Following is the speech by the Financial Secretary, Mr Henry Tang, at the 2nd Citigroup Asia Pacific Fixed Income Investor Conference this (January 26) morning:
Good morning, ladies and gentlemen,
It's a great pleasure to be here today among so many international investors, financiers and bond issuers. Hong Kong is Asia's world city, a leading international financial centre, and you are our kind of people. We very much appreciate Citigroup's initiative in holding this important Conference in Hong Kong.
This morning I would like to speak on the bond market development in Hong Kong, which have long been the focus of HKSAR Government, and which you all have a real interest in.
We see the need to develop the bond market from the perspective of macroeconomic stability and microeconomic efficiency. The Asian financial crisis highlighted the importance of establishing a deep, liquid and mature bond market to avoid over-reliance on bank and equity financing. Historically, Asians financed their business activities through bank loans. This heavy reliance on bank financing led to a significant mismatch in the maturity structure of assets and liabilities. Funding of long-term investments such as infrastructure projects by bank loans made many corporations and regional economies vulnerable to economic swings. In 1997, the chickens came home to roost.
In the past decade, the equity markets have also become another prime source of financing. If you look at the financing structure of the Hong Kong economy, bank loans dropped from nearly 40 % of total financing in 1995 to just over 23% in 2003. But the stock market picked up most of the slack, accounting for nearly 70% of total financing in 2003. The bond market's share rose marginally to just 7%. That compared with over 47% in the US. So you can see the huge potential we have yet to realize.
While the Asian economies collectively hold more than US$2.3 trillion in official reserves, the lion's share of these reserves is held in G7 currencies. The bulk of Asia's savings are channelled first to the OECD markets before a small portion is channelled back to Asia in bank loans and other forms of capital flows. The capital that comes in is mostly short-term, and in foreign currencies, leaving the region exposed to massive capital outflow at a slightest change of market sentiments.
The development of a sizable, robust and diversified bond market in Asia, particularly in local currencies, would provide long-term funding sources to match investment needs and help keep Asian savings within the region. It would also significantly reduce the likelihood of financial instability arising from volatile capital flows seeking better opportunities in times of crisis.
By issuing bonds in local currencies, borrowers can secure long-term funding sources without exchange-rate risks, and lower the cost of capital. For the investors, a well-developed bond market offers alternative investment opportunities. Bonds, traditionally the fare of institutional investors, are gaining huge popularity among retail investors.
Hong Kong is making an all-out effort to become the preferred bond market in Asia, and we are well positioned to do so. Our sound legal system, efficient and transparent regulatory regimes, free flow of information and capital, simple and low tax system, and first-class human resources are all positive factors conducive to fund raising and investment. More importantly, the abundant supply of professional financial intermediaries, the well-established financial market infrastructure, a critical mass of financial expertise and talents, and a strong investor base with no entry restriction to foreign investors are the qualities that set us apart from other also-ran competitors.
Riding on these unique fundamental strengths, Hong Kong has been doing a lot to promote the bond market in recent years, both at the regional as well as the local level.
At the regional level, the Hong Kong Monetary Authority is spearheading a regional initiative under the auspices of the Executives' Meeting of East-Asia Pacific Central Banks (EMEAP) to promote bond market development in Asia. Announced in December last year, the Asian Bond Fund 2 (ABF2) is expected to raise investor awareness and interest in Asian bonds by providing innovative, low-cost and efficient products in the form of passively managed bond funds. We are particularly pleased that EMEAP has chosen to list the Pan-Asian Fund, one of the two major components of ABF2 and the first of its kind in Asia, on the Hong Kong Stock Exchange.
At the local level, our efforts started in 1990 with the launch of the Exchange Fund Bills and Notes Programme. In addition to offering investors a regular supply of debt securities of the best credit quality, it provides bond issuers from both the public and private sectors a reliable benchmark yield curve of up to 10 years to price their bond issues. The sophisticated clearing and settlement system developed for the Programme also serves as the infrastructural platform to support the entire market.
The launch of two Government bond programmes last year demonstrated our capabilities as a premier capital formation centre in offering high quality and innovative debt securities. In May, the Government successfully launched a HK$6 billion bond programme to securitise the income of five Government-owned toll tunnels and the Tsing Ma Bridge. The issue was met with overwhelming response from retail and institutional investors. It was not only Hong Kong's largest cash securitisation. It was also the first securitisation of toll facilities in Asia, as well as the first securitisation publicly offered to retail investors in Asia.
We followed that up in July with a HK$20 billion Global Bond Offering by the Government to finance long-term capital projects. Again, both international institutional investors and local retail investors showed high regard for the bonds. The Global Bond Offering attracted high quality international institutional order books with very competitive pricing. This was the largest-ever dual-currency and multi-tranche offering in the region, and was also named "the best sovereign bond of the year" by AsiaMoney.
