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  • Dec 18, 2014
  • Updated: 8:37am
My Take
PUBLISHED : Wednesday, 05 June, 2013, 12:00am
UPDATED : Wednesday, 05 June, 2013, 12:47am

Shrinking returns of the dim sum iBond


Alex Lo is a senior writer at the South China Morning Post. He writes editorials and the daily “My Take” column on page 2. He also edits the weekly science and technology page in Sunday Morning Post.

The first government iBond series was a great investment. The one that starts taking subscription this week will probably disappoint. That's because more people are waking up to its almost-sure profit, leading to a division of the pie that will probably leave only crumbs to investors - an allotment or two of HK$10,000 each.

It should be clear by now that the iBond has little to do with fighting inflation or promoting the development of a local bond market, as the government has claimed. The total amount of Hong Kong dollars in circulation and in deposits completely dwarfs the HK$10 billion iBond tranche the government is issuing.

But it is, let's face it, a not-too-subtle handout to placate the middle class, started by the highly unpopular administration of former chief executive Donald Tsang Yam-kuen and is now being aped by his even more unpopular successor Leung Chun-ying.

The first iBond in 2011 was highly profitable. Investors received full subscription of up to HK$440,000; more than 6 per cent in the first interest payment; and more than 5 per cent in the second payment. It also shot up 6.7 per cent on its first day of trading, a tidy profit for those who didn't want to hold the bond. This was, of course, a complete surprise to most market pundits, who were almost uniformly negative or uninterested.

Allotments got smaller in the second iBond series last year as more than 330,000 people subscribed with the subscription total amounting to HK$50.2 billion, compared to HK$13 billion in 2011.

Now, even more people will subscribe to the latest series, and inflation is lower. Investors in 2011 were first-time lucky because of several factors. Fewer people wanted iBond then because many distrusted Tsang's government for whatever it did.

And while simple enough as an investment, iBond was a new product in Hong Kong, so people were unfamiliar with it. Added to this were the legion of pundits and self-styled experts in the media who were talking it down.

Now inflation is lower and many more people want a piece of the pie, as they realise it is little more than government welfare for the middle class. This time, maybe it's really not worth the trouble to invest for a profit that is worth only a few dim sum breakfasts.


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This article is now closed to comments

Mr. Lo: "...a not-too-subtle handout to placate the middle class." I believe you're mistaken. But then I am guessing.
The idea probably started with Mr. Joseph Yam. Hong Kong fantasizes itself to be a financial center. But we have practically no debt capital market. Thanks to China, we now have a vibrant stock market and IPOs.
To start a capital market in a country you should establish a treasuries market against which other debt instruments could be benchmarked. For that we need "riskless" HKMA debts with maturities ranging from overnight to 10-year or longer. Obviously, we don't have any.
One obstacle is Hong Kong budget surplus year after year. What is the justification for borrowing? Dim Sum iBond is just a timid experiment.
Here is my suggestion. Invest Exchange Fund in riskier assets for higher return. That means taking a long time horizon. We are rich and could afford the risk. We have an ace in the hole. The swap facility between deep-pocket PBOC and HKMA will tide over any conceivable illiquidity. My strategy is using HKMA as another leg in an arbitrage, which issues HK asset backed or general obligation bonds of various maturities, if our goal is to become a real financial center.
Another issue must be worked out. Abandoning US dollar peg to one against a trade-weighted basket of currencies, including the yuan. But this is a beast with more moving parts.
The only way to move Hong Kong forward is to embrace ONE COUNTRY, no ifs and buts. That will anger morons.
You totally missed the (financial) point. HK government bonds (Exchange Fund notes for example) trade at lower yields than the iBonds although the risk to investors is exactly the same. The investment was and is a no-brainer because the government has chosen to subsidise iBond holders. Rest assured that people who do this for a living were not "surprised".
It is madness. It is the worst policy measure our government has come up with in decades.

Indeed, it is a hand-out, and a bad one for that. The government is running surpluses. They rake in too much money by charging too much tax (or spending too little, arguably). They have no need at all to issue bonds. But instead, they do, and with a coupon that is paid for by the too-high tax revenue they take in. It is a pointless exercise. What they take with one hand, they recycle with the other, minus the ginormous cost and effort involved.

Furthermore, the issue size is tiny compared to the total amount of savings in Hong Kong, so it is a drop of water in the desert. And then worst of all, does this benefit the lower incomes that are hit hardest by inflation (which is occurring primarily in costs of food and housing)? No, because those incomes are unlikely to have significant amounts of savings to participate in this issue. It disproportionally benefits those who can put in big orders and handle six-digit allocations: the rich.

Whiskers Tsang and his team of nitwits like the one in charge of this dismal iBond policy, K.C. Chan should be ashamed of themselves. The latter is even a professor of sorts, even though he has not published anything of academic merit for more than a decade. Can they really not come up with something more sensible to combat inflation? Are they too busy attending lavish dinners with mainland fellow nitwits, Timothy Tong style?


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