In his 2018-19 Budget, the Financial Secretary proposed the introduction of a Pilot Bond Grant Scheme to attract Hong Kong, Mainland and overseas enterprises to issue bonds in Hong Kong. Today, the HKMA announced details of the Pilot Scheme and latest progress of other bond market-related initiatives (Link to press release). I want to take this opportunity to talk about the significance of developing the bond market and the HKMA’s efforts in this regard.
The “three-legged stool” of fund raising
There are basically three ways of raising funds in the financial market – bank loans, equities and bonds. Undoubtedly, the banking industry is the backbone of the economy and plays an important financial intermediary role. As for equities and bonds, people tend to have the impression that fund raising activities gravitate towards the equity market. This can be reflected by the numerous stock market commentators as opposed to only a handful of commentators on bond market activities. In fact, our bond market is no less active than our equity market. According to figures released by the Asian Development Bank, the total amount of US dollar, euro, Japanese yen and Hong Kong dollar-denominated bonds issued in Hong Kong reached US$467 billion (equivalent to HK$3.6 trillion) in 2017, representing an eight-fold increase since 2008. It was also five times more than the total amount of HK$580 billion raised from the equity market (including initial public offerings and further fund raisings by listed issuers) in 2017. In terms of issuance volume, Hong Kong’s bond market was the third largest in Asia (excluding Japan) last year, after the Mainland and Korea.
From the asset allocation perspective, bonds as a type of fixed income securities offer a more stable return, which can help balance the risks of the relatively more volatile equity prices. Indeed, for the most part, stocks and bonds are complementary to each other and their prices tend to move in opposite directions. An appropriate stock/bond mix in an investment portfolio can therefore help balance out risks. That’s why most bond holders are large institutional investors. Hong Kong is a banking hub in Asia, and its equity market is also among the largest in the world. Further development of its bond market can widen the channel for financial intermediation and avoid over-reliance on the equity market and the banking system. It will also enable companies to choose a fund raising option that suits their needs most and maximises fund raising efficiency. As such, a strong “three-legged stool” will help maintain financial stability and will be conducive to the sustainable development of Hong Kong as an international financial centre.
Two decades of hard work in promoting bond market development
Over the years, the HKMA has been committed to promoting Hong Kong’s bond market development. For example, our wholly owned subsidiary, the Hong Kong Mortgage Corporation Limited launched the first note issuance programme back in 1998 and started issuing retail bonds in 2001. The Exchange Fund Bills and Notes issued by the HKMA also help ensure an ample supply of high-quality Hong Kong dollar debt in the market for liquidity management, investment and hedging purposes.
Another important task of the HKMA is to co-ordinate the offering of government bonds and to manage the investment of the funds raised under the Government Bond Programme. As the HKSAR Government maintains a strong fiscal position, it does not need to finance its public expenditure by issuing bonds. The main purpose of the Programme, therefore, is to broaden and deepen the local bond market and to satisfy the various investment demands of institutional and retail investors by offering different types of bonds with different tenors. For example, the inflation-linked retail bond (iBond) issued between 2011 and 2016 was designed to help the public in the fight against inflation. On the other hand, the silver bond first introduced in 2016 was designed to address the demand of retirees for investment products offering a stable return. These products have successfully attracted a wider cross-section of the public to invest in the bond market and enhanced their understanding of debt instruments.
Government bonds can also set a benchmark for the market. Often, private-sector bond issuers make reference to the yields of the “sovereign bonds” issued by a government when setting their own yields. For instance, bonds issued under the Government Bond Programme can be used as the basis for deriving the risk-free yield curve for Hong Kong dollar bonds. Therefore, corporates planning to issue bonds can refer to this yield curve as a benchmark when determining the yields of their own bonds, having regard to other risk factors as appropriate.
In addition to our efforts in product development and issuance, the HKMA has put in place an efficient and robust financial infrastructure to support the operation of the bond market. Established by the HKMA in 1990, the Central Moneymarkets Unit (CMU) provides a one-stop, high-quality and reliable clearing, settlement and depository service for Hong Kong dollar and foreign currency-denominated debt securities issued in Hong Kong. It now has some 200 members, and in 2017 the average daily secondary market transactions it handled reached HK$16.3 billion. By the end of the year, some HK$2 trillion worth of debt securities were lodged with the CMU.
The CMU is also playing an important role in facilitating the Northbound Trading of Bond Connect launched last July, a key milestone in deepening the mutual access of the bond markets between Hong Kong and the Mainland. By using the CMU, the Mainland bond market does not have to make any fundamental changes to its existing direct holding arrangement for bond registration and custody, while international investors can continue to use the nominee holding arrangement they are familiar with. This underscores Hong Kong's unique financial intermediary role and status in facilitating global investors’ access to the Mainland’s financial markets.
Gearing up for green finance
To promote the further development of the local bond market, a slate of measures were announced in the Government’s 2018–19 Budget. These include introducing the Pilot Bond Grant Scheme, and increasing the types of qualified debt instruments and extending tax exemption to debt instruments of any duration under the Qualifying Debt Instrument Scheme. These initiatives are aimed at encouraging more corporate bond issuance in Hong Kong.
In view of the rapid growth of green finance globally, the Government also plans to launch a Green Bond Issuance Programme with a borrowing ceiling of HK$100 billion. The HKMA will provide its full support, taking charge of the offering and promotion of green bond issues. In mid-June, we will co-host the Green and Social Bond Principles Annual General Meeting and Conference in Hong Kong in conjunction with the International Capital Market Association (ICMA)1 . We will also organise a joint seminar with the People's Bank of China to explore green finance opportunities on the Mainland and in Hong Kong. These prominent events will not only deepen the understanding of green finance among the investment community and the general public in Hong Kong, but will also help enhance Hong Kong's participation and profile in green finance globally.
With a growing understanding of green bonds among the stakeholders and capitalising on its strengths as an international financial centre, Hong Kong is well-positioned to attract more companies to issue green bonds locally. Coupled with the “going out” strategy adopted by Mainland enterprises in recent years, which requires huge funding for their overseas expansion, the potential for further development of Hong Kong’s bond market is enormous. Indeed, Mainland enterprises have been proactively using Hong Kong’s financial market for fund raising. In addition to the equity market, many of them have also tapped the local debt market by issuing US dollar-denominated bonds or so-called “Dim Sum” renminbi bonds. According to the Asian Development Bank, foreign currency-denominated bonds issued by Mainland companies in 2017 were worth more than US$220 billion, a considerable portion of which were issued through Hong Kong’s platform. I believe that the implementation of the new initiatives outlined above will be conducive to the sustainable development of the local bond market and bring more growth and job opportunities for our financial services and related sectors, thereby further strengthening Hong Kong’s status as an international financial centre.
Deputy Chief Executive
Hong Kong Monetary Authority
10 May 2018
1 The International Capital Market Association (ICMA) is the self-regulatory association for the international capital market with over 530 member institutions from more than 60 countries. The ICMA provides industry-driven standards and recommendations for issuance, trading and settlement in international fixed income and related instruments. Its market conventions and standards have been the pillars of the international debt market for 50 years.