Howard Lee: Hong Kong as a platform for structured credit
Keynote address by Mr Howard Lee, Deputy Chief Executive of the Hong Kong Monetary
Authority, at the 2021 Asian Structured Credit Virtual Summit, 16 March 2021.
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Susie (Cheung, Co-Convenor of APSA), Jade (Friedensohn, Managing Director of IMN),
distinguished guests, ladies and gentlemen,
1. Good morning everyone. My great thanks to IMN for inviting me to speak at this year's Asian
Structured Credit Virtual Summit. It is a great forum to connect global structured credit
issuers and investors.
2. As we all know, structured credit has been a very important source of financing for many
years, especially in places like the US and Europe. While the Mainland of China is a relative
late-comer, it is catching up fast and has become a very big market in its own right.
However, depending on the structure of their financial markets, not all jurisdictions rely on
structured credit to the same extent. For example, in Hong Kong, the banking sector,
together with the bond and equities markets, remain the primary sources of corporate
financing.
3. Indeed banks in Hong Kong are very liquid. With an average Liquidity Coverage Ratio
standing at 155%, there is not a strong desire among banks to sell or securitise their loan
portfolios to obtain extra liquidity. The HKMA's subsidiary, the Hong Kong Mortgage
Corporation (HKMC), which was set up with an objective of buying mortgage loans from
banks to supply the markets with additional liquidity, could hardly find any seller in recent
years.
4. And our banks are also highly capitalised. Their average Capital Adequacy Ratio is over 20%
whereas the average classified loan ratio stays at low levels under 1%. Therefore, they also
do not have a strong motivation to issue capital efficient products like synthetic
securitisation.
5. However, that does not mean that this will always remain the case, and there is no place for
structured credit products here. There are a few factors that can spur the further
development of these products in the coming years.
6. First of all, Hong Kong has always excelled as an international financial centre that serves
not just the local economy, but also the whole region in the Asian time zone, especially the
Mainland of China. Everyone knows the success of the Hong Kong equities market. It is
disproportionately large compared to our GDP, but it is still growing at a rapid pace with a
strong pipeline of IPOs of companies from the Mainland and elsewhere.
7. In the bond space, there is a fairly common misconception that we do not have a bond
market to speak of. Yes, it is true that corporate HK dollar bond market is small, thanks to
the success of the Linked Exchange Rate System which enables our corporations to tap
into the much deeper investor pool of US dollar bond markets without much currency risk or
hedging costs. But as revealed in a recent report by the International Capital Markets
Association (ICMA), Hong Kong is actually the largest centre for arranging Asian international
bond issuance, capturing 34% (or US$196 billion) of Asian international bonds in 2020,
followed by the US (18%), the UK (17%) and Singapore (5%).
8. Hong Kong is also well ahead of other major international financial centres in terms of
arranging first-time bond issuance, capturing 75% (US$18 billion) of the Asian market versus
Singapore (9%) and the UK (5%). Issuers and investors alike are well served by our
comprehensive financial ecosystem underpinned by free flow of capital, an
internationallyaligned common law system and regulatory environment, and the presence of world-class
professional services with talents from all over the world.
9. All these mean that Hong Kong is well placed to serve as a centre for Asian structured
financing just like other financial intermediation that we are doing, as this market continues to
mature in this part of the world.
10. The macro trends are also supportive. With the record low interest rates and abundant
liquidity in many advanced economies, investors are keen to look for some decent yields for
their investments. Asia including China is clearly a key focus area. Take the Bond Connect
as an example, in 2020 the scheme recorded an average daily turnover of nearly RMB30
billion, representing a growth of 82% over 2019. This accounts for 52% of foreign investors'
total turnover in the CIBM market, and shows that Hong Kong continues to be the preferred
channel for investing in the Mainland market. The next exciting thing will be the launch of the
Southbound Bond Connect, which will open up a ground-breaking conduit for Mainland
investors to access the international bond market via Hong Kong. All these will be important
impetus for the further development of fixed income including structured credit markets in
Hong Kong.
11. Another important macro trend is the burgeoning green and sustainable bond market. The
global green bond market has grown from practically non-existent ten years ago to US$270
billion in 2020. Recognising this trend, Hong Kong launched a few supportive initiatives in the
last few years, including the Green Bond Grant Scheme in 2018. The latest Government
Budget announced a new Green and Sustainable Finance Grant Scheme, which will focus
on green and sustainable bond issuers and borrowers and extend the scope of eligible
products, external reviewers and expenses. To create the demonstrative effect and
establish a benchmark yield curve, the Government itself has issued two rounds of green
bonds since 2019 that are aligned to international standards such as ICMA's Green Bond
Principles. The latest issuance of 30-year green bond by the HKSAR Government is indeed
the longest tenor green bond issued by a government in Asia and the Global Medium Term
Note Programme is the first such programme dedicated to green bond issuances set up by
a government in the world. Encouraged by overwhelming market response, we plan to
double the overall borrowing ceiling to HK$200 billion which will provide more room for
exploring future issuance in other currencies, project types and channels.
