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(1)

The Game-Changing Breakthrough in Accessing China

Shanghai-Hong Kong Stock Connect

Citi Online Academy | June 11, 2014

(2)

Important 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.

At the time of publication, this information was believed to be accurate, but Citi makes no representation or warranty as to correctness of the information

set forth above. The information in this document does not constitute a recommendation, solicitation or offer by Citi for the purchase or sale of any

securities, nor shall this material be construed in any way as investment or legal advice or a recommendation, reference or endorsement by Citi. The

ultimate decision to proceed with any related transaction rests solely with you. Citi is not acting as your advisor or agent.

The implementation of Shanghai-Hong Kong Stock Connect is subject to conditions, including regulatory approvals, completion of all necessary

development work and market readiness.

The information provided in this presentation is provided on an “as is” and “as available” basis and may be amended or changed in the course of the

implementation of Shanghai-Hong Kong Stock Connect. It is not a substitute for professional advice which takes account of any specific circumstances.

(3)

Overview

Shanghai-Hong Kong Stock Connect is viewed as a significant breakthrough for Mainland and Hong Kong markets.

HK and Overseas

Investors

SEHK Members

SSE

SEHK

Subsidiary

SEHK

SSE

Members

Eligible Mainland

Investors

SSE

Subsidiary

Northbound

Southbound

Order Flow

What is Shanghai-Hong Kong Stock Connect?

Shanghai-Hong Kong Stock Connect (Stock Connect) is a mutual

market access program, through which investors in Hong Kong and

Mainland China can trade and settle shares listed on the other market

respectively via the exchange and clearing house in their local market

Hong Kong Stock Exchange (SEHK) is the world’s 6th largest stock

market by market capitalization at US$ 3.1 trillion as of year-end 2013

Shanghai Stock Exchange (SSE) is the world’s 7th largest stock

market by market capitalization at US$ 2.4 trillion as of year-end 2013

Two markets combined (US$5.5 trillion) allow them to achieve top

three position leaping ahead of Japan and London markets

Paves the way for mutual market access for other asset classes

Hong Kong

M ainland China

Exchange

End-2013

(US$ Billion)

End-2012

(US$ Billion)

1. NYSE Euronext (US)

17,950

14,086

2. NASDAQ OMX (US)

6,085

4,582

3. Japan Exchange Group

4,543

3,681

4. London Stock Exchange Group

4,429

3,397

5. NYSE Euronext (Europe)

3,584

2,832

6. Hong Kong Exchanges

3,101

2,832

7. Shanghai SE

2,497

2,547

8. TMX Group

2,114

2,059

9. Deutsche Börse

1,936

1,486

10. SIX Swiss Exchange

1,541

1,233

Largest Domestic Equity M arket Capitalizations at Year-end 2013

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Stock Connect vs. QFII/RQFII

Stock Connect provides another channel for cross-border portfolio investment flow between Mainland China and Hong

Kong markets.

Stock Connect (Northbound)

RQFII (began in 2012)

QFII (began in 2003)

Quota

• Aggregated quota : RMB 300bn (~US$50bn)

• Daily quota : RMB 13bn (~US$2bn)

• Quota Ceiling: RMB 270bn for Hong Kong, RMB 50bn for Singapore and RMB 80bn for London

• RMB198bn approved for HK, $3bn London (Apr ’14)

• Quota Ceiling: US$150bn

• US$ 55bn quota approved (as of April 2014)

Eligible

Investors or

Institutions

• All Hong Kong and overseas investors (including retail and hedge funds) w ill be allow ed to trade SSE Securities via local brokers (i.e. SEHK Participants)

• Hong Kong/London/Singapore based subsidiaries of PRC fund management companies, securities companies, domestic commercial banks, insurance companies

• Other institutions registered and mainly operated in Hong Kong/London/Singapore and possess asset management license from the relevant regulators of their jurisdictions

• Commercial Banks (≥ 10yrs in operation, USD 5 billion AUM, USD300mm Tier 1 Capital )

• Securities Companies (≥ 5yrs in operation, USD 5 billion AUM, USD500mm Capital )

• AMC, insurance companies and other institutions (experience of 2+ years, and AUM ≥ USD 500mm)

Access

• Bilateral (access to SSE and SEHK) • Inflow to Mainland China • Inflow to Mainland China

Currency

• RMB • RMB • USD or other major foreign currency

Eligible

Investments

• All constituent stocks of SSE 180 & 380

• All dual-listed shares i.e. SSE-SEHK A+H

• Exceptions: Shares that are not traded in RMB, Shares under “risk alert”, IPOs

• Stocks, bonds, securities investment funds, w arrants, IPOs, bond issuance and index futures

• Same as R-QFII

Liquidity

• Daily and no restriction for sell transaction

• Buy trades are subject to quota on net buy

• Trade and settlement flow are subject to a closed-loop mechanism under w hich incomes from sales of securities shall be returned to origin instead of being deposited w ith local market.