In addition, the Hong Kong Mortgage Corporation launched a number of retail and institutional bond issues last year, including a HK$20 billion Retail Bond Issuance Programme and a HK$2 billion Mortgage-Backed Securities (MBS) programme, the first-ever retail MBS in Asia.
Besides efforts from the public sector, many structured debt products have also been launched by private issuers in Hong Kong in recent years. The increase in debt issuance activities by both the public and private sectors, particularly those with longer maturity periods and at the retail level, has helped set a benchmark yield curve for the pricing of portfolio, the settlement of derivative transactions and the structuring of new issue financing.
So, we are making good progress. In the past 10 years, the total outstanding amount of both Hong Kong dollar-denominated and foreign currency-denominated bonds has tripled. We also see a remarkable increase in foreign participation in our bond market. From 1997 to end September 2004, the outstanding Hong Kong dollar-denominated debt securities issued by overseas borrowers have increased by 20 times. And as of mid 2004, over half of the total outstanding debt issued in Hong Kong involved international debt securities. The statistics give us a good indication that the bond market in Hong Kong is growing rapidly and increasingly globalized.
Our work to promote the bond market has always been ongoing, particularly in the areas of simplifying the issuance process, refining our financial infrastructure, and offering tax incentives.
One of the Government's key initiatives is to overhaul the existing regime of shares' and debentures' public offering. In the past two years, the Securities and Futures Commission has issued clear guidelines on awareness advertisements, on "dual prospectus" and on relaxation of procedural requirements for registration of prospectuses. The Legislative Council has also passed amendments to simplify procedures for the issue of prospectuses.
To put in place a framework that provides the most efficient, competitive and fair environment for issuers and investors alike, the SFC is now conducting a comprehensive review of all local laws and procedures governing public offers of securities with reference to regulatory reforms introduced in other leading international financial centres. The SFC will put forward proposals for public consultation by the end of the first quarter of this year.
In terms of tax incentives, the Government has increased concessions on trading profit and interest income derived from qualified debt instruments (QDIs). In 2003, we shortened the minimum eligible maturity period of QDIs for a 50 per cent tax concession from five years to three; and doubled the tax concession for QDIs of not less than seven-year maturity period from 50 per cent to 100 per cent. These incentives should help boost the supply and trading of medium and long-term debt instruments.
We have also enhanced Hong Kong's financial infrastructure by developing our payment and settlement systems to enable cross-border multi-currency transactions to be conducted and settled in real time and without settlement risk. Bilateral links have been established between our Central Moneymarkets Unit and debt depositories in other jurisdictions such as Euroclear, Clearstream, AustraClear and Korea Securities Depository. And a direct link with the Government Securities Book-Entry System in the Mainland was set up last April that significantly improves the access of Mainland investors to debt securities issued and traded outside the Mainland in a safe and cost-effective manner.
The long-term growth potential of our bond market is huge. The size of Hong Kong dollar time deposits in the banking system, which could shed some light on the amount the public is prepared to put into assets that produce a stable return, was about HK$710 billion as at September 2004, which is 1.5 times more than the outstanding HKD denominated fixed rate bonds. A transfer of even a small proportion of the time deposits to the bond market would significantly increase its size. Another source of funds for bond investment is the growing pension funds in Hong Kong. The total asset size of the MPF funds have reached HK$118 billion as at end 2004, and are growing steadily by approximately HK$24 billion per year.
The great availability of capital from outside Hong Kong for investment or management here provides a good foundation for a large base of international investors and issuers alike. According to a survey conducted by the SFC, the total assets in the fund management business in Hong Kong in 2003 amounted to HK$2,947 billion, of which 63% came from overseas investors.
Our capital markets would also benefit from the gradual liberalization of capital account process in the Mainland. The approval given by Mainland authorities last year allowing the investment of the foreign currency funds of Mainland insurance companies and the China National Social Security Fund in overseas markets are significant developments. Given our close and unique economic relationship with the Mainland, we will be the premier choice of investment platform for these funds seeking better investment opportunities outside the Mainland. This is re-affirmed by the Chairman of the National Council for Social Security Fund, Xiang Huaicheng, during his visit to Hong Kong last week. In particular, our bond market would likely benefit as the majority of these Mainland funds will be pursuing stable returns.
Ladies and gentlemen, Hong Kong is widely recognised as an international financial centre, and we are well positioned to be an international debt financial centre in Asia. As I have outlined to you, we possess all the qualities that attract fund raisers worldwide. The Government is doing its utmost to facilitate the growth of our bonds market. But in a free economy such as ours, there is only so much we can do. The rest is up to the market itself. Our aspiration to become a debt financing centre would only be materialized with your active participation. I hope that by the end of this year, when we talk about Hong Kong's bond market, we will have even more to crow about.
I wish you all a prosperous and productive Year of the Rooster, and for overseas participants, a most pleasant stay in Hong Kong. Thank you very much.
Ends/Wednesday, January 26, 2005