12. By the end of 2019, US$26 billion of green bonds had been arranged and issued in Hong
Kong with a significant number of them by Mainland and overseas entities. While we do not
have the 2020 figure yet, our estimates show that the issuance pipeline remained strong
during the year despite the disruptive effect of Covid. We are seeing increased issuer and
product diversity and expect the strong momentum to continue. Mainland China has just
announced the ambitious 2060 carbon neutrality target. We believe Hong Kong, which
adopts international standards in green bond issuance, is the ideal platform to raise green
capital from international investors to support this transition and are looking at ways to
facilitate this, in particular within the Greater Bay Area. Clearly structured credit products can
also take a place in helping to meet this huge financing needs in the many years to come.
13. Of course we also have other initiatives that specifically promote the structured credit
market here. One latest development is the amendment of the Banking (Capital) Rules last
year, which brings the current synthetic securitisation rules fully up-to-date with the Basel
rules. These products are commonly found in Europe over the last five or six years. Banks in
Asia-Pacific are now starting to take note of them as a useful tool for credit risk mitigation
and regulatory capital management without having to transfer their portfolio assets. This
feature is extremely useful to help overcome typical constraints such as loan assignment
and confidentiality restrictions. Such products can offer an additional investment opportunity
for institutional investors.
14. When the new capital rules become effective in June this year, the full spectrum of synthetic
securitisation structures will be available for use in Hong Kong. For example, the use of
special purpose vehicles as providers of guarantees or credit default swaps, which
(SPVs)
is a common structure for synthetic securitisation products, will be permitted subject to
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relevant criteria . It effectively lifts the headroom for growth of the synthetic securitisation
market here.
15. Earlier on, I briefly touched on the HKMC, which is a wholly owned subsidiary of the HKMA. I
should also elaborate a bit more on its role in promotion of securitisation in Hong Kong.
16. One of the key business mandates of the HKMC is to develop securitisation and other
financial products that contribute financial stability and facilitate the development of the local
financial markets.
17. Throughout the years, it has been a trailblazer in different areas. For example, it is the most
active corporate issuer in Hong Kong dollar debt market in 2020, issuing US$2.5 billion
corporate debts under a multi-currency medium-term note programme.
18. In terms of securitisation, the HKMC has issued a total of HK$13.2 billion mortgage-backed
securities since 1999, and has helped develop the local secondary mortgage market through
purchasing mortgage loans from banks, and packaging the loans into mortgage-backed
securities for investors with standardisation of product structure and documentation.
19. The HKMC also launched an Infrastructure Financing and Securitisation business in 2019. It
is now in the process of warehousing global infrastructure loans from banks with a view to
packaging and securitising them at an appropriate time in future. The initiative is welcomed
by market players such as multilateral development institutions, commercial banks and
insurance agencies. It is demonstrated by the fact that the HKMC has successively signed
cooperation framework agreements with International Finance Corporation, Sinosure and
MUFG. We expect that more will be forthcoming.
20. Within a short 2 years timeframe, the HKMC has managed to make great progress in
acquiring and warehousing many infrastructure loan assets, across various sectors and
geographies. The business momentum is strong, leading to further opportunities for the
Corporation to continue accumulating a well-diversified portfolio and the necessary track
record in managing this asset class, which are two essential requirements for future
securitisation.
21. With respect to securitisation of infrastructure loan assets, it is not without its challenges.
Market conditions is certainly one such challenge, as we all just witnessed some roller
coaster rides of yield volatility in the past months. And securitising a pool of highly bespoke
infrastructure loan asset pool presents a vastly different proposition to traditional investors
who are more used to investing in a highly homogeneous asset pool such as mortgage
loans. For this reason, there are limited successful precedents in the market globally,
presenting additional challenges for investor to benchmark a relevant issue.
22. Notwithstanding these challenges, we do see that it is a meaningful market development
opportunity. If successful, it will help mobilise capital market liquidity into an attractive
alternative asset class and help fill the market gaps in infrastructure financing.
23. Ladies and gentlemen, I notice from the agenda of this conference that there will be a lot
more interesting discussions in the important subject of fixed income market generally and
structure credit products specifically. Such discussions are very important to further
enhance the understanding of regulators and market practitioners alike about the
opportunities and impediments relating to further development of these products.
24. We in Hong Kong are eager to work with you all to further enhance our financial services
platform in order to offer more exciting opportunities for all. This is clearly demonstrated by
our continuous efforts in making legislative and regulatory changes in the past few years
relating to open ended fund companies, corporate treasury centres, aircraft leasing, limited
partnership regime, and many more. So apart from the initiatives I touched upon, we also
welcome your inputs on what more should be done to better capture the opportunities in the
structured credit space riding on the conducive macro trends I mentioned earlier.
25. Once again, I thank IMN for having me here today. I wish you all a very successful Summit.