The Hong Kong Debt market in 2019
by the Financial Infrastructure Department
US-China trade disputes and the global economic slowdown prompted the central banks of both advanced economies and emerging Asian economies to adopt more accommodative monetary policies to guard against downside risks. This sent bond yields down generally, and in some European economies and in Japan, government bond yields had turned negative. Under these circumstances, emerging Asian bonds became more attractive because of relatively higher yields, registering an increase in the issuance amount. In the Hong Kong dollar debt market, the total issuance volume of Hong Kong dollar debt instruments increased, mainly due to the increased issuance of Exchange Fund Bills and Notes.
Overview of the international bond market
The global economy softened in 2019, prompting central banks around the world to adopt a more accommodative monetary policy. For example, the US Federal Reserve cut interest rates three times in the second half of 2019 to insure against downside risks, and thereafter kept the policy on hold. US Treasury yields exhibited a downward trend during the year despite a moderate pick up of longer term US Treasuries yields since September 2019, resulting in a steepened yield curve. The European Central Bank delivered various stimulus measures.
As a result, government bond yields of some major European Union economies, such as Germany and France, became negative during the year. In Japan, government bond yields also stayed negative in 2019.
The monetary easing in advanced economies contributed to a loosening of financial conditions in emerging Asian markets. Although a number of central banks in the region also cut their policy rates, government bond yields of emerging Asian economies stayed positive, and this, together with expansionary fiscal policies and improved economic and credit fundamentals, created incentives for international
bonds in the region. An Asian Development Bank’s (ADB) survey indicated increased liquidity and trading volumes in most local currency bond markets in 20191.
CHART 1
Average borrowing costs in developed and emerging markets
Notes:
1. Average yields of the BofA Merrill Lynch G7 Government index are used as proxies to the yield levels of developed markets.
2. Average yields of ICE BofA Merrill Lynch emerging market sovereign bond index are used as proxies to the yield levels of emerging markets.
Sources: Thomson Reuters, Bloomberg and Bank of America Merrill Lynch.
1 Asian Development Bank (2019), Asia Bond Monitor, November
Hong Kong Debt Market Review
Since the global financial crisis, a massive amount of funds has flowed into the Hong Kong dollar. Despite the brief triggering of the Convertibility Undertaking during the early part of 2019, the Aggregate Balance stabilised soon afterwards, and Hong Kong’s
monetary environment stayed relatively loose during the year. Nonetheless, the Hong Kong dollar short term interest rates (as measured by Hong Kong Interbank Offered Rate (HIBOR) or Exchange Fund Bills and Notes (EFBN) yields) generally increased.
The yields of key tenors of Government Bonds decreased initially, but bottomed out in September and started to pick up again since then. The yield curve flattened and, indeed, was inverted during some months of the year. The yield spreads between US Treasuries and Hong Kong Government Bonds narrowed, while the yields of the three-year Hong Kong Government Bonds surpassed their US counterparts, making Hong Kong dollar bonds relatively more attractive.
Hong Kong dollar debt issuance in 2019 increased for the eleventh consecutive year to HK$4.18 trillion, an increase of 2% over 2018. The rise in issuance was largely driven by the increased issuance of EFBNs.
Overseas entities
Overseas entities are cost sensitive and their issuance tends to be opportunistic in nature.
Although Hong Kong dollar interest rates, such as HIBORs and Government Bond yields were lower than their US dollar counterparts, the US dollar/Hong Kong dollar basis spreads stayed negative during the year (Chart 2). As a result, the Hong Kong dollar market was less attractive for overseas issuers seeking US dollar funds through the Hong Kong market, compared with tapping the US dollar market directly. A decrease in bond issuance by overseas issuers, including mainly financial institutions and corporates, was observed during the year. Similarly, Multilateral Development Banks, led by the World Bank and the ADB, reduced their issuance in the Hong Kong dollar market, when their bond yields, as AAA-rated institutions, were relatively low and not attractive enough.
CHART 2
Key tenors of USD/HKD basis spreads
Source: Bloomberg.
Local corporates and authorized institutions (AIs)
Local corporates expanded their funding scale in the Hong Kong debt market with the issuance volume up by 14% from 2018. The local corporates remained cash-rich and had access to the international bond market, so they only tapped the Hong Kong dollar market when the cost was low. Re-financing and
“pre-refinancing” for general corporate purposes were dominant reasons for bond issuance and some local developers, in particular, may also issue bonds to finance new projects. Funding activities were more active in the first half of the year to take advantage of the low local interest rates and to accommodate the investment patterns of investors.
However, as interest rates gradually increased from the end of the third quarter, there were fewer opportunities to obtain cheap funding from the Hong Kong dollar bond market. Intensifying trade tensions and economic slowdown also dampened bond market sentiment. Meanwhile, statutory bodies and government-owned corporations roughly maintained their issuance size in the Hong Kong dollar bond market, whereas AIs’ fund-raising activities to support their short term funding needs decreased by 6% year on year.
