FINANCIAL AND MONETARY AFFAIRS
Asia and an international clearing system, will broaden the appeal of Hong Kong's debt instruments to international investors.
The Evolving Hong Kong Dollar Debt Market
The local debt market also saw major developments in 1994. A wave of credit ratings for large companies in the territory and their debt paper facilitated the raising of capital, both domestically and internationally. Those employing international credit rating services ranged from banks, investment companies, holding companies and real estate developers to public bodies such as the Mass Transit Railway Corporation. The rapidly expanding capital market activities also attracted two leading credit rating agencies to set up their regional offices in Hong Kong. In March, Moody's Investors Service established a regional unit in the territory as its headquarters for East Asia and the Asia-Pacific region. Standard and Poor's Corporation is expected to set up an operation in Hong Kong in January, 1995, serving both local customers and facilitating China's access to capital.
The year also saw the private sector develop asset-backed securitisation. Four issues of mortgage-backed securities totalling $3 billion were launched - three by banks and one by a company affiliated to a real estate developer. The development of such a market can be helpful in reducing maturity mismatch and concentration risk in banks' balance sheets. The liquidity management of the issuers has been enhanced, together with the spreading of credit risks, and this effect will be stronger as the liquidity of the secondary market improves with expansion in the size of the market and the number of participants.
The beginning of debt market developments can be traced back to the launching of the Exchange Fund Bills programme in March 1990, which invigorated the local capital markets. Commencing with the weekly issue of 91-day bills, the programme was expanded to include the fortnightly issue of 182-day bills in October 1990 and the issue of 364-day bills every four weeks in February 1991. The bills are issued for the account of the Exchange Fund and are available in minimum denominations of $500,000. They are sold on a discount basis by tenders, which are open to recognised dealers appointed by the HKMA. To promote secondary market activity, 30 market-makers and 103 recognised dealers had been appointed by the end of 1994. The market-makers are obliged to quote two-way yields for the bills during normal money market trading hours. At the year's end, outstanding issues of 91-day, 182-day and 364-day bills amounted to $19.5 billion, $10.4 billion and $6.5 billion, respectively.
Two-year Exchange Fund Notes were first issued in May 1993, replacing the outstanding two-year government bonds. The notes' proceeds are credited to the Exchange Fund, instead of the Capital Works Reserve Fund as in the case of government bonds. To help further develop Hong Kong's debt market, the first issue of three-year Exchange Fund Notes was launched in October 1993, followed by the inaugural issue of five-year Exchange Fund Notes in September 1994.
The Exchange Fund Notes, together with the outstanding two-year government bonds, amounted to $7.5 billion at the year's end. As with the Exchange Fund Bills Programme, both recognised dealers and market-makers have been appointed under the Exchange Fund Note Programme. The notes are available in minimum denominations of $50,000.
The Exchange Fund Bills and Notes are used primarily as a monetary market instrument and are issued in paperless form. These securities are welcomed by the banking community
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