#1Markets and Securities Services Citi September 2016 Accessing China Roadshow: Latest Developments FTSE Russell#2Summary ⚫ China A Shares - Potential Transition To Global Indexes Shanghai & Shenzhen - Hong Kong Stock Connect, You Need To Get Ready Now ⚫ China Connect - Launch of Shenzhen - Hong Kong Stock Connect • China Interbank Bond Market Access citi H#3China A Shares Potential transition to global indexes ftserussell.com FTSE Russell Sudir Raju, Manging Director September 2016#4FTSE Russell is not an investment firm and this presentation is not advice about any investment activity. None of the information in this presentation or reference to a FTSE Russell index constitutes an offer to buy or sell, or a promotion of, a security. This presentation is solely for informational purposes. Accordingly, nothing contained in this presentation is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of making any investment through our indexes. Views expressed here are subject to change. These views do not necessarily reflect the opinion of FTSE Russell or the London Stock Exchange Group plc. FTSE Russell 4#5Agenda • China's investment landscape • Investor access to mainland China • Investment schemes for accessing mainland China • FTSE country classification approach • Index reviews of China A-shares • FTSE Russell's toolset to support our clients FTSE Global China A Inclusion Indexes • Any Questions? FTSE Russell 5#6China's investment landscape (1) 1. Largest economy in the world in PPP terms¹ - Largest manufacturer in the world² - Largest online retail market in the world³# - Largest share of global greenhouse gas emissions (28%)4 - Largest investor in renewable energy5 - Largest population in the world (1.4 billion) 6 2. Second largest equity market in the world? 3. Third largest fixed income market in the world? 1. International Monetary Fund, April 2016 2. McKinsey, June, 2013 3. Morgan Stanley, 13 March, 2015. # China is also expected to become the world's largest retail market by 2018, 4. International Monetary Fund, April 2016 5. The Financial Times, 9 January, 2015 6. World Bank, 2014 7. FTSE Russell FTSE Russell 6#7Number of Companies China's investment landscape (2) Listings on the Shanghai & Shenzhen Stock Exchanges have almost doubled in the past 10 years • Total market value has increased by a multiple of 6 Shanghai & Shenzhen Stock Exchanges Total Shanghai & Shenzhen Stock Exchanges Total Company Listings (2006-2015) Market Value USDbn (2006-2015) 3,000 2,500 2,000 1,500 1,000 500 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 FTSE Russell Total Market Value (USDbn) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Shanghai & Shenzhen Stock Exchanges - data as at 31 May 2016 7#8China's investment landscape (3) • China's equity market expansion is influencing global markets • 7 of the top 10 companies in Asia Pacific are from China • 4 of the top 10 global banks are from China Top Ten Companies - Asia Pacific Total Market Value (USDbn) Top Ten Companies - Global Banks Total Market Value (USDbn) Rank Company Country Rank Company Country 1 China Mobile China 233.5 1 Wells Fargo & Company USA 256.5 2 ICBC China 224.5 2 JPMorgan Chase & Co USA 240.3 3 Tencent Holdings China 209.1 3 ICBC China 224.5 4 PetroChina China 195.7 4 China Construction Bank China 162.2 5 China Construction Bank China 162.2 5 Bank of America USA 154.4 6 Toyota Motor Japan 159.6 6 Agricultural Bank of China China 153.7 7 Agricultural Bank of China China 153.7 7 Bank of China China 141.6 8 Bank of China China 141.6 8 Citigroup USA 138.7 9 Samsung Electronics South Korea 135.5 9 HSBC Holdings UK 126.4 10 Taiwan Semiconductor Taiwan 123.6 10 Commonwealth Bk of Aus Australia 95.3 FTSE Russell Source: FTSE Russell - data as at 31 May 2016 8#9China's investment landscape (4) • International investors only hold a small proportion of China A-shares • The Shanghai and Shenzhen Stock Exchanges at the end of March 2016 had a combined market value of USD 7 trillion • Total aggregate approved QFII/RQFII quota was USD 153.9 billion • Total international take-up of China A-shares is 2-3% FTSE Russell Source: FTSE Russell, SAFE, Shanghai & Shenzhen Stock Exchanges - data as at 31 March 2016 9#10Investor access to China via overseas listings • P Chips have the largest number of listings but H-shares are the largest by weight • N-shares market values have grown considerably since Alibaba's listing in 2014 Weight in Universe (%) Number of Constituents 7 0.3 1.9 57 61 16.9 FTSE Russell 167 136 22.4 39.4 23 19.2 • B-shares • H-shares • N-shares ●P Chips • Red Chips ⚫S Chips Source: FTSE Russell - data as at 31 May 2016 10#11China A-shares are significantly larger than other China share class listings • A-shares are largest by number and listing • Only a small number of investors have access to the mainland market Number of Constituents 57 136 23 167 1,541 61 7 64.2 Weight in Universe (%) 0.7 14.1 6.9 8.0 6.0 0.1 B-shares • H-shares • N-shares P Chips Red Chips •S Chips • A-shares FTSE Russell Source: FTSE Russell - data as at 31 May 2016 11#1228.4 China Share Classes - A-shares • - Largest industries – Basic Materials, Industrials, Consumer Goods & Financials • Limited exposure to Oil & Gas, Telecoms & Utilities A-shares 6.3 1.7 11.5 5.6 14.8 6.7 21.7 Traditional industries = 48% New economy industries = 19% FTSE Russell Oil & Gas Basic Materials Industrials Consumer Goods Health Care Consumer Services Telecoms Utilities Financials Technology Source: FTSE Russell - data as at 31 May 2016 12#1328.4 China Share Classes - H-shares • H-shares are dominated by Financials A-shares 6.3 1.7 11.5 2.8 5.6 14.8 6.7 FTSE Russell 21.7 63.8 H-shares 1.2 9.0 4.0 9.8 4.3 103803 Traditional industries = 18% Financials account for 64% Oil & Gas Basic Materials Industrials Consumer Goods Health Care Consumer Services Telecoms Utilities Financials Technology Source: FTSE Russell - data as at 31 May 2016 13#14China Share Classes - P Chips P Chips are dominated by Technology (i.e. Tencent) 28.4 A-shares 6.3 1.7 11.5 2.8 5.6 14.8 6.7 FTSE Russell 21.7 63.8 H-shares 1.2 9.0 4.0 9.8 4.3 53.8 033003 P Chips Technology accounts for 54% 3.4 4.4 44.6 14.8 Oil & Gas Basic Materials Industrials Consumer Goods Health Care 4.0 5.2 Consumer 2.1 Services 7.8 Telecoms Utilities Financials Technology Source: FTSE Russell - data as at 31 May 2016 14#15China Share Classes – N-shares - • N-share are dominated by Consumer Services (Alibaba = 43%) & Technology (Baidu = 24%) A-shares 6.3 1.7 2.8 5.6 6.7 11.5 21.7 63.8 H-shares 1.2 14.8 N-shares 0.4 0.6 Technology 9.0 4.0 9.8 4.3 53.8 83003 نه تنه P Chips Oil & Gas 3.4 4.4 4.6 14.8 Basic Materials Industrials Consumer Goods Health Care 4.0 5.2 Consumer 2.1 Services 7.8 Telecoms Utilities Financials Technology 28.4 37.2 0.2 FTSE Russell 61.6 Consumer Services Source: FTSE Russell - data as at 31 May 2016 15#16China Share Classes - Red Chips Telecoms, Oil & Gas, Industrials & Financials account for 85% of Red Chips • China Mobile is the largest Red Chip (34%) 28.4 A-shares 6.3 1.7 11.5 2.8 5.6 6.7 37.2 21.7 63.8 H-shares 1.2 9.0 4.0 9.8 4.3 N 0303 14.8 N-shares Financials 0.4 0.6 Red Chips 2.5 12.4 17.6 0.3 0.2 FTSE Russell 61.6 7.4 37.6 53.8 P Chips Oil & Gas 3.4 4.4 4.6 Oil & Gas 16.9 Industrials 14.8 Basic Materials Industrials Consumer Goods Health Care 4.0 5.2 Consumer 2.1 Services 7.8 Telecoms Utilities Financials Technology 2.3 2.6 Telecoms Source: FTSE Russell - data as at 31 May 2016 16#17China Share Classes - B-shares • Basic Materials, Industrials & Consumers Goods account for 69% of all B-shares 28.4 A-shares 6.3 1.7 11.5 21.7 2.8 5.6 6.7 14.8 N-shares 0.4 0.6 63.8 37.2 0.2 FTSE Russell 61.6 7.4 H-shares 1.2 9.0 4.0 9.8 Red Chips 2.5 12.4 17.6 0.3 37.6 4.3 03003 53.8 P Chips 3.4 4.4 4.6 B-shares 14.8 Oil & Gas Basic Materials Industrials Consumer Goods Health Care 4.0 5.2 Consumer 2.1 Services 7.8 Telecoms Utilities Financials Technology 28.4 4.2 7.9 10.2 3.2 16.9 12.0 2.3 1.5 2.6 32.6 Traditional industries = 69% Source: FTSE Russell - data as at 31 May 2016 17#18Access to China A-shares is limited via overseas listings • Only 24% of China A-share companies by market cap can be accessed by other China share classes Large cap China A-shares have the highest representation but still only 34% % of China A-shares by Market Cap Accessed by Other China Share Classes (May 2016) FTSE Russell 40 34.4 35 30 GN NW 25 20 15 10 5 0 7.2 3.0 FTSE China A Large FTSE China A Mid Cap Index Cap Index 23.7 FTSE China A Small Cap Index FTSE China A All Cap Index Source: FTSE Russell - data as at 31 May 2016 18#1916 14 China A-shares as a diversification tool • Historically investor access to China A-shares has been via large caps that have shown lower returns • China A-share mid/small cap indexes have performed strongly over past 10 years • China A-share index correlations to global equities (incl. China) are low. 10 Year Annualised Relative Returns Compared to the FTSE Global All Cap Index (USD TRI %) FTSE China A All Cap Index Rolling 12 Month Correlations (2006-2016) 12 10 8 6 4202 .th. -2 FTSE China A Large Cap Index FTSE Russell Correlation 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 FTSE China A Mid Cap Index FTSE China A China A All Small Cap Cap Index FTSE FTSE China All Cap Index Index FTSE Emerging All Cap Index -0.1 Jina 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Past performance is no guarantee of future results. Returns shown may reflect hypothetical historical performance. Please see the page 50 for important legal disclosures. FTSE China All Cap Index FTSE Emerging All Cap Index FTSE Global All Cap Index Source: FTSE Russell - data as at 31 May 2016 19#20Be prepared for a bumpy ride • Historically China A-share indexes have seen large swings in performance • In more recent times the China A-shares performance has decoupled from global markets • China A-share indexes have a higher historical volatility FTSE Year-on-Year Returns (USD TRI %) (2006-2016) 1 Year Rolling Volatilities (%) (2006-2016) 200 150 100 50 60 60 50 40 30 0 -50 10 -100 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 FTSE Russell FTSE China A All Cap Index FTSE Emerging All Cap Index Past performance is no guarantee of future results. Returns shown may reflect hypothetical historical performance. Please see the page 50 for important legal disclosures. FTSE Global All Cap Index Source: FTSE Russell - data as at 31 May 2016 20#21Investment schemes for accessing mainland China • Qualified Foreign Institutional Investor (QFII) Scheme - (2002) • Renminbi Qualified Foreign Institutional Investor (RQFII) Scheme - (2011) • Qualified Domestic Limited Partnership - (2013) • Shanghai-Hong Kong Stock Connect Scheme - (2014) • Mutual Recognition of Funds (MRF) Scheme - (2015) • China Interbank Bond Market Access Scheme - (2016) FTSE Russell 221 21#22Investment schemes for accessing China A-shares- QFII, RQFII and Stock Connect QFII RQFII Shanghai-Hong Kong Stock Connect (North Bound) Launch Year 2002 Scheme Currency Eligible Entities USD Eligible Investments Commercial banks, securities companies, fund management firms, insurance companies, pension funds, sovereign wealth funds. Size and operational experience qualifications apply Stocks, bonds, funds, warrants, IPOs, index futures Total Allocated Quota and USD 81bn, 273 entities 2011 RMB Financial institutions based in 15 jurisdictions e.g. USA, Hong Kong, U.K., France, Singapore, Germany, South Korea, Australia, Switzerland, Luxembourg, Canada Same as QFII RMB 502bn (USD 76bn), 165 entities 2014 RMB All Hong Kong and overseas investors (including both retail and institutional) No approval needed • All constituents stocks of SSE180 and 380 Indexes • • All dual listed shares (H shares that have A-shares in Shanghai SE) Exceptions: Stocks on "risk alert board", IPOS RMB 300bn (USD46bn) in aggregate balance # of Licensees (May 2016) Liquidity FTSE Russell • • RMB 13bn (USD2bn) daily cap. 3 months lock up period (Was 1 year, before Feb. 2016) • Open-Ended Funds: 1-year injection • period. Daily injection and repatriation, no lock up period Daily and no restriction for sell transaction Open-ended funds can invest/repatriate on a daily basis (Was weekly, before Feb 2016) Cannot repatriate more than 20% of previous year end's total assets each month • • Other products: 6 month investment period, 1 year lock-up, monthly repatriation • Buy-trades are subject to quota on a net buy Cannot buy-sell-then-buy the same stock on the same day Source: FTSE Russell, CSRC, SAFE 22#23QFII and RQFII quota by investor type Historical QFII and RQFII by Investor Type (2003 to 2016) Quota (USD bn) 160 140 120 100 500 450 400 350 300 250 200 150 100 50 50 80 60 60 40 40 20 20 0 Oct 2003 Oct 2004 Oct 2005 Oct 2006 Oct 2007 Oct 2008 FTSE Russell Asset Management Companies Sovereign Wealth Fund Other Investors Oct 2009 Oct 2010 Oct 2011 Commercial Banks Insurance Companies No. of Licenses (RHS) Oct 2012 Oct 2013 Oct 2014 Oct 2015 Securities Companies Pension Fund 0 Source: FTSE Russell, CSRC, SAFE - data as at 31 May 2016 No. of Licenses 23#24FTSE country classification approach Process is carried out annually in September Classifies countries as either developed, advanced emerging, secondary emerging or frontier Assessment on twenty one "Quality of Markets" criteria and on the country's economic status as measured by GNI per capita China A-share market has been on the Watch List for potential inclusion in secondary emerging since 2005 It fails two tests out of the nine Secondary Emerging Quality of Markets criteria based on review results of September 2015 **SE Russell 24 24#25FTSE country classification approach FTSE Quality of Markets Criteria for the China A-shares Market CRITERIA MARKET AND REGULATORY ENVIRONMENT Secondary Emerging China A-share 2015 Formal stock market regulatory authorities actively monitor market (e.g. SEC, FSA, SFC) X Pass No objection to or significant restrictions or penalties applied to the investment of capital or the repatriation of capital and income CUSTODY AND SETTLEMENT X Not met Settlement - Rare incidence of failed trades X Pass Custody - Sufficient competition to ensure high-quality custodian services X Pass Clearing & Settlement - T+3, T+5 for Frontier X T+0 DEALING LANDSCAPE Brokerage - Sufficient competition to ensure high quality broker services X Pass Liquidity - Sufficient broad market liquidity to support sizable global investment Transaction Costs - Implicit and explicit costs to be reasonable and