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					    Introduction of PKU HSBC Chinese Commodity Futures Index (PHCCI)



                            Financial Indices Lab

          HSBC Financial Research Institute at Peking University

                              August 31, 2010



     China has established a comprehensive commodity futures market with
23 commodity futures and 3 exchanges at Shanghai, Zhengzhou and Dalian.
The total trading volume in the market ranks at the second in the world.
However, there exists no well-recognized real-time commodity futures index
for the traders to use. This severely hinders the further growth of commodity
futures market in China.

     The PKU HSBC Chinese Commodity Futures Index, abbreviated as
PHCCI, is a composite commodity futures index for the Chinese commodity
futures market. This index is introduced by Financial Indices Lab of HSBC
Financial Research Institute at Peking University (HFRI). It represents the
real-time movement of Chinese commodity futures market and corresponds to
a replicable portfolio of commodity futures.



    Financial Indices Lab


     The PKU HSBC Chinese Commodity Futures Index (PHCCI), is introduced
by HFRI Financial Indices Lab. Established on September 1, 2009, the
Financial Indices Lab is devoted to providing formal and rigorous research
findings as well as products to the rapidly growing Chinese financial sector.



     PHCCI Features



     PHCCI is a real-time composite commodity futures index for Chinese
      commodity futures market.

     With a clear structure, PHCCI represents the movement of the Chinese
      commodity futures market, serving as a trading benchmark for the
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     Chinese commodity futures traders.

    PHCCI can be replicated as a real-time tradable futures portfolio.




    PHCCI Committee



    PHCCI Committee is responsible for the interpretation, adjustment and
supervision of the index. The Committee consists of renowned economists and
financial experts in China.


                                CCI Committee


                               Wen Hai, Vice President and Professor of Peking
    Chair                      University; HFRI Chair; Dean of HSBC School of
                               Business at Peking University.




                              Gang Fan, Professor of HSBC School of Business at

                               Peking University; Vice Chair of China Society of

                               Economic Reform (CSER).



                              Guoqing Song, Professor of CCER (China Center for

                              Economic Research at Peking University), Chief

                              Economist in SEEC (Stock Exchange Executive

                              Council)


                              Ming Song, Professor of School of Economics and

                              Business    Administration,   Hong   Kong   University;

                              Director of CCFR (Centre for China Financial Research

                              at Hong Kong University), HFRI Executive Chair.




2
                              Zhiyong Tu, Assistant Professor of HSBC School of
                              Business at Peking University; Director of HFRI
                              Financial Indices Lab.




    PHCCI Notions



     PHCCI pursues the following notions:

    The index shall reflect the real-time change of the Chinese commodity
     futures market.

    The index shall be able to be replicated as a real-time tradable commodity
     futures portfolio.

    The index structure shall be concise and clear, the data sources shall be
     accurate and transparent.

    Under the guidance of the above notions, PHCCI has set January 4, 2005
as the base year (1,000 points). The index is computed with the price of the
most active contract for each composing commodity futures, whose weight is
calculated with the average open interests during the past two years.



    PHCCI Construction



   According to the set standards, PHCCI selects the composing
commodities and the corresponding contracts, and the Index Committee
makes the regular adjustment of the index.

    PHCCI Components

     The commodity selected as the PHCCI component shall satisfy the
following restrictions:

1. The ratio of the commodity’s average open interests to that of the whole
   market is more than 1.5%.
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2. The correlation coefficient of the returns of any two composing commodities
   is less than 0.7.

   PHCCI excludes those commodities with small market shares, because
they lack the representativeness of the market and may cause the liquidity
problem in the replicable futures portfolio. (The choice of 1.5% is based on the
international experience and China's market data analysis.) In the meantime,
in order to maintain a balanced and diverse composition, PHCCI requires that
the correlation coefficient of the returns of any two components shall not be
high. (Generally, 0.7 is the critical value of strong correlation in statistics.)

   PHCCI Contract Selection

    PHCCI uses the weighted average value of daily trading volume and open
interests as the criterion to define the most active contract, which shall be
determined every day using a computer program. When the most active
contract shifts, PHCCI will make corresponding adjustment based on the
relative price coefficient of the two contracts.

   PHCCI Adjustment

    Under the following circumstances, PHCCI components and their weights
shall be adjusted according to the above standards:

    1) The first trading day of each year;
    2) The first trading day six months after a new commodity futures is
       listed;
    3) The first trading day after an old commodity futures is delisted.

