Lehman Brothers

Memory of Lehman curbs Hong Kong retail investor access to bonds

Banks are fearful of selling structured debt to the public following the minibond fiasco

PUBLISHED : Monday, 15 July, 2013, 12:00am
UPDATED : Monday, 15 July, 2013, 5:05am

If you want to invest in equities, you can buy stocks, mutual funds, exchange-traded funds, warrants and equity-linked notes, along with an array of insurance instruments that link to equity funds.

If you want to invest in bonds, you generally have one option: mutual funds.

Hong Kong's debt market for retail investors is restricted. The reason surprises no one - the ghost of Lehman minibonds looms large over this market, making banks and regulators petrified about the sale of any kind of structured debt to the public.

Meanwhile, banks do not really see the sale of non-structured debt as worth their time.

Consider, for example, the difficulty involved in buying individual bonds. Investors could buy one through a private bank, but the minimum denomination for a single bond is usually about US$200,000 - too high for most Hongkongers.

They could buy so-called retail bonds, which are bonds issued to the public in small denominations. HSBC sells bonds online in allotments for as low as HK$1,000 (for National Australia Bank) and HK$10,000 (for a China sovereign bond).

But this is a small universe of investment, and the minimum entry point is typically steep, even for retail bonds, and usually ranges from HK$100,000 to HK$1 million per security.

Investors would also find it difficult to buy and sell these bonds. They would have to go through a bank because there is virtually no publicly traded debt in Hong Kong.

According to Hong Kong exchange data, bonds make up only 0.01 per cent of trading turnover on the bourse.

"Currently, apart from some trading in the government iBonds, there are no exchange-traded bonds - but loads of sham 'listings' of bonds which never trade on the stock exchange," says David Webb, the editor of

If an investor used a private bank, they could get access to credit-linked notes. But these derivatives-based instruments are complicated and structurally akin to minibonds, and they are out of bounds to the public market.

"Credit-linked notes were popular in the past, but following the global financial crisis, minibonds created a lot of noise, and retail banks no longer carry the instruments," says a structured products specialist at a global bank.

Exchange-traded bond funds, which are tradeable and low fee, are coming to Hong Kong, but very slowly. For various technical reasons, bonds do not work well for ETFs and, of the 120 funds traded on the Hong Kong exchange, only three deal in bonds.

That leaves mutual funds, which are accessible by the masses but at a cost. Most funds involve an upfront subscription fee of 5 per cent, and then an annual management charge of about 1 per cent.

So why is the public market for bonds so restricted in Hong Kong, and, in particular, why is it so difficult to buy individual bonds?

The simple answer is that banks do not make any money out of it.

Banks earn income on the bid-offer spread on bonds. Typically, this spread is tiny, and if a public investor wants to buy a bond in a small denomination, it would not be worth the bank's time.

This is why, when the occasional small-denomination retail bond appears in Hong Kong, banks do not promote the security. People are left to find out about the investment on the bank's online investing site, where they can quietly subscribe to the offer with few demands on the bank's resources.

Banks could make money selling structured credit, which would also solve bonds' large-denomination problem.

If banks are allowed to structure these securities, they could miniaturise bonds to make them more accessible to public investors - as indeed banks did with minibonds. But the Securities and Futures Commission would never approve such an instrument.

"I think the SFC would freak out if [banks] try to sell derivative products to the public. Anything that looks like a minibond would create serious heat," says Alan Ewins, a partner and derivatives specialist at law firm Allen & Overy.

So, that is the state of Hong Kong's mass market for debt. People can buy mutual funds. Otherwise, for most other instruments, banks do not want to sell them, or regulators do not want to approve them.