立法會
Legislative Council
LC Paper No. CB(1)2519/08-09(These minutes have been seenby the Administration)
Ref : CB1/PL/FA/1

Panel on Financial Affairs
Minutes of special meeting
held on Monday, 11 May 2009 at 11:30 amin the Chamber of the Legislative Council Building

Members present:

Hon CHAN Kam-lam, SBS, JP (Chairman)
Hon Ronny TONG Ka-wah, SC (Deputy Chairman)
Hon James TO Kun-sun
Dr Hon Philip WONG Yu-hong, GBS
Hon Abraham SHEK Lai-him, SBS, JP
Hon Vincent FANG kang, SBS, JP
Hon Jeffrey LAM Kin-fung, SBS, JP
Hon Andrew LEUNG Kwan-yuen, SBS, JP
Hon WONG Ting-kwong, BBS
Hon CHIM Pui-chungHon KAM Nai-wai, MH
Hon Starry LEE Wai-king
Hon Paul CHAN Mo-po, MH, JP
Hon CHAN Kin-por, JP
Hon Mrs Regina IP LAU Suk-yee, GBS, JP

Members absent:

Hon Albert HO Chun-yan
Dr Hon David LI Kwok-po, GBM, GBS, JP
Hon Emily LAU Wai-hing, JP
Hon Tanya CHAN

Public officers
attending:

Agenda item I
Prof K C CHAN, SBS, JP
Secretary for Financial Services and the Treasury

2Miss AU King-chi, JP
Permanent Secretary for
Financial Services and the Treasury(Financial Services)
Mr Clement LEUNG, JP
Deputy Secretary for
Financial Services and the Treasury (Treasury) 2
Mr Edmond LAU, JP
Executive Director (Monetary Management)
Hong Kong Monetary Authority
Mr Daryl HO
Head (Market Development) (Acting)Hong Kong Monetary Authority

Clerk in attendance :Ms Rosalind MA
Chief Council Secretary (1)5

Staff in attendance :Mr Noel SUNG
Senior Council Secretary (1)4
Ms Haley CHEUNG
Legislative Assistant (1)8

ActionI

Government Bond Programme(LC Paper No. CB(1)1507/08-09(01) ⎯ Letter dated 5 May 2009 to
the Administration
LC Paper No. CB(1)1507/08-09(02) ⎯ The
Administration's
supplementary informationon
Government
Bond
Programme
G6/123/5C⎯ The Legislative Council
Brief issued by the Financial
Services and the Treasury
Bureau3

LC Paper No. CB(1)1469/08-09(01) ⎯ The Administration's paperonGovernment
Bond
Programme
LC Paper No. CB(1)1559/08-09(01) ⎯ The
Administration's
presentation material on
Government
Bond
Programme (tabled at themeeting and soft copy issued
on 11 May 2009) (Chineseversion only)
LC Paper No. CB(1)1558/08-09(01) ⎯ Dr Hon David LI's letter
dated 8 May 2009 (tabled at
the meeting and issued tomembers on 12 May 2009)(Chinese version only))
Briefing by the Administration
At the invitation of the Chairman, Secretary for Financial Services andthe Treasury (SFST) advised that the Government aimed to promote the further
and sustainable development of the local bond market and enhance the breadth,depth and liquidity of the market through launching a regular and systematic
government bond programme (GBP). In response to the Panel's request at themeeting held on 4 May 2009, the Government had provided supplementary
information on the considerations for launching and details of implementing
GBP (LC Paper No. CB(1)1507/08-09(01)). SFST pointed out that the
proposed framework of GBP had been drawn up having regard to government
bond programmes of overseas economies and views of market participants. Inview of Members' comments on the details of GBP and the setting up of a
subcommittee to study the two proposed resolutions for the implementation of
GBP (the Subcommittee), SFST advised that the Financial Secretary (FS) had
withdrawn the notices given for moving the motions regarding the proposed
resolutions at the Council meeting on 20 May 2009. SFST further said that
the Government would work closely with the Subcommittee to facilitate thelatter’s scrutiny of the proposed resolution.
2.
Head (Market Development) (Acting) Hong Kong Monetary Authority(H(MD)/HKMA) gave a powerpoint presentation on the proposed frameworkof GBP, including mechanism for executing GBP, determination of yields forgovernment bonds, and the possible benefits to investors.
Discussion

