لایب سان

Author(s): Xiaojiang Zhang

Publisher: Springer Singapore, Year: 2018

ISBN: 978-981-10-8496-6,978-981-10-8497-3

Contents 1 Building Blocks of an Investment Portfolio . . . . . . . . . . . . . . . . . . . . 1 1.1 Foreign Exchange Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1.1 Onshore CNY FX Instruments . . . . . . . . . . . . . . . . . . . . 1 1.1.2 Offshore CNY/CNH FX Instruments . . . . . . . . . . . . . . . . 19 1.2 Traded Money Market Instruments . . . . . . . . . . . . . . . . . . . . . . . 20 1.2.1 Onshore CNY Market . . . . . . . . . . . . . . . . . . . . . . . . . . 20 1.2.2 Offshore Money Market Management . . . . . . . . . . . . . . . 36 1.3 Fixed Income Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 1.3.1 Instruments Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 1.3.2 Instruments by Cashflow Structures . . . . . . . . . . . . . . . . . 62 1.3.3 The Market Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 1.4 Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 1.4.1 Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 1.4.2 Bond Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 1.5 Gold Contract on Shanghai Gold Exchange . . . . . . . . . . . . . . . . . 89 1.5.1 Physical Gold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 1.5.2 Deferred Delivery Gold . . . . . . . . . . . . . . . . . . . . . . . . . 90 2 Macro Economics, Monetary Cycle, Industry Cycle, Monetary Condition, Supply and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 2.1 Traditional Macro Cycle Indicators . . . . . . . . . . . . . . . . . . . . . . . 93 2.1.1 GDP and Growth Contribution . . . . . . . . . . . . . . . . . . . . 93 2.1.2 Electricity Generation and Industrial Growth . . . . . . . . . . 94 2.1.3 Pork and Copper Price as Growth Indicators . . . . . . . . . . 94 2.1.4 Export Dependency and Market Distribution . . . . . . . . . . 96 2.2 Real Estate Cycle Specificities . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 2.2.1 New Construction, Sales and Existing Inventory . . . . . . . 99 2.2.2 Real Estate Dependency . . . . . . . . . . . . . . . . . . . . . . . . . 101 v 2.3 Government-Driven Investment . . . . . . . . . . . . . . . . . . . . . . . . . . 103 2.3.1 Government Spending and Its History . . . . . . . . . . . . . . . 103 2.3.2 Budgetary Deficit Constraint . . . . . . . . . . . . . . . . . . . . . . 105 2.4 USD Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 2.4.1 Global Monetary Condition and Funding Cost . . . . . . . . . 107 2.4.2 Exchange Rate Fluctuation and Its Impact on Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 2.5 Industrial Cyclical Specificities . . . . . . . . . . . . . . . . . . . . . . . . . . 110 2.5.1 Industry Classification . . . . . . . . . . . . . . . . . . . . . . . . . . 110 2.5.2 State-Owned Versus Private-Owned . . . . . . . . . . . . . . . . 121 2.5.3 Cycle and Seasonal Patterns . . . . . . . . . . . . . . . . . . . . . . 123 2.6 Monetary Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 2.6.1 Quantity Versus Price Target . . . . . . . . . . . . . . . . . . . . . 125 2.6.2 Quantity Target, M1, M2, and Total Social Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 2.6.3 Regional Distribution of Aggregated Social Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 2.6.4 A Distribution Perspective from Financial Intermediary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 2.6.5 Price Target, 10 Year Bond Yield and 7D Repo Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 3 Applied Pricing Curve in the Market and Term Structures . . . . . . . 141 3.1 Curves and Term Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 3.1.1 FX Curve and FX Swap Points . . . . . . . . . . . . . . . . . . . . 141 3.1.2 Money Market Curves Across Different MM Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 3.1.3 Government Bonds and Interest Rate Term Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 3.1.4 Central Bank Bill Curve . . . . . . . . . . . . . . . . . . . . . . . . . 147 3.1.5 Tax Spread Curve and Policy Bank Bonds . . . . . . . . . . . 148 3.1.6 Credit Curve by Rating and Industry . . . . . . . . . . . . . . . . 148 3.1.7 Bond Future IRR, Contract Spread and Roll-Over . . . . . . 150 3.2 In-depth Factors Driving Onshore FX and Money Market Curves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 3.3 Monetary Policy-Driven Supply Policy Factors . . . . . . . . . . . . . . 153 3.3.1 Deposit Reserve Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . 153 3.3.2 Open Market Operation . . . . . . . . . . . . . . . . . . . . . . . . . 153 3.3.3 Discount Window . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 3.3.4 Short-Term Liquidity Operations . . . . . . . . . . . . . . . . . . . 154 3.3.5 Standing Lending Facility . . . . . . . . . . . . . . . . . . . . . . . . 154 3.3.6 Mid-term Lending Facility . . . . . . . . . . . . . . . . . . . . . . . 155 3.3.7 Pledged Supplementary Lending . . . . . . . . . . . . . . . . . . . 155 vi Contents 3.3.8 Non-monetary Policy-Driven Supply Factors . . . . . . . . . . 155 3.3.9 Structural Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 3.3.10 Seasonal Issues and Market Expectation . . . . . . . . . . . . . 159 3.4 In-depth Factors Driving Fixed Income Portfolio Return and Risk Curve Parameters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 3.4.1 Cross-Border Monetary Flow and Pricing Transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 3.4.2 Domestic Monetary Supply . . . . . . . . . . . . . . . . . . . . . . 160 3.4.3 Product Supply and Demand . . . . . . . . . . . . . . . . . . . . . 160 3.4.4 Tax Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 3.4.5 Cost of Funds and Risk Appetite . . . . . . . . . . . . . . . . . . 