Yiu-kwan Choi: The debt market of Hong Kong - what can we offer to
investors?
Keynote address by Mr Yiu-kwan Choi, Deputy Chief Executive of the Hong Kong Monetary Authority,
at the third Annual Asia Pacific Bond Congress, Hong Kong, 13 June 2006.
* * *
Mr. Shale, distinguished guest, ladies and gentlemen,
It gives me great pleasure to speak at this year's Asia Pacific Bond Congress. On behalf of the Hong
Kong Monetary Authority, I would like to extend my warmest welcome to everyone here today,
especially those of you who have traveled from afar to visit us. I would like also to thank Euromoney
for organizing this excellent event, and for organizing it in Hong Kong for the third time. It is a clear
recognition of the important role of Hong Kong - Asia's World City, in the bond markets of the Asia
Pacific region.
Like many other financial markets, the bond markets in the Asia Pacific region have recently seen
plenty of new developments, challenges as well as opportunities. I am glad to see that the Congress
has rightly covered many of these latest issues, and I am sure that for those who were here yesterday
would have learnt from my colleague, Ms Julia Leung, about the Hong Kong Monetary Authority's
efforts in enhancing regional cooperation. So today it would probably be useful for me to take a few
minutes to share with you on what the HKMA has been doing to develop our bond market, and more
importantly, what our market can offer to investors.
Development of the bond market in Hong Kong
Let me give you a quick overview of the current status of the Hong Kong dollar debt market. At the end
of 2005, the value of outstanding Hong Kong dollar debt reached $660 billion HK dollars, equivalent to
$85 billion US dollars, which is over 30 times the size of the market 14 years ago. The size of the HK
dollar debt market relative to GDP also increased significantly to 48% in 2005 from 3% in 1991. In
2005, the gross issuance of Hong Kong dollar debt reached $400 billion HK dollars, or an equivalent
of $51 billion US dollars. Everyday, overseas borrowers, financial institutions and corporations
participate actively in our market. In Asia, our market has the highest proportion of overseas issues,
with the amount outstanding being only second to Japan and Korea.
While we have a very well developed debt market today, one should be aware that there was virtually
no debt market in Hong Kong before the 90s. Because of cumulative fiscal surplus, the Hong Kong
government had not found it necessary to borrow any money in the market at that time. While this is
good from the point of view of fiscal management, it was not conducive to debt market development, in
the sense that we did not have a representative yield curve for the Hong Kong dollar.
As we all know, a liquid and deep debt market is an important component of a financial centre. The
HKMA therefore decided to develop a local debt market through a two-pronged approach, namely to
develop a market of high quality Exchange Fund paper, and to build an efficient financial
infrastructure.
A market for exchange fund paper
In order to facilitate the development of a Hong Kong dollar debt market, the HKMA rolled out the
Exchange Fund Bills and Notes programme in 1990. This initiative has been very successful in
creating a yield curve for Hong Kong dollar. As of today, the yield curve has been extended up to 10
years and serves as a benchmark for debt instruments issued by other entities in the local market.
In order to maintain a liquid market for the Exchange Fund paper, the HKMA has also put in place a
market-making system under which market makers are obliged to quote two-way prices. Currently, 26
banks in Hong Kong have been appointed as market makers, and tenders of Exchange Fund Bills and
Notes of maturities between 3 months and 10 years are held regularly.
These arrangements have been effective to help promote the liquidity of the Exchange Fund paper
and enhance the credibility of the Hong Kong dollar yield curve. Indeed, overseas borrowers have
remained the largest issuers in our market, with outstanding debts reaching an equivalent of 32 billion
US dollars at the end of 2005, from just 1.3 billion US dollars at the end of 1997.
Financial infrastructure
Let me now move on to another important area of our work: that is the building of an efficient financial
infrastructure for the bond market. Our objective is to build a multi-currencies and multi-product
payment and settlement platform to make Hong Kong the payment and settlement hub of the region.
We believe that a safe and efficient payment and settlement system is crucial to the development of
the debt market. Our system will serve not only the local investors but also investors elsewhere in the
region to facilitate their fund transfers and delivery versus payments when they buy or sell debt
instruments.
