ENG-2005 — Page 125

Financial and Monetary Affairs 95

The HKMA conducted a comprehensive review of Hong Kong's financial infrastructure in the first half of 2005. The objective was to establish a coherent development strategy and implementation plan to build a safe and efficient financial infrastructure based on a multi-currency, multi-dimensional platform, and to develop Hong Kong into a payment and settlement centre in the region. Steps have been taken since the second half of 2005 to implement the recommendations.

Major projects and business initiatives arising from the review include:

• Migration of RTGS to an open platform;

Developing a Renminbi Settlement System;

• Establishing linkage between the Ringgit RTGS system in Malaysia and the US dollar RTGS system in Hong Kong;

• Introducing a new device 'Liquidity Optimiser' in the Hong Kong dollar RTGS system; and

• Launching a Bond Price Bulletin website.

Development of the Bond Market

The Government has boosted the development of the bond market in recent years by providing the necessary financial infrastructure, simplifying the issuance process, removing regulatory impediments, offering tax incentives and encouraging public corporations to issue bonds. Investor education on bond investment has also been strengthened.

The Hong Kong dollar debt market grew further in 2005, with the total outstanding amount rising to $664 billion at year-end, a 9 per cent increase from a year earlier. Issuers included the Exchange Fund, statutory bodies or government- owned corporations, Als, multilateral development banks (MDBs), non-MDB overseas borrowers and local corporations.

New issues of EFBNs increased by 4 per cent to $214 billion and accounted for more than a half of the total new debt issuance in 2005. The two-year paper was particularly welcomed by the market, with subscription averaging almost three times the issue size. Against the background of an increasingly restrictive monetary policy in the US and the introduction of the refinements to the Linked Exchange Rate system, liquidity tightened in the banking system in 2005. The Aggregate Balance, a measure of interbank liquidity, declined sharply from a daily average of $30 billion in 2004 to $4 billion in 2005, putting upward pressure on yields, particularly at the shorter end. The yield on the one-year EFBN rose markedly by 332 basis points to 3.9 per cent at the end of 2005.

Excluding the Exchange Fund paper, new issuance of Hong Kong dollar debt totalled $188 billion in 2005, representing a 10 per cent increase from the previous year. Of this total, non-MDB overseas borrowers remained the most active, accounting for 56 per cent of the new issues. That was followed by Als and local corporates, with shares of 33 per cent and 5 per cent, respectively.