• RQFII product (excl. open-ended fund) :

- 6 months injection period

- 1 year lock-up period

- Monthly repatriation allowed. ( Quota w ill be reduced accordingly)

- R-QFIIs need to provide audit reports issued by domestic accounting firm and relevant tax payment evidence if R-QFIIs repatriate investment gains

• Open-ended fund RQFIIs :

- Daily injection and repatriation

- No lock-up period

- Quota shall be used w ithin 1 year upon approval

• QFIIs (excl. China open-ended fund) :

- 6 months injection period

- Lock-up period: 3 months for pension, insurance, mutual funds, charitable funds, endowment funds, governments and

monetary authorities; 1 year for other QFIIs

- Monthly repatriation (up to 20% of its total asset of QFII investments at end of last year) allowed but quota w ill be reduced accordingly. For profit repatriation, audit reports issued by domestic accounting firm and relevant tax payment evidence are needed

• Defined China Open-ended fund :

- 6 months injection period

- 3 months lock-up period

- Weekly injection and repatriation permitted

- Monthly repatriation capped at 20% of its total asset of QFII investments at the end of last year.

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Key Features

Northbound

Southbound

Eligible

Investors

• No restrictions, all Hong Kong and overseas institutional and individual investors

• Co-exist w ith QDII, QFII or RQFII schemes

• All Mainland Institutional Investors

• Individual Investors holding an aggregate balance no less than RMB500,000 in their securities and cash accounts

Eligible Market

Participants

• SEHK Participants (EPs and CPs) subject to meeting certain eligibility and readiness requirements.

• SSE Members

Eligible

Securities

• All constituent stocks of the SSE 180 and 380

• All dual-listed shares i.e. SSE-SEHK A+H (68)

• Exceptions

− Shares that are not traded in RMB

− Shares under “risk alert”

− No IPOs

• All constituent stocks of the HS LargeCap (78) and HS MidCap (163)

• All dual-listed shares i.e. SSE-SEHK A+H (68)

• Exceptions

− Shares that are not traded in HKD

− A+H shares on any other mainland exchange

− No IPOs

Quota

(Net Basis)

• Aggregate quota: RMB300 billion (calculated end of day)

• Daily quota: RMB13 billion (calculated on real-time basis)

• First-come-first-served basis, no restriction on sell

• Aggregate quota: RMB250 billion (calculated end of day)

• Daily quota: RMB10.5 billion (calculated on real-time basis)

• First-come-first-served basis, no restriction on sell

Price Limit or

Day Trading

• ±10% on previous closing price; any orders w ith price beyond the price limit w ill be rejected

• Day trading not permitted (no same day turnaround)

• No price limit

• No restriction on day trade

Trading

Day/Hours

• Available w hen both markets are open for trading and banking services are available on the corresponding settlement days

Follow s trading hour of SSE but SEHK w ill accept orders five minutes before SSE opens

− Opening Call Auction: 09:15–09:25

− Continuous Auction (Morning): 09:30–11:30

− Continuous Auction (Afternoon): 13:00–15:00

• Available w hen both markets are open for trading and banking services are available on the corresponding settlement days

• Follow s trading hour of SEHK

− Opening Call Auction: 09:00–09:30

− Continuous Auction (Morning): 09:30–12:00

− Continuous Auction (Afternoon): 13:00–16:00

Settlement

• Settlement cycle: T for securities, T+1 for cash

• Settlement currency: RMB

• T+2 for both securities and cash

• Settlement currency: RMB, how ever trade w ill be quoted in HKD

Stock Connect allows investors, via local brokers, to purchase or sell shares listed on the SEHK and SSE.

266 stocks

1

82% Market Cap

78% ADT

568 stocks

1

90% Market Cap

80% ADT

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Quotas

Northbound

Southbound

Aggregate Quota

RMB300 billion

RMB250 billion

Daily Quota

RMB13 billion

RMB10.5 billion

Key Principles

Quota control only applies to buy orders, i.e. sell orders are always allowed

Quota is used on a first-come, first-served basis

Quota may be adjusted in the future

Aggregate Quota

When to calculate: At the end of each trading day

Aggregate Quota Balance: Aggregate Quota - Aggregate Buy Trades + Aggregate Sell Trades

If Aggregate Quota Balance <Daily Quota: Suspend buy order input for the next trading day

If Aggregate Quota Balance increases to Daily Quota level: Resume buy order input for the next trading day

Daily Quota

When to calculate: Real-time during trading hours

Daily Quota Balance: Daily Quota - Buy Orders + Sell Trades + Adjustments (e.g. Buy Order cancelled, Buy Order rejected by

SSE, Buy Order executed at a better price)

If

Daily Quota balance ≤ 0

During opening call auction (Pre-opening): Reject new buy orders until DQ Balance becomes positive (e.g. due to Buy Order

cancellation)

During continuous auction (Continuous Trading): Suspend buy order input for the remainder of the day

Buy orders already input in CSC before suspension will not be affected

Quota Information

Quota information will be published on HKEx website at scheduled time

To ensure stability in Hong Kong and Mainland markets, and the smooth implementation of the Stock Connect, both

aggregate and daily quotas have been set up.

