange bonds may first be included (not total cash trading confirmed by regulator) volume in Q1 2017.

Source: CSRC, SAFE, ChinaMoney, CFETS, China Bond, CSRC, SAFE training notes as of Nov 2016 *Original data in CNY: USD/CNY FX as of May 12th: 6.8948 60 Agenda

I. The 15 years of China’s capital market opening up

II. Investment Characteristics of QFII/RQFII

III. Evolution and Progress while Opening Up

IV. Appendix 1: Haitong Securities: A Pioneer in China’s Capital Market

V. Appendix 2: Stock Connect Vs. QFII/RQFII Scheme

61 Investment Characteristics of QFII/RQFII

Asset Allocation of QFII/RQFII*

QFII Asset Allocation RQFII Asset Allocation

Cash & Cash & Index Index Equity futures futures 40% 20% 30%

Securities Fund Equity 10% 60% Bond & Bond & Fixed Fixed Securities Income Income Fund 20% 10% 10%

QFII total asset: More than USD 87.02 bn RQFII total asset: More than USD 29.01 bn

Source: CSRC, SAFE training notes as of Nov 2016 *Original data in CNY: USD/CNY FX as of May 12th: 6.8948 62 Investment Characteristics of QFII/RQFII

Equity Investment Investment  Uphold value investment philosophy; Sector Preference  Have rather longer holding period of stocks and lower turnover rate compared to retail and  Market capitalization wise, (R)QFIIs prefer large caps. onshore institutions;  Top 10 stocks (R)QFIIs overweight*  Trade rationally, build positions at bottom and Name Ticker Sector sell off in a rising market; Bank of Beijing 601169.CH Banking  Have consistent judgment and actions; Bank of Nanjing 601009.CH Banking Kweichow Moutai 600519.CH Food & Beverages Returns

Midea Group 000333.CH Home Appliances  Have stable and relative high returns; Hikvision 002415.CH Electronics • From 2003 to 2016, (R)QFIIs have accumulated Wuliangye 000858.CH Food & Beverages returns ofmore than USD 21.76 bn, realizing a Gree 000651.CH Home Appliances Compound Annual Return of 16%. *

• Onshore mutual funds have slightly beat the Shanghai International Airport 600009.CH Airport index and delivered a compound annual return Hengrui Medicine 600276.CH Pharmaceutical of 2.9% in the past 10 years.  All of the 10 stocks (R)QFIIs overweight rank in top 5  Strict limit retreat; percentile in overall A share market capitalization. • Compared to onshore mutual funds, (R)QFIIs  Sector wise, among the stocks (R)QFIIs overweight, (R)QFIIs experienced less retreats in a bearish market. In concentrate on banks (36.2%), food & beverages (16.5%), 2016 onshore mutual funds delivered home appliances(12.3%), pharmaceutical(4.7%), etc; -15.55% return while (R)QFIIs delivered -6.58%  (R)QFIIs do not follow the hype and speculate on theme return. stocks

Source: * As of 2017 Q1 report •Thomson Reuters, Lipper 63 •*Original data in CNY: USD/CNY FX as of May 12th: 6.8948 Investment Characteristics of QFII/RQFII

Fixed Income & Futures Investment

Fixed Income Investment Futures Investment

 Majority of (R)QFIIs’ fixed income  According to regulations, (R)QFIIs investment is inCGB, financial bond. can only do index futures hedging. • Of the USD 110.46 bn custody  Open Interest must match stock balance of foreign cash positions. institutions, almost 93% is in  Due to the low turnover rate in stock CGB and financial bonds. cash positions, (R)QFIIs have lower Only USD 7.91 bn, 7% of the turnover than onshore institutions. custody balance is credit bonds. *  (R)QFIIs mainly use buy-and-hold strategy.  (R)QFIIs have a higher credit preference for credit bonds • High quality AAA rating • Typically prefer issuers like Petro China, SinoPec, State Grid

Source: Shanghai Clearing House, ChinaBond *Original data in CNY: USD/CNY FX as of May 12th: 6.8948 64 Agenda