competitive Transparency - Market depth information / visibility and timely trade reporting process Pass X Pass X Pass Source: FTSE Group as at September 2013 25SE Russell 25#26FTSE country classification approach Areas of Concern for the China A-shares Market Capital mobility, e.g. approval process, lock-up period and repatriation cycle of the QFII/RQFII schemes • Settlement and clearing (security settlement on T+0, money settlement on T+1) Company suspensions SE Russell 26#27China Suspensions • On 9 July 2015, 664 of the 1,424 constituents in the FTSE China A All Cap Index were suspended/halted • On 31 May 2016, 121 companies or 5.94% are suspended/halted in the index Number of Suspensions and Trading Halts in the FTSE China A All Cap Index 700 (2008-2016) Number of Suspensions and Trading Halts 600 500 400 12,000 10,000 8,000 6,000 300 200 4,000 Index Value 100 wm 2,000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 - FTSE China A All Cap Index (RHS) - Suspensions - Trading Halts Total (LHS) 27SE Russell Source: FTSE Russell, Bloomberg - data as at 31 May 2016 27#28Index reviews of China A-shares Including China A-shares in the Asia Pacific ex Japan review universe would impact the index reviews . China will become 55% of the review universe Large swings in market value would impact the review of other countries and increase turnover India would be the next largest market with 8.8% China should be reviewed as stand alone country • Similar to how FTSE Russell reviews Japan • • All China share-classes will be reviewed in one universe FTSE Russell's free float rule would need to be updated PetroChina is the 4th largest company (USD 195.7bn) in Asia Pacific but its A-share only has a free float of 2.5% (USD 4.5bn) 28SE Russell 28#29FTSE Global China A Inclusion Indexes • Created to support the transition of China A-shares to FTSE's Global Indexes The Inclusion Indexes offer various options, and an investor can determine which is most relevant: • • Allocation of A-shares based on aggregate quota granted to QFIIs and RQFIls. As the quota amount increases the weight of China A-shares becomes larger in FTSE's global benchmarks. This is the headline version of the China A Inclusion Indexes Allocation of A-shares based on the China's foreign ownership limit, but not QFII/RQFII quota amounts. Inclusion indexes using this allocation method are referred to as China A Inclusion (No Quota) Indexes A customised allocation of A-shares Market participants who do not wish to have China A-shares in their global benchmarks can continue to use the FTSE Global Equity Index Series, which will remain unchanged . The mechanism can accommodate other market access schemes, such as the Shanghai- HK and potentially the Shenzhen-HK Stock Connect programme, when they are considered suitable 29SE Russell 29#30Transition of China A-shares in Global Benchmarks 35 Weight in FTSE Emerging Markets All Cap China A Inclusion Index 30 25 25 Weight of China A-shares (%) 20 15 10 10 5 0 Weight in FTSE Global All Cap China A Inclusion Index 26.9% 35.8% Current China A-shares weight adjusted by Aggregate Approved Quota China A-shares weight adjusted by Foreign Ownership Limits China A-shares weight adjusted by Free Float 5.9% 4.4% 3.0% 0.5% Dec 2005 Dec 2007 Dec 2009 Dec 2011 Dec 2013 Dec 2015 Time FTSE Russell Past performance is no guarantee of future results. Returns shown may reflect hypothetical historical performance. Please see the page 50 for important legal disclosures. This graph contains forward-looking representations based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Source: FTSE Russell - data as at 31 May 2016 30#31China's expansion in various FTSE Emerging Markets All Cap Indexes (%) 60 50 50 40 40 % 30 FTSE Emerging All Cap Index FTSE Emerging Markets All Cap China A Inclusion Index 5.9 FTSE Emerging Markets All Cap China A Inclusion (No Quota) Index Hypothetical index with neither FOL nor R/QFII quota restrictions for A- shares 35.8 26.9 25.0 23.5 10 18.3 16.0 20 20 PTSE Russell China (excluding China A-shares) China (including China A-shares at their aggregate quota) China (including China A-shares at their foreign ownership adjusted weight) China (including China A-shares at their free float adjusted weight) China A-share ■■B-share, H-share, Red chip, P chip Source: FTSE Russell - data as at 31 May 2016 31#32Summary & questions • The FTSE Global China A Inclusion Indexes are tools to help clients transition/respond to the inclusion of China A-shares in global benchmarks • The indexes are evolving to reflect changes in the China A-shares market and the needs of our clients • The indexes includes China A-shares at a weighting equivalent to their aggregate approved R/QFII quota, foreign ownership limits and customised allocations • In the headline version the weighting of China A-shares will increase as access to the mainland market increases • FTSE Russell will continue to work with our clients and regulators/exchanges to support the inclusion of China A-shares in our benchmarks FTSE Russell 20 32#33Question Q6. Should China A-shares be included in global benchmarks? a) Yes, access is sufficient for their inclusion b) No, it is too early for their inclusion c) Still do not know FTSE Russell 33#34Disclaimer © 2016 London Stock Exchange Group plc and its applicable group undertakings (the "LSE Group"). The LSE Group includes (1) FTSE International Limited ("FTSE"), (2) Frank Russell Company ("Russell"), (3) FTSE TMX Global Debt Capital Markets Inc. and FTSE TMX Global Debt Capital Markets Limited (together, "FTSE TMX") and (4) MTSNext Limited ("MTSNext"). All rights reserved. FTSE Russell® is a trading name of FTSE, Russell, FTSE TMX and MTS Next Limited. 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All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index. This publication may contain forward-looking statements. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking statements are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially from those in the forward-looking statements. Any forward-looking statements speak only as of the date they are made and no member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking statements. FTSE Russell 34#35FTSE Russell ftserussell.com#36Shanghai & Shenzhen – Hong Kong Stock Connect You Need To Get Ready Now 5 Sep 2016 Ⓡ Strictly Private and Confidential For Institutional Clients Only cíti#37Shenzhen VS Shanghai Connect I Trading Hours Order Cancellation SZ Connect Opening call auction: 9:15-9:25 ⚫ Continuous auction: 9:30-11:30; 13:00-14:57 Closing call auction: 14:57-15:00 • • SH Connect Opening call auction: 9:15-9:25 Continuous auction: 9:30-11:30; 13:00-15:00 Not applicable Order can be sent 5 minutes prior to the start. Unexecuted Orders Can be cancelled during trading hours except 09:20- 09:25 and 14:57-15:00 Can be cancelled during trading hours except 09:20-09:25 Eligible Stock 37 Confirmed Orders Order may be cancelled by SZSE trading system after it has been confirmed due to the unsuccessful order validation. An example of this is the order price exceeded the current price range. ⚫ Around 880 (Main: ~270, SME: ~410, ChiNext: ~200) ⚫ Market Capitalization ~ RMB 15 Trillion (74%) ADT: RMB230 bn (68%) Constituent stocks of the SZSE Component Index and SZSE Small/Mid Cap Innovation Index with market capitalization >= RMB 6 billion Shares dual listed on SZSE and SEHK (A+H shares) • ⚫ Not applicable • Around 567 • Market Capitalisation ~ RMB 21.8 Trillion (85%) • ADT: RMB137 bn (68%) • Constituent stocks of the SSE 180 Index and SSE 380 Index Shares dual listed on SSE and SEHK (A+H shares) Except : shares not traded in RMB; IPOs (Risk Warning Board: Can only Sell) ETF will be announced separately after Shenzhen-Hong Kong Stock Connect has been in operation for a period of time and upon the satisfaction of relevant conditions More focus on new industries security e.g. Technology companies • More focus on traditional industries e.g. banking and utility etc. Source: http://www.hkex.com.hk/eng/market/sec_tradinfra/chinaconnect/Documents/Briefing%20to%20Participants%20on%20Shenzhen-Hong%20Kong%20Stock%20Connect.pdf Data as of Aug 2016 citi#38Shenzhen VS Shanghai Connect II SZ Connect SH Connect Eligible Investors *All HK and overseas investors except for ChiNext Market of SZSE, only those investors who are institutional professional investors * *All HK and overseas investors Quota 'Aggregate Quota abolished Fees 'Daily Quota RMB 13bn *Same fees as Shanghai Connect 'Daily Quota RMB 13bn Operations model *Same model as Shanghai-Connect, same SPSA and integrated model applicable for Shenzhen Connect. Pre-trade checking CCASS 5-digit Stock Code *00XXXX ->7XXXX (Main Board & SME Board) *300XXX -> 77XXX (ChiNext Market) Require *60XXXX- -> 9XXXX (To be confirmed by HKEX) *Subject to resolution of related regulatory issues, other investors can trade ChiNext stocks listed on Shenzhen Stock Exchange 3 a Source: http://www.hkex.com.hk/eng/market/sec_tradinfra/chinaconnect/Documents/Briefing%20to%20Participants%20on%20Shenzhen-Hong%20Kong%20Stock%20Connect.pdf Data as of Aug 2016 citi#39Trading Information. Trading on Hong Kong Holidays Open only: Order Types Order Modification Board Lot Odd Lot Max Order Size Spread Price Limit Day (Turnaround) Trading Manual Trade / Block Trade Margin Trading Stock Borrowing & Lending (SBL) Short Selling Non-trade Transfer •⚫ both SEHK and SSE/SZSE are open for business; and banking services of both markets are open on the corresponding money settlement days Limit orders only (SSE/SZSE limit orders may be executed at or better than the input price) Not allowed (must cancel and re-input order) 100 shares (applicable to buy orders only) Sell orders only (should be made in one single order) 1 mn shares Uniform at RMB 0.01 •In general ±10% on previous closing price (±5% for ST and *ST stocks) •Price of buy orders must not be lower than 3% of current best bid price (in its absence the latest trade price; and in the absence of both then previous closing price) Not allowed Not allowed •Only eligible A shares are allowed •SSE/SZSE may suspend margin trading in specific A shares if the volume of margin trading in such A shares exceeds a certain threshold •Only allowed for (i) covered short selling and (ii) meeting pre-trade checking •Only eligible persons may lend China Connect Securities •Only eligible A shares are allowed (see List of Eligible SSE/SZSE Securities for Short Selling) •Short selling orders must be (i) flagged; (ii) in multiple of 100 shares and (iii) subject to tick rule •Short selling quantity of is subject to a daily limit (1%) and a 10-day cumulative limit (5%) ⚫SSE/SZSE may suspend short selling of specific A shares if the short selling activities of such A shares exceed a certain threshold •There are reporting requirements (Short Selling Weekly Report, Large Open Short Position Report) •Short selling statistics are available on HKEX website to facilitate short selling Allowable for: ⚫SBL for covered short selling purpose (not more than one month duration); ⚫SBL for the purpose of satisfying the pre-trade checking (1 day duration which cannot be rolled over); •Transfers between EPs and their clients for the purpose of rectifying error trades; •Post-trade allocation of shares to different funds/sub-funds by fund managers; ⚫Other situations specified by SSE, SZSE and ChinaClear. 3 C Source: http://www.hkex.com.hk/eng/market/sec_tradinfra/chinaconnect/Documents/Briefing%20to%20Participants%20on%20Shenzhen-Hong%20Kong%20Stock%20Connect.pdf Data as of Aug 2016 citi#40Why Citi? Citi is committed to the China business with a full end-to-end solution: Complete end-to-end solution: Best-in-class research Trade execution 40 FX Facilitations Post Trade and Custodian FOO Commitment to Stock Connect from day 1 of Stock Connect launch in October 2014: Citi clients have been able to trade Stock Connect across all execution channels (high touch, algorithms and program trading) Research coverage of 143 A shares covered as of August (and 65 at launch) (Shanghai-listed: 90/ Shenzhen-listed: 53) No 1 foreign broker for SPSA account 1 (Source: HKEX) CNH liquidity: Citibank is one of the 7 CNH Primary Liquidity Providers who is also a full-service broker citi#41Citi is ready for Shenzhen Connect • Citi target to be ready to trade Shenzhen Connect on day 1 for all desks (High Touch, Program Trading, and Electronics Execution) Citi will handle the closing auction in Shenzhen (there is no closing auction in Shanghai) Citi algorithms will be optimized for seamless execution quality and consistency in Shenzhen Same Custodian and Trading accounts can be used for both Shanghai and Shenzhen 41 citi#42Citi Research Citi Research Global footprint : 284 Analysts Covering 3373 stocks 67 countries · • • • First mover in A-share coverage: covered 65 A-shares when SH-HK Connect launched in Oct 2014 As of August 2016, Citi Research covers 143 A-shares (Shanghai-listed: 90/Shenzhen-listed: 53) with focus on Healthcare, Media, Tech and Consumer Consistently ranked #1 for HK/China stock recommendation performance among 18 peers, per StarmineⓇ 2016 Asia Institutional Investor(II) survey: ✓ The most improved firm: Citi racks up the biggest gains of the region's best sell-side analysts ✓ 12 teams ranked Top 3: #1 in Property, #1 in Small/Mid-Cap, and #1 in Utilities; ✓ #2 in HK, #3 in Insurance, #3 in Oil & Gas, and #3 in Transportation 2015 II China survey: #1 in Utilities, #1 in Property, #1 in Small-Mid caps 42 citi#43Citi China Macro Day Markets APAC Corporate Access Citi China Macro Day: China's economy in a Global Context 2016 20 September Mandarin Oriental Hotel Hong Kong LIU Mingkang 43 First Chairman of the China Banking Regulatory Commission (CBRC) between March 2003 and October 2011. He was also the Deputy Director of the Committee for Economic Affairs of the National Committee of the Chinese People's Political Consultative Conference and a member of the Monetary Policy Committee of the People's Bank of China. Jean Claude Trichet Former President of the European Central Bank. Made Newsweek's list of world's most powerful along with Ben Bernanke. He was named "Person of the Year" by the Financial Times (2007), "Policymaker of the Year" twice by The International Economy magazine (1991 and 2007) citi#44Annual China Conference in Shenzhen and Macau Markets APAC Corporate Access Citi China Investor Conference 2016 Alfred Schipke Resident Chief Rep. for China IMF Andrew Sheng