162 3.4.6 Credit Allocation Limits and Industry Policy Issued by Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 3.4.7 Bond Future Net Basis, Implied Repo Rate and Cheapest-to-Deliver Optionality . . . . . . . . . . . . . . . . 163 3.5 MTM Basics for Listed Capital Markets Products . . . . . . . . . . . . . 165 4 Regulatory Regime and Some Policies in Focus . . . . . . . . . . . . . . . . 167 4.1 Central Bank Objectives and Its Balance Sheet Analysis . . . . . . . . 167 4.2 Foreign Exchange Trading Regulation and Mid Pricing Guideline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 4.3 Leverage Regulatory Requirement . . . . . . . . . . . . . . . . . . . . . . . . 171 4.4 ABS and Its Related Regulation . . . . . . . . . . . . . . . . . . . . . . . . . 171 4.5 Currency Account and Capital Account Market Liberalization . . . . 172 4.6 CFETS (China Foreign Exchange Trade System) . . . . . . . . . . . . . 174 4.7 China Banking Regulatory Commission and Interbank Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 4.8 China Securities Regulatory Commission and Exchange Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 5 Market Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 5.1 Fixed Income Institution Players, Market Making Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 5.1.1 Interbank Money Market Activities by Bank Types . . . . . 179 5.1.2 Banks 3-Tiered Banking Systems in Details . . . . . . . . . . 184 5.1.3 Mutual Funds, Tax Policy and Carry Advantage . . . . . . . 200 5.1.4 Insurers and Long Investment Horizon . . . . . . . . . . . . . . 205 5.1.5 Foreign Financial Institutions . . . . . . . . . . . . . . . . . . . . . 214 5.1.6 Private Equities, a Growing Presence . . . . . . . . . . . . . . . 220 5.1.7 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 5.1.8 Securities Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 5.2 FX Trading Players . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 Contents vii 6 China, International Trade and Global Supply Chain . . . . . . . . . . . 233 6.1 Major International Supply Chains . . . . . . . . . . . . . . . . . . . . . . . . 233 6.2 Electronics and Electric Supply Chains . . . . . . . . . . . . . . . . . . . . 234 6.3 Automotive Supply Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 6.4 Chemicals and Pharmaceutical Manufacturing . . . . . . . . . . . . . . . 249 6.5 Apparel Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 6.6 Agricultural Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 7 Portfolio Objectives and Trading and Investment Strategies . . . . . . 263 7.1 Onshore CNY Liquidity Portfolio Management Objectives . . . . . . 263 7.1.1 Asset Liability Management (ALM) . . . . . . . . . . . . . . . . 264 7.1.2 Reserve Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 7.1.3 Diversification on Maturity and Counterparty . . . . . . . . . . 265 7.1.4 Support for Central Open Market Operations . . . . . . . . . . 266 7.2 Offshore FX Liquidity Portfolio Management Strategy Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266 7.2.1 Funding Cost, Return Rate and Liquidity . . . . . . . . . . . . 266 7.2.2 SAFE Limit, Cross Border Flow and CNH Liquidity Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 7.3 Trading Accounts FX MTM and Strategies . . . . . . . . . . . . . . . . . 267 7.3.1 FX Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 7.3.2 Trade-Financed CNY CNH Interest Rate Arbitrage . . . . . 279 7.3.3 Cross-rate Split Strategies . . . . . . . . . . . . . . . . . . . . . . . . 281 7.4 Trading Accounts Bond Strategies . . . . . . . . . . . . . . . . . . . . . . . . 282 7.4.1 Trading Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 7.4.2 Rate View from Global Perspective . . . . . . . . . . . . . . . . . 285 7.4.3 Rate View from Domestic Perspective . . . . . . . . . . . . . . . 291 7.5 Bond Future Net Basis Strategy and Negative Implied Repo Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312 7.5.1 Net Basis Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312 7.5.2 CTD Conversion Strategy . . . . . . . . . . . . . . . . . . . . . . . . 313 7.5.3 On-the-run, Existing Issuance and Tax Spread . . . . . . . . . 313 7.5.4 Domestic Market’s Short Sale Implication . . . . . . . . . . . . 314 7.6 Investment Accounts Objectives and Strategies . . . . . . . . . . . . . . 314 7.6.1 Some Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314 7.6.2 Garden Variety of Portfolio Objectives and Investment Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315 7.6.3 Insurance Companies’ Long End ALM Strategies . . . . . . 318 7.6.4 Mutual Fund Investment, a Mixed Asset Pool to Start With . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 7.6.5 Foreign Banks’ Short Duration and Carry Trade . . . . . . . 320 7.6.6 Off-balance Sheet Wealth Investment, a 3 Trillion USD and Still Growing Sector . . . . . . . . . . . . . . . . . . . . 320 viii Contents 7.6.7 Trust-Based High Yield Regulatory Arbitrage Strategy, a Substantial Sector with Limited Potential . . . . . . . . . . . 323 7.6.8 Asset-Backed Securities Investment, Regulatory Capital Advantage, Risk Diversification, and Yield Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . 324 7.6.9 Convertible Strategy and Callable Implications . . . . . . . . 324 7.7 Trading and Investment in Gold . . . . . . . . . . . . . . . . . . . . . . . . . 325 7.7.1 Physical Gold Segment . . . . . . . . . . . . . . . . . . . . . . . . . 325 7.7.2 Deferred Delivery Gold . . . . . . . . . . . . . . . . . . . . . . . . . 327 8 Risk Management Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329 8.1 Trading Accounts Limits Allocation . . . . . . . . . . . . . . . . . . . . . . 331 8.2 Investment Accounts Risk Allocation Practice . . . . . . . . . . . . . . . 331 Contents ix

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