HKMA poised to launch HK$150 million pilot bond scheme
Last year, city’s total issuance of US dollar, euro, yen and local currency denominated bonds was US$467 billion, 10pc of Asia’s total, making it the region’s third largest market, excluding Japan
Hong Kong Monetary Authority (HKMA) says its anticipated pilot bond grant scheme (being dubbed, the PBGS), earmarked for HK$150 million (US$19.11 million), will be launched soon.
The three-year strategy is part of the government’s overall HK$500 million fund, revealed under its 2018-2019 budget, aimed at boosting the city’s competitiveness in the financial services industry, and raising its share of the Asian bond market.
In 2017, Hong Kong’s total issuance of US dollar, euro, yen and local currency denominated bonds was US$467 billion, according to data from the Asian Development Bank.
That was 10 per cent of Asia’s total – excluding Japan’s total bond issuance of US$4.72 trillion – making Hong Kong the region’s third biggest bond market behind China and South Korea.
“We would like to attract new issuers and support Hong Kong’s banking business,” said executive director of the HKMA’s external department, Vincent Lee Wing-sing on Thursday.
“There are opportunities for mainland Chinese firms to consider issuing bonds in Hong Kong under the Belt and Road Initiative.”
Companies need to be first-time issuers to be eligible for the bond scheme, or have not sold any bonds in the city in the past five years. The minimum issuance size is HK$1.5 billion, in any currency.
Additionally to meet the criteria of being a truly “Hong Kong bond”, the bank arranger is required to use “substantial” debt capital services in Hong Kong, including for debt origination and structuring, legal, audit, sales and distribution.
Bond issuers or their guarantors to have obtained a credit rating will be granted half of the arranger’s fee, up to a maximum HK$2.5 million, and bonds without a credit rating will be allowed up to the value of HK$1.25 million. Issuers are allowed to apply to the grant for a maximum of two bond issuances.
Consequently, a bond issuer that decides to sell a HK$1.5 billion bond in Hong Kong using the scheme will pay a typical arrangement fee of between 0.5 and 1 per cent, which is expected to generate up to HK$15 million of business to Hong Kong’s banks and advisers, Lee said.
The PBGS will become effective as soon as Hong Kong’s Legislative Council passes the budget.
Enoch Fung, head of market development in the HKMA’s external department, added the pilot scheme and other government initiatives are aimed at accelerating Hong Kong’s bond market development.
Under the current the Qualified Debt Instrument scheme, the HKMA has been working with the government to remove the criteria of a bond having to possess a maturity of seven years and above, to allow investors to enjoy tax exemptions from trading profit and bond interest income.
The HKMA has also been working to allow investors to lodge and settle bonds listed on the Hong Kong stock exchange in addition to the current requirement of being cleared and settled under HKMA’s Central Moneymarkets Unit infrastructure.
“We hope more bonds can enlist with this scheme. Our two-pronged approach is to provide benefits to both issuers and investors,” Fung said.
Another measure proposed under the government’s budget includes the launch of a HK$100 billion green bond programme, that is aimed at allocating funds to projects that meet environmentally friendly standards.
“At up to HK$100 billion, this is potentially the world’s largest sovereign green bond programme to date,” said Justin Chan, co-head of markets Asia-Pacific at HSBC.
However HKMA’s Lee did concede that the prospect of higher US interest rates could dampen the appetite of bond issuance in Hong Kong.
Natixis Asia, the corporate and investment bank, also said a decline in onshore Chinese funding costs this year means it could be more conducive to issue bonds on the mainland than in Hong Kong, except when regulatory restrictions make it difficult, such as for real estate firms.