LCQ19: Developing Hong Kong’s bond market
Question by the Hon Chan Chun-ying :
Some members of the financial sector have pointed out that, although Hong Kong has become a major location in the Asian region for arranging the issuance of international bonds as well as green and sustainable bonds, Hong Kong’s bond market is relatively small in overall scale and less diverse when compared with mature bond markets such as those in Europe and the United States (“US”). Moreover, Hong Kong’s bond market is mainly involved in US dollar (“USD”) financing while Hong Kong dollar (“HKD”) financing is of a smaller scale. On developing Hong Kong’s bond market, will the Government inform this Council:
(1)given the linked exchange rate of HKD to USD, and the current HKD interest rates being lower than USD’s, whether the Government will consider leveraging such features to promote the issuance of HKD bonds in Hong Kong by enterprises (including Mainland enterprises); if so, of the details; if not, the reasons for that;
(2)given that where enterprises issue bonds denominated in USD or Renminbi but use HKD for settlement of accounts in their actual operations, exchange rate risks will arise upon currency conversion, whether the Government will introduce measures to attract enterprises to opt for issuing HKD bonds for those projects in respect of which bonds will be issued and for which settlement of accounts will be made in HKD, so as to reduce the exchange rate risks that they may face; if so, of the details; if not, the reasons for that; and
(3)as the Government indicated earlier that it would, by drawing on the successful experience regarding the issuance of green bonds in Hong Kong by the Shenzhen Municipal Government last year, promote the issuance of green bonds in Hong Kong by more Mainland entities, of the latest progress of the relevant work?
Reply by the Secretary for Financial Services and the Treasury, Mr Christopher Hui:
In consultation with the Hong Kong Monetary Authority, our reply to the three-part question is as follows:
(1)&(2) When choosing the denomination of their bonds, issuers will take into account multiple market factors such as interest rate, liquidity and investor base. The Government adopts a multi-pronged approach in promoting the development of Hong Kong’s bond market, including the local currency market.
Under the Government Bond Programme (“GBP”) set up in 2009, the Government has issued 37 tranches of Hong Kong dollar (“HKD”)-denominated institutional bonds totalling HK$242.2 billion as at end-October this year, which have helped establish a representative benchmark HKD yield curve for the market. The Government has also issued eight batches of iBond and seven batches of Silver Bond totalling HK$197 billion as well as an inaugural retail green bond of HK$20 billion under the Government Green Bond Programme in May this year. The issuances of these HKD-denominated retail bonds have contributed to the development of the retail bond market in Hong Kong.
The Government has also introduced a number of financial support measures, including grant schemes and tax incentives, to bolster bond issuances in Hong Kong. For example, the Government rolled out the Pilot Bond Grant Scheme in 2018, and enhanced it as the Green and Sustainable Finance Grant Scheme in 2021, to provide financial support for issuance of bonds, including HKD bonds, in Hong Kong. The Government has put in place the Qualifying Debt Instrument scheme and introduced multiple rounds of enhancements to the Scheme taking account of market circumstances, to provide concessionary tax treatment on the interest income and trading profits derived from eligible debt instruments including HKD bonds.
The Steering Committee on Bond Market Development in Hong Kong chaired by the Financial Secretary released a report in August this year, putting forward a series of recommendations on promoting the development of Hong Kong’s bond market, including those relating to HKD-denominated bonds. The recommendations cover expanding the issuance of HKD-denominated bonds with a longer tenor; promoting issuances of green bonds; and stepping up efforts to promote Hong Kong as a bond centre. We are progressively implementing those recommendations. We issued the first HKD-denominated long-tenor bond of 20 years under the GBP in May this year, hence extending the benchmark HKD yield curve from the previous 15 years to 20 years.
(3) The Government is committed to promoting more offshore bond issuances (including green and sustainable bonds) in Hong Kong by Mainland local governments, corporates and financial institutions. Following the successful bond issuance in Hong Kong by the Shenzhen Municipal People’s Government last year, the People’s Government of Hainan Province issued its first offshore Renminbi (“RMB”) bonds totalling RMB5 billion in Hong Kong last month. The Shenzhen Municipal People’s Government also issued bonds totalling RMB5 billion in Hong Kong for the second time. Bond types included blue bonds and sustainable bonds for the first time, further enriching the range of RMB financial products available in the Hong Kong market. In accordance with the Exemption from Profits Tax (Shenzhen Municipal People’s Government Debt Instrument) Order (Cap. 112DP) effective since March 2022, the interest paid or profit received arising from the debt instruments issued in Hong Kong by the Shenzhen Municipal People’s Government is exempted from the payment of profits tax. To support more Mainland local governments to issue bonds in Hong Kong, we will amend the legislation to extend the above tax exemption to the debt instruments issued in Hong Kong by the People’s Government of Hainan Province and other Mainland provincial and municipal governments. The Hong Kong Monetary Authority has also expanded the list of eligible collateral for the RMB Liquidity Facility last year to include the RMB, USD and Euro denominated debt securities issued in offshore markets by the Mainland Local People’s Governments at various levels.
We have been maintaining close liaison with relevant Mainland authorities to actively promote Hong Kong’s bond platform, as an example, by collaborating with the Development and Reform Commission of Guangdong Province to jointly organise a seminar in September this year on examining the expansion of the offshore RMB bond market and leveraging on bond financing to support the development of the Greater Bay Area, as well as exploring the future development direction of the “dim-sum” bond market in Hong Kong. The seminar provided a good platform for around 100 representatives of Government authorities, financial institutions, industry organisations, trade and relevant enterprises of both places to share experiences of issuing “dim-sum” bonds in Hong Kong, and exchange views on the prospect of the internationalisation of RMB and the development of the Greater Bay Area. In addition, the Hong Kong Monetary Authority and the Hong Kong Exchanges and Clearing Limited have collaborated with the Guangzhou Branch of the People’s Bank of China to launch the “Guide for Mainland corporates to issue green bonds in Hong Kong”, which provides operational guidance for more Mainland corporates to issue green bonds in Hong Kong. We will continue to support more Mainland local governments, corporates and financial institutions to issue bonds in Hong Kong.