ENG-2006 — Page 120

92 Financial and Monetary Affairs

year earlier. Issuers included the Exchange Fund, statutory bodies or government- owned corporations, Als, MDBs, non-MDB overseas borrowers and local corporations.

New issues of EFBNs increased by 3 per cent to $220 billion and accounted for almost a half of the total new debt issuance in 2006. The Exchange Fund papers were broadly welcomed by the market, with subscription averaging over four times the issue size of Exchange Fund Bills, and over three times the Exchange Fund Notes.

Excluding the Exchange Fund paper, new issuance of Hong Kong dollar debt totalled $234 billion in 2006, representing a 24 per cent increase from the previous year. Of this total, non-MDB overseas borrowers remained the most active, accounting for 63 per cent of the new issues. That was followed by Als and local corporations, with shares of 19 per cent and 9 per cent, respectively.

While the US Federal Reserve kept its policy interest rate on hold in the second half of the year, following 17 consecutive increases since mid-2003, issuance of fixed- rate debt accounted for a smaller share of the market in 2006. Excluding EFBNs6, fixed rate debt constituted about 51 per cent of total new issues in 2006, down from 74 per cent in 2005. The average maturity was broadly stable at around three years.

During the year, there was a growing interest in bond offerings at the retail level. The HKMA offered four issues of retail Exchange Fund Notes, totalling $800 million.7 The Hong Kong Mortgage Corporation (HKMC) also issued four series of retail bonds to the public, comprising two series of Hong Kong dollar bonds amounting to $100 million and two series of US dollar bonds totalling US$10 million. All these HKMA and HKMC issues were well received and oversubscribed.

The Government participates actively in ongoing international and regional initiatives to develop the domestic and regional bond market. The HKMA, through its chairmanship of the EMEAP Working Group on Financial Markets, continues its effort on the implementation of Asian Bond Fund 2 (ABF2) in 2006.

All 11 members of the EMEAP Group have invested a total of US$2 billion in ABF2, which invests in domestic currency bonds issued by all EMEAP economies except Australia, Japan and New Zealand. ABF2 consists of an ABF Pan-Asian Bond Index Fund (PAIF) and eight single-market funds. The PAIF is a single bond fund investing in domestic currency bonds issued by sovereign and quasi-sovereign issuers in the eight EMEAP economies, whereas the eight single-market funds will each invest in the same type of bonds issued in the respective markets. After the successful listing of the PAIF and three single-market funds of Hong Kong, Malaysia and Singapore in 2005, three other single-market funds of Korea, the Philippines and Thailand were listed or offered to the public as unlisted open-ended funds during 2006. The remaining two single-market funds are scheduled for public offering in 2007.

6 All EFBNs were fixed rate debt instruments.

7

These issues followed the introduction of the refined Retail Exchange Fund Programme under which investors could purchase Exchange Fund Notes through a larger distribution network and at lower prices.

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