ENG-1999 — Page 119

FINANCIAL AND MONETARY AFFAIRS

Other initiatives in 1999 to further develop the local debt market included allowing market participants to use Exchange Fund paper as margin collateral for trading in futures, index options and stock options. This promotes market-wide use of the Exchange Fund paper, increases the liquidity of fixed-income market and helps reduce systemic risk. Another initiative was the listing of Exchange Fund Notes on the Stock Exchange of Hong Kong. All outstanding issues of Exchange Fund Notes were listed and traded on the Stock Exchange since August 16. The listing and trading of Exchange Fund Notes will enhance their liquidity in the secondary market and enlarge the investor base to include retail investors. It will also pave the way for the listing of bonds issued by government owned corporations, such as the HKMC, the MTRC, the AA and the KCRC, and eventually of corporate bonds.

Development of a Secondary Mortgage Market

Hong Kong provides fertile ground for the development of a secondary mortgage market, as evidenced by the strong increase in outstanding residential mortgage loans. from 8 per cent of GDP in 1980 to 40 per cent (excluding the Home Ownership Scheme and the 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 the funding of the purchases largely through the issuance of unsecured debt securities. In the second phase which began in October 1999, the HKMC securitises the mortgages into mortgage backed securities (MBS) and offers 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 $8.7 billion at end-1999, 90 per cent of which were floating rate mortgages and 10 per cent were fixed rate mortgages. The HKMC operates prudent purchasing criteria, with the aim of ensuring that its portfolio remains of the highest asset quality. At December 31, there were nine loans with delinquent payments of over 90 days, or just 0.16 per cent of the Outstanding Principal balance. The weighted average current loan-to-valuation ratio was 72 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.

Debt issuance is the mainstay of HKMC's funding sources, since one of the objectives of the HKMC is to promote the development of the local Hong Kong dollar debt capital market. At the end of 1999, the HKMC has successfully issued a total of $11.4 billion of unsecured debts through its $20 billion Note Issuance Programme (NIP) and $20 billion Debt Issuance Programme (DIP), making it one of the most active issuers of Hong Kong dollar fixed rate securities. Issue maturities ranged from 1.5 years to 10 years. The HKMC debt securities were well received by financial institutions, institutional investors and retail investors. The oversubscription rate of the notes issued under the NIP, in which the HKMA acts as the arranger, custodian, agent and operator, averaged 4.9 times.

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