The forthcoming re-launch of the retail Exchange Fund Note programme, with a number of refinements, offers a good choice for retail investors.
I have often emphasised the need for greater diversity in the financial intermediation channels, which will, among other things, help promote economic growth and development, and, through reducing the risk of over-dependence on a particular channel, promote financial stability. The need for this diversity is clearly in the public interest, to the extent that public sector involvement in achieving and ensuring adequate diversity is well justified. It is a common feature of the Asian region that the debt market is under-developed compared with debt markets elsewhere. This is also the case in Hong Kong, despite our status as an international financial centre.
As far as investors are concerned, I am sure they would like to see more choices for investment opportunities between the low risk, low return bank deposits and the high-risk, high-return investments in stocks and shares. To the extent that the management of savings has been institutionalised, for example, through Mandatory Provident Fund Schemes, there is less of a problem in product availability, as transactions are done at a wholesale level. But at the retail level, there clearly is still a lack of supply of paper and a convenient platform for investor access.
To be sure, there has been significant progress in the development of the retail bond market in the past few years, principally the result of active promotion by the HKMA, the Hong Kong Mortgage Corporation Limited and the Government of their retail bond programmes. The low-interest-rate environment has also helped. The outstanding amount of retail bonds has grown from a mere HK$200 million in 2000 to about HK$11.8 billion at the end of 2004. This is a big leap, but there is still ample room for further development. Using time deposits as a proxy indicator for the potential demand of retail bonds, the amount of retail bond holdings is equivalent to less than 3% of Hong Kong dollar time deposits outstanding at the end of 2004.
As part of the efforts to widen the investor base in bonds, the HKMA launched a pilot scheme in 2003-04 to facilitate retail participation in the Exchange Fund Notes (EFN) programme. A total of HK$330 million 2-year and 3-year EFNs were sold to retail investors under the scheme. Following a review of the pilot scheme, we announced on Tuesday (3 May) that we shall re-launch the retail EFN programme, which will start with an issue of HK$300 million of 2-year EFN on 17 May. The issue is currently being offered for subscription until 11 May.
A few refinements have been made to the new programme. First, non-competitive bids by retail investors will be allotted at the lowest accepted price at the competitive tender. In plain words, retail investors will get the best pricing that institutional bidders are able to get. Previously retail investors had to pay the average accepted tender price. Secondly, the distribution network will be much wider than before, with seven banks and more than 700 branches available for retail investors to make the subscription. This will provide easier access and more convenience for the public to invest in EFNs. Thirdly, the selection of EFN issue for offer to retail investors will be made more flexible to take account of market conditions and investor appetite.
The EFN is a good alternative investment option for retail investors. First, it is a secure investment of high credit quality, as it is issued by the Hong Kong Special Administrative Region Government for the account of the Exchange Fund. Secondly, the EFN is the most liquid instrument among all Hong Kong dollar bonds in the secondary market. The turnover averages HK$36 billion per month. It is relatively easy for investors to buy and sell EFNs in the secondary market. The pricing of EFNs is highly transparent. Investors can readily check out the reference prices of EFNs available daily on HKMA website, Reuters and other electronic media and newspapers. The minimum investment size for EFNs is HK$50,000.
As with any other bond, the EFN is of course subject to market risk: the market price of the EFN may fall below the purchase price should interest rates go up during the holding period. Investors should consider this risk before they consider investing in EFNs. Usually, the longer the maturity of a bond, the more sensitive to interest rate moves its price will be. Therefore some bond investors tend to reduce the "duration", or the average remaining maturity, of their bond portfolio in times of rising interest rates.
For retail investors, an alternative way of looking at the EFN is that it is an instrument providing a steady stream of income, especially if the investor is holding the bond until maturity. In some ways it is akin to holding fixed deposits, although the tenure of the EFN is longer. Currently, the 2-year EFN yields about 2.35%, compared with about 1.5% for a 1-year fixed deposit.
We encourage anyone wishing to know more about the EFN to take a look at the HKMA website or obtain a copy of the pamphlets and EFN Programme Information Memorandum from the Distributor Banks.
Joseph Yam
5 May 2005
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