I. The 15 years of China’s capital market opening up

II. Investment Characteristics of QFII/RQFII

III. Evolution and Progress while Opening Up

IV. Appendix 1: Haitong Securities: A Pioneer in China’s Capital Market

V. Appendix 2: Stock Connect Vs. QFII/RQFII Scheme

65 Evolution and Progress while Opening Up

More Companies & Larger Market Value* 3500 9 3223 8

3000 7.6507 7 In Jan 2002, there were only 1158 listed companies in the market. 6 By end of April 2017, there are 3223 listed companies in the market. 2500 # of Listed 5 Company In 2002, the market capitalization of total A share was only USD 0.57 tn. 1700 4 2000 Market Cap 3.5374 3 By end of April 2017, the market capitalization of A share has reached (USD tn) USD 7.65 tn already. 1500 2 1158 1 1000 0.5671 0 2002 Jan 2009 Dec 2017 Apr

More Vehicles & Instruments NEEQ (National Equities Exchange Quotations) 2013 December Margin Trading & Short Selling 2010 March MMA: SH-HK/SZ-HK/Bond Connect Index Futures 2014 November/2016 December/TBA 2010 February Instruments & Vehicles Index ETF Options: SSE 50 ETF, etc Treasury Futures 2015 February 2013 September

Source: CSRC, SAFE, Wind *Original data in CNY: USD/CNY FX as of May 12th: 6.8948 66 Evolution and Progress while Opening Up

Optimized Investors Structure*

Free Float Market Percentage by free float market capitalization 1.70% Capitalization USD 3.05 tn 5.10% 1.96% 2.20% Retail Tradable Market Capitalization USD5.95 tn 4.40% General Corporate Investor

Mutual Fund Total Market 7.60% Capitalization: USD 7.83 tn 43.62% Insurance & Social Security Fund 7.80% Registered private equity

(R)QFII

25.62% Broker proprietary holding

According to 2017 Q1 report, A share’ total market capitalization is USD 7.83 tn, tradable market capitalization is USD 5.95 tn and free float market capitalization is USD 3.05 tn.

In the past 15 years, professional institutional investors’ percentage of free float market capitalization has significantly increased compared to retail clients. Retail clients’ holding percentage of free float market capitalization has decreased from more than 70% to less than 45%.

By the end of 2017 Q1, the AUMs of private equity, insurance fund, segregated fund accounts have developed from zero to USD 0.38 tn, USD 0.26 tn and USD 0.19tn, respectively. Along with foreign investors like QFII, RQFII, Connect, etc, China’s capital market investor structure is significantly enriched and optimized.

Source: CSRC, SAFE, listed companies’ filing as of 2017Q1, Haitong Research House * National Team refers to stablization fund: CSF (China Securities Finance); Central Huijin Investment Limited; SAFE’s investment platforms. *Original data in CNY: USD/CNY FX as of May 12th: 6.8948 67 Evolution and Progress while Opening Up

Institutional Building

 Both Shanghai and Shenzhen Exchanges have regulated  Both exchanges have introduced suspension management. Related filings, corporate “Information Disclosure Direct Electronic governance procedures, suspension durations are Platform”. regulated.  The platforms do not need exchanges’  SH names should be suspended for no more than 5 prior approval in advance, ensuring the months; SZ names should be suspended for no more than promptness of public announcements 6 months 1 and listed companies are responsible for the truthfulness, accuracy and 4 thoroughness of the information.  Dividend tax policy encourages Regime Improvement long term investment by applying 2 a lower tax rate for stocks held for longer terms. 3  Both exchanges have regulated refinancing rules For stocks held within 1 month, regarding benchmark price, valuation, refinancing scale, the dividend tax rate is 20%; for backdoor listing, etc. stocks held between 1 month and  Regulations such as: benchmark date can only be the 1 year, the dividend tax rate is first day of issuance period; refinancing scale cannot be 10%; for stocks held longer than 1 more than 20% of total shares, the intervals between 2 year, dividends are tax exempt. refinancing should be more than 18 months, etc.

Source: CSRC, SAFE 68 Evolution and Progress while Opening Up

MSCI Inclusion Prospect New Proposal based on “Connect” access framework (under discussion) According to the obstacles impeding A share from inclusion in 2016 Recap on Obstacles and policy updates, MSCI proposes a new scheme to include A share.

