'Although the debt market has, over the past 15 years, become a significant channel of financial intermediation, sizing it against GDP it is still a lot smaller than the banking and equity markets, and by quite a wide margin. Furthermore, retail interest, increasing as it may have been, is still lacking by the standards of the developed markets in the US, Europe and Japan.' Joseph Yam Chi-kwong, Hong Kong Monetary Authority BUT HE IS certainly doing his best to attract that greater retail interest in debt securities. He has a benchmark yield curve (well, sort of), a market making system, paperless clearing and now retail investors are to get more flexible allocations, the best price of the day and four new Exchange Fund note distributors. He is also not above making a straight sales pitch. Buy these notes, he tells you, because they are safe, they gave you more interest income than bank deposits (true, look at the first chart on yields), they are liquid (well, sort of) and the market is transparent. Your first question, however, may be why he wants this so badly, and the fact is that he has some good reasons for it. Leave aside that a thriving local currency debt market would strengthen Hong Kong's position as a financial centre, the whole composition of debt finance in our economy could change. Instead of having to rely for borrowings only on those glorified pawn shops that we call banks, corporate borrowers could widen their reach, lower their debt costs, structure those debts more flexibly to their needs and have greater comfort that no lordly banker would peremptorily crook his finger for repayment or demand of his customers that they give him a monopoly in financial services. We would almost certainly see those corporate borrowers rely more on debt and less on the stock market than they do at the moment, which would be no bad thing, and retail investors would have a wider range of investment choices plus better returns. But the bar chart gives you the picture at the moment. First and foremost is the stock market with a capitalisation of $6.5 trillion, more than 500 per cent the size of our gross domestic product. Next comes bank deposits, then non-government debt issues (almost all of them held by financial institutions) and then our Exchange Fund with outstanding debt issues of $125 billion, which amounts to only 9.5 per cent of GDP. Contrast this to Japan, the only Asian country that actually has a thriving debt market. Here you have a stock market capitalised at only 72 per cent of GDP while government debt issues stand at an astonishing 150 per cent of GDP. Quite a difference. But what are Mr Yam's prospects for success with his latest measures? In my view, not really all that good. In the first place he would need much greater issuance of government debt to create the benchmark of a low risk and liquid instrument on which pricing of other instruments could be based. Japan has this because Japan's government is a profligate borrower. Ours is not, and to raise our government debt ratios to Japan's levels only for the purpose of stimulating a fixed income market would be fiscally irresponsible. Secondly, Mr Yam may claim that the seven distributors of retail notes he now has are solidly behind his efforts but, of course, they are not. They are all banks and would rather promote deposits than Exchange Fund notes to their retail clients. With deposits they keep the extra yield that otherwise goes to the holders of the notes. Theirs is lip service alone. Thirdly, critical mass in a fixed income market is achieved only when financial institutions have enough paper to satisfy their natural appetite and are willing to trade more. Ours is still far from that point and its liquidity is heavily HKMA assisted. Good try, Joe. Some day you may get this engine to run on its own rather than have the starter constantly engaged, but I think that day is still some time away.