Ladies and Gentlemen,

Let me first welcome you all to this signing ceremony to launch the pilot scheme for promoting fixed rate mortgages. This marks not only a major achievement of the Mortgage Corporation, but also a major milestone in the development of the residential mortgage market in Hong Kong.

We firmly believe that the development of fixed rate mortgage products will bring significant benefits to Hong Kong. To the home buyers, it provides an additional choice of mortgage finance that can protect them from adverse movements in interest rates. To the investors, the HKMC debt securities provide an additional source of high quality and liquid Hong Kong dollar assets with an attractive enhancement of yield above those of Exchange Fund Notes. To the originating banks, their partnership with the Mortgage Corporation provides an extra source of steady fee income and a new avenue for marketing their banking products to the mortgage borrowers. To the Mortgage Corporation, it will help us to diversify our mortgage portfolio to include a good mix of floating and fixed rate mortgages.

Fixed rate mortgages, of course, are not new outside Hong Kong. In the USA, for example, over 70 per cent of the mortgages are on fixed rate terms. Fixed rate mortgages are uncommon in Hong Kong as the banks' funding sources are largely short term and floating rate based. Offering fixed rate mortgages will thus expose the originating banks to both interest rate and maturity mismatch. Of course, the risk can be hedged but the cost of hedging is not low for banks. It is not surprising that the banks in Hong Kong so far have not been keen in offering fixed rate mortgages.

We can fill this gap in mortgage product development and the consequential lack of choice for the consumers by a new partnership between the Mortgage Corporation and commercial banks. The synergy is obvious. The issuance of fixed rate notes is one of the core businesses of the Mortgage Corporation. The Corporation can make use of its funds secured on fixed rate debt paper to purchase fixed rate mortgages from banks. In this way the Mortgage Corporation will not be exposed to the risk of interest rate mismatch. Under the arrangements of the pilot scheme, the originating banks also will not be exposed to any adverse movements in interest rates as the Mortgage Corporation will buy the fixed rate mortgages soon after origination on a loan by loan basis. Mr Peter Pang, CEO of the Mortgage Corporation and representatives of the two participating banks will give a detailed briefing on the arrangements of the pilot scheme after the signing ceremony.

The pilot scheme is a major step forward in the development of fixed rate mortgage products in Hong Kong. We hope to build an efficient framework that will promote a sustained growth and diversification of fixed rate mortgage products. Some have suggested that now is not the right time to introduce fixed rate mortgages as interest rates are still relatively high. It is obvious that the demand for fixed rate mortgages depends crucially on the level of fixed mortgage rate in relation to the prevailing floating mortgage rate as well as the borrowers' expectations of the likely movements of interest rates. However, in real life, there is hardly any "ideal" timing for the introduction of fixed rate mortgages. Even when interest rates are relatively high, there are home buyers who are risk averse, who wish to secure fixed interest rate on their mortgages.

The important point here is that we should give the home buyers the choice and it is up to them, not the banks and the Mortgage Corporation, to decide whether they would be interested to fix the interest cost of their mortgages. Such choice for the borrowers is not available at present and we are very pleased that the Mortgage Corporation, working with the banking sector, is helping to develop the necessary market infrastructure for fixed rate mortgages. Once the infrastructure is in place, we can leave market forces to decide on how much and how quickly we should have fixed rate mortgages in Hong Kong.

Finally I would like to take this opportunity to thank Chase Manhattan Bank and Dao Heng Bank for their keen interest in participating in the pilot scheme. I am also grateful to those professionals involved in the project, both from the participating banks and the Mortgage Corporation, for working so diligently. They have developed the framework for the pilot scheme and brought the product to the market in a remarkably short period of time. This is the beginning of a new era in mortgage financing in Hong Kong.

Thank you.