(7)

Settlement of Northbound Trades in CCASS

3:00pm

4:00pm

4:30pm

6:00pm

7:30pm

T 9:15am

Securities Settlement on T ( Cash Prepayment to transfer SSE Securities Between Counterparties)

Cash Settlement on T+1, in RMB via RTGS (If cash is not paid on T)

Designated Banks make RTGS payments to

HKSCC on behalf of CPs

(for CPs w/ net payable items)

11:45am

Northbound

Trading Session

Cash prepayment to release

CNS allocated shares

Final

Clearing

Statement

1

st

CNS BSR

(Deliver Shares)

2

st

CNS BSR

(Receive Shares)

SI Settlement

via DI (FOP)

SI

BSR

(FOP)

8:30pm

CPs inquire money obligations

for next day settlement:

Settled Position Report

Inquire Money Position

CPs download

Statement of

12:00pm

T+1 8:00am

9:30am

After 12:30pm

Designated Banks

receive CHATS

HKSCC makes RTGS payments to CPs

(for CPs w/ net receivable items)

On Exchange

Settlement

Off Exchange Settlement

(8)

Implementation Timeline

Implementation is expected to take at least six months, subject to SFC approval and market readiness.

May

June

July

August

September

May 2014

1

st

round

of EP / CP

briefing

End of May

2014

Return of Form

of Indication of

Interest by EP

and CP

June/July 2014

2nd round of

EP / CP briefing

By mid-June

2014

1

EP and CP

submit

application to

participate in

SH—HK Stock

Connect at

initial launch

August 2014

3rd round of EP / CP

briefing (Market Rehearsal

arrangements)

September 2014

Market Rehearsal and

subsequent launch

(launch date TBD)

October

October 2014

Formal Launch

(Subject to SFC

approval)

10 April 2014

Joint

Announcement

April

Approximately Six Months from the Date of the Joint Announcement to Complete the Preparation for the Formal Launch

(9)

Key Takeaways

Impact

Mainland China Market

• Short term: Narrow s the A-H discount/premium

• Longer Term: Improve A-share market fundamentals and efficiency w ith more balanced investor base; A-shares may be added to the global index (e.g. MSCI Emerging Market) w hich w ould result in substantial liquidity flow into A-share market

• Currently foreign investors account for < 1% turnover, domestic retail investors accounts for >80%

• Shanghai Stock Exchange to remain relevant as Mainland China continues to liberalize outflow investment flow

Hong Kong Market

• Hong Kong Stock Exchange to remain relevant as China continues to liberalize cross-border investment flow

• Paves the w ay for mutual market access for other asset classes (e.g. commodities, fixed incomes etc.)

• Currently Institutional (mainly foreign) accounts for 60% turnover; retail investors (mainly local) accounts for 20%

Securities Firms

• Other than the exchanges, large securities firms in Hong Kong and Mainland w ill benefit most. In addition to brokerage services, securities firms may consider offering foreign exchange services, margin trading etc.

• QFII Broker/dealers: Good portion of their business may be related to access or structured products such as p-notes. This development may slow ly shift the flow aw ay from these products over time.

Investors

• Retail investors w ill have the ability to trading SEHK and SSE Securities via Stock Connect

• Hedge fund managers, w hich is currently not a preferred investor type for QFII/RQF II, w ould be able to get direct access to A-share market and may be less reliance on access products.

• Existing QFII/RQFII asset managers are unlikely to shift aw ay from QFII/RQF II scheme since Stock Connect may not be a reliable channel for them to create their desired portfolio. How ever many are also expected to leverage Stock Connect to supplement their existing QFII/RQFII scheme.

• Institutional investors currently not qualified or do not apply for QFII due to various reasons (i.e. domiciled country has no MOU w ith China, doesn’t meet QFII capital/AUM qualification, liquidity concerns) w ill have the ability invest into A-shares via participating Stock Connect brokers in Hong Kong.

How to get ready?

• Interested investors should inquiry w hether their broker(s) w ill be participating in the SH-HK Stock Connect during initial launch in October

• Investors should also have a RMB cash account, access to FX services and custodian in Hong Kong or China market to better tap RMB liquidity and minimize settlement risk as there w ill be no buy-in exemption for A-shares.

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