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6Hong Kong, China
 Barbara Shiu
Executive Summary
Although the debt market in Hong Kong, China had a slow start,lagging behind the rapid development of the banking and equities mar-kets in the late 1970s, it had reached a total of approximately HK$414billion (US$53 billion)
1
by the end of the third quarter of 1999.However, after years of scal surpluses, Hong Kong, China su¬ered ascal decit of HK$23.2 billion (US$3 billion) following the Asian nancialcrisis, which underscored the need for further development of the debt market.A well-developed debt market can diversify funding sources andreduce maturity mismatch by channeling long-term savings to long-terminvestments. However, Asian governments have traditionally invested mostof their reserves outside the region, mainly in the Organisation for EconomicCo-operation and Development (OECD) markets. Asia as a whole has ahigh saving rate of about 30 percent, and a mature debt market can serveas an additional and stable investment channel for investors.In all highly developed nancial markets, companies routinely raisefunds through the issuance of debt instruments, and investors generallyregard these as a conventional investment. However, Asia in general su¬ersfrom a marked absence of deep and liquid debt markets and the alterna-tive source of business nance that these markets can provide. In hisspeech for the 1999 to 2000 budget, the Honorable Donald Tsang, theinance Secretary, stressed that the Government regards further develop-ment of the bond market as a pressing priority.In the current market, Exchange und papers, issued by the HongKong Monetary Authority (HKMA), the de facto Central Bank, accountfor about a quarter of the debt market, with private sector papers accounting
1.The Hong Kong dollar is linked with the US dollar through the CentralBureau of Statistics. or illustration purposes, the exchange rate of US$1: HK$7.75was used throughout this paper.
 
192
Government Bond Market Development in Asia
for the remaining three quarters. Issuance of debt securities in the pri-vate sector during the rst three quarters of 1999 was very active.Since the launch of the Exchange und Bills and Notes Programin 1989, the tenor of Exchange und papers has been lengthened to 10years through a gradual issuance process. This lengthening of the matu-rity of the papers has provided a reliable benchmark for the issuance of debt securities. Recently, the Government has decided that, as part of the measures to strengthen the Currency Board system, new issuanceof Exchange und papers will be limited to an inow of foreign fundsto directly provide the corresponding currency backing. This allows thesize of the Exchange und papers to grow gradually. The success of the Exchange und Paper Program has facilitated the development of the debt market in Hong Kong, China. Since August 1999, the Exchangeund notes (ENs), the papers with the longer tenor, have been listed onthe Stock Exchange of Hong Kong (SEHK).Through the continued e¬orts of the HKMA, an infrastructure forthe clearing and settlement of debt securities has also been put in place.The Central Moneymarkets Unit (CMU) is now linked to Euroclear, Cedel,the Reserve Bank Information and Transfer System (RITS), and Austraclearin Australia and New Zealand. A bilateral link with Korea SecuritiesDepository was also set up at the end of 1999. Such important linkageshave helped promote Hong Kong dollar debt securities overseas.With its existing infrastructure, Hong Kong, China has an impor-tant role to play as a regional nancial center for the bond market in theregion. The government bond market is liquid, with a daily turnover of about 10 percent of the total outstanding amount. Tenors of papers havebeen extended up to 10 years, creating a reliable benchmark yield curvefor Hong Kong dollar debt. The CMU, which is operated by the HKMA,is linked up to major Asian and European clearing houses, thereby pro-viding an e¹cient means of transacting debt papers both domesticallyand across borders.Hong Kong, China is also well positioned to be a leading regionalnancial center for listed foreign currency debt papers. Currently, how-ever, all listed debt papers denominated in foreign currencies have to becleared and settled outside the Central Clearing and Settlement System(CCASS) operated by the Hong Kong Securities Clearing Company(HKSCC), as it is not yet capable of handling foreign currencies. TheHKSCC has undertaken to allow the clearing and settlement of securi-ties in foreign currencies under the Real Time Gross Settlement System(RTGS). It was envisaged that this would have been implemented in themiddle of 2000, providing a major step forward in stimulating trading of debt securities listed on the SEHK.
 
 Hong Kong, China
193
Bond market development in Hong Kong, China has another greatadvantage in the form of the Governments policy of providing a free,open, and competitive environment for the development of the localeconomy. The Government provides the necessary infrastructure and astable legal and administrative framework under which businesses ourishwith minimum intervention, having implemented a set of prudential scal,monetary, and regulatory policies to enhance economic growth.However, a number of factors have been identied for the furtherdevelopment of the debt market, particularly to improve liquidity anddepth. While over-the-counter (OTC) debt market activity has grown sat-isfactorily in Hong Kong, China, trading activity in the listed debt marketremains low. Secondary market trading in debt securities is generallylow relative to that in the equities market, even in more establisheddebt capital markets such as New York and London. However, the levelof secondary market activities for debts is negligible when comparedwith the activities for equities.
Improve Information .low
Market information relating to the paperstraded in the OTC market is available through information vendors suchas Reuters and Bloomberg. An improvement in the ow of informationbetween the OTC and the SEHK should be considered to enhancetransparency.
Market-Making and Credit Rating
A market-making system, similarto the one in the OTC market, should be introduced on the SEHK toencourage trading, and improvements made in credit rating and marketinfrastructure.
Widen the Investor
 
Base
Widening of the investor base should resultfrom the Governments decision to launch the Mandatory Provident und(MP) in December 2000. It has been estimated that annual pensionfund contributions will amount to more than HK$10 billion (US$1.3billion), or around one percent of gross domestic product (GDP) ini-tially, growing to around HK$60 billion (US$7.74 billion) when thescheme matures. The establishment of MP funds will signicantly in-crease the demand for long-term Hong Kong dollar debt securities. Tofurther encourage the participation of retail investors in the debt market,more e¬orts should be made in public education on debt securities.
Modernize Legal .ramework
The existing legal framework for regu-lation of debt securities has become outdated in certain aspects, as it isbased on United Kingdom legislation dating from 1929. The Securities
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