We have therefore been working actively on linkages between the Central Moneymarkets Unit (the
CMU), which is our key custodian system for debt instruments in Hong Kong, and other custodian
systems in the region and international custodian systems such as the Euroclear and Clearstream.
These linkages have been instrumental in fostering cross-border bond trading and investment.
With the seamless interfaces between the CMU and the Real Time Gross Settlement (RTGS) systems
in Hong Kong for the Hong Kong dollar, US dollar and Euro, all transactions in debt instruments
denominated in any of these three currencies and under the custodianship of the CMU can be settled
in Hong Kong on a DvP basis in an efficient way.
The recent IPO of the Bank of China Limited is probably a good example to demonstrate the efficiency
and robustness of our HKD RTGS system: being a settlement system which typically handles an
average turnover of $400 to $500 billion Hong Kong dollars a day, it saw a record high turnover of
$1.23 trillion on 1 June when the Bank of China was listed on that day. Notwithstanding such huge
amount of settlement, the inter-bank payments were processed smoothly on that day.
To further develop Hong Kong into a payment and settlement hub for the region, we will continue to
explore opportunities for linking our RTGS systems and the CMU with similar systems in the region.
For example, the HKMA has been working with Bank Negara Malaysia for the establishment of a link
between the Ringgit RTGS system and the US dollar RTGS system in Hong Kong. This is aimed at
reducing the settlement risk of Ringgit/US dollar foreign exchange transactions through PvP
settlement in the Asian time zone. The link is expected to go live by the end of 2006. We are exploring
similar linkages with other Asian central banks.
Bond Price Bulletin
One of the factors affecting secondary market activities in the bond market is the lack of information on
bond prices. To help overcome this problem, the HKMA launched the Bond Price Bulletin at the
beginning of 2006. The bulletin provides investors with convenient on-line access to information on
bond products and bond prices provided by eight major banks in Hong Kong. Indicative bid/offer prices
of over 200 bonds of different currencies issued by both public and private sector entities are provided
by the eight contributing banks.
Outlook
Let me now turn to talk about the outlook of our debt market.
Notwithstanding the achievements we have made so far in developing our debt market, we fully
appreciate that there is nothing to be complacent and there are still many challenges facing us. The
HKMA has therefore embarked on a review of our debt market development with a view to identifying
measures which can be adopted to help market development.
On the demand side, everybody knows that the Mainland of China is enjoying a rapid economic
growth and business opportunities are mushrooming. The recent announcement by the Mainland
authorities of measures to liberalise portfolio investment outflows has marked the emergence of such
kind of opportunity for Hong Kong. Under these new rules, each Chinese citizen is allowed, among
other things, to invest in fixed income securities overseas within certain limits. We expect that this will
help boost the demand for fixed income securities although we do not know exactly how much such
investment outflows will be approved by the Mainland authorities in the initial years.
Given our experience and achievements in financial services and the fact that we are the only
international financial centre of China, I am sure that Hong Kong is well positioned to grasp the
opportunity.
Apart from the initiatives and developments I just mentioned, I believe that it would be useful to
highlight a few fundamental factors which make Hong Kong an ideal place for the bond market. The
first is our free capital mobility. The absence of capital controls means that there are no restrictions on
foreign enterprises using our capital markets to raise funds. Foreign investors can also freely invest in
our markets and easily remit the proceeds back home. Secondly, our well-developed financial
markets, including derivative markets, would allow issuers and investors to manage any interest rate
risk or exchange rate risk effectively. Thirdly, Hong Kong has a critical mass of financial institutions
which stand ready to support issuers to tap the capital markets. Hong Kong is also an asset
management centre thus providing a large investor base for debt instruments. Last but not least, the
absence of capital gains tax and interest withholding tax would also favour bond market development.
Our exceptional geographical, cultural and language advantages also make Hong Kong an ideal place
to link up the Mainland of China with the rest of world.
On our part, the HKMA will continue to play a leading role in enhancing the development of the debt
market in Hong Kong, by removing market frictions and unnecessary restrictions, and by keeping up
with the best practices adopted in other well-developed markets.
Lastly, I would like to thank Euromoney again for inviting me to speak. I look forward to the continued
cooperation with our partners on the healthy development of the bond market in this region. Thank
you.