This short quantitative anlysis demonstrates the positive contribution of adding RMB or USD denominated Chinese bond indices to your existing investment portfolio

1. Riding the Dragon: A quantitative introduction to Chinese bond markets both
onshore (CIBM) and offshore (Dim Sum & Kung Fu)
------
How to convince local investors to invest into Chinese bonds ?
1
STRICTLY PRIVATE
& CONFIDENTIAL
1 Financial Institutions
Department
Dirk-Emma Baestaens, PhD.
Head FID
February 2022

2. 2
Question ?
How to convince local long term investors to look into CIBM, or in order to avoid
currency risk , into offshore Chinese $-denominated bonds (Kung Fu) ?
Answer ?
Both onshore and offshore bond indices constitute efficient portfolio optimizers
in risk/return terms and merit therefore full attention of portfolio managers.
Besides, the Chines bond indices’ low correlation value with that of traditional
asset classes of a “Western” portfolio make the Chinese indices the preferred
choice to diversify away existing portfolio risk.
So, you would be well advised to seriously consider investing into Chinese bonds.
Problem Setting

3. 3
Portfolio Construction with China Bond Indices (rebased 100=3/12/2012)

4. 4
• Using Bloomberg data from 2016 to 2022, we computed standard portfolio performance metrics
• Sharpe ratios for Chinese bonds as well as traditional “Western” assets are given below.
• HY Kung Fu bond index performed badly since mid 2021 because of the “three red lines” policy
highlighting the real estate sector’s woes (Evergrande).
Portfolio Construction with China Bond Indices

5. 5
• Using Bloomberg daily data from 2016 to 2022, we computed correlations
-0,600 -0,400 -0,200 0,000 0,200 0,400 0,600 0,800 1,000
US Treasuries
China KUNG IG
Cash
China gov ONS
BONDS Global Inflation TR
China corp ONS
Gold Spot
US Bonds Corp TR
China Gov DIM
EUR Bonds AGG TR
China KUNG HY
US Corp HY
BEL20 index
DAX Index
S&P 500
Correlations with SP500
-0,400 -0,200 0,000 0,200 0,400 0,600 0,800 1,000
US Treasuries
China KUNG IG
Cash
China gov ONS
China corp ONS
China Gov DIM
BONDS Global Inflation TR
US Bonds Corp TR
Gold Spot
EUR Bonds AGG TR
China KUNG HY
US Corp HY
S&P 500
DAX Index
BEL20 index
Correlations with BEL20
Portfolio Construction with China Bond Indices

6. 6
• We computed the
efficient frontier
with constraints, that is
max 15% weight per
asset,
• Both Chinese onshore
bond indices (Gov +
Corp) as well as the Dim
Sum bond index fall
above the frontier
• In sum, given their good
Sharpe ratios and low
correlation coefficients,
all RMB (CNY + CNH) are
good building blocks to
construct efficient
portfolios
Portfolio Construction with China Bond Indices: Constrained Efficient frontier

7. 7
• Assuming you do not want to
run RMB currency risk, we
computed the efficient
frontier with constraints,
that is max 15% weight per
asset and now without any
RMB exposure.
• So we only retained the USD
Kung FU bond index.
• Clearly, the efficient frontier
shifted towards the right and
the Kung Fu index (the red
dot) now lies above the
curve.
Portfolio Construction with China Bond Indices: USD Constrained Efficient frontier

8. WANT MORE HELP ? ICBC Brussels Branch FID Team Contacts
8
Dirk-Emma BAESTAENS Ph.D., Deputy Head Financial Institutions, Financial Institutions
Department
Tel: +32 2 539 8873 | Mob: +32 478 885 783 | Email: dirk.baestaens@be.icbc.com.cn
Obtained his Ph.D. in Business Economics at the Alliance Manchester Business School after
which he became assistant professor of finance at the Erasmus University, Rotterdam where
he co-authored Trading Neural Networks in Financial Markets. He then joined BNPP Fortis
bank where he headed the credit risk quant group before joining the trading room where he
was in charge of the Client Solutions Development Group within the sales derivative &
structured products entity focusing on rates & FX . In 2016 he joined Belfius Bank, the only
Belgian state bank to develop the FIG activities where he mainly focused on custody and
lending solutions. Early 2021, he joined ICBC (Europe) Brussels.
Rouslan AKHMETSHIN, Relationship Manager Financial Insititutions Department,
Tel: +32 2 539 88 72 | Mob: +32 484 163 991 | E-mail: rouslan.akhmetshin@be.icbc.com.cn
Obtained his Master degree in Applied Economics at the University of Antwerp. He started his
carreer at Deutsche Bank as an advisor in retail and personal banking in investments. He then
joined Private Insurer, a branch 23 insurance company, as a fund accountant where he was
responsible for middle and back office activities. At the beginning of 2020, he joined ICBC
(Europe) Brussels where he has developed considerable expertise in client onboarding and
associated compliance issues.
Alexandre DESUTTER, Relationship Manager Financial Insititutions Department,
Tel: +32 2 539 88 92 | Mob: +32 477 479 039 | E-mail: alexandre.desutter@be.icbc.com.cn
Obtained his master degree in Finance at the Louvain School of Management after which he
became commercial advisor investment banking with ING. He then became head of corporate
banking operations Belgium branch at CACIB before joining Ebury as FX & trade finance sales.
Late 2020 he joined ICBC (Europe) Brussels as FID relationship manager.
Guo YANG, Relationship Manager & Treasurer Financial Insititutions Department,
Tel: +32 2 539 88 76 | Mob: +32 498 490 403 | E-mail: guo.yang@be.icbc.com.cn
Obtained his master Global Business Analysis at the Alliance Manchester Business School in
2011. He joined ICBC’s Zhejiang Provincial Branch as relationship manager while he later
acted as secretary to the CEO. In 2017 he was expatriated to ICBC (Europe) Brussels as
Relationship manager and Treasurer.
Financial Institutions
Department