I have often emphasised the need for diversification in the
financial intermediation channels to maximise the contribution of
the financial system to economic growth and development.
Diversification can also promote financial stability through
reducing the over-dependence of financial intermediation upon one
particular channel. Such diversification is therefore clearly in
the public interest, to the extent, I think, of requiring the
involvement of the public sector in its promotion, if the free
market does not produce the desired results.
Indeed, Hong Kong's non-interventionist Government finally got
around to this view back in 1989 and on 14 March 1990 the first
weekly issue of 91-day Exchange Fund Bills, amounting to HK$300
million, was launched. Since then the Exchange Fund Bills and Notes
Programme has become a central feature of Hong Kong's debt market.
The total amount of Exchange Fund paper now outstanding is HK$125
billion. And it was not just a matter of bringing supply to the
market to meet demand. We developed a benchmark yield curve, a
market-making system and a sophisticated market infrastructure,
including a paperless clearing and custodian system.
But more needs to be done. Although the debt market has, over
the past 15 years, become a significant channel of financial
intermediation, sizing it against GDP it is still a lot smaller
than the banking and equity markets, and by quite a wide margin.
Furthermore, retail interest, increasing as it may have been, is
still lacking by the standards of the developed markets in the US,
Europe and Japan. And the further promotion of retail interest,
specifically in Exchange Fund Notes, is the focus of attention of
our gathering today.
As you may be aware, over the past year or so, we made various
experimental attempts to attract retail investors to the primary
issues of Exchange Fund Notes. On the basis of the experience
gained, and subject to three refinements to be introduced to the
arrangements, we have decided to continue offering Exchange Fund
Notes to retail investors.
The first refinement is the introduction of greater flexibility
in the selection of specific issues of Exchange Fund Notes to be
offered to retail investors in the primary market. Instead of
indiscriminately opening up all the 2-year and 3-year Exchange Fund
paper for subscription by retail investors, we intend to take
account of market conditions and consult our Distributors in
deciding on the timing and tenor for issues with a retail feature.
Initially, one issue will be selected for non-competitive bids from
retail investors in each quarter. The number of issues per quarter
may be increased subsequently, subject to market response. This
refinement may mean a reduction in the frequency of issues open to
retail investors compared with the experimental period, but it will
enable the allocation of a larger portion of the selected issues
for allotment to them. It will also facilitate more focused retail
marketing for the relevant issues.
The second refinement is the enhancement of price attractiveness
for the retail investors. Exchange Fund Notes open to retail
investors will be allotted to successful non-competitive bids at
the lowest price, i.e. the highest yield, accepted at the
competitive-bid tenders, rather than the average accepted price (or
average accepted yield). In other words, the retail investors will
be assured of getting the best price that institutional bidders are
able to get. I am sure retail investors will welcome this.
The third refinement is the strengthening of the distribution
network. The number of Retail Exchange Fund Notes Distributors will
be increased from three to seven. The extensive branch networks of
the Distributor Banks and their sophisticated telephone and
Internet banking facilities will, I hope, make it much easier for
retail investors to gain assess to the primary market for Exchange
Fund Notes. The large retail banks have in the past been criticised
for not supporting the development of the retail debt market for
fear of losing their retail deposits. Just by looking at the names
of the magnificent seven you will realise how wrong that criticism
has been. In alphabetical order, the magnificent seven are: Bank of
China (Hong Kong), DBS Bank (Hong Kong), Bank of East Asia, Hang
Seng Bank, The Hongkong and Shanghai Banking Corporation, Standard
Chartered Bank, and Wing Lung Bank. I thank them sincerely for
their participation as Retail Exchange Fund Notes Distributors.
Access for retail investors to the primary market of debt, not
necessarily restricted to Exchange Fund Notes, is, of course, only
part of our continuing efforts. To increase and sustain retail
investor interest in bond products in general, we need also to
provide convenient access to the secondary market at low
transaction costs and reliable market information. But this is a
subject for another occasion, after ideas, just recently discussed
and endorsed by the new Financial Infrastructure Sub-Committee of
the Exchange Fund Advisory Committee, mature and arrangements put
in place, in collaboration with the industry.
Allow me to conclude with a commercial targeted at retail
investors.
The Exchange Fund Notes are a very safe investment - you are
putting your money with the Exchange Fund, which is managed by the
HKMA.
The Exchange Fund Notes provide you with a steady stream of
fixed-interest income that is higher than interest on bank
deposits.
The Exchange Fund Notes are highly liquid - you can sell them
any time you want. There are 26 market-makers appointed by the HKMA
to make a market in Exchange Fund paper.
The Exchange Fund Notes have a transparent and efficient price
discovery system - up-to-date prices and yields can be easily found
in newspapers and the financial media.
But we all should not forget, of course, that the prices of
Exchange Fund Notes can go up as well as down, depending on the
level of interest rates.
End of commercial.
Thank you.
