Hong Kong Dollar Debt Market

The Hong Kong dollar debt market continued to grow in 2003. Outstanding Hong Kong dollar debt securities increased by 5 per cent to $558 billion at year-end. The Exchange Fund accounted for about 22 per cent of total outstanding debt. Other issuers included AIs, statutory bodies or government-owned corporations, multilateral development banks (MDBs), non-MDB overseas borrowers and local corporations.

New issuance of Exchange Fund paper, mainly for rollover purposes, amounted to $213 billion in 2003, accounting for about 56 per cent of the total new issuance. Demand for Exchange Fund Notes remained steady, with an average over-subscription rate of about 4.6 times in 2003. The Hong Kong dollar Exchange Fund Notes yield curve shifted upward with the US Treasuries yields amid the brightening US economic outlook. The yield on 10-year Exchange Fund Notes rose to 4.39 per cent at the end of 2003 from 4.27 per cent in 2002. Nevertheless, as the yield on the Exchange Fund Notes was rising at a slower pace, the yield spread tightened to about eight basis points at the year-end, as compared with 44 basis points in 2002. The average daily turnover of Exchange Fund papers amounted to $21 billion in 2003.

Issuance activities of non-Exchange Fund paper decreased in the year. Hong Kong dollar debt issues launched in 2003 totalled $170 billion, compared with $180 billion in 2002. Of this amount, $61 billion or 36 per cent was issued by AIs, $86 billion or 50 per cent was issued by non-MDB overseas borrowers, and $16 billion or 9 per cent was issued by statutory bodies or government-owned corporations. Despite the decline in issuance activity, the product range continued to expand. The year saw the launch of a significant number of structured deals, such as step-up bonds with callable features, extendable notes and fixed-floating rate bonds. The Government also encouraged public corporations to take the lead in launching debt issuance programmes, including Hong Kong dollar bonds with longer maturity periods and particularly at the retail level. Recent examples included 7 to 15 year bonds issued by the Airport Authority, the Kowloon-Canton Railway Corporation and the MTR Corporation Limited in 2003. Retail interest was strong. The Kowloon-Canton Railway Corporation successfully launched a 10-year issue, the longest maturity so far for retail investors in Hong Kong. Ford Credit, the financing arm of the US-based car producer Ford Motor, issued the first retail bond by a foreign company in Hong Kong. Besides, a number of banks continued to issue retail certificates of deposit.

Fixed-rate debt still dominated the market and constituted about 87 per cent of total new issues in 2003. The average maturity profile of all outstanding fixed-rate debts at year-end increased slightly compared with the previous year.

The HKMA launched on August 1, 2003 a one-year pilot scheme for promoting Exchange Fund Notes in the retail market. The scheme introduced a new arrangement, whereby a portion of each quarterly issue of 2-year and 3-year Exchange Fund Notes will be made available for non-competitive tender by retail investors through the Retail Exchange Fund Notes Distributors ('Distributors'), namely Bank of East Asia, DBS Bank (HK) and Wing Lung Bank. In the first three non-competitive tenders conducted in August, October and November 2003, Exchange Fund Notes totalling $241 million were sold to retail investors. In addition to providing the non-competitive tender service, the Distributors agreed to adhere to a number of unified standards in the distribution of Exchange Fund Notes to retail investors in the secondary market to enhance pricing transparency and facilitate comparison by retail investors.

Along with the launch of the scheme, the HKMA added a new section, 'Exchange Fund Notes: Information for Investors', to its website to educate retail investors on bond investment. An updated pamphlet was also distributed to the public to promote awareness of the retail Exchange Fund Notes programme.

The Financial Secretary announced in his Budget Speech on March 5, 2003 that income from Qualified Debt Securities⁵ with a maturity period of seven years or more, which were previously eligible for a 50 per cent profits tax concession, would be totally exempted from profits tax. In addition, the Government relaxed the minimum maturity requirement on the current 50 per cent tax concession in respect of Qualified Debt Securities from five years to three years.

The Government is implementing measures to overhaul the existing regulatory framework for offers of shares and debentures under a three-phased approach. Measures under Phase I involved the issuance of various guidelines by the SFC in February 2003, permitting awareness advertisements, putting in place an alternative 'dual prospectus' structure, and allowing faxed copies of expert consent letters and bulk print proofs of prospectuses for the purpose of registration. They also included a 'two class' exemption⁶ by the SFC in relation to prospectuses for offers of debentures, which came into operation in May 2003. Phase II involved the Companies (Amendment) Bill 2003, which was introduced into the Legislative Council in June. It proposed, among other things, to simplify procedures for registration and issue of prospectuses. In Phase III, the SFC will conduct a comprehensive review of all local laws and procedures governing public offers of securities as well as regulatory reforms introduced in other leading jurisdictions, with a view to putting in place a framework that provides the most efficient, competitive and fair environment for issuers and investors alike. The SFC has started the review and aims to put forward proposals for public consultation by September 2004.