There is considerable scope for developing the bond market, both on the Mainland and in the region generally. Hong Kong is in a position to help in this process.
At the East Asia Economic Summit of the World Economic Forum held here in Hong Kong at the end of last month, the subject of Asian monetary co-operation came up again. I took part in the panel discussion on the subject, along with a number of central bankers from other jurisdictions. It was interesting to note that everyone was convinced that greater monetary co-operation in the region is needed, specifically in the form of financial arrangements that individual economies could call upon in times of difficulty. This renewed interest is understandable given the sharp slowdown that almost all economies are experiencing and the potential risks to the stability of financial systems as a result of sharp financial market adjustments, happening so soon after the Asian financial crisis of 1997-98.
While monetary co-operation, in the form of financial arrangements that assist in the maintenance of monetary and financial stability, is helpful, I reiterated the point I often made that monetary co-operation should also be aimed at increasing the efficiency of financial intermediation in the region. Specifically, I urged for greater effort to be given to the development of the bond market, to complement the banking and equity markets as an additional and significant channel of financial intermediation. I also pointed out the need for the bond market to serve as a back-up in case of any systemic disruption in those two more established channels so that savings could continue to be mobilised into productive investments and economic growth and development sustained.
I am glad therefore to notice, in another forum held earlier this month, that great efforts have been devoted to bond market development in the Mainland. The forum was jointly organised by the World Bank, the Ministry of Finance of the Mainland and the Hong Kong Monetary Authority. We felt happy to have been involved in organising that meaningful event and I felt privileged to have been invited to speak there. I took the opportunity of the forum to describe in some detail our experience in bond market development in Hong Kong. Specifically, in terms of further developing (domestic and international) bond market financial intermediation of the Mainland, I offered the use of our financial infrastructure in two ways.
The first is to replicate it or make use of the technology that we have developed - including the market making and custodian arrangements, and the payment, clearing and settlement systems - for use in the Mainland for the renminbi bond market. This would be a big project, involving crucially the creation of an inter-bank real time payment system for the renminbi, similar to the real time gross settlement (RTGS) system that we have in Hong Kong. There would need to be major surgery to the existing inter-bank payment system in the Mainland, not just minor modifications. I understand that a lot of attention has already been given to developing a modern inter-bank payment system in the Mainland, but that, perhaps because of the complexity of the project, progress has been rather slow. It is, of course, for the Mainland authorities to assess and decide whether or not to consider the use of alternative technology and arrangements, and whether the way we constructed our inter-bank payment system is suitable for application in the Mainland. I am aware that the inter-bank payment system of a compact currency area as Hong Kong may not be directly applicable to the vast geographical area of the Mainland. But we are quite hopeful that the technical difficulties in such transfer of technology, should it be felt desirable, should not be prohibitive and we stand ready to assist.
The second is simply for the Mainland to make better use of the financial infrastructure in Hong Kong, particularly that for the US dollar, to issue bonds and, indeed, to conduct any activity of financial intermediation. These can be organised in such a way that does not undermine the effectiveness of the Mainland's capital controls and other relevant policies. For example, a well-structured US dollar bond programme by the Mainland, organised in Hong Kong, making use of our market making and custodian arrangements, and the US dollar payment system, could reduce the overall cost of borrowing and hence the costs of servicing the Mainland's foreign debt. It would also consolidate Hong Kong's position as a regional bond centre and an international financial centre. Again, we stand ready to assist.
Joseph Yam
29 November 2001
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