   Table 1 shows the index composition after the adjustment on January 5,
2009. Table 2 shows the most recent adjustment on January 4, 2010.

                   Table 1 PHCCI Composition(adjusted on January 5, 2009)

                   PHCCI Components and Contracts                           Weights(%)

                           Copper                 CU0903                     26.51

       Metal              Aluminum                AL0903                     4.77

                            Gold                  AU0906                     7.83

                               Subtotal                                      39.11

                           Bean I                   A0905                    16.66
    Agricultural
                            Corn                    C0905                    10.69


4
                           Cotton                 CF0905                     4.15

                        Refined Sugar             SR0905                     11.43

                           Wheat                  WS0905                     3.38

                               Subtotal                                      46.31

                            Fuel                  FU0903                     2.39

     Chemical              Rubber                 RU0905                     9.58

                            PTA                     TA0905                   2.61

                               Subtotal                                      14.58

                                    Total                                    100




                   Table 2 PHCCI Composition(adjusted on January 4, 2010)

                   PHCCI Components and Contracts                           Weights(%)

                           Copper                 CU1004                     23.67

                          Aluminum                  AL1004                   4.34
       Metal                Gold                  AU1006                     6.66

                          Deformed
                                                  RB1005                     16.66
                            Steel

                               Subtotal                                      51.33

                           Bean OiI                 Y1009                    13.87

                            Corn                    C1009                    4.29
    Agricultural
                            Cotton                CF1005                     3.04

                        Refined Sugar             SR1009                     12.48

                               Subtotal                                      33.69

                             Fuel                 FU1005                     2.49

                           Rubber                 RU1005                     7.38
     Chemical
                             PTA                    TA1003                   2.77

                            PVC                     V1003                     2.3

                               Subtotal                                      14.98

                                    Total                                    100




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    P H CC I P r o p e r t i e s



      The Risk and Return of PHCCI

---The risk and return of PHCCI lie between those of Hushen 300 Stock Index
and CITIC S&P Government Bond Index.




6000
             phcci
             stock
             bond
5000



4000



3000



2000



1000



     0
    Jan/05           Jan/06         Jan/07          Jan/08          Jan/09           Jan/10        Jan/11
                       Fig.1 Trends of PHCCI, Shanghai Index and CITIC S&P Government Bond Index
                Fig.1 Trends of PHCCI, HS300 Index and CITIC Government Bond index




    After adjusting to the same base, Figure 1 shows the trends of PHCCI
(unleveraged), Hushen 300 Stock Index and CITIC S&P Government Bond
Index from January 2005 to August 2008. The average annual returns of the
three indices are 12.59%、20.05%、5.17% and the standard deviations (risks)
are 17.71%、33.43%、1.65% respectively.


      The Diversification Effect of PHCCI

---PHCCI can raise the mean-variance frontier of the stock and bond portfolio,
reducing the portfolio risk under given return.


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      14%
    Annual           Efficient Portfolio with PHCCI
                     Efficient Portfolio without Futures
    Return
                     Efficient Portfolio with 20% PHCCI
      12%




      10%




         8%




         6%




         4%


              0          5%                10%             15%        20%              25%                    30%
                                                                            Volatility (Standard Deviation)
                                   Fig.2 The Diversification Effect of PHCCI




    Figure 2 shows the variation of the efficient frontier when PHCCI is added to
the stock and bond portfolio. As shown in the figure, with 20% PHCCI added,
the efficient frontier of the stock and bond portfolio can be significantly elevated.
When the proportion of PHCCI is not restricted, the efficient frontier of the
portfolio is the highest. This means under given return, the risk of the porfolio
containing unrestricted PHCCI is the lowest and the risk of no futures portfolio
is the highest.


   The Replicability of PHCCI

---At any point, PHCCI can be replicated as a real-time tradable commodity
futures portfolio.

     The activeness of PHCCI contracts ensures that opening or closing a
position at any time will not cause significant market impact. For example, on
January 5, 2009, PHCCI was closed at 1221.64. Suppose an investor have
one million RMB and replicate it to PHCCI portfolio, the construction is as
follows:




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       Table 3 PHCCI Theoretical Portfolio(created at the close on January 5, 2009)

                                                                           Value
                   PHCCI Portfolio               Units   Price(RMB)
                                                                       (10,000 RMB)

