Edmond Lau, Executive Director (Monetary Management), Hong Kong Monetary Authority
Good morning ladies and gentlemen,
1. First of all, I would like to thank the organiser, Euromoney Conferences, for inviting me to share my thoughts with you at the Australian Debt Capital Markets Forum today. I would also like to extend my very warm welcome to all of you here, especially the Australian delegation who have travelled from afar.
2. This is the first time for event of such kind to be held in Asia, and we are very pleased that it is taking place in Hong Kong. This is a recognition of Hong Kong debt market's position in the Asian Pacific time zone.
Hong Kong as a funding base for the Australian and other overseas issuers
3. Hong Kong has been a major funding base for many overseas issuers. As at the end of 2009, around US$43 billion, or almost 59%, of the outstanding non-public sector debt securities in Hong Kong dollar were actually issued by overseas entities. As far as the Australian issuers are concerned, they are often the single largest group of overseas issuers in Hong Kong dollar debts. And in fact, by the end of 2008, almost 9% of the debt securities issued by Australian entities outside of Australia were held by Hong Kong investors according to the International Monetary Fund, making us the 4th largest overseas holders. These figures, to a certain extent, reflect the strong tie between Hong Kong and Australia, in particular Hong Kong’s position as a major international funding base for Australian issuers.
The Hong Kong debt market in servicing international fund raising activities
4. With the benefit of an established legal framework, free capital mobility and the wide-ranging auxiliary professional services, Hong Kong has been playing a major role in terms of international fund raising activities in the region. In particular, when a regional issuer is issuing foreign currency debt, a substantial portion of the economic value-added work is sometimes conducted by intermediaries based in Hong Kong. This is especially the case when it involves issuers based in Mainland China. In the other direction, Hong Kong also has the potential to act as the platform for foreign and local issuers looking to tap Mainland investors when the Mainland market further opens up.
5. We have therefore put in efforts to ensure Hong Kong will be in a favourable position to tap such opportunities once available. Our banking and settlement systems are already capable of processing transactions that are denominated in the renminbi. Multi-currency cross-border arrangements involving US dollar, and euro have also been in operation since March 2009, allowing settlements of such currencies between the Mainland's Domestic Foreign Currency Payment Systems and the respective Real Time Gross Settlement systems in Hong Kong.
The current market landscape of the Hong Kong dollar debt market
6. That said, we do recognise that there are areas in our debt market for which further improvements are necessary. For instance, our public segment is relatively small and tilted towards the short end. As for the corporate segment, bonds are usually short-dated as well and issued under private placements.
7. The relatively small public segment is partly the outcome of the strong fiscal position of the Hong Kong SAR Government, which renders little need to finance expenditures through debt issuances. As such, the prominent issuances in our public segment have always been Exchange Fund Bills and Notes, which are essentially instruments for banks to manage liquidity and to access the Discount Window. They are part of the Monetary Base under the Linked Exchange Rate System, so further growth is dictated by the inflow of US dollar under the Currency Board system. This leaves little flexibility for issuance for market development purposes. It also means that such papers are predominately short-dated.
8. Such a debt market raises a few concerns from a market development perspective. On the demand side, concentration of public sector papers in the short end means that investors with long-term investment needs, such as pension funds and insurance companies, may find it hard to manage their Hong Kong dollar bond portfolios, hence reduced interest to participate.
9. The limited supply of public sector paper also reduces the attractiveness of our debt market to the overseas investors. In particular, our public segment is not sizeable enough to get us into the Citigroup's World Government Bond Index, which is a very popular index among the global bond fund managers. As a result, fund managers who are tracking the index have little reasons to participate in the Hong Kong dollar debt market, hence rendering an investor base that is local as well.
10. On the supply side, private issuers with long-term funding needs may face difficulties in finding a reliable and transparent pricing reference to facilitate the issuance of long-term debts in Hong Kong. They may then decide to raise long-term funds elsewhere, such as the equity market. This reduces the competitiveness of our bond market as a long-term fund raising platform, which is not ideal as development of the bond market along with the development of the equity market and the banking sector is key to reinforcing Hong Kong's status as an international financial centre.
Establishing the Government Bond Programme to promote market development
11. There is thus a need to further develop our public segment, especially in the long end. It is against such background that the Government Bond Programme is launched, under which a variety of maturities of government bonds will be issued regularly according to a pre-announced schedule. In particular, issuances under the Government Bond Programme are not part of the Monetary Base, so that there is more flexibility to cater for market development needs. For example, further long-dated bonds could be supplied under the Programme so as to satisfy the demand for such bonds, thereby attracting a larger number of investors, whose demand lies mainly in the long end, to the local bond market.
Refining the Qualifying Debt Instrument scheme to enlarge our investor base
12. Another initiative being taken to encourage bond trading and investment activities is the establishment of the Qualifying Debt Instrument scheme, or the QDI scheme in short. In gist, the objective of the scheme is to attract a greater pool of traders and investors through allowing institutional and corporate investors to enjoy concessionary profit tax on interest income and trading profits derived from certain debt securities that are traded and issued in Hong Kong.
13. The Financial Secretary has just proposed further refinements to the scheme in his recent Budget Proposal. The tax concessions are proposed to extend to short-dated debt instruments, and the law would be clarified so as to accommodate private placement in light of the characteristics of our debt market. The Government is now working on the relevant legislative amendments to implement these proposed initiatives, and we hope that there would be an increase in bond trading and investment activities with an enlarged QDI pool.
14. Apart from the specific measures that I have just mentioned, we will of course continue our efforts in identifying and removing market frictions, as well as maintaining effective dialogues with our market players to improve the operations of the debt market.
15. Our objective is clear. We shall continue to do what we can to facilitate overseas issuers and investors to make best use of Hong Kong for international fund raising activities, thus fulfilling our role as an international financial centre. I therefore look forward to the further participation of investors like you, and overseas issuers like those of the Australian delegation, in our debt market.
16. Thank you very much.