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Following is the speech (English only) by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Luncheon Reception of The Hong Kong Capital Markets Association today (September 26):
Tony (Li), Distinguished Guests, Ladies and Gentlemen,
It is my great pleasure to be here today to attend the luncheon reception of the Hong Kong Capital Markets Association, and to be among friends of our financial community. I am delighted to have the opportunity to talk to you about the development of bond market in Hong Kong, and to hear any suggestions you may have to strengthen Hong Kong's advantage as a place of choice for your capital raising and investment activities in this region.
Everyone in this room knows that the financial services industry is of particular importance to the economy of Hong Kong. It is the government's policy to strengthen our position as an international financial centre, and I am sure the Hong Kong Capital Markets Association shares this mission.
Today, I would like to focus on the development of bond market in Hong Kong. Let us review our strengths and challenges in developing the bond market. Are we making full use of our strengths to meet the challenges? What more can we do together to advance the development of Hong Kong's bond market?
First, our strengths. Hong Kong's fundamentals are well known : free flow of capital and information, an independent judiciary based on the rule of law, clean and efficient government, a simple and low tax regime, and state-of-the-art telecommunications infrastructure. More specifically to the bond market, Hong Kong has the critical mass of talents i.e. a large pool of qualified professionals, world class financial infrastructure and abundant liquidity. We have also built a paperless clearing, settlement and custodian system operated by the Central Money Markets Unit (CMU) in the Hong Kong Monetary Authority (HKMA). We introduced our Real Time Gross Settlement (RTGS) payment system in 1996, now with DvP, or delivery versus payment, with real time and end of day capabilities, not only for Hong Kong dollar but also for US dollar transactions. We have also recently decided to extend the same facilities to the euro. We expect to launch that in the second quarter of 2003.
In addition to a world-class infrastructure, we have also abundant liquidity. As at the end of July this year, total deposits in the banking system amounted to 3.2 trillion Hong Kong dollars, of which 1.8 trillion was in Hong Kong dollars and 1.4 trillion was in foreign currencies, the bulk of which in US dollars. The total amount of new issues of Hong Kong dollar debt instruments, other than Exchange Fund Bills and Notes was over 108 billion dollars in the first half of this year which is more than 71 per cent of the total for 2001. Recent new issues, particularly those aimed at the retail sector, have met with overwhelming demand, indicating the strong appetite in the market for more issues.
These encouraging developments notwithstanding, there are still a number of challenges that need to be overcome before the bond market in Hong Kong can realize its full potential. An active bond market needs a critical mass of issuers from both the public and private sectors. However, few corporate issuers have so far been visible. This is not due to a lack of interest. Indeed, many companies have expressed an interest. But some may be looking to the Government to modify the regulatory regime, which would remove obstacles presented by the out-dated provisions in the Companies Ordinance that render bond issuance by private companies both cumbersome and expensive. Moreover, only a handful of local corporates manage to secure a credit rating that would enable them to tap the bond market in a cost-effective manner. On the demand side, there is a well-known lack of a secondary market. Investors by and large hold onto their bonds until maturity and seldom trade in the secondary market. There is also insufficient variety in bond products available to the investor. Investor education on the bond market, despite the success in a series of high-profile issues targeted at the retail sector, is still inadequate.
So, in the face of these challenges, what are we doing to take Hong Kong's bond market forward? I would like to take this opportunity to share with you the latest progress in a number of initiatives on the Government side.
The Financial Market Development Task Force has recommended steps to increase public awareness and user-friendliness of the bond offering mechanism by firstly, allowing advertisements to be issued prior and subsequent to the registration of a prospectus to increase awareness of forthcoming public offers. Second, the Task Force has recommended to make available fact sheets and mini prospectuses alongside a prospectus during the offer period. The use of mini prospectuses and fact sheets will facilitate easy understanding of the key information set out in the prospectus.
The Task Force has also recommended the opening up of new application channels for IPOs, including through the Internet, telephone and ATM, to extend reaching of investors in the application process. The adoption of new application channels is expected to enlarge the retail investor base as potential investors have greater choices to choose from in the method of application most suitable to their needs. The new application channels are to be provided with the traditional paper prospectuses and application forms.
In addition, the Task Force has recommended providing for programme offerings by permitting a "dual prospectus" structure. The Companies Ordinance does not expressly make provision for an offer to be made on a continuous basis or through successive tranches. It also does not expressly contemplate the filing of an offer-specific supplemental prospectus, which updates a document that was previously registered as a stand-alone document, i.e. the base prospectus containing, among other things, financial and other information on the issuer, the mechanics of the programme and risk factors. The use of the dual prospectus structure will facilitate continuous offerings of debt securities without the need to re-register the base prospectus. This will remove a series of administrative hurdles, such as obtaining a further copy of an expert's consent. Guidelines for the above initiatives will be issued by the Securities and Futures Commission (SFC) by the end of 2002.
In relation to listed debt offerings, concerns have been raised by market practitioners about the inefficiencies and costs caused by the need to comply with two sets of contents requirements in the course of applying for listing, i.e. being those contained in the Third Schedule to the Companies Ordinance and in the Listing Rules of the Stock Exchange of Hong Kong. This results in a need to apply to the SFC for transaction-specific Companies Ordinance exemptions on a case-by-case basis, which increases the costs of an offering. The Task Force, therefore, has recommended reducing the burden on issuers of listed debt securities to comply with the disclosure requirements of the Companies Ordinance where there is duplication with the Listing Rules. In July this year, HKEx has reduced the listing fees for debt securities to encourage bond listings.