 Recap on three main obstacles resulting The number of China A-shares in the MSCI China Index would be in no inclusion in 2016 * reduced to 169 from 448 under last year’s proposal; • QFII 20% monthly repatriation limit The weight of China A-shares in the MSCI EM Index would be • Voluntary suspension approximately 0.5%; • Pre-approval requirements by The weight of China A-shares in the MSCI China Index would be SH/SZ exchanges on financial approximately 1.7%; products linked to China A share Current Standard New Proposal (IF=5% )

What has Changed? Weight # of Sec Weight # of Sec Est. 1 Way Turnover MSCI China  SZ Connect was launched in Dec 2016. A shares 0% 0 1.7% 169 1.7% Investors can access around 1480 B shares 0.2% 2 0.4% 4 0.15% Shanghai & Shenzhen stocks without applying for a license and quota and are H shares 38.6% 70 37.7% 86 1.3% not subject to capital mobility restrictions. Red Chip 16.9% 30 16.6% 38 0.72%  SH/SZ exchanges have implemented new P Chip 21.5% 34 21.8% 50 1.58% suspension policies to regulate voluntary Overseas 22.8% 14 21.8% 18 0.32% suspension and have brought the voluntary Total 100% 150 100% 365 5.77% suspensions back to the pre-crisis level. MSCI EM - 833 - 1048 1.62% A shares 0% 0 0.5% 169 0.48%

Source: * MSCI: China A Inclusion consultation as of 2017 March 69 Agenda

I. The 15 years of China’s capital market opening up

II. Investment Characteristics of QFII/RQFII

III. Evolution and Progress while Opening Up

IV. Appendix 1: Haitong Securities: A Pioneer in China’s Capital Market

V. Appendix 2: Stock Connect Vs. QFII/RQFII Scheme

70 Why Haitong Securities?

We are …

 Earliest Securities House in China  A+H listed company  Pioneer in Innovative Businesses  Most extensive brokerage network  Leading investment bank in China  Most pre-eminent research team  BBB S&P Long Term Credit Rating  Component Stock of CSI300 and Heng Seng China Enterprise Index  Best Securities Firm  China Securities Golden Bauhinia Award

… Practicability, Innovation, Prudence, Excellence 71 Haitong Securities: A Pioneer in China’s Capital Market

Competitive Landscape, Extensive Client Base, Broad Network, Sound Financials

Competitive Landscape - Listed Financial Companies Nationwide Network Coverage

Heilongjiang Total Assets (USD billion) Revenue (USD billion) Jilin Liaoning Xinjiang Beijing Inner Mongolia CITIC CITIC Gansu Tianjin 86.71 5.5 Hebei Shanxi Shandong Haitong Haitong Qinghai 81.39 4.1 Shaanxi Henan Jiangsu Tibet Anhui Shanghai GTJA GTJA Hubei 59.75 3.7 Chongqing Zhejiang Sichuan Hunan Jiangxi Huatai Huatai Guizhou Fujian 58.26 2.5 Branches: >10 Yunnan Guangxi Guangdong Branches: 5 – 10 Source: Wind April, 2017 Hong Kong & Branches: <5 Hainan Macau Source: Bloomberg Source: Haitong Securities

Clients Base Main Financials Retails (million) 8.6 7.6 (USD million) 2012 2013 2014 2015 2016 4.6 4.7 5.0 3.8 4.1

Revenue 1326.691 1517.402 2609.361 5527.75 4065.554 Net Profit 440.8563 585.6313 1119.1 2298.824 1296.157 2010 2011 2012 2013 2014 2015 2016

Institutional & HNW (thousand) 25 22 19 18357.34 24546.24 51184.64 82358.33 81402.88 15 Total Assets 12 12 14 Equity 8516.647 8926.981 9920.813 15630.55 17700.78

2010 2011 2012 2013 2014 2015 2016 ROE 5.38% 6.52% 11.88% 17.56% 7.38% Source: Haitong Securities, April 2017 Source: 2012-2016 Annual Reports Haitong Securities

72 Haitong Securities: A Pioneer in China’s Capital Market

Global Presence

Ireland U.K. Poland

China Japan Portugal U.S.A. Spain Hong Kong/ Mexico Macau India

Singapore Brazil

73 Haitong Securities: A Pioneer in China’s Capital Market

Haitong Differentiator*

• Registered Capital USD 1.67 bn RELIABLE PARTNER in China • 2nd Largest Securities Company by assets/net assets/revenue/net profit from 2008- 2016 • BBB rating by S&P

