Presentation on theme: "Bond market development: The case of Hong Kong"— Presentation transcript:
1 Bond market development: The case of Hong Kong Alfred WongHong Kong Monetary Authority
2 Outline I. Motivation to develop bond market Authorities’ efforts Lessons and impediments
3 Part I What motivates the authorities to develop the local currency bond market?
4 An overview of the financial system Financial MarketsMoney marketBond marketEquity marketLendersHouseholdsFirmsCentral bankBorrowersHouseholdsFirmsGovernmentBanks and other financial institutionsInsurance companies and pension fundsOther financial intermediariesFinancial Intermediaries
6 Motivation of the authorities Lessons from the Asia financial crisisCurrency and maturity mismatchesProne to sudden capital flow reversalTo foster financial stabilityAs back-up facilitiesDiversity in financial intermediation
7 The role of the State A multifaceted role: Investor protectionInnovationProvision of market infrastructurePositive non-interventionismFacilitating, not forcing!
8 Part II What have the authorities done to develop the local currency bond market?
9 Major initiatives taken since the Asian financial crisis Product developmentMarket infrastructureTax and regulationRegional cooperation
10 1. Product development Government issues Securitised debts Bond funds Retail bonds
11 Government issues Exchange Fund Bills and Notes (EFBNs) HK$ debt instruments issued by the HKMABenchmark yield curveGood liquidity in the secondary marketBanks collectively hold about 85% of the outstanding EFBNs forfavourable risk weighting andcan be used as collateral to borrow from the HKMAGovernment bondsThe Government successfully launched its first global bond offering in July 2004Total HK$20 billion of which US$1.25 (around 50%) in a 10-year US$ denominated bond
12 Securitised debts The Hong Kong Mortgage Corporation Established by the Hong Kong SAR Government in March 1997To promote development of a secondary mortgage marketmortgage purchasedebt issuancesecuritisation of mortgage loansmortgage insuranceIn May 2004, the Government sold HK$6 billion (US$770 million) of securitisation bonds, backed by toll revenues from 5 tunnels and 1 bridge to finance infrastructure projects
13 Bond funds An EMEAP initiative ABF1 (2003) ABF2 (2005) Closed-end: Confined to investment of the central banks onlyUSD-denominated sovereign and quasi-sovereign bonds in the regionABF2 (2005)Open to any interested investorsDomestic currency-denominated bonds in the region
14 Retail bondsThe Hong Kong Mortgage Corporation first offered bonds to retail investors in October 2001The HKMA operated a pilot scheme to stimulate retail investment in Exchange Fund Notes in 2003The programme was refined in 2005 under which the fee structure was simplified and retail distributors were appointed
15 2. Market infrastructure Benchmark yield curveHong Kong bond settlement systemOn-line access to market information for retail investors
16 Benchmark yield curveA domestic yield curve gradually took shape when the HKMA began issuing Exchange Fund papers in 1990sConsiderable effort has been directed at maintaining a smooth and continuous yield curve in designing the EFBN issuance programme
17 Hong Kong dollar bond settlement system Central Moneymarkets Unit (CMU)Established in 1990 to provide computerised clearing and settlement facilities to debt securitiesLinked with other major international securities settlement systemsTo foster cross-border bond trading and investment
18 Clearing and settlement system CDC- ChinaUSDRTGS(2000)Clearstream20032004EuroclearDvP1994PvP2002PvP1994CMUDvPHKDRTGS (1996)1997AustraClear- AustraliaPvP1998DvP1999AustraClear- New ZealandKSD- South KoreaEURORTGS(2003)
19 On-line access to bond prices CMU Bond Price Bulletin websiteLaunched in 2006Provides convenient access to indicative bond prices quoted by major banks in Hong Kong
21 3. Tax and regulation Demand side: Supply side: tax concessions to bond buyersTrading profits from bonds with a maturity period of 7 years or more (issued after 5 March 2003) were exempted totally from profits tax (previously 50% tax concession)Minimum maturity requirement for the 50% tax concession was relaxed from 5 to 3 yearsSupply side:simplified issuance process for fund raisersThe Government and the Securities and Futures Commission have together streamlined regulations and procedures for issuing and listing debt securitiesEnabled issuers to market their offers with greater flexibility and effectiveness to the publicLowered issuance costs
22 4. Regional cooperationAPEC Initiative on the Development of Securitisation and Credit Guarantee MarketsAsian Bond Market Initiative (ABMI)Asian Bond Fund (ABF)
24 Hong Kong dollar bond market Steadily growth over the past decadeOutstanding Hong Kong dollar bond reached US$85 billion at end-2005Almost 50% of GDP
25 Local currency bond outstanding US$ billion% of GDPSources: HKMA and HK Census and Statistics Department.
26 Market growth by issuer US$, bnUS$, bnSource: HKMA.
27 Financing structure in 2005* *As at end-September 2005
28 Part III Lessons and impediments: any more we can do?
29 More work to do? Macroeconomic policies Government bonds Banking sector soundnessCorporate governanceRegulatory frameworkTax treatment / incentivesInvestor base
30 Impediments to the Hong Kong dollar bond market SupplyIssuance of Exchange Fund papers is limitedGovernment issuance is politically sensitiveLack of corporate issuersBusiness sizeCredit bureauxDemandMutual funds invest mainly in equitiesCurrency board system
31 Retail demand for bonds Transaction cost is high for individualsIncreased competition between banks made deposits fiercely competitiveAttraction is mainly on medium term papersThere is more interest in holding bonds via other investment vehicles (e.g. mutual funds)Any more room for ABF2-typed initiatives?
32 Looking ahead Market making system Length of the yield curve League tableTender arrangementsUniform-price auctionLength of the yield curveNumber of EFN issuesEFN futures marketElectronic trading platform
33 Conclusion The Hong Kong bond market has grown steadily since crisis Structure of financing still tilted towards loans and equitiesScope for improvements
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