Distinguished Fellow Asia Global Institute. Chief Advisor to the China Banking Regulatory Commission 1-2 November Four Seasons Hotel Shenzhen 3-4 November Grand Hyatt Macau Jiemian Yang Vice President Shanghai Institute for International Studies 44 N Lord Mervyn King Economist Former Governor of the Bank of England, and Chief of its Monetary Policy Committee Greg Gibb Co-Chairman & CEO, Lufax China's Largest P2P Lender Weiqun Chen Former deputy Director of the Office of the Board of Supervisors The State-owned Assets Supervision and Administration Commission of the State Council (SASAC) James P Rubin Foreign Affairs Columnist Sunday Times Ex-Chief spokesperson US State Dept citi#45Citi China Stock Connect Daily Citi CN Stock Connect Daily, Weekly A/H Strategy Report, Southbound Stampede research series Citi 01 Sep 2018 12:04:46 ET | 30 pages Citi Equities | China Stock Connect Daily Market Commentary | Sept 1 CHINA STOCK CONNECT TODAY citi . . INDEXES AT CLOSE SHCOMP 3085 +0.35%; SZCOMP 2032 +0.22%; CSI300 3327 +0.48%; HSI 22976 -0.17%; HSCEI 9541 -0.58%; MXCN 61.77 -0.77% CHINA POLICY NEWS - China to Promote Mixed-Ownership Reform for Insurance Companies; China to Step Up Supervision of Natural Gas Distribution Prices; China to Set Up 7 More Free-Trade Zones ⚫ CHINA MARKET NEWS - China To Build 40 Manufacturing Innovation Centers By 2025; Fosun Signals IPO of Health Assets to Be Announced This Year; China's Hottest Property Market Imposes Curbs to Cool Prices ⚫ FLOWS - Yesterday's Top 10 Most Traded Stocks - MARGIN- Latest Outstanding Balance of Margin Financing & Daily Margin Financing Amount ⚫ A/H PREMIUM - Latest A/H Premium ⚫ Citi A-SHARE RESEARCH - Jiangsu Hengrui Medicine | New China Life - Citi STOCK CONNECT / A-SHARE EVENTS - Citi Exclusive A-share Results Call: Han's Laser (REPLAY) + Hisense Kelon (REPLAY) + Hengrui Medicine (REPLAY) + Qingdao Haier (REPLAY) ⚫ CHINA MACRO DATA CALENDAR China A/H-Share Equity Strategy 1H16 Results Review: EPS Stabilization with Reduced B/S Risks ■Stay Positive on MXCN/ HSCEI while Neutral on CS1300. MXCN 1H18 EPS was down 9% y-o-y or up 17% h-o-h, given high bases of 1H15 WTI & A-shares. Citi analysts reported 31% beats, 28% misses and 43% in line. Key Beats: I.T. (OW). Consumer Disc. (OW) and Materials (N); Key Misses: Industrials (OW). Utilities (UW) and Staples (UW). Financials (OW) are in line. Our top-down MXCN 2016E/ 2017E EPS growth at -3%/ +0% remain unchanged. We stay positive on MXCN (10% upside) while Neutral on CS1300 (3% downside), and highlight 10 A/H Buys & 7 Sells post 1H16 results, some of which belong to our 2H16 top stock picks. 2016E EPS Stabilization with Reduced B/S Risks: MXCN 2016E EPS revision was 0% in August, reversing the significant downward 10% revision YTD. supported by upward revisions from IT. (OW), Materials (Neutral) and Financials (OW). We see reduced B/S default risks, given a) improving Interest Coverage in 1H16 (3.64x vs. 3.10x in 2015), and b) corporate credit growth deceleration with only 4% yoy loan growth reported by 15 listed Banks. ROE (excl. Financials, mkt-cap weighted) dropped slightly for MXCN while stable for CS1300, due to reduced leverage, still slow asset turnover while stable net margins. ■Broader Read-through: 1) CS1300 reported +2% yoy of employees and continued +5% yoy of cash salary, re-affirming our positive views on consumption upgrade. 2) We estimate non-SOES contributed 56% (vs. 50% in 2014), and listcos contributed one-third of China's 1H18 profit. 3) July YTD Industrial Profit improved to 6.9% yoy. vs. 2.3% drop yoy in 2015, partially helped by 8% interest expenses drop yoy. ■Weekly Intelligence: August number of senior officials arrested remained low (50% below peak); August number of bond defaults stayed low (80% below May peak): Southbound Connect flow used 40% daily quota in past few days vs. normally 10%. MXCN earnings revision stopped declining in August, led by I.T., Materials, and Financials 2016 CEPS bond 2016E MEXON CEPS 20E MCN Core EPS trend Jason Sun AC +852-2501-2490 jasont sun citi.com Michael Zhucpu Xiao [email protected] Citi Research Equities Strategy Asia | China CHINA POLICY NEWS • • China to Promote Mixed-Ownership Reform for Insurance Companies: China said to support investment in insurance companies by qualified government, private and foreign capital, according to 5-yr plan for insurance industry development issued by CIRC on its website. The statement was to encourage qualified insurance companies to list shares in domestic and overseas markets, support/regulate overseas investment by insurance companies and to support insurance funds to participate in asset securitization business. (Bloomberg) China to Step Up Supervision of Natural Gas Distribution Prices: China will increase supervision of local natural gas transmission and distribution prices, National Development and Reform Commission says in a statement on website. NDRC aims to lower provincial natural gas transmission and distribution prices that are "excessively high"; and China will look closely at fees charged on natural gas users by distributors (Bloomberg) M-My-1 Jan-18 M18 May-18 Source: Bloomberg, WIND and Chi Research See Appendix A-1 for Analyst Certification, Important Disclosures and non-US research analyst disclosures. Citi Research is a division of Citigroup Global Markets Inc. (the "Firm), which does and seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the clojectivity of this report Investors should consider this report as only a single factor in making their investment decision. Certain products (not inconsistent with the author's published research) are available only on Citi's portals. Not for distribution in the People's Republic of China, excluding the Hong Kong Special Administrative Region and Qualified Foreign Institutional Investors 45 citivelocity.com cíti#46A-Shares Conference and Explorer Series Annual Citi A-Share Conference in Hong Kong . Markets APAC Corporate Access China A-Share Corporate Day 2016 12-13 May Mandarin Oriental Hotel Hong Kong 11 citi A-Shares Explorer Series Markets | Citi China Stock Connect 08 9 A-Share Explorer Series Power Grid Equipment and Water Tour 2016 4 August Pingdingshan and Xuchang, Henan SAugust Xin, Terracot ta Ar a Mausoleum of the Firt in Empero O citi cffr#47Achieve Best Execution of China Equities with Citi Seamless liquidity and execution consulting: Stock Connect QFII Cash Swap / Pnotes Yes Yes N/A Yes Citi's Execution Consultants partner with you to provide Best Execution by helping you measure and manage implementation of your trades across channels: High Touch trading desk: full-service trading team that manages your execution according to your bespoke requirements Electronic Execution: a full suite of high-performance algorithms and DMA provided by a team of dedicated algorithmic trading experts who train and advise you on the optimal way to implement your strategy Program Trading: a globally-integrated team to help you manage rebalances, inclusion and deletion events and cash flows across all markets globally in a seamless manner CNH Funding: . Citigroup Global Markets can prefund client on T+0 For buy trades, clients can choose to settle T+0 or T+1 (We can also arrange extend settlement) If you settle in CNH, no extra funding cost will be charged as it is embedded in the commission rate If you settle in USD, Citigroup can facilitate FX trading and the funding cost will be reflected on the FX rate provided by our FX desk. 47 citi#48Custodian Citibank NA • 4th largest custodian in the world • US$15 trillion of assets under custody Leading proprietary network providing clients unique access to local market expertise and global reach • Leading provider of integrated RMB/CNH banking and FX services • Local Market Expertise on Stock Connect, QFII, RQFII and other China market access channels Shanghai-Hong Kong Stock Connect 1st Anniversary Trading and Investor Education Awards by HKEX Top 3 Largest SPSA Portfolio Value • • Top 3 Highest Number of SPSA Accounts Opened 48 SPSA Award citi#49Appendix 1: MSCI A-Shares Inclusions Market Development • MSCI potential China A-Shares 5% inclusions RU 3.6% MX 4.5% BR 6.5% Others 17.4% SA 7.1% Emerging Market CHINA 20.7% China 25.9% RU 3.6% CHINA MX Overseas 4.4% 5.2% BR IN 7.9% TW 12.0% Others 17.1% Emerging 6.4% Market CHINA 21.0% Others CHINA 14.1% 17.4% RU 3.0% MX China 27.3% CHINA A-Shares 3.6% 1.1% BR China 39.9% Emerging SA Market CHINA 5.3% Overseas 5.2% 5.7% KR 15.2% SA 7.0% KR 14.9% IN 6.4% IN 7.7% TW TW 11.8% 9.7% CHINA A-Shares 18.2% CHINA Overseas KR 12.3% 4.3% Current Status • Inclusion of overseas listed Chinese companies such as Baidu and Alibaba in November 2015 SAIR Potential Initial Step: Partial Inclusion (5%*) • Further improvements in quota allocation mechanism and size of overall quota • Further relaxation on capital mobility and other market accessibility constraints Potential Full Inclusion (100%*) Abolishment of the quota system ⚫ Full liberalization of capital mobility restrictions • Alignment of International accessibility standards Data as of March 30, 2016 * The percentage number refers to the Inclusion Factor applied to the free float-adjusted market capitalization of China A share constituents in the pro forma MSCI China Index. China A-share securities are subject to a foreign ownership limit of 30% # Overseas listed Chinese companies were included in Nov 2015 Source: MSCI Consultation on China A-Shares Index Inclusion Roadmap Aps://www.msci.com/documents/1296102/2907491/Consultation+on+China+A-Shares+Index+Inclusion + Roadmap/1634d584-0320-4a30-b7a3-9c148f2ed5d0 citi#50In any instance where distribution of this communication is subject to the rules of the US Commodity Futures Trading Commission ("CFTC"), this communication constitutes an invitation to consider entering into a derivatives transaction under U.S. CFTC Regulations §§ 1.71 and 23.605, where applicable, but is not a binding offer to buy/sell any financial instrument. This communication is prepared by individual sales and/or trading personnel of Citi which distributes this communication by or through its locally authorised affiliates (collectively, "Citi"). 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Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world. citi#51Markets and Securities Services Citi September 2016 China Connect - Launch of Shenzhen-Hong Kong Stock Connect Cindy T. Chen Country Head Hong Kong Securities Services [email protected] This document is solely for information and we will not be responsible for updating any information contained herein. It is not intended to provide specific advice on any other matter. If advice is required, legal, tax or otherwise, you should consult our own advisors, legal or otherwise. No responsibility for any loss occasioned as result of using this document is accepted. Under no circumstances it is to be considered an offer or sell or a solicitation to buy any investment or product. © 2016 Citibank, N.A. All rights reserved.#52Important Note • This document is solely for information and Citi will not be responsible for updating any information contained herein. It is not intended to provide specific advice on any other matter. If advice is required-legal, tax or otherwise-you should consult your own advisers, legal or otherwise. No responsibility for any loss occasioned as a result of using this document is accepted. Under no circumstances is it to be considered an offer to sell or a solicitation to buy any investment or product • The formal launch of Shenzhen-Hong Kong Stock Connect will only take place after preparation for the relevant trading and clearing rules and systems has been finalized, all regulatory approvals have been granted, market participants have sufficiently adapted their operational and technical systems, and all necessary arrangements for cross-boundary regulatory and enforcement cooperation, as well as investor education, have been in place. A separate announcement will be made with respect to the formal launch date. Since rules on trading, clearing and settlement may not have been completely promulgated or finalize by relevant authorities, therefore Citi solutions may be amended or changed in the course of the implementation of the Shenzhen Hong Kong Stock Connect citi H#53Agenda I. Overview of China Connect Schemes II. Key Features and Changes III. China Connect vs QFII/RQFII IV. How to Get Ready 1 3 6 8 citi H#54China Connect | Expand Further China and Hong Kong continue to expand the mutual market access with addition of Shenzhen and more to come 1 China A Equity Exchange Traded Fund Bond SH Connect (2014) SZ Connect (2016) IPO (TBD) SH/SZ Connect (2017) CIBM Connect (TBD) Listed Bond Connect (TBD) Most efficient and scalable China access platform for international investors Expanding to other major asset classes ETFs, bonds. Mutual Recognition of Funds MRF (2015) citi H#55China Connect | A Transformational Breakthrough Stock Connect is a transformational breakthrough for global investors to access the China A-shares market Shanghai Northbound Shenzhen Northbound SSE ~568 stocks ~90% Market Cap ~80% ADT SZSE ~880 stocks ~74% Market Cap ~68% ADT SEHK Subsidiary Daily Quota RMB13bn (~US$2bn) SEHK Subsidiary RMB13bn (~US$2bn) Why is it a transformational breakthrough? • Available to everyone from day one (e.g. retail investors, institutions, hedge funds, overseas investors) No approval or license required (e.g. no approval from CSRC, SAFE, PBOC, SFC) Scalable model and designed to be multi-assets and multi-markets (e.g. ability to extend to Shenzhen Exchange, equity derivatives, ETF, etc.) • Broader impacts (IPO, index, RMB internationalization) - World's Largest Stock Exchanges – Market Capitalizations (US$ trillion) Mainland China Hong Kong SEHK Members Mainland China 19.2 Hong Kong 13.4 SEHK Members Hong Kong or Overseas Investors "Home Market" rules or laws apply to the extent possible; price discovery remains in the home market. Hong Kong or Overseas Investors "Home Market" rules or laws apply to the extent possible; price discovery remains in the home market. 