4

3.
The Chairman drew members' attention to the letter of Dr David LI
tabled at the meeting (LC Paper No. CB(1)1558/08-09(01)), expressing support
to the implementation of GBP for the development of the local bond market.
Considerations for the launch of GBP
4.
Mr CHIM Pui-chung expressed support for GBP in principle but
doubted whether investors' confidence and interest in government bonds would
be adversely affected by the Lehman Brothers-related Minibonds fiasco. Hequestioned whether the Government had a comprehensive plan for
implementing GBP taking into account the impact of bond issuance on the
securities market. Mr CHIM also expressed reservation on possible investors'
response to the government bonds given the expected unattractive yield amid
the prevailing low interest rate environment.
5.
Mr James TO opined that the Government should also take into accountthe total quantity of bonds to be issued by other public organizations and theimpact of GBP on other issuers in the market when designing the parameters of
GBP.
6.
SFST responded that the government bonds to be issued under GBP
were different in nature from the Lehman Brothers-related Minibonds, thelatter being complicated structured financial products comprising underlying
collaterals subject to an array of default risks. Bonds to be issued under GBP
were high quality investment instruments with stable return. SFST advisedthat in the implementation of GBP, the Government would give carefulconsideration to the timing and size of issuance, taking into account factors
including the prevailing market conditions, investor demand and pricing of thebonds. SFST further pointed out that issuance of government bonds under
GBP was not expected to have any abrupt impact on the bond market given themodest size of each bond issuance.
7.
While expressing support in principle to GBP, Mrs Regina IP wasconcerned about the considerations for the timing of launching GBP. She
queried the reasons for the Government to seek implementation of GBP in sucha hasty manner, and doubted whether the Government had proposed theissuance of government bonds as an attempt to restore investors' confidence in
the investment in bonds in the aftermath of the Lehman Brothers-related
Minibond fiasco. She asked whether the current low interest rate environment
was conducive to the Government’s decision for early implementation of GBP.
Mrs IP opined that Members of the Legislative Council (LegCo) should begiven adequate time to examine details of the implementation framework
before passing the relevant resolutions for the implementation of GBP.
8.
SFST stressed that government bonds would be issued on an on-goingand long-term basis under GBP to promote the further and sustainable5development of the local bond market. The interest rate environment was
only one of the considerations in determination of the timing for launching
GBP. He advised that as the Government had been studying and considering
measures to promote the development of local bond market having regard tooverseas practices and experience of past bond issuance exercises, it had beenable to work out the proposed framework for implementation of GBP shortly
after the relevant announcement by FS in his 2009-2010 Budget Speech.
Nevertheless, the Government had not set any rigid schedule for moving the
motions regarding the relevant resolutions. There would be sufficient time for
LegCo to consider the proposed framework of GBP.
9.
Referring to the considerations for the launch of GBP in the
supplementary information provided by the Government, Mr KAM Nai-wai
sought elaboration on whether it was the right time for launching GBP.
10.
SFST said that given the current investment environment in whichinvestors were looking for high quality products with stable return, bonds
issued under GBP were expected to be well-received by the market, inparticular the institutional investors. As such, the Government considered it
an opportune time to launch GBP. Permanent Secretary for Financial
Services and the Treasury (Financial Services) (PS(FS)) supplemented that awell-developed government bond market was often seen as a necessary
pre-condition for the development of the corporate bond market. The growthof the Hong Kong dollar bond market driven by the on-going and systematicissuance of government bonds could also help meet the demand of institutional
investors such as pension funds and insurance companies for Hong Kong dollar
assets to match with their long-term Hong Kong dollar liabilities. In the lightof, inter alia, investors' interest in government bonds amid the volatile market,
the Government considered it an opportune time to launch GBP.
11.
Mr CHAN Kin-por expressed support for GBP to promote thedevelopment of the bond market. He said that the insurance industry
welcomed the issuance of government bonds to provide Hong Kong dollar
assets to match with their long-term Hong Kong dollar liabilities. He calledon the Government to expedite implementation of GBP to make good use of
the current low interest rate environment and to meet the demand of investors.
On the issuance size, Mr CHAN opined that the proposed borrowing ceiling of
HK$100 billion should be increased if there was favourable market response to
GBP.
12.
SFST said that in drawing up the proposed overall issuance size of
GBP, a prudent approach was adopted. The borrowing ceiling of HK$100
billion represented a long-term target to be achieved in five to ten years. He
reiterated that the objective of GBP was to promote the further and sustainable
development of the local bond market, attracting more investors to the local

