The Government is considering the possibility of issuing bonds to fund capital projects. The HKMA stands ready to provide assistance in this.
On 22 October 2003 the Financial Secretary presented to the Legislative Council his strategy concerning the public finances. He referred to the possibility of issuing bonds to fund capital projects that would bring long-term economic benefits to Hong Kong. He emphasised that this possible source of funding was for capital and not recurrent spending. He pointed out the additional benefits this might have for the development of the capital markets in Hong Kong and the provision of an additional investment avenue for members of the community. I very much agree with his views.
We in the HKMA have, since the beginning of 1990, spent much effort in developing the debt market in Hong Kong, taking advantage of the need for the introduction of a monetary policy instrument to facilitate effective monetary management. With the substantial unsatisfied demand for first-class Hong Kong-dollar fixed-income instruments, we were able, over a short period of time, to bring considerable supply to the market in the form of Exchange Fund Bills and Notes. We engineered a market-making system to ensure liquidity in the secondary market and efficiency in price determination, leading to the establishment of a reliable benchmark yield curve for the whole spectrum of maturity in the paper from the very short end to ten-year. We also paid a lot of attention to building the market infrastructure, in terms of the payment, clearing and settlement arrangements, to support the healthy development of the market. This infrastructure, run by our Central Moneymarkets Unit (CMU), is further linked to the major international central securities depositories, such as EuroClear and Clearstream, to facilitate the holding or trading of paper lodged in the CMU by international investors.
We have thus accumulated comprehensive and unique experience in the issue of debt and in the operation of the infrastructure of the market, and have in fact put this to good use in providing effective services to a number of issuers. Indeed, the HKMA for the account of the Exchange Fund is itself a regular issuer in the primary market, issuing about HK$4 billion of Exchange Fund paper every quarter, and a market maker in the secondary market, supporting a pool of outstanding paper amounting to about HK$120 billion. Should the Government decide to go ahead with the issue of bonds, either on an ad hoc basis or in the form of a regular programme similar to that of the Exchange Fund, this could be arranged with minimal lead time. We reckon that this could probably be done and completed in parallel with the internal process of examination by the Policy Committee and the Executive Council, and the consideration of the necessary Resolution by the Legislative Council.
This is not an advertisement for business, although it is a fact that, at least in terms of cost effectiveness, time efficiency and market development, the HKMA will probably be best placed in an exercise of this nature. There are, of course, other considerations, and we do have our limitations: we are not, for example, very good at laying out red carpets for investors. And we do not really wish to compete with the private sector if it can do an equally competent job. Our attitude in this matter is one of willingness to provide whatever assistance is needed by the Government, to the extent that this represents a legitimate call on our resources. Indeed, the predecessor of the HKMA, the Office of the Exchange Fund, was the issuing agent for Government bonds in the early nineties. As part of the effort to develop the debt market, there was a series of six issues of two-year Government bonds totalling HK$3 billion. But, since the Government was running substantial surpluses at the time and did not need to borrow, after this trial period the Government bonds were replaced by Exchange Fund Notes, with the market development objective subsumed under the more important objective of developing an instrument for monetary management.
Modelling the issue of Government bonds on the well-tried Exchange Fund Bills and Notes Programme has the additional advantage that there is ready market acceptance, familiar listing arrangements and an established retail investment arrangement.
Quite separately, we are considering the pros and cons of allowing Government bonds, depending on how they are structured, to be fungible with Exchange Fund paper and therefore to have access to the Discount Window. This would ensure that Government bonds would enjoy the same favourable pricing for Exchange Fund paper, which is currently almost the same, for up to ten-year maturity, as corresponding US Treasury paper. But there are important monetary considerations to be debated internally in the HKMA and discussed at the Sub-Committee on Currency Board Operations of the Exchange Fund Advisory Committee.
Joseph Yam
4 December 2003
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