Further, the Government aims to introduce amendments to the Companies Ordinance in the next legislative session to provide in the law for introducing an alternative regulatory framework which is more friendly to programme offers, providing statutory safeharbours from the application of prospectus-related requirements, and permitting electronic filing and removing known regulatory obstacles to facilitate the use of alternative application channels.
The above recommendations are changes to the prospectus regime made in response to requests from market participants and are designed to be implemented quickly. While they amount to little more than adjustments to procedural requirements and clarifications of existing legislation, they are intended to facilitate the conduct of a public offering. They do not however seek to address all the inadequacies arising from the existing regulatory regime governing securities offerings.
In parallel, the Government has therefore asked the SFC to undertake a full and thorough review of the existing laws and processes relating to public offerings of securities, i.e. encompassing a review of the broader legal and regulatory framework, and formulate longer term solutions designed to modernise Hong Kong's regime for offering financial products.
Moreover, the Government has been encouraging bond issuance by quasi-government bodies and private companies to take advantage of the favourable market conditions. The volatile stock market, and the low bank deposit rates relative to yields on bonds, are strong pulling factors attracting investors to invest in the bond market. We are also looking at ways to facilitate the development of the secondary market. To this end, I have invited the Hong Kong Association of Banks (HKAB) to consider ideas that would provide for a transparent and efficient secondary bond market. Specifically, I have asked HKAB to consider encouraging banks to provide access for an investor to buy and sell bonds through the ATM, or telephone and Internet banking facilities. I have asked HKAB to consider encouraging banks to become market makers and to provide credit lines against bonds as collateral, which would inject additional liquidity into the secondary market. I have invited HKAB and member banks to conduct public and investor education campaigns on bond investment. With the wide retail banking network, it would be an effective way of educating the investing public if banks in Hong Kong promote better knowledge about the bond market.
Another significant development which the Government has initiated recently is to develop securitisation and credit guarantee markets in the Asia Pacific region in order to promote the development of a regional bond market. This is an initiative raised in APEC by Hong Kong together with Korea and Thailand. I presented the initiative at the APEC Finance Ministers Meeting held in Mexico earlier this month. This initiative is based on the fact that there is over-reliance on bank and equity financing in the region and the development of a deep and liquid bond market would provide diversity and competition within the financial intermediary channels. As we know very well, the generally low credit ratings that Asian issuers receive from international rating agencies have been a major factor impeding the development of the bond market in Asia. Through the use of securitisation and credit guarantee, the credit rating of a bond issue could be raised significantly, thereby enabling the issuer to access a larger pool of investors who would otherwise not be available. Securitisation would also enable the building of a pool of smaller bond issues or debt obligations so that smaller companies may tap the capital market. We are working out detailed action plans with Korea and Thailand and will involve other APEC economies interested in this initiative to take it forward. We envisage a number of policy recommendations will come up as a result of this initiative.
In parallel, we are also pursuing the idea of an Asian Bond Fund in cooperation with economies in the region. Given that there is a total of 1.3 trillion US dollars official reserves in the region, it would make sense for a portion of such savings to stay within the region without having to flow through G7 markets before returning to the region in the form of volatile capital flows. Hence the idea of an Asian Bond Fund which would facilitate investment by official reserve managers to diversify a fraction of their bond portfolio to Asian bonds. For the bond market in Hong Kong, this idea would provide a welcome source of liquidity.
On the quasi-government and private sector side, there has been an encouraging series of new issues. The total amount of new issues of Hong Kong dollar debt instruments other than Exchange Fund Bills and Notes was 53 and 54 billion dollars in the first and second quarter of this year respectively, which is 40 per cent higher than the average quarterly figures for 2001.
Going forward, I believe the Hong Kong Capital Markets Association has an important role to play in the further development of the bond market. I understand that the Association organises bond seminars regularly and has a weekly bond page on a local newspaper. I would encourage the Association to do more in this and other respects so as to raise the overall investor awareness, understanding and knowledge on bond investment.
Looking ahead, rationalization of the regulatory regime, continued enhancement in market infrastructure, increased public awareness of bond investment opportunities, further evolution of electronic trading, and the accumulation of funds managed under the Mandatory Provident Fund Scheme are expected to add impetus to the growth of the Hong Kong bond market. Furthermore, Hong Kong has the advantage of being a capital raising centre for China. The Mainland authorities have arranged a number of bond issues in Hong Kong and we have no reason to believe they will not continue to do so.
Ladies and Gentlemen, to sum up, with Hong Kong's strengths i.e. a critical mass of talents, world class infrastructure, and abundant liquidity both locally and in the region, Hong Kong is in a good position to become a leading regional bond centre in Asia, raising capital for the whole of Asia. This would be a tremendous boost to our financial services industry and the economy as a whole. The Government appeals to the Association to join hands with us in taking up this challenge. To this end, I am sure we will have the support of the Hong Kong Capital Markets Association and your members and I look forward to hearing your views. Thank you.
End/Thursday, September 26, 2002
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