Hong Kong Budget 2018-2019

Hong Kong outlines grant for first-time corporate bond issuers and plans for green bonds in budget

Government to launch HK$2.5 million pilot bond grant scheme to develop market, as well as a green bond issuance programme of up to HK$100 billion

PUBLISHED : Thursday, 01 March, 2018, 8:17am
UPDATED : Thursday, 01 March, 2018, 8:12pm

The Hong Kong government announced a package of measures to develop the city’s bond market, including green bonds, in its 2018-19 budget on Wednesday.

To attract more first-time corporate issuers from China and the more than 60 countries covered by the Belt and Road Initiative, the government said it would launch a HK$2.5 million (US$319,428) three-year pilot bond grant scheme that will seek to cut issuer expenses by half.

The pilot scheme will cover eligible enterprises issuing bonds for the first time in Hong Kong. However, each company can apply for a grant for two bond issuances at most.

A government source told the South China Morning Post the upper grant limit was set after taking into consideration a similar grant scheme launched by Singapore in June 2017.

“We hope to further expand the bond market in Hong Kong. We believe the HK$2.5 million bond grant is pretty competitive. Our incentive is a bit higher than the S$400,000 (US$302,341) bond grant offered by the Singaporean government,” the source said.

Singapore’s central bank launched the grant last year to encourage the use of credit ratings by issuers in the Singapore dollar bond market. Issuers of Singapore dollar bonds can claim 100 per cent of their credit rating expenses up to the limit of S$400,000.

However, unlike the pilot scheme proposed by Hong Kong, in Singapore there is no limit on the maximum number of issuances. The Hong Kong Monetary Authority will announce the final details.

Meanwhile, to promote green finance, the government also announced it will launch a green bond issuance programme of up to HK$100 billion to provide funding for its green public works projects.

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Green bonds are no different from regular bonds with one exception, that proceeds are earmarked for projects with environmental benefits; primarily, those mitigating climate change.

In its budget announcement, the Hong Kong government said it will target to issue its inaugural government green bond between 2018 and 2019, and will submit a resolution to the city’s Legislative Council “as soon as possible” to achieve this timeline.

“The measure will encourage more issuers to arrange financing for their green projects through our capital markets,” Paul Chan, the financial secretary, said in the budget, which did not offer further details about what these public works projects were.

With such issuances, Hong Kong will join other Asian governments in tapping the global green bond market, which the Climate Bonds Initiative estimates will grow to US$250 billion this year, from US$156.7 billion in 2017.

The competition for investors’ money for sovereign green bonds has become more intense of late. Indonesia, rated BBB- by Standard & Poor’s, is currently selling a US$1.25 billion green bond, which, if it succeeds, could become the country’s first sovereign green bond issue.

The measure will encourage more issuers to arrange financing for their green projects through our capital markets
Paul Chan, the financial secretary

In October 2017, the Tokyo metropolitan government also issued its maiden green bond, raising 10 billion yen (US$93.4 million), whose proceeds were geared towards promoting the use of renewable energy sources such as solar and geothermal, and countermeasures against floods and other natural disasters.

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John Timpany, a partner for KPMG China based in Hong Kong, said that given Hong Kong’s higher sovereign credit rating at AA+ by S&P, and strong fiscal health with zero net debt, he expected that its green sovereign bond issue would be well received by the market.

“There has been a shortage of green bond papers that would satisfy all the criteria of large institutional investors who invest based on a ESG [environmental, social and governance] mandate. Even if the Hong Kong government decides to issue in the Hong Kong dollar, rather than the US dollar, for most international investors I don’t think they would consider it a currency risk in their portfolio,” said Timpany.

Apart from green bond issuance, the government said it would also provide a green bond “grant scheme” to subsidise qualified green bond issuers using the green bond certification scheme operated by the Hong Kong Quality Assurance Agency.

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The green bond certification programme is part of the government’s efforts to keep pace with the development of green financing globally. The agency, which is a non-profit organisation of government, has taken the lead in providing third-party conformity assessments for green finance issuers through a certification programme.