                        Copper          CU0903   2.14     24810/ton         26.51

       Metal           Aluminum         AL0903   0.80     11960/ton         4.77

                          Gold          AU0906   0.41    190.25/gram        7.83

                                     Subtotal                               39.11

                         Bean I         A0905    4.88      3413/ton         16.66

                          Corn          C0905    6.88      1554/ton         10.69

    Agricultural         Cotton         CF0905   0.71     11740/ton         4.15

                     Refined Sugar      SR0905   3.94      2902/ton         11.43

                         Wheat         WS0905    1.68      2010/ton         3.38

                                     Subtotal                               46.31

                          Fuel          FU0903   0.88      2701/ton         2.39

     Chemical           Rubber          RU0905   1.67     11455/ton         9.58

                          PTA           TA0905   1.02      5128/ton         2.61

                                     Subtotal                               14.58

                                      Total                                 100




   The International Co-movement of PHCCI

---PHCCI strongly correlates with the major international futures indices.

    Figure 3 describes the co-movement of PHCCI with CRB index from 2000
to 2010. Their correlation coefficient reaches 0.81.




8
        300
    Indices              PHCCI
                         CRB


        250




        200




        150




        100




         50
         Jan/00 Jun/00 Dec/00 Jun/01 Dec/01 Jun/02 Dec/02 Jun/03 Dec/03 Jun/04 Dec/04 Jun/05 Dec/05 Jun/06 Dec/06 Jun/07 Dec/07 Jun/08 Dec/08 Jun/09
                                                                                                                                           Year
                                                       Fig.3 Trends of PHCCI and CRB Index




   The Lead Effect of PHCCI

---PHCCI significantly leads Chinese CPI.

         180                                                                                                                                           110
                          Monthly PHCCI Growth
                          Monthly CPI Growth

         160                                                                                                                                           108




         140                                                                                                                                           106


    PHCCI                                                                                                                                                CPI
         120                                                                                                                                           104




         100                                                                                                                                           102




          80                                                                                                                                           100




          60                                                                                                                          98
          Jan/01 Jul/01 Jan/02 Jul/02 Jan/03 Jul/03 Jan/04 Jul/04 Jan/05 Jul/05 Jan/06 Jul/06 Jan/07 Jul/07 Jan/08 Jul/08 Jan/09 Jul/09

                                               Fig.4 Trends of Monthly PHCCI and CPI Growth



   Figure 4 shows the trends of monthly PHCCI and CPI growth from 2001 to
2010. It’s easy to see from the figure that PHCCI leads CPI. Table 4 gives the
specific correlation coefficients of PHCCI and CPI under different lead-lag
9
periods.

         Table 4 Correlation Coefficients of PHCCI and CPI under Different Lead-lag Periods
                              PHCCI to CPI(-i)                       PHCCI(-i)to CPI
                         Correlation                           Correlation
     Lag Number i                            P Value                                 P Value
                         Coefficient                           Coefficient
          0                0.262              0.006               0.262               0.006
          1                0.337              0.004               0.178               0.066
          2                0.387              0.000              0.099                0.313
          3                0.423              0.000              0.032                0.747
          4                0.443              0.000              -0.045               0.647
          5                0.454              0.000              -0.129               0.193
          6                0.455              0.000              -0.200               0.043
          7                0.451              0.000              -0.260               0.009
          8                0.435              0.000              -0.318               0.001
          9                0.413              0.000              -0.350               0.000
          10               0.411              0.000              -0.356               0.000
          11               0.410              0.000              -0.342               0.000
          12               0.399              0.000              -0.343               0.000

     Table 4 shows that PHCCI significantly leads CPI and the correlation
coefficient reaches its peak (0.455) under 99% significance level when PHCCI
is 6 months ahead of CPI. Hence, PHCCI can be a good predictor of CPI.



      PHCCI Release



       As a public index, PHCCI will be provided to:

 Traders
---to observe the real-time movement of Chinese commodity futures market,
and to analyze the risk and return of commodity futures assets.

 Investors
---to serve as an investment benchmark for the commodity futures portfolios
that are long-term held.

 Researchers
---to quantitatively analyze Chinese commodity futures market, and explore
more market rules.



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   The daily real-time trend of PHCCI, its sub-indices and the historical data
download can all be found at the website of HFRI Financial Indices Lab
---http://www.fil.hfri.pku.edu.cn



 C o n ta c t I n f o r m a t i o n




    For more details of PHCCI construction, please contact the HSBC
Financial Research Institute at Peking University or visit our
website---http://www.fil.hfri.pku.edu.cn

Tel: 86-0755-26032017;           86-010-62756569

Email: fil@szpku.edu.cn




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