Download Hong Kong Debt Market Development

Bond market development:
The case of Hong Kong
Alfred Wong
Hong Kong Monetary Authority
1
Outline
I.
Motivation to develop bond market
II.
Authorities’ efforts
III. Lessons and impediments
2
Part I
What motivates the authorities
to develop the local currency
bond market?
3
An overview of the financial system
Financial Markets
Money market
Bond market
Equity market
Lenders
Borrowers
Households
Firms
Central bank
Households
Firms
Government
Banks and other financial institutions
Insurance companies and pension funds
Other financial intermediaries
Financial Intermediaries
4
Financing structure in Asia – 1996
% of GDP
350
Stock
300
Bond
250
Loan
200
150
100
Thailand
Taiwan
Singapore
Philippines
Malaysia
Korea
Indonesia
India
China
0
Hong Kong
50
5
Motivation of the authorities
• Lessons from the Asia financial crisis
– Currency and maturity mismatches
– Prone to sudden capital flow reversal
• To foster financial stability
– As back-up facilities
– Diversity in financial intermediation
6
The role of the State
• A multifaceted role:
– Investor protection
– Innovation
– Provision of market infrastructure
• Positive non-interventionism
– Facilitating, not forcing!
7
Part II
What have the authorities done to
develop the local currency bond
market?
8
Major initiatives taken since the
Asian financial crisis
1.
2.
3.
4.
Product development
Market infrastructure
Tax and regulation
Regional cooperation
9
1. Product development
•
•
•
•
Government issues
Securitised debts
Bond funds
Retail bonds
10
Government issues
• Exchange Fund Bills and Notes (EFBNs)
–
–
–
–
HK$ debt instruments issued by the HKMA
Benchmark yield curve
Good liquidity in the secondary market
Banks collectively hold about 85% of the
outstanding EFBNs for
 favourable risk weighting and
 can be used as collateral to borrow from the HKMA
 Government bonds
– The Government successfully launched its first
global bond offering in July 2004
– Total HK$20 billion of which US$1.25 (around
50%) in a 10-year US$ denominated bond
11
Securitised debts
• The Hong Kong Mortgage Corporation
– Established by the Hong Kong SAR Government in March
1997
– To promote development of a secondary mortgage market
mortgage purchase
debt issuance
securitisation of mortgage loans
mortgage insurance
• In May 2004, the Government sold HK$6 billion
(US$770 million) of securitisation bonds, backed by
toll revenues from 5 tunnels and 1 bridge to finance
infrastructure projects
12
Bond funds
• An EMEAP initiative ABF1 (2003)
– Closed-end: Confined to investment of the central
banks only
– USD-denominated sovereign and quasi-sovereign
bonds in the region
• ABF2 (2005)
– Open to any interested investors
– Domestic currency-denominated bonds in the region
13
Retail bonds
• The Hong Kong Mortgage Corporation first
offered bonds to retail investors in October
2001
• The HKMA operated a pilot scheme to
stimulate retail investment in Exchange
Fund Notes in 2003
– The programme was refined in 2005 under
which the fee structure was simplified and
retail distributors were appointed
14
2. Market infrastructure
• Benchmark yield curve
• Hong Kong bond settlement system
• On-line access to market information for
retail investors
15
Benchmark yield curve
• A domestic yield curve gradually took
shape when the HKMA began issuing
Exchange Fund papers in 1990s
• Considerable effort has been directed at
maintaining a smooth and continuous yield
curve in designing the EFBN issuance
programme
16
Hong Kong dollar bond settlement
system
• Central Moneymarkets Unit (CMU)
– Established in 1990 to provide computerised
clearing and settlement facilities to debt
securities
– Linked with other major international securities
settlement systems
• To foster cross-border bond trading and investment
17
Clearing and settlement system
CDC
USD
RTGS
(2000)
- China
Clearstream
Euroclear
CMU
HKD
RTGS
(1996)
DvP
AustraClear
- Australia
AustraClear
- New Zealand
KSD
- South Korea
EURO
RTGS
(2003)
18
On-line access to bond prices
• CMU Bond Price Bulletin website
– Launched in 2006
– Provides convenient access to indicative bond
prices quoted by major banks in Hong Kong
19
CMU Bond Price Bulletin
20
3. Tax and regulation
• Demand side:
– tax concessions to bond buyers
 Trading profits from bonds with a maturity period of 7 years or
more (issued after 5 March 2003) were exempted totally from
profits tax (previously 50% tax concession)
 Minimum maturity requirement for the 50% tax concession
was relaxed from 5 to 3 years
• Supply side:
– simplified issuance process for fund raisers
 The Government and the Securities and Futures Commission
have together streamlined regulations and procedures for
issuing and listing debt securities
 Enabled issuers to market their offers with greater flexibility
and effectiveness to the public
 Lowered issuance costs
21
4. Regional cooperation
• APEC Initiative on the Development of
Securitisation and Credit Guarantee Markets
 Asian Bond Market Initiative (ABMI)
 Asian Bond Fund (ABF)
22
After all these…
23
Hong Kong dollar bond market
• Steadily growth over the past decade
– Outstanding Hong Kong dollar bond
reached US$85 billion at end-2005
– Almost 50% of GDP
24
Local currency bond outstanding
US$ billion
90
% of GDP
60
Ot hers (lhs)
80
P ublic sect or (lhs)
70
50
T ot al out st anding as
a % of GDP (rhs)
60
40
50
30
40
30
20
20
10
10
0
0
1997
1999
2001
2003
2005
25
Sources: HKMA and HK Census and Statistics Department.
Market growth by issuer
US$, bn
US$, bn
90
80
70
90
80
Government &
St at ut ory bodies
Local Corporat es
70
60
60
50
50
Aut horized
Inst it ut ion
s
40
Non-MDB
overseas
30
40
30
20
20
MDBs
10
10
Exchange Fund
0
1997
Source: HKMA.
1998
1999
2000
2001
2002
2003
2004
0
2005
26
Financing structure in 2005*
2005*
1996
Malaysia
Korea
T aiwan
Singapore
T hailand
India
Philippines
Mainland
Hong Kong
100
80
60
40
% of GDP
20
0
Indonesia
Public
Average
Private
0
20
40
60
% of GDP
80
100
27
*As at end-September 2005
Part III
Lessons and impediments: any
more we can do?
28
More work to do?
•
•
•
•
•
•
•
Macroeconomic policies
Government bonds
Banking sector soundness
Corporate governance
Regulatory framework
Tax treatment / incentives
Investor base
29
Impediments to the Hong Kong
dollar bond market
• Supply
– Issuance of Exchange Fund papers is limited
– Government issuance is politically sensitive
– Lack of corporate issuers
Business size
Credit bureaux
• Demand
– Mutual funds invest mainly in equities
– Currency board system
30
Retail demand for bonds
• Transaction cost is high for individuals
• Increased competition between banks made
deposits fiercely competitive
• Attraction is mainly on medium term papers
• There is more interest in holding bonds via
other investment vehicles (e.g. mutual funds)
• Any more room for ABF2-typed initiatives?
31
Looking ahead
• Market making system
– League table
– Tender arrangements
– Uniform-price auction
•
•
•
•
Length of the yield curve
Number of EFN issues
EFN futures market
Electronic trading platform
32
Conclusion
• The Hong Kong bond market has grown
steadily since crisis
• Structure of financing still tilted towards
loans and equities
• Scope for improvements
33