• 337 business outlets in China, serving 8.56mm retail and 25,000 institutional and high net PERFECT COMBINATION of worth clients. The total assets of clients have exceeded USD 0.34 tn. Local knowledge and global • Global presence by Haitong International and Haitong Bank in 15 countries and regions presence • Outstanding Research Institute with Best Analysts in 20 Research Areas

FULL SET of Securities and • Cover all types of investors: banks/insurance/MFMs/PFMs/trusts/corporations/Individuals • Business lines: brokerage, investment banking, asset management, trading and solution, Fund services direct investment, international business, financial leasing: 1+1+...+1>N

• 1st batch of securities firms to participate in pilot programs for innovative products: PILOT in Innovative Business quantitative hedge, ETF arbitrage, stock index futures, commodity futures, margin trading, NEEQ, Shanghai-Hong Kong stock connect, CIBM products

ROBUST Compliance and Risk • The only firm established in the 80s that has never changed its name, received any Management System government capital injections, or been acquired by another entity

.*Original data in CNY: USD/CNY FX as of May 12th: 6.8948 74 Haitong International Business - Serving Global Investors

Market Share Impressive Performance As the earliest established QFII team, we are proudly serving:  Haitong is in a leading position in the QFII/RQFII – 1st Buy side QFII business; ranks top 2 in terms of trading volume – 1st Fixed income fund and client numbers; – 1st A share open end fund  Our (R)QFII client asset exceeded USD 7.25bn*, – 1st small cap fund accounting for 6.25%+ of total (R)QFII assets; – 1st enhanced active ETF  For Bond liquidity, we helped to find over 50% of – 1st S&P China Index Fund the liquidity for our clients. – The largest QFII open end fund – We proudly serve SWFs, Pensions, Endowments,  Prominent Execution Capabilities – Experienced Foundations, AMCs, investment bank, commercial trading team with leading execution platform bank, insurance across the world. which has been chosen by 80% of broker-dealer type QFII clients. Leading position in terms of asset market share  Comprehensive Research Service - Our competitive and comprehensive research service (R)QFII Total Asset has gained us business relationships with all the 6.25% leading QFII investment advisors in the market.

 Best Overseas Institutional Sales Team by New Haitong Fortune Magazine, the most influential research Others 93.75% award in China

Source: * as of 2017 Q1 *Original data in CNY: USD/CNY FX as of May 12th: 6.8948 75 Agenda

I. The 15 years of China’s capital market opening up

II. Investment Characteristics of QFII/RQFII

III. Evolution and Progress while Opening Up

IV. Appendix 1: Haitong Securities: A Pioneer in China’s Capital Market

V. Appendix 2: Stock Connect Vs. QFII/RQFII Scheme

76 Stock Connect Vs. QFII/RQFII Scheme

SH-HK Stock Connect QFII/RQFII

QFII: It depends on the type of QFII applicants. The applicant should meet Northbound trading: No specific requirement specific requirements on its financial status, AUM, credit, internal control, etc. Investor Qualification Southbound trading: Institutions or individuals with at least RMB 500,000 in securities and cash accounts RQFII: The applicant must meet requirements set by CSRC and SAFE, such as it should have a legal fund management license from its authorities. Northbound trading: 568 Eligible Names ·SSE 180 Index / 380 Index; dual-listed A & H Shares ; Southbound trading:[266 Eligible Names All stocks traded in Shanghai and Shenzhen Stock Exchanges. Equity Investment Targets ·Hang Seng Composite LargeCap & MidCap Indices; dual- Also, QFII/RQFIIs can participate in IPOs. listed A & H shares; Investors cannot participate in IPOs. Yes, e.g. bonds, funds, ABS, preferred shares, and other securities approved Other Investment Targets No by CSRC.

QFII: total quota of USD 150bn, of which USD 76.7bn has been approved RQFII: total quota of RMB 970bn, of which RMB 404.9bn has been approved. RMB 270bn for Hong Kong; RMB 50bn for Canada, Australia, Switzerland, Northbound trading: RMB 300bn Luxembourg, Chile, Hungary, Malaysia, Thailand and UAE respectively; RMB Aggregate Quota Southbound trading: RMB 250bn 80bn for U.K., France, and Germany, respectively; RMB 30bn for Qatar; RMB 120bn for South Korea; RMB 100bn for Singapore, RMB 250bn for U.S..