6bond market to provide the necessary conditions for the development of, forinstance, the corporate bond market.
Types of bonds to be issued
13.
Mr Jeffrey LAM expressed support for GBP to develop the bond market
which would be key to reinforcing Hong Kong's status as an international
financial centre. Noting that the Government would not rule out thepossibility of adding more variety to the types of bonds to be issued under
GBP, Mr LAM asked whether bonds for financing infrastructural projects andRenminbi (RMB)-denominated bonds would be issued. Mr CHAN Kin-por
opined that consideration should be given to issuing RMB-denominated bonds
under GBP to meet the demand of the insurance industry for RMB assets.
14.
SFST responded that the Government intended to issue only fixed ratebonds with a simple structure and denominated in Hong Kong dollar at theinitial implementation stage of GBP. Other types of bonds might be issued at
a later stage of implementation if the issuance was considered beneficial topromoting the development of the local bond market. Given the policy
objective of GBP to develop the Hong Kong dollar debt market, SFST advisedthat the Government had no plan to issue RMB-denominated bonds at thisstage. SFST also said that sums raised under GBP would not be used forfinancing infrastructural projects as sufficient public resources would be
provided for these projects. Responding to Mr Jeffrey LAM's further enquiry
on the tenor of the bonds to be issued under GBP, SFST advised that bonds oftenors within a range of two to ten years would likely be issued at the initialstage of GBP, with a view to providing a diversified tenor mix to meet market
demand. In the long run, consideration would be given to issuing bonds witha longer tenor, The Government would continue to tap market views whendrawing up the details for individual issuances under GBP.
Investment of the Bond Fund
15.
The Deputy Chairman was of the view that as there was no need for theGovernment to raise funds to finance public expenses, there was no urgency for
it to issue government bonds through GBP. Noting that the proceeds raised
under GBP would be credited to the Bond Fund, to which the investment
strategies of the Exchange Fund (EF) and the "fixed rate" sharing arrangement
would apply, the Deputy Chairman expressed concern about the investment
risks involved. In this connection, he noted that while the compound annual
investment return of EF in the years 1994 to 2008 was 6.1%, there had been
great fluctuations in the rates of return during the period. He therefore sought
further information on the expected investment risks of the moneys in the Bond
Fund.

7

16.
Mr James TO was concerned whether investment gain could beguaranteed if the Bond Fund adopted the investment strategies of EF, andwhether the investment returns would be sufficient to meet the financial
obligations and liabilities associated with GBP.
17.
SFST said that placing the Bond Fund with EF for investment would beappropriate as the two funds shared similar investment objectives, i.e. topreserve capital and generate reasonable investment returns. The long-termand conservative investment strategies of EF could serve the need of the Bond
Fund as the investment risk would be averaged out over a longer term. The"fixed rate" sharing arrangement applicable to the Bond Fund was expected toprovide a stable investment return for the Bond Fund.
Executive Director(Monetary Management)/Hong Kong Monetary Authority (ED(MM)/HKMA)
supplemented that the "fixed rate" sharing arrangement meant that investment
return for the Bond Fund in any one year would be determined in accordancewith the average rate of return of EF's investment portfolio over the past six
years or the average annual yield of three-year Exchange Fund Notes for theprevious year, whichever was the higher. Deputy Secretary for Financial
Services and the Treasury (Treasury) 2 added that given the "fixed rate"
sharing arrangement, the Government expected that moneys in the Bond Fundshould be adequate to meet the financial obligations and liabilities associatedwith GBP. In the very unlikely event of any shortfall in the Bond Fund, theGovernment would seek LegCo's approval for transfer of funds from thegeneral revenue to the Bond Fund in accordance with paragraph (c) (iii) of the
proposed resolution under section 29 of the Public Finance Ordinance (Cap.2).
18.
Mr James TO queried whether the government bonds to be issued under
GBP would be principal-guaranteed, as there might be shortfall in the Bond
Fund to meet the financial obligations and liabilities associated with GBPshould the investment of the Bond Fund suffered great losses and theGovernment could not obtain the approval of LegCo for appropriation from thegeneral revenue to meet the shortfall.
19.
The Deputy Chairman and Mr KAM Nai-wai expressed concern about
the administrative and fund management costs incurred for placing the Bond
Fund with EF for investment. In reply, ED(MM)/HKMA advised that HKMA
would not charge to the Bond Fund administrative or staff costs incurred for
implementation of GBP and investment of the sums raised under GBP, except
for expenses arising from the necessary procurement of services from financial
institutions or other third party by HKMA for the offering of bonds.
20.
Mr WONG Ting-kwong supported the implementation of GBP to meetthe demand for government debt securities in the market. Noting that thesums raised under GBP would be invested by HKMA in accordance with theinvestment strategies of EF, Mr WONG was concerned about the oversightmechanism to ensure proper management and investment of the Bond Fund.

