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FINANCIAL AND MONETARY AFFAIRS
per cent, some 130 basis points (bps) above that on 10-year US Treasury Notes. The daily turnover of Exchange Fund paper during 1999 averaged $16.1 billion.
Issuance activities of private sector debt paper remained active, contributed to largely by increased activities of local corporates and authorised institutions. A total of $131.3 billion Hong Kong dollar debt issues were launched in 1999, compared with $95.7 billion in 1998. Out of this amount, $67.1 billion or 51 per cent was issued by authorised institutions and $23.2 billion or 18 per cent was issued by local corporates. In co-operation with the HKMA's request, the multilateral financial organisations have not issued any Hong Kong dollar debt with a tenor of less than three years. Partly as a result of this, their debt issuance decreased from $43 billion in 1998 to $15.9 billion in 1999. Issuance of fixed-rate debt instruments continued to dominate the market and constituted 59 per cent of total new issues in 1999. The maturity profile of new issues has also extended: 43 per cent of the new debt issued in 1999 had maturities between three to five years, up from 27 per cent in 1998.
The growth of the domestic debt market can be attributed partly to a combination of government initiatives and continued improvement in supply and demand conditions. The launch of the Exchange Fund Bills and Notes Programme in 1990 marked an important milestone in the development of the Hong Kong debt market. Government debt paper provides a benchmark yield against which private debt issues can be priced. From a weekly issue of 91-day bills, the programme was gradually expanded to include 182-day and 364-day bills and two-, three-, five-, seven- and 10- year Exchange Fund Notes. As for the tap issues of 28-day Exchange Fund Bills, the size of each issue was further reduced from $2 billion to $1.5 billion during the year, owing to reduced demand.
To enhance secondary market liquidity, the HKMA has put in place an effective market-making system for Exchange Fund Bills and Notes. Under the market- making system, market makers are appointed to quote two-way prices (bid/offer) during normal money market trading hours for Exchange Fund paper. In light of the success of the market-making system in enhancing the secondary market liquidity of the Exchange Fund paper, the arrangement was extended to the notes of the Mass Transit Railway Corporation (MTRC), Airport Authority (AA), Kowloon-Canton Railway Corporation (KCRC) and the Hong Kong Mortgage Corporation Limited (HKMC). There were 28 market makers at the end of 1999. This has significantly promoted the liquidity of the paper in the secondary market.
To encourage the supply of high-quality debt issues in Hong Kong, profits tax exemption has been granted to the Hong Kong dollar debt securities issued by 10 multilateral financial organisations, such as the World Bank and the Asian Development Bank. To facilitate the development of the local debt market, in May 1996 the Government introduced a scheme under which the interest income and trading profits derived from eligible debt securities issued in Hong Kong enjoy a concessionary profits tax rate equal to 50 per cent of the profits tax rate.
In April, the Government lowered the minimum denomination requirement for private sector debt securities to qualify for a 50 per cent profits tax concession on income derived from the securities from $500,000 to $50,000. This makes the requirement the same as that currently applied to debt securities issued by specified public sector issuers. The measure will achieve a more level playing field for public and private sector issuers, thus encouraging more local issuers to issue debt securities. and making the market more active.