2 Shenzhen 3.9 Shanghai 5.7 7.2 6.5 4.9 HK 3.8 3.4 2 1.8 1.6 NYSE Hong Kong, Shanghai, Shenzhen NASDAQ London NYSE Japan OMX Stock Exchange Euronext Exchange Group - Group Tokyo TMX Group Deutsche BSE India Börse Source: World Federation of Stock Exchanges as of June 2015 H Citi®#56Key Features and Changes cíti Citi®#573 Hong Kong Mainland China China Connect | Shenzhen Northbound and Southbound Key features and changes Northbound Shenzhen Stock Exchange SEHK Subsidiary Daily Quota: RMB 13 bn SEHK Members Southbound Quota Eligible Mainland Investors Eligible Stock SZSE Members RMB 10.5 bn SZSE Subsidiary HK or Overseas Investors Stock Exchange of Hong Kong Eligible Investors Source: Hong Kong Exchanges and Clearing Limited (HKEX), Citi Securities Services Northbound Aggregated Quota: None Daily Net Buy Quota: RMB 13 bn ~880 Stocks Main: ~270, SME: ~410, ChiNext: ~200 RMB 15 trillion (74%) Market Cap. ~ RMB 230 billion (68%) ADT Constituent stocks of the SZSE Component Index and SZSE Small/Mid Cap Innovation Index with market capitalization > RMB 6 billion; A shares of SZSE-listed companies which have H shares listed on SEHK Exceptions: (1) Shares that are not traded in RMB; (2) Shares under "risk alert"; (3) No IPOS • ChiNext stocks are limited to Professional Investors initially Southbound Aggregated Quota : None Daily Net Buy Quota: RMB 10.5 bn ~417 stocks (vs. 318 stocks for Shanghai southbound) ~HKD 21 trillion (87%) Market Cap. ~HKD 39 billion (92%) ADT Constituent stocks of the Hang Seng Composite LargeCap /MidCap Index; Constituent stocks of the Hang Seng Composite SmallCap Index with market capitalization > HKD 5 billion; • H shares of SEHK-listed companies which have A shares listed on SZSE or SSE Exceptions: (1) Shares that are not traded in RMB; (2) Shares under "risk alert"; (3) No IPOs Aggregate balance RMB 500k or more in securities and cash accounts H Citi®#58China Connect | Shanghai vs. Shenzhen (Northbound) There are only minor differences between Shanghai and Shenzhen northbound connection thus allows the Shenzhen launch to be relatively quick for the market to get ready Northbound Eligible Investors Eligible Securities Trading Hours Order Cancellation Risk Management Measures SSE (Shanghai) • No restrictions; open to all Hong Kong, overseas institutional and individual investors • Constituent stocks of the SSE 180 and 380 • All dual-listed shares i.e. SSE-SEHK A+H (68) Exceptions: (1) Shares that are not traded in RMB; (2) Shares under "risk alert"; (3) No IPOS ~569 Stocks, ~RMB 30 trillion (~90%) Market Cap Opening call auction: 9:15-9:25 (SEHK will accept orders at 09:10) • Continuous auction: 9:30-11:30; 13:00-15:00 • Unexecuted orders: can be cancelled during trading hours except 09:20-09:25 • Confirmed Orders: Not applicable ⚫ ChinaClear Shanghai Branch will apply its risk management measures on the HKSCC's unsettled positions on the SSE securities e.g. Mainland Settlement Deposit (MSTD), Mainland Security Deposit (MSCD) SZSE (Shenzhen) No restrictions; open to all Hong Kong, overseas institutional and individual investors, except for ChiNext which is limited to institutional professional investors initially • Constituent stocks of the SZSE Component and SZSE Small/Mid Cap Innovation with market capitalization > RMB 6billion* • All dual-listed shares SZSE-SEHK A+H Exceptions: (1) Shares that are not traded in RMB; (2) Shares under "risk alert"; (3) No IPOS ~880 Stocks, ~ RMB 15 trillion (74%) Market Cap. Opening call auction: 9:15-9:25 (SEHK will accept orders at 09:10) Continuous auction: 9:30-11:30; 13:00-14:57 Closing call auction: 14:57-15:00 • Unexecuted orders: can be cancelled during trading hours except 09:20-09:25 and 14:57-15:00 • Confirmed Orders: Confirmed order may be cancelled by SZSE due to the unsuccessful order validation • ChinaClear Shenzhen Branch will apply its risk management measures on the HKSCC's unsettled positions on the SZSE securities CCASS Stock Code 60XXXX (SSE) >>> 9XXXX 00XXXX (Main and SME) >>> 7XXXX • 300XXX (ChiNext) >>>77XXX Source: Hong Kong Exchanges and Clearing Limited (HKEX), Citi Securities Services *Subject to final regulatory approval, the periodic review of eligible stocks will be in line with half-yearly rebalancing of underlying indexes e.g. 6-month daily average 1 Nov 2015 till 30 Apr 2016 4 (review period for end 2016 launch) H Citi®#59China Connect | Implementation Timeline and Open Items Preparation for the launch of Shenzhen-Hong Kong is expected to take about four months August August 16 September August-September CSRC & SFC Announcement Briefing Sessions for Participants October November December 2016 August - Until the launch Market Communication & Investor Education September-November Rule Amendments (at least 6 weeks from Announcement date) Market Rehearsals (Three weekends) Final Regulatory Approval on Commencement Key Open Items Before Launch 1 Rules Amendments 2 CGT clarification from SAT • Mid/Late November Official Launch CSRC & SFC to approval Shenzhen Connect rules which is expected to include details on SBL, order types Pending amendment of CCASS Rules, which may impact the Terms and Conditions for Stock Connect services Potential relaxation on the shares lock up rule and buy in exemption may be permitted for A-shares Confirmation that the capital gains tax temporarily waived (Circular 79) will also apply to Shenzhen shares including stock, stock index/futures and equity investment funds. Dividends withholding tax of 10% Source: Hong Kong Exchanges and Clearing Limited (HKEX), Citi Securities Services 5 cíti H Citi®#60China Connect vs QFII/RQFII cíti Citi®#61China Connect vs. RQFII/QFII Key differences between China Connect and RQFII/QFII 6 Eligible Investors Quota Eligible Investments China Connect (Northbound) Available to all overseas investors since day 1 Except ions: ChiNext are limited to Professional Institutional Investors at initial stage) No license required from CSRC Daily Net Buy Quota: RMB 13 billion each for Shanghai and Shenzhen No aggregate total quota ceiling • No approval from SAFE or CSRC required Constituent stocks of SSE 180 & 380, SZSE Component Index and SZSE Small/Mid Cap Innovation Index with market capitalization > RMB 6 billion¹ • All dual-listed shares i.e. SSE-SEHK and SZSE-SEHK A+H Exceptions: Shares not traded in RMB, Shares under "risk alert", IPOS RQFII (since 2011) • Only available to approved RQFII jurisdiction (currently 17) Subsidiaries of PRC fund management companies, securities companies, domestic commercial banks, insurance companies based in the RQFII jurisdiction • Other institutions registered and mainly operated in the RQFII jurisdictions and possess asset management license from the relevant regulators of their jurisdictions • Quota approved: RMB510 billion (Aug '16) for 208 RQFII entities • Go through a filing process only o if the applied quota <="Basic Quota❞ for commercial institutions outside Mainland. Additional quota requires approval from SAFE SWFs, central banks and monetary authorities are not subject to Basic Quota and are able to file the intended investment quota according to their investment needs All SSE and SZSE stocks Corporate, government, enterprise, convertible and interbank bond market • Securities investment funds including closed-end, open-ended and ETFs • Others such as warrants, index futures, IPOS QFII (since 2002) Only available to qualified institutions in markets with MOU with China (currently 55) Commercial Banks (≥ 10yrs in operation, US$5 billion AUM, US$300mm Tier 1 Capital) Securities Companies (≥ 5yrs in operation, US$5 billion AUM, US$500mm Capital) • AMC, insurance companies and other institutions (experience of 2+ years, and AUM ≥ US$500mm) • Quota approved: US$81.48 billion (as of Aug '16) for the 299 QFIls from 30 countries • Go through a filing process only o if the applied quota <="Basic Quota" for commercial institutions outside Mainland o if the applied quota < = US$5 billion for SWFs, central banks and monetary authorities, • Additional quota requires approval from SAFE • Minimum Basic Quota of each QFII is USD 20MM • Same as RQFII Subject to final regulatory approval, the periodic review of eligible stocks will be in line with half-yearly rebalancing of underlying indexes e.g. 6-month daily average 1 Nov 2015 till 30 Apr 2016 (review period for end 2016 launch) 1. 2. Basic Quota for commercial institutions outside of Mainland is USD 100 million + 0.2% of the average assets size in past 3 years - Existing quota. citi H#62China Connect - vs. RQFII/QFII (continue) Key differences between China Connect and RQFII/QFII Currency China Connect (Northbound) • Offshore RMB RQFII (since 2011) Offshore RMB 7 Securities Lending and Borrowing Liquidity Funding or Cash account • Permitted with restrictions • Not available QFII (since 2002) • USD or other major foreign currencies • Not available • Daily liquidity • No restriction for sell trades • Buy trades are subject to daily net buy quota • Trading and settlement flow are • subject to a closed-loop mechanism under which income from securities sales shall be returned to origin instead of being deposited with local market Prefunding not required No approval required from PBOC • . Quota shall be used within 1 year upon quota is granted or approved Open-ended funds 。 Daily injection and repatriation 。 No lock-up period All other RQFIls o 3 months (instead of 1 year) lock-up period from the date that accumulative principal injection reaches RMB100MM 。 Daily injection and repatriation (instead of six months injection period and Monthly repatriation) o For principal repatriation, principal can be re-injected, but net amount of investment capital remitted to China shall be within the investment quota (instead of quota will be reduced accordingly) • RQFII custodian must confirm available cash before trade occurs • Obtain approval from RMB/FCY from PBOC • Quota shall be used within 1 year upon quota is granted or approved Monthly repatriation capped at 20% of its total QFII investments at the end of prior year Open-ended funds 。 Daily injection and repatriation o 3 months lock-up period from date of the US$20mm principal injection • All other QFIls o 3 months lock-up period from date of the US$20mm principal injection Daily injection and repatriation 。 For principal repatriation, principal can be re- injected, but the net amount of capital remitted into China must be within the investment quota. No need to file with SAFE ⚫ QFII custodian must confirm available cash before trade occurs • Obtain approval from RMB/FCY from PBOC citi H#63How to get ready cíti Citi®#64Get Familiar with China Market and Shenzhen cíti Citi®#65Turnover No. 1, Size No. 2, Benchmark weight No. 8 US China Japan UK France Germany Canada India Korea Australia Others 0% Global Equity Market Cap Distribution 3% 3% 3% 2% 2% 2% 5% 5% 8% 10% 16% Total Global Market Cap was USD 66 tn based on Bloomberg Statistics 15% 20% 20% 25% 30% 35% 37% 40% Global Equity Turnover Distribution China 39% US Japan BATS - Europe Euronext Korea Germany Canada Australia 3% 2% 2% 1% 1% 1% India 1% Others 0% 5% 5% 10% 27% Total Global Market Turnover was USD 103 tn (Jan Nov, 2015) based on 58 Exchanges' data 15% 19% 20% 25% 30% 35% EE US China Japan Germany France UK Brazil Italy 2014 Global GDP Distribution 4% 4% 3% 3% 3% 3% 6% 5% 13% 23% Total 2014 Global GDP was USD 77 tn based on 185 countries worldwide USA Japan UK France MSCI AC World Index Weight 3.4% 8.1% 6.7% Switzerland 3.3% Germany 3.2% Canada 2.8% China 2.6% Australia 2.3% Korea 1.5% Others 35% Others 0% 5% 10% 15% 20% 25% 30% 35% 40% 0% 10% Russia India Total MSCI AC World Index Market 13.3% 20% 30% 40% 50% T 40% 45% 53.0% 60% 8 Source: Wind, Bloomberg, Factset and Citi Research. Note: GDP data as of 2014; Mkt Cap and Turnover data as of Nov 2015; MSCI AC World Index data as of Dec 18, 2015 H Citi®#669 Trend toward Internationalization & Institutionalization Structual trends of China A-share holding structure HK and A-shares Stock Exchange Trading Value Market Share 1.3% 100% 100% A-share HK 13% 90% 90% 24% 1% 31% ■Foreigners 32% 33% 80% 80% 43% 70% 70% 5% 27% 49% 60% Gov't and 60% 22% Corporates 28% 50% 9% 50% 10% 40% 80% 40% 47% 8% 29% Institutional Others 16% 30% 30% Investors 9% ■Mainland China 46% 20% 20% 41% 10% 39% 37% 24% 19% 13% ■ EU 10% 20% 20% 15% ■Retailors 9% ■ US 0% 0% China A (1Q2016) Japan (2014) Taiwan Korea (2013) (2012) US (2010) EU (2012) Retailors Institutional Investors Retailors Domestic Institutions Foreigners US Equity Holding Structure Japan Equity Holding Structure EU Equity Holding Structure TW Equity Holding Structure 100% 100% 100% 100% 0% 90%- ■Foreigners 90% 90% 90% Federal govemment 80% 80%- 80%- retirement funds 80% Property-casualty insurance companies ■Foreigners 70% 70% 70%- Exchange-traded funds ■Foreigners 70% ■Foreigners Corporates Life insurance companies 60% 60%- 60% 60% General govemment Juridical People Household sector. 30% 30% 20% 10%- State and local government retirement funds. Securities Cos 50% 50%- 50% 50% Private pension funds Investment funds and others. Corporations Insurance Cos Mutual funds 40% 40% Trust Banks 40% ■Insurance corps and pension funds 40% Trust Funds 0% 20% ■Households 10% 30% Banks Regional Banks Source: Various Stock Exchanges, US Census Bureau, Bank of Japan, CHFS and Citi Research Note: China Overall means all Mainland Chinese companies listed in China A-share, HK, US, SGP and others. 