8

Mrs Regina IP expressed a similar view. Mrs IP was also concerned about theadministrative costs incurred for the offering of bonds under GBP.
21.
SFST responded that under the proposed framework of GBP, FS would
direct HKMA to assist the Government in coordinating the offering of bonds,
and to invest moneys in the Bond Fund in accordance with the investment
strategies of EF.
HKMA would make use of the existing market
infrastructure and experience for issuance of Exchange Fund Bills and Notes(EFBN) for GBP. Such an arrangement could minimize the administrative
costs incurred for implementation of GBP. The proposed "fixed rate" sharing
arrangement would also provide the Bond Fund with a stable investment returnfor meeting the financial obligations and liabilities associated with GBP.
Responding to Mr Abraham SHEK's concern about who would be accountable
for the implementation of GBP, SFST said that the Government as a whole was
responsible.
Yields for the government bonds
22.
The Deputy Chairman enquired about the determination of yields for thebonds to be issued under GBP. Mr KAM Nai-wai and Mr Abraham SHEK
raised similar enquiry, in particular for retail tranches. In reply, SFST advisedthat the yields of the bonds would be determined by prevailing market
conditions such as the interest rate environment at the time of issuance. The
pricing mechanism of retail bonds to be issued under GBP would follow themarket convention but the exact interest rate benchmark to be used had yet to
be determined. Responding to Mr KAM's further enquiry, ED(MM)/HKMA
provided for Members' reference the yields of two-year US Treasury (0.94% to0.95%) and two-year EFBN (0.56% to 0.57%).
ED(MM)/HKMA
nevertheless stressed that the yields of government bonds would have to be
determined in accordance with the prevailing market conditions at the time ofissuance.
23.
Responding to the Deputy Chariman's enquiry about bond prices in thesecondary market, SFST advised that bond price in the secondary market mightfluctuate according to changes in interest rates in the market. In general, if
interest rates rose, bond prices would fall and vice versa. Individual investors
could mitigate the risk of incurring trading loss due to fluctuations in interest
rates by holding the bond until maturity when they could collect the full sum of
the principal, and would have earned the interests paid according to the coupon
rate of the bond.
24.
Mr James TO was concerned about the mechanism to safeguard thereasonable price fixing of the bonds to be issued under GBP. In thisconnection, Mr TO asked the Government to consider measures such asprescribing the maximum yield for the government bonds in the legislation.
In reply, SFST pointed out that the price of the government bonds would be9determined by the market. Market forces would make the price of thegovernment bonds close to the market interest rates even if legislative or
administrative measures were put in place to fix the price of the bonds at
issuance. SFST further advised that similar to previous bond issuance
exercises, issuance of bonds under GBP should follow market convention inorder to promote the development of the local bond market.
25.
Mr Vincent FANG expressed support for GBP to strengthen Hong
Kong's position as an international financial centre. Mr FANG asked theGovernment to consider issuing a larger proportion of bonds for the retailtranche to meet the demand of retail investors for products of lower risk andmore stable return. While appreciating that the yields for the government
bonds would be determined by the market, Mr FANG sought information on
the range of possible yields for reference.
26.
SFST responded that the Government had not set any fixed proportionof bonds intended for institutional and retail tranches respectively. The exact
size of individual bond issues and the proportion for each tranche would bedetermined having regard to relevant factors including the prevailing market
conditions, market demands, and impact on other issuers in the market.
ED(MM)/HKMA supplemented that if there was strong demand for a retailissue, consideration could be given to increasing the size of that particular issue
or offering an additional issue shortly, according to common market practices.
As for the yields of government bonds, SFST reiterated that these would bedetermined by the market. He could not forecast the market interest rates at
the time of bond issuance and therefore was unable to provide such information
at the present stage. ED(MM)/HKMA supplemented that market conditions
would vary over time and it would be difficult to provide a reasonableprojection at this stage.
Mechanism for offering government bonds
27.
Mr Abraham SHEK expressed support for GBP in principle but
requested the Government to allow sufficient time to respond to Members'
concerns before implementation. Pointing out that some $20 billion worth ofgovernment bonds had been issued in previous securitization exercises, Mr
SHEK queried whether the borrowing ceiling of $100 billion proposed for GBP
would be sufficient to promote the development of the local bond market.
28.
SFST responded that GBP was an on-going programme aimed atincreasing the size of the local debt market, which was different from previous
one-off issuances on ad hoc basis. The regular and systematic issuance ofbonds under GBP would attract more investors and thus enhancing liquidity ofthe bond market, allowing the market to grow into a critical mass. In response
to Mr Abraham SHEK's view that the Government should make reference tothe mechanism for offering bonds in the securitization exercise in 2004,

