Analysis: Hong Kong Bond Market to Continue Expansion

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Last updated at: (Beijing Time) Thursday, March 28, 2002

Analysis: Hong Kong Bond Market to Continue Expansion

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The Hong Kong Airport Authority(AA) retail bonds has got a over subscription of 13 times when theapplication was closed at noon Wednesday, indicating the increasing enthusiasm about bonds among investors.

The total application amount reached 1,429 million HK dollars (183.2 million U.S dollars), which is greater than the minimum issue amount of 100 million HK dollars (12.8 million U.S dollars),according to the AA.

AA Finance Director Raymond Lai Wing-chueng said that AA is very pleased with the outcome of the retail bond issue, and that it is also good to the development of the bond market in Hong Kong.

In January, the subscription of the Hong Kong Mortgage Corporation (HKMC) retail bonds reached a record of 1,371 million HK dollars (175.77 million U.S. dollars), 8.1 times as much as theminimum issue amount of 150 million HK dollars. This time, the subscription of the AA retail bonds has set a new record.

Fund managers attributed the investors' enthusiasm about retailbonds to the low interest rate environment and said that retail bonds offer the general public an additional investment choice that provides them with a stable return.

They predicted that retail bonds would continue to be an attractive tool for investment, as the U.S Federal Reserve announced to keep the interest rate unchanged early this month.

As a matter of fact, the AA has taken into consideration the possible increase of the interest rate in the coming years in issuing the retail bonds.

The 2-year and 3-year tranches of the AA retail bonds carry coupons of 3.5 percent and 4.5 percent, respectively, payable semi-annually.

In total, the 3-year AA retail bonds will bear a return of 13.5percent. Even if the interest rate will rise by 1 percent in 2003,by 1.5 percent in 2004 and by the 2 percent in 2005, the 13.5 percent return of the retail bonds will still be higher than the possible 9.5 percent return of the deposit.

Moreover, the AA retail bonds carry coupons of 0.5 percent higher than the retail bonds issued by the HKMC in January, also reflecting the possible rise of interest rate.

Actually, it is the policy of the Hong Kong Special Administrative Region (SAR) to facilitate the development of the debt market, including the market at the retail level.

By aggregating the investment amounts of individual investors, the retail bond arrangement enables the small investors to enjoy ahigher interest return that is previously the privilegia of institutional investors.

Currently, the Hong Kong debt market is one of the largest in the region, growing by over 40 folds between 1990 and 2001.

Outstanding HK dollar debt reached 494 billion HK dollars (63.3billion U.S. dollars) at the end of 2001. Despite its rapid growth,the Hong Kong debt market remains small relative to the stock market and bank loans.

To facilitate the development of the debt market, the Hong KongSAR government has set up a Working Group under the Financial Market Development Task Force to work on measures to develop the Hong Kong debt market and to simplify the procedures for issuing retails bonds.

Members of the Working Group include the Securities and FuturesCommission (SFC), Hong Kong Mortgage Corporation, the Hong Kong Monetary Authority and the Hong Kong Exchanges and Clearing Ltd.

To capture the opportunities offered by the low interest rate environment, the Working Group is focusing on short-term measures that could be implemented in two to three months' time.

Examples of these short-term measures include publication of user-friendly SFC guidelines, streamlining the structure and contents of the prospectus of bond issuance, and allowing more application channels.

Apart from the short-term measures, the working group will alsoconsider longer-term solutions that require amendments to the Companies Ordinance and related regulations.

Market analysts said that the issuance of retail bonds by the Airport Authority and other issuers will facilitate the development of the local debt market, give the investing public more choices, and enhance Hong Kong's position as an internationalfinancial center.

The process of channeling the wealth of the general public intobond investment will help to increase the depth of the debt market.The growth potential of the retail bond market is quite considerable.

The size of Hong Kong dollar time deposits in the banking system, which gives some indication on the amount the public is prepared to put in assets that produce a stable return, exceeds 1.8 trillion HK dollars (230.77 billion U.S. dollars).

A transfer of a modest 5 percent of this amount to the bond market would significantly increase its size by 90 billion HK dollars (11.54 billion U.S. dollars).

Development of the retail bond market is also welcomed by the banks, which are looking at ways to enhance fee income through expanding their securities operations.

The current loan-to-deposit ratio is at a low level of 65 percent. The conversion of some of this excess liquidity into bonds will help the banks to reduce the cost of deposit interest payments and provide them with a new source of fee income from acting as the placing agent and market makers for the issuers.

On the other hand, the issuance of retail bonds also benefits the issuer by broadening the investor base.

Therefore, the benefits of retail bonds present a compelling case for Hong Kong to further strengthen its efforts to promote the development of the retail bond market.

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