ENG-1998 — Page 122

FINANCIAL AND MONETARY AFFAIRS

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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.

Development of a Secondary Mortgage Market

There are fertile grounds for the development of a secondary mortgage market in Hong Kong as evidenced by the strong increase in outstanding residential mortgage loans from 8 per cent of GDP in 1980 to 40 per cent (excluding 'Home Ownership Scheme' and 'Private Sector Participation Scheme') in 1998. A properly developed secondary mortgage market can play a useful role in channelling long-term funds, such as insurance and pension funds, to meet the rising demand for long-term home financing.

The HKMC, wholly owned by the Government through the Exchange Fund, was incorporated in March 1997 with the mission of developing Hong Kong's secondary mortgage market. The HKMC is a public limited company incorporated under the Companies Ordinance. Its business is being developed in two phases. The initial phase involves the purchase of mortgage loans for its own portfolio and fund the purchases largely through the issuance of unsecured debt securities. In the second phase, the HKMC will securitise the mortgages into mortgage backed securities (MBS) and offer them for sale to investors.

Since its commencement of business in October 1997, the HKMC has proceeded smoothly with the first phase of its business plan. On the mortgage purchase side, the outstanding principal balance of the HKMC's mortgage portfolio totalled $11.4 billion as of December 31, 1998, 90 per cent of which were floating rate mortgages and 10 per cent were fixed rate mortgages. Following a successful six-month pilot scheme, the purchase programme for fixed rate mortgages was introduced as a standard programme in September 1998. The HKMC operates prudent purchasing criteria, with the aim of ensuring that its portfolio remains of the highest asset quality. At November 30, 1998, there were no loans with delinquent payments of over 60 days. The weighted average current loan-to-valuation ratio was 66 per cent and the weighted average debt-to-income ratio was only 38 per cent, well below the 50 per cent limit set by the HKMC.

On the funding side, the HKMC successfully issued a total of $5.2 billion of unsecured debts in 1998 through its $20 billion Note Issuance Programme (NIP) and $20 billion Debt Issuance Programme (DIP), making it the second most active issuer of Hong Kong dollar fixed rate securities for the year. Issue maturities ranged from 1.5 years to three years. The HKMC debt securities were well received by financial institutions and institutional investors. The oversubscription rate of the notes issued under the NIP, in which the HKMA acts as the arranger, custodian, agent and operator, averaged 4.5 times.

On December 3, 1998, the Board of Directors of the HKMC gave its approval in principle for the HKMC to partner with mortgage insurers to launch a mortgage guarantee scheme that will let home buyers secure mortgage loans up to 85 per cent LTV ratio. Under the scheme, the HKMC will provide a guarantee at a fee to the lending bank for an amount up to 15 per cent of the value of the property. The HKMC will fully hedge the exposure of the guarantee by taking out an insurance of equal amount with a mortgage insurer. If everything goes well, the scheme will be launched in the first quarter of 1999. The HKMC also intends to launch a multi-