0% Non financial corps 20% 20%- 10% C/6L 1979 1983: 1987 1661 1995 1999 2003 2007 2011 Households 0% 10% 30% ■Financial Insts 1999 - 2001- - 2007 2005 2007- 2009- 2011- 2013 Governments Households H Citi®#6775% of China listcos' market_cap in A-shares. US$9.4tn Market_cap of Chinese Companies Global Distribution Map SZ total US$3.1tn, 75% to be connected Others 25% Stock Connect SZ-HK Connect Univers e 75% China total US$9.4tn SGP/EU/Others HK 20% MXCN, US1.5tn, 82% of China HK mkt_cap, ~85% connected Source: Bloomberg, Wind and Citi Research 10 Non- MXCN 18% MXCN 82% 0% 3889 US 5% China A-SH 42% China A-SZ 33% SH total US$4.0tn, 83% connected SH Dual List 1% Not Connecte d 17% SH380 21% SH180 61% CSI300, US$3.3tn, 46% of China A-shr mkt_cap CSI300 46% MFs Benchmark Non- CS1300 54% citi H#6893% of China listcos' turnover in A-shares US$40tn Turnover of Chinese Companies Global Distribution Map SZ total US$17.5tn, at least 40% to be connected SH total US$19.4tn, 80% connected Others 58% SZ300 42% MXCN, US1.3tn, 81% of China HK turnover Non- MXCN 19% Source: Bloomberg, Wind and Citi Research, as of Dec, 2015 11 MXCN 81% Stock Connect Not Connect ed 21% SH380 China total US$40tn, ~45% turnover is investable already 29% US HK 3% 4% China A-SH 49% China A-SZ 44% MFs Benchmark SH180 49% CSI300, US$13.6tn, 37% of China A-shr turnover Non- CS1300 63% CSI300 37% citi H#6910 Shenzhen -- China's Transition Future Rmb tn 9 9.4 88 8.3 24% 8 11% 7.5 7 19% 6 5 11% 45% 30% 5.7 110 Rmb61tn (USD 9.4tn) Market Value Geographical Distribution By Sector ■SZ SH ■Hong Kong US and others 5.6 9% 10% 10% 4 3 67% 45% 2 44% 3.6 3.6 42% 30% 3.2 20% 2.7 30% 9% 2.1 12% 24 2.1 35% 20% 13% 33% 42% 71% 49% 50% 20 2.0 1.9 1.8 1.7 13% 17% 35% 54% 46% 61% 93% 1 55% 71% 36% 46% 65% 33% 41% 0 IT Capital Goods 3% Banks 9% 19% 6% 12% Materials Retailing Energy Real Estate Health Care Cons Stap Utilities Diversified Fin Telecom Auto Transportation Insurance Source: Bloomberg, Wind and Citi Research, as of April 14, 2016 12 citi H#70SZ/SH Market Statistics Average 74% of Shanghai listcos are SOE controlled SH SOE/Private % Comparison by Sectors 100% Private ■SOE 90% SOE Average: 74% 80% 9% 6% 5% 3% 1% 40% 37% 36% 30% 29% 29% 25% 20% 100% Private Only 38% of Shenzhen listcos are SOE controlled SZ SOE/Private % Comparison by Sectors ■SOE 70% 61% 58% 90% 60% 80% 50% 40% 30% 20% 10% 0% IT Health Care Real Estate Retailing Auto Insuranc Materials Cons Stap Telecom Capital Goods Diversified Fin Banks Transportation Energy 70% Utilities 0% Source: Wind and Citi Research; Note: Sector distribution by mkt-cap. YTD, turnover velocity in Shenzhen 4.0x vs. 3.0x in Shanghai SH vs SZ Turnover Velocity Comparison Source: Wind and Citi Research; Note: Sector distribution by mkt-cap. Retail is holding more shares in Shenzhen than Shanghai SH vs. SZ Holding Structure Comparison IPO waiting list concentration on Shenzhen IPO Waiting List Distrubition - SH vs. SZ Telecom Banks Health Care IT Real Estate Retailing Capital Goods Cons Stap 11% 26% 25% 60% TT 64% 62% 60% 56% 74% 72% 70% 70% 83% 50% 100% 100% 40% - 30% SOE Average: 38% 20% 10% Materials Auto Energy Utilities Transportation Diversified Fin SH -SZ 100% 500% 90% ■Foreigner 450% 400% 80% 350% 70% 300% 60% 8% ■Gov't and Corporates GEM (SZ) 39% Main Board (most in SH) 32% 250% 50% 200% 40% 7% ■Institutional Investor 150% 30% 60% 100% 20% 37% ■Retail 50% 10% Investor SME (SZ) 29% 0% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 SH SZ Source: Wind and Citi Research; Note: Using number of companies given data availability. Source: Wind and Citi Research; Note: Turnover Velocity is calculated using annualized trading value divided by average total market cap. Source: Wind and Citi Research 13 cíti H#71Get familiar with UCITS or relevant funds requirements cíti Citi®#72Stock Connect - UCITS Requirements Some regulated funds are required true RVP/DVP solution to avoid counterparty risk and to maintain full control over the shares at all times to better protect the assets of the fund Commission for the Supervision of the Financial Sector (CSSF) The main conditions imposed by the CSSF are: • • • the use of a delivery versus payment ("DVP") settlement process avoiding additional counterparty risks; The depositary or an entity within its custodial network (i.e. a sub- custodian) must ensure that it retains control over the shares at all times ensuring that accounts opened by the Luxembourg depositary with the Hong Kong sub-custodian are segregated at the level of UCITS sub-funds or structured as UCITS assets omnibus accounts of the Luxembourg depositary with the Hong Kong sub-custodian; and ⚫ the disclosure in the prospectus and KIID has to cover the specific legal risks of compulsory use of the local central securities depositaries, Hong Kong Securities Clearing Company Limited and ChinaClear for custody of securities on a cross border basis and other specific risks. Central Bank of Ireland On July 15, 2015, the Central Bank of Ireland published an important update to its UCITS and AIFMD Q&A permitting Irish authorized investment funds to acquire Chinese shares via the Stock Connect program. Key conditions are: . The depositary or an entity within its custodial network (i.e. a sub- custodian) must ensure that it retains control over the shares at all times • The depository or a member of its custodial network can be a General Clearing Participant, Direct Clearing Participant or Custodian Participant as appropriately determined by the depositary in fulfilment of its legal obligations • The depository must review the Stock Connect infrastructure arrangements to ensure that its legal obligations can be met • The depositary needs to satisfy itself that the manner in which the shares are to be held meet with the requirements of the UCITS / AIFMD Regulations and any conditions imposed by the Central Bank • Definition of DVP per BIS: A security settlement mechanism that links to a security transfer and a fund transfers in such a way as to ensure that delivery occurs if and only if the corresponding payment occurs. • UCITS V imposes a 'strict liability' on the Fund Depositary/Global Custodian. This means that if an asset of the fund is lost, the Fund Depositary has an immediate obligation to replace the asset or equivalent cash value, even if the asset was lost due to the actions of its delegates. Fund Depositaries are also will bear the burden of proof to demonstrate that it has performed its duties, acts in solely in interest of the investors and exercise prudent measure to protect the fund's assets. A depositary can only avoid this strict liability standard where it can prove, cumulatively, that the loss was as a result of an external event, beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary in performing all of its tasks. 14 Citi®#73Stock Connect (Northbound) - Available Stock Connect Solutions Citi Model C and SPSA+ solutions provides real-time RVP/DVP settlement and maintain proper segregation and control of the fund assets Agency Broker/PB Model Standard SPSA Citi® Model C/SPSA+ Manager Instruct s GC under POA provided by Depositary/Trustee Depositary Bank/Trustee Global Custodian Manager Depositary Bank/Trustee Manager Depositary Bank/Trustee Appoints GC Instruct s GC under POA provided by Depositary/Trustee Appoints GC Instruct s GC under POA provided by Depositary/Trustee Appoints GC Domicile of the Fund Global Custodian Domicile of the Fund Global Custodian Domicile of the Fund Local Custodian No contractual relationship between local custodian and EP Local Custodian Shares are no longer within SSE Shares are pre- delivered to local broker Local Custodian transfer shares to EP the custodian chain Not true RVP/DVP Stock Connect EP (HK Broker) Maintains account with HKSCC/CCASS shares are held by the broker at the local depository (CCASS) HKSCC/CCASS (CSD) Hong Kong Mainland China ChinaClear (CSD) Stock Connect EP (HK Broker) Maintains account with HKSCC/CCASS HKSCC/CCASS (CSD) Hong Kong Mainland China ChinaClear (CSD) Local Custodian Maintains account with HKSCC/CCASS Shares are held by the local custodian bank at the local depository (CCASS) Custodian maintain full control of the shares at all time HKSCC/CCASS (CSD) Hong Kong Mainland China ChinaClear (CSD) 15 citi H#74Clarify requirements and select solutions cíti Citi®#75Shenzhen Connect - How to get ready? How to get ready for Shenzhen Connect Citi Solutions: • Citi offers unique true DVP and multiple brokers solutions i.e. Model C or SPSA+ which will apply to Shenzhen shares • Same accounts, Investor ID and cutoff times available for Shanghai HK Connect will apply to Shenzhen HK Connect. • No new document requirements expected to this point (subject to review of the final rules) Existing Stock Connect fee schedule will be applied to Shenzhen shares Existing China Connect clients 1. Review Fund Prospectus (amendment, risk disclosure or approval required?) 2. Check with Trustee or Depot bank to confirm new requirements (if any) 3. Review changes to the Stock Connect Terms and Conditions from your broker and custodian (if any) New China Connect Investors 1. 2. 3. 4. Decide on the Equity and Custody solution (e.g. Model C and SPSA+) • • Equity solution e.g. High Touch, Electronic (including E2C), PT and D1 (swap) For trust or retail funds, recommend confirming with your custodian whether they offer true DVP settlement and multiple broker support Establish CNH FX or funding arrangement with custodian or broker Review operation specifics including cutoff times for T+0 settlement Review Custody Stock Connect Documentation Custody China Connect General Terms and Conditions & Custody China Connect Fee Agreement (if applicable) SPSA Form (if applicable) Review Broker Stock Connect Documentation 16 cíti H#7617 How Citi Can Help? Citi is committed to be the go-to bank for China market access ✓ 4th largest custodian in the world ✓ US$15 trillion of assets under custody ✓ Largest proprietary network providing clients unique access to local market expertise and global reach ✓ Leading provider of integrated RMB/CNH banking and FX services ✓ Citigroup Global Markets offers premier execution capability including integrated research, high-touch and electronic execution for cash and synthetic trading ✓ Citi Investment Research and Analysis (CIRA) offers independent, thorough market and stock analysis covering over 100 Stock Connect shares SPSA Award Shanghai-Hong Kong Stock Connect 1st Anniversary Trading and Investor Education Awards Top 3 Largest SPSA Portfolio Value Top 3 Highest Number of SPSA Accounts Opened Offers the most comprehensive suite of solutions for investors to access Stock Connect Local Market Expertise on Stock Connect, QFII, RQFII and other China market access channels • Leading provider of clearing services for brokers and uniquely capable of supporting a multi-broker arrangement Citi also developed unique Model C and Citi SPSA+ solutions specifically to allow regulated funds to use multiple brokers for execution and most importantly remain in compliance with relevant fund regulations such as UCITS, 40Act and MPFA or SFC regulated funds. Citi's Model C and SPSA solutions allow the funds to - Utilize multiple brokers and transact under true DVP / RVP environment to eliminate counterparty risk with the broker Ensure proper segregation of assets throughout the entire custodian chain Ensure the depositary bank and the sub custodian bank maintain full control over the securities at all times Ensure shares are held by custodian bank (instead of the broker affiliate of the custodian bank) in the entire chain instead of using a broker as a sub-custodian which may trigger requirements for the trustee or global custodian to perform diligence on the broker cíti#77IRS Circular 230 Disclosure: Citigroup Inc. and its affiliates do not provide tax or legal advice. 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Our cornerstone initiative is our $100 Billion Environmental Finance Goal - to lend, invest and facilitate $100 billion over 10 years to activities focused on environmental and climate solutions. citi#78Markets and Securities Services Citi September 2016 China Interbank Bond Market Access Zoey Gao Vice President, Global RMB Product, Citi Markets [email protected] (86) 21 2896 6638 Joanne Goh Vice President, China Market Specialist, China Securities Services [email protected] (86) 21 2896 2318 For Institutional Investors Only-Not for Distribution to Retail Customers. Not For Onward Distribution Ⓡ#79Table of Contents Overview of CIBM CIBM Policy Updates Appendix: Citi Markets and Securities Service Capability Appendix: QFII and RQFII Market Update Appendix: Understanding RMB 3 10 15 19 34 79 H Citi®#80Overview of CIBM cíti Citi®#81Current Status of RMB and China Bond Market The RMB is fast becoming an attractive global currency and the China bond market has also gained its international position in terms of bond issuance and trading volume. 6 57 47 Top 6 Currency in Global Payments China is now the world's largest economy measured by purchasing power parity (PPP) and the largest trading nation. RMB has been showing a consistent three-digit growth over the past two years with an increase in value of payments by +321%. The successful RMB inclusion in the SDR basket (in effect from October 2016) will shake up the way the world thinks about a 'reserve asset'. World Payment Shares in SWIFT June 2016 Bond Outstanding amount reach RMB 57 trillion The China bond market has grown more than six times in size since 2005, making China the largest among emerging markets and the third largest in the world by issuance. Trading activity has grown rapidly and the market is very liquid with ~RMB 485 trillion in total trading volume as of June 2016. China Total Bond Outstanding Amount June 2016, in RMB trillion 47% Debt to GDP Ratio China's bond market is still small by GDP Share compared to global or regional peers. In 2016, the estimated national debt of China was at about 46.76 percent of the gross domestic product. Country Debt to GDP Ratio June 2016 (%) USD 40.97% EUR 30.82% GBP 8.73% JPY 3.46% CAD 1.96% CNY 1.72% AUD 1.68% CHF 1.41% SEK 1.16% HKD 1.04% Source: RMB tracker by SWIFT 70 60 60 50 40 40 30 30 20 20 10 0 300% 40 57 250% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD Source: Winds 2016 200% 150% 100% 47% 50% 0% China India Source: Statista EST. Germany Brazil UK France US Japan 81 cíti H#82Higher Yields for a High Quality Sovereign Chinese bonds have historically offered significantly higher yields relative to other major bond markets, despite China's strong sovereign credit quality. Historically low correlation to other developed and emerging market debt. 3-10 years Yields for Government Bonds August 2016 3% 2% China 1% Korea US 0% UK Japan Germany China -1% 3 years 2.395% 5 years 10 years 2.540% 2.739% -US 0.891% 1.189% 1.594% -UK 0.137% 0.227% 0.591% -Germany -0.624% -0.501% -0.051% -Japan -0.189% -0.165% -0.069% -Korea 1.232% 1.259% 1.435% Source: investing.com 88 82 citi H#83Complex Regulatory and Operational Framework of Bond Market Bond types are regulated by different government bodies from issuance, trading and investor market perspectives, and cleared by different custodians, all of which create additional complexity for wide access to China's bond market. Regulates Market Trading People's Bank of China (PBOC) Interbank Bond Market (CIBM) CCDC or SHCH CSDC Custodian Transfer Government Bonds China Securities Regulatory Commission (CSRC) Exchange Market Government Bonds PBOC Bills/Bonds MOF Financial Bonds Regulates the Bond Issuance Financial Bonds PBOC Corporate Bonds Mid-term Financing Bills CSRC Convertible Bonds Short-term Financing Bills NAFMII Enterprise Bonds NDRC Detachable CB Enterprise Bonds Eligible Investors ROII, RMB Clearing & RMB Participant Banks Non-listed Listed Banks Commercial Banks Trust Companies Social Security Fund Insurance Companies Securities Co., Mutual Funds, QFII, RQFII Regulates