10

H(MD)/HKMA advised that as far as he understood, the offering mechanism
used in the 2004 exercise mainly followed the commercial operation of
appointing bank syndicate and distributing banks for the global sale of bonds,
which was appropriate for a one-off issuance exercise. For the on-goingissuance of bonds under GBP, the proposed offering mechanism had beendrawn up with reference to those of government bond programmes in othereconomies. Instead of appointing bank syndicate for the offering ofgovernment bonds, the Government had proposed to offer the institutional
tranche of government bonds by way of competitive tender opened to Primary
Dealers to be appointed by HKMA.
29.
Mr Abraham SHEK expressed views from the investor protection angle
on bonds to be issued under GBP. Mrs Regina IP also expressed views on
issues relating to investor protection, such as risk disclosure to investors,
investor education and training of frontline staff in the sale of bonds to retailinvestors. In response, SFST advised that the Government was committed toadhering to a high level of transparency and information disclosure for thebonds to be issued under GBP. The Government would make reference tocommon industry standards when preparing the offering documents to facilitate
investors in making informed investment decisions. PS(FS) supplemented
that in coordinating the offering of bonds under GBP, HKMA would follow theestablished tendering procedures and be subject to the relevant regulatory
requirements enforced by the Securities and Futures Commission on theoffering and sale of bonds, such as disclosure requirements.
30.
To ensure fair arrangements in the offering of government bonds, Mr
TO suggested that the Government set out in the proposed resolution under
section 3 of the Loan Ordinance (Cap.61) that the government bonds would be
distributed in a "fair and reasonable" manner.
Use of moneys in the Bond Fund31.
On the use of sums raised under GBP, Mr Vincent FANG and Mr
WONG Ting-kwong shared the view that the sums should be used for investingin public works projects to revive the economy of Hong Kong. This was
similar to the arrangement in the securitization exercise of "five tunnels andone bridge" in 2004. In reply, SFST pointed out that the Government had
made clear its financial commitment for implementation of public
infrastructure projects in the next five to ten years. The sums raised under
GBP would not be required for funding such projects. He further advised thatthe securitization exercise of "five tunnels and one bridge" was a one-off
exercise, which was different from the long-term, on-going and systematic
nature of GBP. The setting up of the Bond Fund was thus consideredappropriate for managing sums raised under GBP. The Bond Fund would bemanaged separately from the fiscal reserves and other government accounts,
enabling clear presentation and ready assessment of the financial performance

11of GBP. This could also provide clear information to investors on the Bond
Fund's ability to meet the financial obligations and liabilities associated withGBP.
Way forward
32.
Pointing out that the investing public was unfamiliar with the local bondmarket, the Chairman asked the Government to provide more information on
the operation of the local bond market to facilitate Members' consideration of
the proposed resolutions for the implementation of GBP. He also opined that,in addition to the conventional fixed rate bonds, the Government should
consider issuing other types of bonds under GBP to promote market
development and liquidity in the secondary bond market.
33.
SFST took note of Members' views. He assured Members that theGovernment would work closely with the Subcommittee and provide necessary
information to facilitate the latter’s scrutiny of the proposed resolutions for the
implementation of GBP.

IIAny other business

34.

There being no other business, the meeting ended at 1:22 pm.

Council Business Division 1
Legislative Council Secretariat
28 August 2009