Inflation-linked bonds will do little to help beat rising cost of living

PUBLISHED : Wednesday, 06 July, 2011, 12:00am
UPDATED : Wednesday, 06 July, 2011, 12:00am

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Newly-introduced government inflation-linked bonds will give Hong Kong savers a safe option to invest their money but are unlikely to do much to help the public cope with rising living costs and soaring rents.

The government is selling up to HK$10 billion worth of inflation-linked bonds to the public and says this could help ease mounting inflationary pressure on food and housing. Rising prices have eaten into the income of the city's poor and middle class. The tax-free government bond, which matures in 2014, pays investors every six months at least 1 per cent interest.

If inflation is higher than 1 per cent, the bond will pay a rate linked to the composite consumer price index, a measure of inflation, over a six-month period. Analysts expect inflation over the next six months will be about 5 per cent so it is expected bondholders will collect just HK$500 in interest with a minimum investment of HK$10,000 in the bond.

Chan Ka-keung, secretary for financial services and the treasury, expects a 'healthy appetite' from small investors for the bond, which will be traded over-the-counter and on the Hong Kong stock exchange.

The Hong Kong Monetary Authority said it could not provide a forecast for interest payments or inflation targets but according to HSBC analysts the city's headline inflation is driven by food and rental prices.

Food price rises jumped to 7 per cent in May from 6.3 per cent in April, while housing rentals climbed 6.1 per cent in May from April's 5.1 per cent. Hong Kong's inflation is expected to hit another 35-month high in June and it will stay high for the next three months.

Rising inflation has hit Hong Kong's cash-strapped savers who have suffered from rates of close to zero since 2002 and have struggled to find low-risk savings products.

Chan said the government had sold HK$30 billion worth of bonds to institutional investors since 2009 but conceded bonds did not have the same appeal to retail investors because interest payments were marginal.

Frances Cheung, senior strategist for Asia excluding Japan at French bank Credit Agricole, said: 'It [the bond] is really a subsidy. The government's paying to maintain the artificially high interest. It does nothing to develop a market.'

The US Federal Reserve could raise interest rates late next year as inflation is likely to become a bigger concern than economic recovery. Given the Hong Kong's currency peg to the US dollar, a rise in US rates will also ease some inflationary pressure in the city but returns on the bond would be lower.

'The bond is low risk and could protect investors from rising inflation, but it will not help them to beat inflation,' said Kenny Tang Sing-hing, a general manager at AMTD Financial Planning.