Total quota can be increased according to market demands from time to time.

Northbound trading: RMB 13bn Southbound trading: RMB 10.5bn Daily Quota 【Once daily quota is reached, no buy orders will be No accepted in that trading day, but sell order still acceptable. 】

Quota for Individual Depends on the applicant’s institution type, AUM, financial status, etc. Each No Investors QFII applicant would be granted a quota ranging from USD 50mn to 1.5bn. 77 Stock Connect Vs. QFII/RQFII Scheme (cont’d)

SH-HK Stock Connect QFII/RQFII Northbound trading: Overseas investors place orders at SSE through Hong Kong brokers and SEHK. Trading Channel QFIIs/RQFIIs place orders at SSE and SZSE through local Southbound trading: Domestic investors place orders at SEHK brokers. through local brokers and SSE. Available when both markets are open for trading, and banking services are available in both markets on the corresponding settlement days. Take 2015 for example, 13 All trading days of SSE and SZSE. Trading Day trading days of SSE will not be open for Northbound trading, and 20 trading days of SEHK will not be open for Southbound trading. Cross-board Capital HKSCC and ChinaClear will perform obligations of clearing and QFIIs/RQFIIs need to remit capital and exchange foreign settlement, therefore investors will not have to remit funds or currencies into RMB by themselves under their approved Management exchange currencies by themselves. quota. SEHK will apply similar checking on all Northbound sell orders to ensure there is no overselling by individual Pre-Trade Checking Exchange Participants. There are two models: the Current N.A. Pre-Trade Checking Model and the Enhanced Pre-Trade Checking Model Only limit orders are acceptable, market orders are not Both market and limit orders are acceptable. Order Type allowed. HKSCC and ChinaClear provide nominee services and manage corporate actions for investors, including collecting and distributing cash dividends, collecting voting instructions, rights issue etc.

Northbound trading: HKSCC act as the nominee to hold SSE QFIIs/RQFIIs are actual securities holders and they participate Arrangement for Securities on behalf of Hong Kong and overseas investors. in corporate actions directly, e.g. voting, rights issue, etc. Corporate Actions Southbound trading: ChinaClear act as the nominee to hold SEHK Securities on behalf of domestic investors.

Some corporate actions such as initial public offering etc. : no. 78 Stock Connect Vs. QFII/RQFII Scheme (cont’d)

SH-HK Stock Connect QFII/RQFII Northbound trading: Commission, handling fee, securities management fee(CSRC levy), transfer fee, stamp duty(on the seller), etc. • Capital Gain Tax: Waived • Dividend Tax: for HK investors (both individual and institutional), 10% withheld by the issuers Commission, handling fee, securities management Southbound trading: Commission, transaction levy, fee(CSRC levy), transfer fee, stamp duty(on the seller), transaction fee, trading tariff, stamp duty, etc. etc.

Taxes and Fees • Capital Gain Tax: individual investors are exempted from CTG, while institutional investors • Capital Gain Tax: Waived since Nov/17/2014; are not. • Dividend Tax: withheld by the listed companies. • Dividend Tax: 20% dividend tax for individual investors (withheld by ChinaClear) ; for institutional investors, the dividend income is subject to corporate tax (exempt if the dividend income is from H share that is held longer than 12 months).

Block Trading No Yes

Hedging (via China onshore No Yes, via China onshore index futures. instruments)

79 Disclaimer

This document was prepared by Haitong Securities Co., Ltd. in good faith upon sources believed to be reliable but no representation or warranty expressed or implied is made as to their accuracy or correctness. Haitong Securities Co. Ltd accepts no liability for any direct or consequential loss or damage arising from any use of this document or its contents. All information and opinion expressed here is subject to change without notice. The copyright belongs to Haitong Securities Co., Ltd. No part of this document may be published or copied in any form or by any means without the written permission of Haitong Securities Co., Ltd.

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80 Important Disclosure

Haitong may also engage in securities transactions in a manner inconsistent with this document and with respect to financial instruments covered by this document.

This document is provided for informational purposes only. Haitong will not accept any responsibility for any loss resulting from the use of the information or opinions referred in this document.

Additional information is available upon request.

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