maturity fixed rate Hong Kong dollar paper, but it is impossible at this stage to quantify the likely increase in demand.
MAB commented on an earlier draft that an issue of bonds to fund the scheme would compete with Government Bonds and other issuers, driving up funding costs for everyone. I have two comments. First, there are no long dated Government bonds, and in any case, the Hong Kong Government cannot have debt outstanding of more than $5 billion in 1997, under the terms of the MOU on the airport. Secondly, the issue of Exchange Rate Bills and Government Bonds is not a revenue raising exercise, at least according to official policy statements on the matter. These issues were designed to help stimulate the development of a debt market in Hong Kong and to enhance the range of measures available to the Government for influencing liquidity in the interbank market. If it were decided, in the general public interest and in order to enhance Civil Service morale at a crucial time, that the issue of bonds to help fund the proposed scheme were a high priority, then it is reasonable to assume that MAB would be directed to reduce their own participation in the market as an issuer, and to use the other methods available to them for influencing the levels of Hong Kong dollar liquidity.
The Government could virtually at a stroke create a level of demand for such instruments which would be likely to make the proposed scheme viable. This could be achieved by ensuring that the new private sector pension legislation required approved schemes to maintain at least 50% of their assets in Hong Kong dollars. Such a solution might provoke criticism on the grounds that the private sector was in effect being forced by legislation to fund the previously unfunded Civil Service pensions. However, I consider that such criticism could be forestalled by careful explanation, along the following lines:-
(a)
(b)
(c)
Under the present arrangements, civil servants are totally exposed to the risk of a decline in value of the Hong Kong dollar.
All funded schemes are able to hedge against that risk by placing a proportion of their assets overseas, and can thus afford scheme members the option of defining some of their benefits in a foreign currency.
Under the proposed arrangements, Civil Servants would only be able to hedge the value of 50% of their lump sum: their pension would remain exposed to the Hong Kong dollar risk. The private sector would be able to hedge 50% of the total value of the assets in their schemes
In technical terms, there is no theoretical obstacle to raising funds via an issue of securitised debt backed by pension fund receivables. Such an issue would be more straightforward than some of the mortgage backed issues in the United States, where very complex pricing models are required to take account of the probability of early redemption of mortgages. (Even if officers participating retired early, their payments would not fall due until the retirement date.) Zerő coupon issues are attractive in many jurisdictions because they have significant tax advantages (the yield is classified as return of capital rather than income.) The principal advantage of them for the scheme is that no periodic payments would be required to service the borrowing, as would be the case with bank debt or coupon bearing securities.
The preliminary conclusion is that in the present state of the capital markets, it is unlikely to be possible to raise sufficient funds at fixed rates through the issue of securitised debt. There is another possibility. Funds could be raised by issuing six month paper on a rolling basis, the proceeds of which would be
(under he
Chuese
agree)