The Hong Kong Dollar Debt Market

There have been impressive developments in the domestic debt market in
recent years. The outstanding amount of Hong Kong dollar debt
instruments stood at $345.5 billion at end-1997, representing a 24 per cent
increase over 1996 and equivalent to 26 per cent of the GDP. Exchange
Fund Bills and Notes accounted for 29 per cent of the market while the
rest consisted of private sector issues such as negotiable certificates of
deposit, bonds, floating rate notes and asset-backed securities.

The total outstanding amount of Exchange Fund Bills and Notes increased
to $102 billion at the end of 1997, compared with $92 billion at end-1996.
Reflecting the favourable reception to the Exchange Fund paper, the
average oversubscription rate for the Note issues was about 3.5 times in
1997. At end-1997, the yield of the 10-year Exchange Fund Notes stood
at 6.76 per cent, only about 70 basis points above that of the 10-year US
Treasury Notes. The daily turnover of the Exchange Fund paper in 1997
was $14 billion, equivalent to 14 per cent of the amount of paper 0outstanding.

In 1997, multilateral financial organisations including the European
Investment Bank, the International Finance Corporation and the World
Bank launched a total of 12 Hong Kong dollar debt issues, involving a total
issue size of $8.45 billion. After a period of subdued activity in 1996, the
mortgage-backed securities market picked up in 1997. There were three
issues, involving a total of $4.2 billion.

The growth of the domestic debt market can be attributed partly to a
combination of government initiatives and continued improvement in
supply and demand conditions. The launch of the Exchange Fund Bills
and Notes Programme in 1990 marked an important milestone in the
development of the Hong Kong debt market. Government debt paper
provides a benchmark yield against which private debt issues can be
priced. From a weekly issue of 91-day bills, the programme was
gradually expanded to include 182-day and 364-day bills and two-,
three-, five-, seven- and 10-year Exchange Fund Notes. Three tap
issues of 28-day Exchange Fund Bills were launched in 1996 to

facilitate the liquidity management of banks under the RTGS system.
They continued to be rolled over in 1997 in view of the continuing
market demand.

To encourage the supply of high-quality debt issues in Hong Kong, profits
tax exemption has been granted to the Hong Kong dollar debt securities
issued by 10 multilateral financial organisations, such as the World Bank
and the Asian Development Bank. To facilitate further the development of
the local debt market, in May 1996 the government introduced a scheme
under which the interest income and trading profits derived from eligible
debt securities issued in Hong Kong enjoy a concessionary profits tax rate
equal to 50 per cent of the profits tax rate.

Since 1994, the HKMA has broadened the scope of repo securities eligible
for discounting under the Liquidity Adjustment Facility (LAF) to cover
high quality Hong Kong dollar private debt issues (in addition to Exchange
Fund Bills and Notes). At the end of 1997, 52 private debt issues totalling
$99.5 billion qualified as LAF-eligible securities.

[Back] [Forward]