(a)
(b)
T
(c)
The amounts involved. The Hong Kong Government estimates that the total outstanding liability at 1 July 1992 for the 50% of accrued pensions that is commutable into lump sums is over HK$20 billion. In order to offer enough officers the chance to participate for a worthwhile proportion of their future lump sum payments, the scheme would need to be able to raise at least $ 5 billion as a start, rising to $10 billion over a 5 year period.
The need to fix interest rates. The object of the scheme is to secure a portion of the value of future lump sums against the risk of a serious reduction in the value of the Hong Kong dollar. The period of maximum risk is likely to be the five years either side of 1997. If we have got to 2002 without any major deterioration in Hong Kong's financial and monetary condition, the 1997 transition related anxieties would (by definition) have evaporated. If the scheme is to work for officers retiring in that period, it will be necessary to raise funds at fixed rates for up to ten years. Any circumstances in which a serious fall in the value of the Hong Kong dollar took place would certainly involve a dramatic rise in Hong Kong dollar interest rates, assuming that the link rate system were still functioning; even if the link rate system had given way under the strain, it is only prudent to assume that the crisis against which we are seeking to insure would be characterized by a strong upward movement in interest rates. This is the major obstacle to the scheme's feasibility, but there may be ways of surmounting it.
The two
The pricing of long term China sovereign risk. major debt rating agencies, Moody's and Standard & Poors (both of the United States) are the major influence on the pricing of debt securities. The 1997 issue has proved to be a significant practical and intellectual