the PBOC CBRC NCSSF CIRC Investors CSRC Institutional & Retail Investors Key: China Central Depository & Clearing Co., Ltd (CCDC); Shanghai Clearing House (SHCH); China Securities Depository and Clearing Corporation Limited (CSDC); Ministry of Finance (MOF); National Association of Financial Market Institutional Investors (NAFMII), formed in 2007 and supervised by PBOC ; National Development and Reform Commission (NDRC); China Banking Regulatory Commission (CBRC); National Council for Social Security Fund, PRC (NCSSF); China Insurance Regulatory Commission (CIRC) 83 H citi#84CIBM Remains Dominant China Interbank Bond Market-89.13% of Total Bond Market Assets under custody as of August 2016, total value of RMB 41.41 trillion (%) Asset Backed MTN Securities Enterprise Bonds 1% 9% Capital Instrument 2% Financial Bond 4% Agency Bond 3% 3% Government Bond 26% Policy Bank Bills 30% Local Governnment Bond 21% Source: CCDC Historical Trading Volume in RMB trillion 500 450 400 350 300 250 96.12% 200 150 100 50 3.88% 0 2010 Source: Winds China Exchange Market-10.87 % of Total Bond Market Assets under custody as of August 2016, total value of RMB 5.05 trillion (%) Bonds with Detachable Warrants 0.13% 0.61% Convertible Bond SME PE Bond 9.98% Government Bond 13.99% 3.02% Local Government Bond 0.21% Policy Bank Bonds Central Bank Bills 1% Source: CSDC 9.72% 90.28% 2011 12.6% 87.4% 2012 21.63% 78.37% 2013 23.09% ■Exchange Market ■China Interbank Bond Market Enterprise bonds 16.91% Corporate Bond 55.14% 76.91% 30.84% 69.16% 79.76% 20.24% 2014 2015 Aug 2016 84 citi H#85Small Number of Foreign Investors Interbank Traded Bonds -90% Bond under Custody - RMB 41 trillion Spot Bonds ~13% Spot bond trading at ~RMB 53 trillion Bonds held by Foreigners ~1.7% Total foreigners holding bonds - RMB 0.68 trillion Source: CCDC ΑΛΛ As of August 2016, -90% of China onshore bonds under custody are in CIBM. Stock Exchanges + Counter only accounted for ~10%. As of August 2016, most foreign investors could only invest in spot bonds in CIBM, which is 13.37% of total CIBM trading volume. Most transactions (~87%) are from credit lending and repo. As of August 2016, foreign holdings of China domestic bonds were ~RMB 686 billion or 1.66% of the market. Domestic commercial banks dominate trading activity in CIBM with -60% market share. Growth in Foreign Investor Access Who is already in ? No. of Foreign Institutional Investors allowed access to bond market as of August 2016 What are they investing in? May 2016, in RMB billion Spot Bonds Government Bond 296 349 Policy Bank Bonds 201 305 Mid Term Notes 28 Enterprise Bond 17 400 350 300 250 211 200 150 138 100 100 50 51 0+ 2011 2012 2013 2014 2015 August 2016 Commercial Bonds 1 Others Credit Lending 0%, but expected to be growing as Repo PBOC started to allowed certain foreign investors to invest in those Derivatives instruments. What are the trends? • Ease of market access requirements for foreign investors by gradually changing current approval process into filing process Foreign investors could invest in other instruments in CIBM other than spot bonds • The expected bond connect and the inclusion of RMB in the SDR basket should bring in fresh demand from foreign investors for RMB denominated assets • Considering the rising nominal GDP, doubling the ratio of bond market cap/GDP ratio in the next decade could quadruple the size of the bond market Sources: CCDC, CFETS, SHCH 85 H Citi®#86Overview Foreign Institutional Investors (FII) in CIBM As of July 2016, 332 Flls acquired permission to enter CIBM where 94% domestic bonds are traded. Fll's total domestic bond holding was RMB663bn (or 1.63% of China bond market), of which ~80% was attributable to CIBM. FII's participation in CIBM Investor Type Distribution 42% 14% Holdings Distribution 4.3% 0.2% 3.1% 44% 37.1% 55.3% Bond Maturity Distribution 1% 17% 36% 46% ■Treasury Bond ■Other Fl■RQFII ■ QFII Mid Term Notes ■Policy Bank Bond Enterprise Bond ■Commercial Bond ■Up to 1 year 1-5 years ■5-10 years Moren than 10 years As of July 2016 Source: CFETS FII's Trading Characteristics Buy trade dominates, but can be further detailed: ■ Banks prefer hold-to-maturity investment ■ AMCs have similar volumes of buy and sell trade Very similar pattern to domestic investors As of July 2016 Source: CCDC/SCH Typical counterparties in CIBM ☐ ☐ Domestic banks Foreign banks Securities companies As of end of 2015 Source: CCDC/SCH How to find a counterparty ■ Own channel ■ Bond settlement agent (BSA) ■ Via BSA ■ Domestic alliances such as investment advisors 86 H Citi®#87CIBM Policy Updates cíti Citi®#88Updated Guidance on CIBM Access In Q2 2016, China regulators released several FAQs and procedures for ROIls entering the China Interbank Bond Market (CIBM) and China Interbank Foreign Exchange Market (CIFM). For Overseas Financial Institutions: For ROIls: PBOC and SAFE publishes FAQs, May 2016: Implementation Details and SAFE Notices provide explicit guidance and clarification for foreign investors to enter CIBM April 2016: May 2016: CCDC, SHCH and CFETS releases operation guidelines for foreign investors to invest in CIBM Key issues solved/clarified: PBOC released FAQs and procedures on Foreign Central Banks, Sovereign Wealth Funds and Supranational (Rolls) investing the CIBM and CIFM to address many technical details. Account opening/closure Network connect set up /termination Investment quota and liquidity Product and Agreement Inbound/Outbound transfer RMB special account Agent Selection Overseas Financial Institution ROII Complete within 3 days, given documents submitted are in good order. Complete within 3 days, given the submitted documents are in good order and there is zero balance in the account with no outstanding rights. No quota limitation. No fund repatriation restriction. Cash bond Bond lending: Lending agreement Bond forward, IRS and FRA (hedging purpose) : NAFMII. Principal injection and repatriation are allowed in either RMB or foreign currency. Maintain FX/RMB currency proportion for inbound and outbound with no more than 10% deviation, except the first repatriation. Bond derivatives: NAFMII or ISDA Bond Repurchase: NAFMII Bond lending: Lending agreement Principal injection and repatriation are allowed in either RMB or foreign currency after FX conversion onshore Open with domestic bank, which shall be used exclusively Open with PBOC or domestic bank, which shall for fund settlement of bond trading. N/A be used for fund settlement of bond trading. Dual agent allowed. Non-trade transfer allowed between PBOC account. and commercial banks 88 88 citi#89CIBM: A Step Towards Internationalization Year Published Qualified investors ROIl program 2015 Central Banks, SWFs, Supranationals Quota No quota Products Cash bond, bond repo, bond lending, bond forward, IRS, FRA Access method to (1) PBOC as agent CIBM (2) Bond settlement bank as agent (3) Direct Participation Market Access Registration FX Onshore: Access FX as CFETS member via (1) PBOC as agent (2) FX agent bank (3) Direct Participation For FX spot, forward, swap, option Offshore: Fund transfer Expanded Fl program 2016 Banks, insurance companies, securities companies, funds and other asset management firms, as well as the investment products issued by these institutions; long term investors recognized by PBOC, such as pension funds, charity funds, endowment funds . No quota • manage the program under the "macro prudential" method • Cash bond Others: Bond repo will be allowed for RMB participating banks and clearing banks Domestic commercial banks with agency qualification Registration Via bond settlement bank Onshore: · • FX conversion with bond settlement bank Repatriation is allowed as long as outgoing FX mix (FCY vs. RMB) is within 10% of that brought in Offshore: Fund transfer QFII/RQFII 2011/2013 QFII and RQFII holder to apply CIBM access in a separate application process QFII: quota by investors • RQFII: quota by region and investors Cash bond Domestic commercial banks with agency qualification Approval RMB participating bank /RMB clearing bank 2010 RMB clearing banks Oversea RMB clearing banks with positive offshore RMB balance from RMB XB business Quota by bank Cash bond Bond repo (need NAFMII) Domestic commercial banks with agency qualification QFII: Onshore FX conversion with custodian bank Approval Offshore RMB in/outflow RQFII: • Offshore RMB in/outflow 89 H Citi®#90Simplified CIBM Access Process No quota restriction, qualified investors only need to do a filing with PBOC to get into CIBM. Before 2015 Engage PRC Agent/Custodian Regulatory Approval Process Account Opening Rolls SWFs, central banks/monetary authorities, international organization RMB Banks RMB clearing/participating banks, insurance companies in HK/ SG/TW Other Fls Other Fls, e.g. asset managers, securities companies, pension funds PBOC Engage PBOC as Bond Agent Bond Agent Engage Bond Agent PRC Custodian Engage PRC Custodian PBOC Seek CIBM access and Quota Approval PBOC Seek CIBM Access and Quota Approval CSRC Seek QFII/RQFII License Approval Current Rolls SWFs, central banks/ monetary authorities, international organization All other OFIs, Exc. ROII Which can be recognized by PBOC as "mid/long-term investors" Engage PRC Agent/Custodian Bond Agent/ PBOC Engage PBOC or Type A as Bond Agent Bond Agent Engage Bond Agent, Bond Agent Reviews the Eligibility Filing with PBOC PBOC Filing with PBOC BJ, No Quota Cap PBOC Filing with PBOC SH, No Quota Cap SAFE Seek QFII/RQFII Quota Approval PBOC Seek CIBM Access and Quota Approval Open Accounts or Registration with CCDC SCH CFETS Bond agent/ custodian bank 90 citi H#91Key Highlights of Expanded FI Programs In 2016 H1, China took a major step toward encouraging long-term foreign institutional investors to invest in the world's third-largest bond market. B M Quota Cap The Announcement encourages long-term foreign investors to invest in CIBM and No Quota Cap for eligible investors. Investors Broaden the investors Banks, insurance companies, securities companies, funds and other asset management firms, as well as the investment products issued by these institutions; long term investors recognized by PBOC, such as pension funds, charity funds, endowment funds Bond Instruments The eligible foreign institutional investors can invest in products allowed by the PBOC, e.g. cash bond, etc. RMB participating banks can conduct bond repo Market Entry The eligible foreign institutional investor can participate in CIBM via filing with PBOC Shanghai Headquarter through a bond settlement agent. Two page registration form with 20 business day turn-around FX Transfer RMB from Offshore to onshore. Can conduct FX forward, swap for hedging bond portfolio, subject to basis risk. FX conversion only; register with SAFE, conduct via bond settlement bank Repatriation For investor, foreign currency outflow remittance is allowed. Foreign currency mix has to maintain similar level as its inflow to China, within 10% deviation 91 H Citi®#92Appendix: Citi Markets & Securities Service Capability cíti Citi®#93Citi in China 1 1st foreign QFII custodian bank and 8 20 Top Rated custodian in 1st foreign bank to launch QDII China for 8 years Top QFII custodian with 20% market share 30 Capacity at around 30% 55 Consumer outlets covering 13 major cities in China 60 Captured 60% market share in the insurance QDII 9,000 Employees in China 159,000 Settlements per year with 100% settlement rate Present in Major Cities Across the Country Citi® 东方·花旗 Citi ORIENT Beijing citi Citi citi Dalian •Tianjin ⚫ citi Nanjing citi Wuxi Citi Milestones in China 1902 1st established operations in Shanghai 2002 1st international bank granted an FX license 2003 1st international bank with a custodian bank license; cleared 1st trade of the QFII scheme 2006 1st international bank receiving QDII license and approval to offer custodian service; Strategic alliance with Guangfa Bank 2007 Launching RMB services to local residents 2008 Launched RMB debit cards Citi Shanghai 2009 Received regulatory approval to act as an interbank bond market maker. citi citi Hangzhou Chongqing Chengdu citi citi citi Changsha Guiyang Citi Guangzhou ■citi Shenzhen Citi QFII/RQFII Clients HONG KONG MONETARY AUTHORITY 香港金融管理局 BLACKROCK NORGES BANK UBS ACR Citi Existing Branch Representative Office Lending Company COE 2012 1st foreign bank to launch sole branded credit card in China; launched Citi Oriental Securities, securities JV mainly focusing on underwriting business. 