Flawed reasoning for HK dollar bond market
The government has adopted a proposal to issue significant quantities of bonds. A monetary official describes this as 'an initiative to develop the bond market rather than a way of supporting government expenditure' (given that our fiscal reserves already provide cover for spending). It is also argued that the small bond market inhibits development of an investor base and discourages corporations from using it to raise funds.
But who are the investors and corporations that might use this market? Last year, I interviewed existing and potential users of the local bond market. I discovered first that, as regards Hong Kong investors, the needs of fund managers and the like - the mainstay of any bond market - can readily be satisfied in markets in other currencies, notably the US dollar, where both liquidity and choice are far greater than Hong Kong could ever hope to achieve, even with government leading the way.
Any currency risk for the Hong Kong investor can be offset through the futures or forward exchange markets. Meanwhile, few potential international investors would be especially attracted to Hong Kong corporate bonds, given the paucity of first-class names and the likely meagre scale of their issuance. The Hong Kong currency would hold no particular attraction relative to the US dollar to which it is pegged.
Second, on the issuance side, only a limited number of local companies can realistically contemplate a viable bond issue, given factors such as size and credit standing. Even then, those who can borrow in the Hong Kong domestic debt market are likely to have just as good, if not better, opportunities in international markets. Meanwhile, those who cannot issue bonds in a cost-effective manner (and most Hong Kong companies fall into that category) will continue to depend on direct borrowing from banks for their debt finance.
So, there will be scant interest to develop the market beyond the proposed official pump-priming. But such realities will not deter our officials from their quest to boost the market. They are driven by two other motives, both suspect.
One is the knee-jerk compulsion to emulate Singapore, which sits higher up the bond league tables. However, I have seen no official assessment of what real benefits might accrue to Hong Kong - or, indeed, costs be incurred - as opposed to just attaining a higher league position. Nor have I noted any appreciation of the differing extents to which Hong Kong and Singaporean institutions may be depended upon, or leaned on, to be loyal executives of government initiatives. Nor am I aware of any official consideration of how the difference between currency regimes may influence the development of the respective bond markets.
The other motive of the government is the mistaken belief that the box noting 'local bond market' must be ticked to have any chance of being regarded as an international financial centre. The Hong Kong dollar is not a major currency. Hong Kong businesses will never amass a particularly large presence as issuers in bond markets. We would always be pushing uphill to develop the Hong Kong dollar bond market. But that does not matter. It is largely irrelevant to our standing as a financial centre.
Partly because relevant statistics are not available, our officials appear to overlook the fact that Hong Kong is already much more active as a financial centre in the arrangement and distribution of bond issues in other currencies, notably the US dollar. There lies growth potential, and Hong Kong should be particularly well placed to win yuan bond business as that market is freed up.
For such reasons there appears to be no great concern among market professionals about the Hong Kong dollar segment not developing more fully. The government should acknowledge that reality, stop fretting and take a back seat.
Tony Latter is a senior research fellow of the HK Institute of Economics and Business Strategy; his research paper on the bond market can be found at www.hkimr.org