102 Financial and Monetary Affairs
The Hong Kong dollar debt market grew further in 2004, with the total outstanding amount rising to $608 billion at year-end, a 9 per cent increase from a year earlier. In 2004, the Government issued Hong Kong dollar debt for the first time since 1984. Other issuers included the Exchange Fund, statutory bodies or government-owned corporations, Als, multilateral development banks (MDBs), non-MDB overseas borrowers and local corporations.
New issuance of Exchange Fund Bills and Notes (EFBNs) was stable at $206 billion and accounted for more than a half of the total new debt issuance in 2004. Demand for EFBNs was strong, with an average over-subscription rate of three times in 2004. The ample liquidity in the banking system due to capital inflows also helped keep yields on EFBNs down. The Aggregate Balance, a measure of interbank liquidity, rose sharply to a daily average of $30 billion in 2004, up from $3 billion a year earlier. The yield on 10-year Exchange Fund Notes decreased by 74 basis points to 3.63 per cent at year-end, which was 58 basis points lower than the yield of comparable US Treasury bonds.
Excluding the Exchange Fund paper, new issuance of Hong Kong dollar debt totalled $171 billion in 2004, little changed from the previous year. Of this total, non-MDB overseas borrowers remained the most active, accounting for 45 per cent of the new issues. That was followed by Als and statutory bodies or government- owned corporations, with shares of 31 per cent and 10 per cent, respectively.
With interest rates remaining at historical lows in Hong Kong, fixed-rate debt still dominated the market. Excluding EFBNs7, fixed rate debt constituted about 78 per cent of total new issues in 2004, down from 89 per cent in 2003. Around half of these new issues were medium-term debts with maturity of three to five years.
In 2004, the Government launched two bond issues to provide funding for capital works projects and greater flexibility in the management of Government liquidity. These issuance activities have also helped to promote the development of the local bond market. In July, the Government completed a $20 billion global bond offering, which included Hong Kong dollar and US dollar tranches of different maturities and involved both institutional and retail investors. The tranches denominated in Hong Kong dollars were split between retail and institutional investors, while the international tranche, a US$1.25 billion 10-year note, was allocated to over 100 institutional investors around the world. Earlier, in May 2004, the Government completed the securitisation of toll revenues from selected Government-owned tunnels and bridges by issuing bonds of $6 billion. All the Government issues were met with strong demand and oversubscribed. The success of these two bond offerings and the overwhelming response from both retail and institutional investors have demonstrated that Hong Kong possesses the expertise and infrastructure for large scale bond issuance, and also indicated the enormous potential demand in Hong Kong for high quality bonds.
7
All EFBNs were fixed rate debt instruments.