2013 1st batch of foreign banks to launch domestic fund distribution business 2014 Pilot Foreign Currency Cross Border Treasury Center Solution in Shanghai Free Trade Zone 2015 Citi partners with local banks to offer CIBM service to clients AEGON Julius Bär m Swiss Re 华夏基金 China A MC suva insurance plus 93 cíti H#94Citi in China Interbank Bond Market Top bond market maker and PBOC Primary Dealer - - One of the only three foreign banks Awarded Excellent Bond Market Marker 2015 Large trading volume (ranked No.1 in foreign banks and No.6 among all players) Direct communication channels with Regulators; participate in PBOC's open market operation Active influence towards Regulator's Policy & Product Innovation (Invited by regulators to join most key advisory panels) ⚫ Pioneer in derivatives market - - Widely recognized by partners and competitors as top 3 in CNY IRS market First to trade CNY IRS with foreign counterparties (Mar 2006) First to trade Shibor linked IRS in China (Jan 2007) First peer of CRM (credit risk mitigation tool, Onshore CDS) dealers First trade of LPR IRS • Active in primary market Underwriter for Sovereign Panda Bond issued by Korea Finance Ministry with strong book building capability China Interbank Bond Market-Market Makers Industrial & Commercial Bank of China Agricultural Bank of China Bank of China China Construction Bank China Merchants Bank China CITIC Bank Citi China China Everbright Bank Industrial Bank China Minsheng Bank Ever Growing Bank Bank of Beijing Bank of Shanghai Bank of Nanjing Bank of Hangzhou Bank of Hankou CITIC Securities Guotai Junan Securities JP Morgan China China Development Bank Bank of Communications Standard Charter Bank China International Capital Corporation Guangdong Development Bank Shanghai Pudong Development Bank 94 citi H#95Citi FX Capability Onshore China • In 2006, Citi was appointed as the China Interbank FX market marker, one of the first foreign banks to get approval - One of the most active market makers in the Interbank Foreign Exchange Market in China. • In March 2011, Citi received approval to trade Yuan options Globally FX Week Best Banks Awards November 2015 • Best FX Bank Overall Best Bank for Forwards FX Best Bank for FX in North America Best Bank for USD/JPY Best Bank for FX for Corporates Best Bank for FX in North America. Best Bank for e-Trading Best Bank for FX Prime Brokerage Best bank for FX research FX-Week Best Banks Awards 2015 Year Awards Most popular Derivatives Market Maker Award . Best Bank for FX for Investors Best CFETS Member Award 2010 Spot Trading Excellence Award Derivatives Trading Excellence Award Most popular Derivatives Market Maker Award Best CFETS Member Award 2011 2012 2013 Spot Trading Excellence Award CFETS FX Trader Excellence Award CFETS Market Maker Improvement Award Best CFETS Member Award CFETS Market Maker Improvement Award CFETS FX Trader Excellence Award Global Finance Best FX Provider Awards November 2015 . • Best FX Bank Globally Best FX Bank in Latin America • Best FX Bank in North America Best bank for Corporate Currency Hedging Financial News October 2015 . Best Single Dealer Platform - Citi Velocity Trading Euromoney Awards for Excellence July 2015 Best Global Bank CFETS RMB Trader Excellence Award 2014 CFETS RMB Trader Excellence Award Citi Ranked 16th in the CFETS Top 100 RMB Market Makers. • Best Emerging Markets Investment Bank Globally Risk Magazine Institutional Investor Rankings June 2015 • Overall FX House of the Year • FX Option House of the Year ATIVES DERIVATIVE BEST PROVIDERS GLOBAL AWARD 2014 EUROMONEY 2015 AWARDS FOR EXCELLENCE Risk INSTITUTIONAL INVESTOR RANKINGS 2015 95 citi#96Appendix: QFII and RQFII Market Update cíti Citi®#97China: Too Big to Ignore Top 6 Currency in Global Payments China is now the world's largest economy measured by purchasing power parity (PPP) and the largest trading nation. RMB has been showing a consistent three-digit growth over the past two years with an increase in value of payments by +321%. The successful RMB inclusion in the SDR basket (in effect from October 2016) will shake up the way the world thinks about a 'reserve asset'. World Payment Shares in SWIFT June 2016 China Stock Market is the 2nd largest worldwide As of June 2016, total trading volume of both the Shanghai and Shenzhen stock exchange reached USD-39 trillion, and ranked 2nd largest in terms of market capitalization. Global Exchange Market Capitalization June 2016, in USD trillion 30 322 25 USD EUR GBP 8.73% JPY 3.46% CAD 1.96% CNY 1.72% AUD 1.68% CHF 1.41% SEK 1.16% HKD 1.04% Source: RMB tracker by SWIFT The world's second largest economy GDP weighting in USD trillion, 2015 20 40.97% 30.82% 15 10 5 0 US China Summary of China Equity Market June 2016 Market Japan Hong Kong UK No. of Listed Companies Market Cap Average Daily Trading Value (in USD billion) (in USD billion) US 25.30% Shanghai Main Board 1,122 3,784 29 Rest of US, 27% Rest of the the World World, 41.32% 41% China, 2% Shenzhen Main Board 478 997 13 UK, 5% France, 6% Germany, 7% Japan, 14% UK 3.36% France 3.76% Germany 4.73% Japan 6.01% GDP Weighting 1990 World GDP 22.5 Trillion GDP Weighting 2015 World GDP 73.4 trillion Source: International Monetary Fund, World Economic Outlook Database China 15.52% Shenzhen- SME Board 791 1,419 24 Shenzhen- 512 781 15 ChiNext Board Source: Bloomberg, SSE, SZSE 97 H citi#98China Markets Performance China foreign exchange, funds and bonds market also performed correspondingly to reflect the boom and collapse of the stock market and China capital market development. Equity-China A Share 1H16 China A share Market Movement 2-30 Years Yields for Government Bonds August 2015 4.00% 3500 3400 3300 3200 3100 3000 2900 2800 2700 2600 2500 04/01/2016 Source: Bloomberg China Foreign Exchange Market USD / RMB Foreign Exchange Rate 6.75 6.70 6.65 6.60 6.55 6.50 6.45 6.40 6.35 6.30 3.00% 2.00% 1.00% 0.00% -1.00% 2 Yrs 5 Yrs 10 Yrs 30 Yrs 04/02/2016 04/03/2016 04/04/2016 04/05/2016 04/06/2016 JP US ―UK CN Source: Investing.com 2016-04-21 Source: SAFE 2016-04-28 2016-05-06 2016-05-13 2016-05-20 2016-05-27 2016-06-03 2016-06-14 2016-06-21 2016-06-28 2016-07-05 2016-07-12 2016-07-19 China Mutual Funds Market (NAV of Open-ended Funds in RMB Billion) 8,397 7,950 7,114 6,681 9,000 8,000 7,000 6,000 5,124 5,000 4,221 4,000 3,622 3,486 3,000 2,000 1,000 ااااس Dec 2012 Jun 2013 Dec 2013 Jun 2014 Dec 2014 Jun 2015 Source: AMAC Dec 2015 Jun 2016 98 cíti H#99QFII and RQFII: Main Channel For China A Shares Investment The QFII scheme was established in 2002 to attracted foreign institutional investors to invest in China's domestic A-share market. RQFII was launched around 10 years after the QFII schemes to be further expanded to meet the increasing demand for offshore RMB products. QFII Scheme The Qualified Foreign Institutional Investors (QFII) scheme is a program that allows foreign asset owners, sell sides and asset managers to make foreign currency -denominated (primarily USD) investments into securities markets on the China. The QFII scheme has transformed from an initial test-bed for foreign participation in the China securities market to the cornerstone of China's cross-border programs. We believe QFII will paly a pivotal role in the opening of China's capital account. QFIls Around the World RQFII Scheme The RMB Qualified Foreign Institutional Investors (RQFII) scheme is to promote usage of the RMB abroad by providing a RMB-denominated investment channel into China's capital-controlled environment. The RQFII scheme has been dominated by asset managers since the scheme's inception in 2011. We are now seeing the scheme grow to include asset owners and the sell side. Continuous Expansion of RQFII (RMB in Billions) Country/ Region Inception Date Quota Ceiling No. of RQFIls with Quota Total Approved Quota Hong Kong 2011 270 79 270 Singapore 2013 100 23 56.5 UK 2013 80 15 30.1 France 2014 80 7 24 Korea 2014 120 34 74 North America 59 USD 11.038 bn Germany 2014 80 2 6.543 Qatar 2014 Canada 2014 Australia 2014 Middle East Europe 65 USD17.128 bn Switzerland 2015 Luxemburg 2015 USD 5 bn Africa APAC 169 Chile 2015 USD 0.15 bn USD 47.865 bn Hungary 2015 No. of QFIIS • Size of Quota Malaysia 2015 UAE 2015 Thailand 2015 엉엉엉엉엉엉엉엉엉 8 30 50 50 50 50 02113 0 1.825 30 5 50 50 50 0 50 50 United States 2016 250 O O O O O o O o O o 10 0 0 0 0 0 0 Source: CSRC, SAFE. 99 citi#100Key Highlights of QFII New Rules On February 4, 2016, SAFE eased QFII access with more transparent quota allocations and easier in/outflow. Simplified Quota Approval Mechanism Basic Quota. QFII can make a filing with SAFE for a "basic investment quota" based on certain % of its total asset or AUM The Basic Quota is set within a range of US$20 million to US$5 billion (increased from the previous upper limit of US$1 billion). • For certain types of QFIIs such as SWFs, central banks and monetary authorities, the Basic Quota will not apply and they may apply a quota up to US$5 billion through filing process. • SAFE's approval is only required when the quota being applied for exceeds the Basic Quota. Injection Period Removed and Lock-up Period Improved • 3 months lock-up period for all the QFIls. The new lock-up period for principal repatriation has been shortened from 1 year to 3 months for non-open-ended funds other than pension funds, insurance funds, mutual funds, charitable funds, endowment funds, governments and monetary authorities • 6 months injection period removed, but a QFII will need to use its quota within one year of the filing or approval Flexible Cross-border Remittance . Daily basis injection or repatriation on the net subscription or redemption for open-end fund • The net amount of investment capital remitted into China shall be within the investment quota • No approval needed for non-open-end fund principal repatriation. No restriction in term of frequency of repatriation for non-open-end fund • The monthly net repatriation cap still applicable to all QFIls (being 20% of its total onshore assets as at the end of the previous year) Type of QFII Basic Quota Calculation For QFII or its Group Company Who Have Their Majority of Assets (or Assets Under Management) outside of China For QFII or its Group Company Who Have the Majority of Assets (or Assets Under Management) inside of China Foreign SWFs, Central Banks and International Monetary Authorities . US$100 million + 0.2% of the average assets size in the latest three years - Existing RQFII quota (in US$) The basic quota granted shall not exceed US$5 billion Equivalent RMB 5 billion + 80% of the assets size in the last fiscal year - Existing RQFII quota (in US$) • The basic quota granted shall not exceed US$5 billion • The basic quota granted shall not exceed US$5 billion 100 H Citi®#101Key Highlights of R-QFII New Rules SAFE announced the new R-QFII rules on September 5, 2016 ligh Simplified Quota Approval Mechanism • • • Basic Quota. R-QFII can make a filing with SAFE for a "basic investment quota" based on certain % of its total asset or AUM. For certain types of R-QFIIs such as SWFs, central banks and monetary authorities, the Basic Quota will not apply and they shall self-determine the intended investment quota through filing process. SAFE's approval is only required when the quota being applied for exceeds the Basic Quota. Type of R-QFII Basic Quota Calculation For R-QFII or its group company with majority of assets (or assets under management) outside of China USD 100 million in RMB equivalent + 0.2% of the average assets size in the latest three years - Existing QFII quota (in RMB) I Injection period removed and lock-up period improved 3 months lock-up period for all the R-QFIIs except open ended fund, commence from the date when accumulated principal injection reaches to RMB 100 million. For R-QFII or its group company with majority of assets (or assets under management) inside of China RMB 5 billion + 80% of the average assets size in the last fiscal year - Existing QFII quota (in RMB) Flexible cross-border remittance • • Daily injection or repatriation are allowed for all R-QFII product types. Re-injection of principal is now allowed for non-open-end fund within the investment quota. Foreign SWFs, Central Banks and international monetary authorities Determine the intended investment quota at its own discretion. 101 Citi® H#102Comparison of QFII and RQFII Schemes Quota Eligible Investors or Institutions Currency Add. Quota Gap Period Liquidity for Open-end Fund Account QFII • No individual quota ceiling, Quota shall be used within 1-year upon approval • Aggregated quota ceiling: US$$ 150 billion 1. Only go through filing process For commercial institutions, if the applied quota < = "Basic Quota❞ For SWFs, central banks and monetary authorities, if the applied quota < = US$$ 5 billion 2. Any applied quota larger than the Point 1 above, quota approval needed from SAFE Commercial Banks (≥10 years in operation, US$5 billion AUM, US$300 million Tier 1 Capital) • Securities Companies (≥5years in operation, US$5 billion AUM, US$500 million Capital) • AMC, insurance companies and other institutions (Experience of 2+ years, and AUM ZUS$500 million • Quoted granted in US$ or other major foreign currency No waiting time for additional quota application Daily injection and repatriation • 3 months lock-up period starting from the date US$20 million principal injected • 3 months lock-up period starting from the date US$20 million principal injected No injection period restriction R-QFII Aggregated quota ceiling: each RQFII eligible countries has a aggregated quota ceiling, within a range RMB 50 billion to RMB 250 billion 1. Only go through filing process - For commercial institutions, if the applied quota < = "Basic Quota" For SWFs, central banks and monetary authorities: own discretion Any applied quota larger than the Point 1 above, quota approval needed from SAFE • PRC AMC, securities companies, commercial banks, insurance companies in approved RQFII markets • Other institutions registered and mainly operated in RQFII approved markets and possess asset management license from the relevant regulators of their jurisdictions • Quoted granted in RMB No lock-up period • 3 months lock-up period since accumulated principal injection reaches to RMB 100 million. Liquidity for Non-open-end Fund Account Monthly Cap ⚫ No restriction on repatriation frequency ⚫ For principal repatriation, principal can be re-injected, but the net amount of investment capital remitted into China shall be within the investment quota ⚫ For profit repatriation, audit reports issued by domestic accounting firm and relevant tax payment evidence are needed For all the QFIIs, monthly repatriation capped at 20% of its total asset of QFII investments at the end of last year For profit repatriation, audit reports issued by domestic accounting firm and relevant tax payment evidence are needed •No monthly cap. 102 citi H#103Overview of QFII/RQFII Asset Allocation and Investment QFII/RQFII's asset allocation is majorly attributable to China A-shares, while their equity investment indicate strong "value investment" strategy, with 80% investment flowing into high ROE CSI 300 component stocks. QFII/RQFII's asset allocation QFII RQFII Total Asset: $29.94bn Equivalent Total Asset: $29.94bn 0 10 20 30 40 Bond Fund 50 60 70 80 90 100 Equity Cash and Other Source: CSRC Apr 2016 Training QFII/RQFII's equity investment allocation in China A-shares. 5% 15% 80% ■CSI 300 Component Stocks ■SME Board ■Enterprises Board As of Mar 2016. Source: CSRC QFII/RQFII's position distribution in China A-shares by industry and by stock ROE QFII's Position Distribution 45% 40% 35% 30% 25% 20%- 15% 10% 5% 0% 47.2% h..... ....h Bank Food, Drink and Tobacco As of Aug 2016. Source: Wind Durable Consumer Goods and Clothing 50% 45% 40% 35% 29.6% 30% 25% 20% 15% 10% 3.5% 4.2% 5% 0.9% 0% Transport Material Cars and Other <0 0-5 5-10 Autoparts 10-15 Stock ROE% 15-20 >20 As of Aug 2016. Source: Wind 14.5% 103 citi H#104RQFII Landscape Quota ceiling/Approved Quota (RMB billion) 300 250 270 270 no Canada: 1.825/50 USA: 0/250 UK: 30.1/80 Germany 6.543/80 France: 24/80 Luxembourg: 10/50 Hungary: 0/50 Switzerlan d 5/50 Qatar: 0/30 UAE: 0/50 Thailand: 0/50 Malaysia: 0/50 Singapore: 56.5/100 Korea:74/120 HK: 270/270 250 50 50 Quota (RMB bn, by Q2 2016) 150 200 Australia: 30/50 Chile: 0/50 100 100 60 80 56.5 30.1 24 120 80 80 80 74 50 30 50 50 50 50 50 50 50 50 50 30 6.543 10 0 1.825 5 0 0 0 50 о 60 50 0 Hong Kong Singapore UK France Korea Germany Qatar Canada Australia Switzerland Luxembourg Chile Hungary Malaysia UAE Thailand I USA L ■Quota Ceiling (RMB bn) ■Total Approved quota (RMB bn) Source: SAFE, CSRC. 104 citi#105RQFII and QFII Quota Availability for Foreign Investors as of June 2016 RQFII USD 218bn (USD 76bn approved) UAE RMB Obn of 50 approved France RMB24bn of 80bn approved UK RMB30.1b n of 80bn approved Germany RMB6.543 bn of 80bn approved Singapore RMB 56.5 bn of 100 approved HK RMB270bn of RMB270 approved Hungary RMB Obn of 50 approved US Obn of RMB250 approved RMB Obn of 50 approved Source: SAFE Qatar RMB Obn of 30 approve d Switzerla nd RMB 5bn of 50 approved Chile RMB Obn of 50 approved Canada RMB 1.825bn of 50 approved Luxembo urg RMB 10bn of 50 approved Thailand Korea RMB74bn Australia RMB 10bn of 50 approved Malaysia RMB Obn of 50 approved of 120bn approved QFII USD 150bn (USD 81bn approved) USD 68.82bn Available QFII Quota USD 81.18bn Approved QFII Quota 105 H Citi®#106QFII/RQFII Application Process Under normal situation, the QFII/RQFII application takes around 2-3months to complete. QFII/RQFIL Client Prepare application documents | RQFII Custodian cíti ian Bank 3-5 Weeks CSRC Obtain securities investment license SAFE Obtain Investment Quota via filing/approval process 2-3 Months PBOC Obtain approval for RMB and FCY account with custodian bank CSDCC Apply investor IDs in both CSDCC Shanghai and Shenzhen branches 2 Weeks SSE/SZSE Filing with Shanghai and Shenzhen Stock Exchange above approval Capital Injection Start Trading 106 H Citi®#107QFII/RQFII Application Requirement Foreign investors intending to enter China securities market must meet certain qualifications for getting the approval from CSRC and SAFE. QFII Years of Business Experience Net Asset Assets under Management Other Requirement Fund Management Company, Insurance Companies and Other Institutional 2+ Investors* Securities Firms N/A No less than N/A USD 500 million 5+ No less than USD 0.5 billion No less than N/A USD 5 billion N/A No less than USD 5billion Tier 1 capital not less than USD 300 million Commercial Banks 10+ MOU RQFII Between CSRC and Applicant's financial regulator Application Requirement Subsidiaries of PRC fund management companies, securities companies, domestic commercial banks, insurance companies Other institutions possess asset management license from the relevant regulators Based in Hong Kong/UK/Singapore/France/Korea/Germany/Qatar/Canada/Australia/Switzerland/Luxemburg/Chile/Hungary /Malaysia, UAE, Thailand and the US registered and mainly operated in Hong Kong/UK/Singapore/France/Korea/Germany/Qatar/Canada/Australia/ Switzerland/ Luxemburg/Chile/Hungary/Malaysia/UAE/Thailand/US *Other Institutional Investors include pension funds, charity funds, donation funds, trust companies, government investment management companies etc. 107 citi H#108QFII/RQFII Documentation Requirement Qualified institutions should apply to CSRC for QFII/R-QFII license and subsequently to SAFE for investment quota. QFII Required Documentation Regulator Purpose of Application • CSRC QFII / RQFII Application Form CSRC License SAFE Quota RQFII Registration forms of QFII / RQFII team Investment Plan Copy of Business License Copy of Financial License • Certificate of proof that key personnel of applicant satisfy requirements for qualification of practice in the country where the applicant is domiciled • Statement on any substantial penalties by regulators in the last three years • Statement on fund sources and domestic securities investment plan Audited financial statements for the latest year Power of attorney signed with PRC custodian Other documents required by CSRC For Basic quota filing: Explanation Letter for application of quota filing QFII Registration Form • Audited balance sheets for the past 3 years/last year (or audit reports for securities AUM, etc.) Securities Investment business license issued by CSRC • Evidence document for approved RQFII quota (if applicable) For quota application (if the asked quota > basic quota): Application letter Audited balance sheets for the past 3 years/last year (or audit reports for securities AUM, etc.) Other materials required by SAFE 108 citi H#109Citi China Custodian QFII/RQFII Operational Support Capabilities Citi China has a dedicated QFII/R-QFII operation team to support the daily operation work, including regulatory reporting, client service, settlement and corporate actions. Settlement Services Efficient settlement of transactions and enhanced operational efficiency through our advanced technology and processing platforms Highest STP rate in the industry - 99% For China A, for those clients which may not be able to send out the settlement instruction before cut-off time ( e.g. due to time zone issue), Citi China now can facilitate them to settle based on CSDC data. Those client only need to pre-set a SI with Citi china to authorize Citi China to settle without settlement instruction and based on CSDC data. Asset Servicing • Robust corporate actions offering • Income payment • Proxy voting: flexible voting methods Corporate actions calendar: we provide the corporate actions calendar to our R-QFII clients who require the service. The corporate actions calendar is a value-added report to R-QFII clients, which is a weekly summary covering all living corporate actions events of the A-shares of the China stock market. With this corporate actions calendar, R-QFII clients will be able to have a full picture on the whole corporate actions event. Reporting • Full support of QFII/RQFII reporting requirements for internal and regulatory reporting, including comprehensive substantial shareholding reports, securities and cash holdings, corporate actions, executive MIS reports, investment activity reports and annual financial reporting of the client's investment, inward and outward remittances, foreign exchange conversions • Assist to communicate with regulators on reporting and information disclosure requirement Value Added Services • Timely provision of market information and notification of any regulatory changes to QFII rules • Citi maintains a consistent and regular interaction with the regulators and market participants in order to ensure that our clients get the most updated and accurate information in a timely manner. Assist to resolve problems/errors between the broker and the central depository (CSDCC), and complete special regulatory reporting and abnormal cash movement after approval Perform periodic service reviews to receive RQFII's feedback on our services, which will enable us to improve our services 109 H citiⓇ#110Partnership with Other Services Provider Well-established relationships between Citi and top local services providers. By working closely together, Citi China manage to deliver best class custodial services in QFII and RQFII space. Below is a reference list with our QFII/RQFII's services providers which have been working with Citi many years. Brokers CICC Citic . UBS • Goldman Gaohua • Shenyin & Waiguo Asset Managers Harvest Futures Companies Haitong futures CPA Firms EY • KMPG · China AMC • Galaxy futures • Deloitte . China International . Guotai Junan futures • PWC • Bosera Fund Management Aegon-Industrial Citic futures Haitong • Guosen . Galaxy • Guangfa Guotai Junan • Huabao 110 H Citi®#111Appendix: Understanding RMB cíti Citi®#112Understand RMB RMB is developing quickly as a functional currency for trade settlement and cross-border investment Before 2009 - Domestic Today - "One Currency, Two Systems" RMB (Renminbi) Chinese Currency (Onshore) CNY (Onshore) SH RMB (Renminbi) Current Account Capital Account Current Account Capital Account Restricted Restricted Unrestricted Subject to Approval London CNH (Offshore) Taiwan Hong Kong Singapore Convertible Current account and capital account strictly controlled. No cross-border allowed ⚫ G3 currencies used for cross-border trade and investment • . Little exposure for RMB outside China; no offshore RMB market FX daily band onshore + PBOC Intervention RMB as Top 5 World Payment Currency* (20%+ of China RMB trade settled) In the process of liberalizing capital account No FX restriction offshore Onshore + Offshore FX Daily Volume: $285Bn+ 'Orphan Currency': no natural oversight structure *SWIFT, Data as of 2015; +According to Triennial Central Bank Survey of foreign exchange and derivatives market activity in 2013 112 H Citi®#113RMB FX and Interest Rate Market FX Rate (Aug 2010 - Jan 2016) 6.9 6.8 6.7 6.6 6.5 6.4 6.3 6.2 6.1 6 27/08/2010 27/11/2010 27/02/2011 27/05/2011 27/08/2011 27/11/2011 27/02/2012 27/05/2012 27/08/2012 Interest Rate (Aug 2012 – Jan 2016) 12 10 8 6 4 2 0.2 0.15 0.1 0.05 0 USDCNH-USDCNY (right) -0.05 USDCNH -0.1 USDCNY -0.15 -0.2 06/08/2012 06/11/2012 06/02/2013 Source: Bloomberg. Data as of Jan 13, 2016. 06/05/2013 06/08/2013 06/11/2013 06/02/2014 06/05/2014 06/08/2014 06/11/2014 27/11/2012 27/02/2013 27/05/2013 27/08/2013 27/11/2013 06/02/2015 06/05/2015 06/08/2015 27/02/2014 27/05/2014 27/08/2014 27/11/2014 27/02/2015 06/11/2015 27/05/2015 27/08/2015 27/11/2015 3M HIBOR (HK) 3M SHIBOR (Shanghai) 113 H Citi®#114The Roadmap of RMB Internationalization Trade Currency Any corporate can use RMB to settle trade anywhere in the world Cross Border Trade Settlement China 2009: Pilot for 5 Cities 2010: 20 Provinces 2011: Nationwide in China Rest of World 2009: Pilot for 3 countries/ territories Documentation 2010: All countries/ territories 2012: Provincial pilots of simplification 2013: Nationwide simplification 2014: SFTZ: no documentation Investment Currency RMB increasingly used in cross- border investment and financing Offshore RMB Centers London Hong Kong Taiwan Singapore 2007: RMB-denominated bond 2010: CNH transferability, access to China bond market, RMB-denominated ETFs 2011: RMB IPO, 2013: CNH HIBOR fixing 2014: HK Primary Liquidity Provider (Citi) Cross-border Investments 2011: RQFII 1 - RMB20bn 2011: RMB FDI and ODI, FIE financing offshore 2012: RMB inter-company loan 2013: RQFII 3 - RMB270bn, further relaxation on RMB FDI 2014: SFTZ: 2-way RMB pooling 2014: SH-HK stock connect, RQDII (no quota) 2015: Mutual Recognition of Funds (MRF) Reserve Currency RMB on its way to become a world reserve currency RMB in Reserve Portfolio RMB entered Special Drawing Rights currency basket in Nov 2015 20 has established arrangement for clearing and settlement At least 38 central banks hold RMB reserves as of 2014 (IMF 2015 survey) Currency Swap Agreements Bilateral currency swap agreements between China and 32 central banks NZ 114 H citiⓇ#115SDR Inclusion is Positive for Long-term Capital Flows into RMB Assets Background • IMF formally announced the inclusion of the RMB as a fifth currency in the SDR currency basket from October 1, 2016 onward, with a weighting of 10.92% • It could encourage an increase in global asset diversification into RMB assets and promote RMB internationalization • Global asset allocations and diversification into RMB assets will likely be gradual Global FX Reserve • Global FX reserves (ex-China) as of 2Q15: US$7.8 trillion • The US$ took 63.8% of the world's allocated FX reserves outstanding, while the RMB is estimated to have taken merely 1.1% as of 2Q15 Top 20 Countries Ranked by FX Reserve (Ex-China) (US$ in Billions) 1,400,000 Allocation into RMB Assets • The direct SDR-related flows would be FX conversions by IMF members ($280 Billion as of 3Q15) to maintain their quotas in the appropriate proportion by the end of September 2016 • As China opens up channels for investment, private and public sector allocation to RMB assets is expected to rise • It is estimated that the RMB's share in global reserves could reach 5% in five years, and 10% in 10 years Projected Growth of RMB Allocation (US$ in Billions) 1,000 800 600 400 200 1,200,000 1,000,000 800,000 600,000 400,000 200,000 Source: IMF, Citi Research. Japan Saudi Arabia Switzerland Taiwan Russia South Korea Brazil Hong Kong India Singapore Germany Mexico Algeria Thailand UK France 0 2015 Assumptions 2020 According to IMF, RMB may have taken 1-2% of the world's allocated FX reserves outstanding as of 2015. A industry survey of central banks sponsored in April 2015 highlights that the RMB could account for 5% of global FX reserves in 5 years, and 10% (US$780 billion) in 10 years, With this assumption, we can back out an annual growth rate of 23% of RMB allocations. The graph shows a projected trend based on this growth rate. 115 H Citi® 2025#116Onshore-Offshore Liquidity Comparison FX Forward/Swap Accessible for ROIls Avg. Daily Vol: USD 20-40bn Avg. Deal Size: USD 10-20m Tenor: Up to 10yrs Liquid Tenor: Up to 1yr No access for onshore entities Avg. Daily Vol: USD 10bn Avg. Deal Size: USD 20m Tenor: Up to 5yrs Liquid Tenor: Up to 1yr ☐ No access for onshore entities Avg. Daily Vol: USD 20-40bn Avg. Deal Size: USD 20-50m Tenor: Up to 5yr Liquid Tenor: Up to 1yr IRS CCS Onshore Deliverable CNY Accessible for Rolls Thin Liquidity Accessible for ROIls Avg. Daily Vol: CNY 25bn Avg. Deal Size: CNY 100-200m Tenor: Up to 10yrs Liquid Tenor: Up to 5yrs Offshore Non-Deliverable CNY ☐ No access for onshore entities Avg. Daily Vol: USD 2bn Avg. Deal Size: USD 20-30m Tenor: Up to 10yrs Liquid Tenor: Up to 5yr ☐ No access for onshore entities Avg. Daily Vol: USD 50-300m Avg. Deal Size: USD 10-50m Tenor: Up to 10yrs Liquid Tenor: Up to 1yr Offshore Deliverable CNH ☐ No direct access for onshore entities New market (CNH HIBOR) Thin Liquidity No access for onshore entities New market (CNH HIBOR) Avg. Daily Vol: USD 600-800m Avg. Deal Size: USD 10-50m Tenor: Up to 10yrs Liquid Tenor: Up to 5yr FXO Accessible for ROIls Avg. Daily Vol: USD 200-300m Avg. Deal Size: USD 10-20m Tenor: Up to 3yrs Liquid Tenor: Up to 1yr ☐ No access for onshore entities Avg. Daily Vol: USD 500m Avg. Deal Size: USD 30m Tenor: Up to 5yrs Liquid Tenor: Up to 1yr ☐ No access for onshore entities Avg. Daily Vol: USD 1bn Avg. Deal Size: USD 50-100m Tenor: Up to 3yrs Liquid Tenor: Up to 3yrs Source: SAFE, Citi Research 116 Citi® H#117In any instance where distribution of this communication is subject to the rules of the US Commodity Futures Trading Commission ("CFTC"), this communication constitutes an invitation to consider entering into a derivatives transaction under U.S. CFTC Regulations § § 1.71 and 23.605, where applicable, but is not a binding offer to buy/sell any financial instrument. This communication is prepared by individual sales and/or trading personnel of Citi which distributes this communication by or through its locally authorised affiliates (collectively, "Citi"). 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