Other developments
In September 2019, Fitch downgraded Hong Kong’s credit rating from AA+ to AA, and Moody’s Investors Service changed Hong Kong’s credit outlook to
“negative” from “stable”2. The downgrade was seen as partly prompted by the social incidents which started around the middle of 2019, rather than a worsening of Hong Kong’s economic and credit fundamentals. Following the downgrade, the yield spreads of Hong Kong dollar bonds, including Government and corporate bonds, over US
Treasuries did not record a significant increase, and the downgrade did not seem to have had any material impact on the bond issuance activities of Hong Kong corporates, partly because the downgrade was more or less expected.
Government Bonds
The HKMA continued to implement the Government Bond Programme to promote the further and sustainable development of the local bond market.
At the end of 2019, the total outstanding amount of 13 issues of institutional bonds stood at HK$91.3 billion. In addition, two Islamic bonds issued under the Government Bond Programme were outstanding, each with an issuance size of US$1 billion.
During the year, the Government issued the fourth batch of Silver Bond, an inflation-linked bond with a minimum annual interest rate of 3%, targeting Hong Kong residents aged 65 or above. The size of the issuance was HK$3 billion, with a tenor of three years. The number of valid applications was 56,564, with total subscription over HK$7.9 billion. The results were very satisfactory against the backdrop of rising bank deposit rates, demonstrating the immense potential of the silver market for the financial sector to tap into. In the 2020-21 Budget, the Government also announced that it would resume the issuance of iBond and continue to issue Silver Bond to promote the development of the retail bond market and the silver market respectively.
In May 2019, the Government successfully offered its inaugural green bond under the Government Green Bond Programme, with an issuance size of US$1 billion and a tenor of five years. The landmark transaction set an important new benchmark for potential issuers in Hong Kong and the region.
Proceeds raised under the Programme are credited to the Capital Works Reserve Fund to finance or refinance public works projects that provide environmental benefits and support the sustainable development of Hong Kong. In the 2020–21 Budget, the Government announced its plan to issue green bonds totalling HK$66 billion within the next five years, having regard to the market situation.
Looking ahead
The local bond market may continue to face
headwinds in 2020, particularly with the slowdown in the domestic economy caused by the lingering US-China trade tensions and the outbreak of coronavirus. These may dampen corporate
investment and hence bond issuance amount, while heightening credit risk. While issuers may be willing to obtain more financing, the actual issuance will depend on whether funding costs are attractive.
However, there are positive developments in the retail bond market with several retail bond issuances in the pipeline this year. The HKMA will continue to support the development of the local bond market through the implementation of the Government Bond Programme, Government Green Bond Programme, and various other initiatives.
2 Subsequently in January 2020, Moody’s downgraded Hong
APPENDIX (see notes)
Table B1: Issuance of Hong Kong dollar debt instruments (in HK$ million)
(A) Exchange
Fund
(B) Government
(A) + (B) Public Segment (year-on- year rate of change)
(C) Authorized Institutions
(D) Local corporates
(E) MDBs
(F) Non-MDB
overseas issuers
(G) Statutory bodies &
government- owned corporations
(C) to (G) Non-public
Segment (year-on- year rate of change)
Total (year-on-
year rate of change)
1998 316,850 0 316,850 34,359 0 44,502 12,856 9,171 100,888 417,738
1999 261,443 0 261,443
(-17.5%) 82,838 6,744 15,920 39,123 8,931 153,556
(52.2%) 414,999 (-0.7%)
2000 275,036 0 275,036
(5.2%) 97,881 3,900 19,330 51,474 8,325 180,910
(17.8%) 455,946 (9.9%)
2001 237,009 0 237,009
(-13.8%) 74,134 1,000 7,462 45,139 24,075 151,810
(-16.1%) 388,818 (-14.7%)
2002 216,228 0 216,228
(-8.8%) 96,608 6,354 5,200 51,401 20,760 180,323
(18.8%) 396,551 (2.0%)
2003 219,648 0 219,648
(1.6%) 94,479 1,570 2,641 55,750 15,724 170,164
(-5.6%) 389,811 (-1.7%) 2004 205,986 10,250 216,236
(-1.6%) 75,670 6,699 3,530 56,890 17,799 160,588
(-5.6%) 376,824 (-3.3%)
2005 213,761 0 213,761
(-1.1%) 101,039 11,574 1,800 65,263 8,560 188,236
(17.2%) 401,997 (6.7%)
2006 220,415 0 220,415
(3.1%) 83,442 22,624 2,950 107,244 17,419 233,679
(24.1%) 454,094 (13.0%)
2007 223,521 0 223,521
(1.4%) 99,586 18,153 1,700 82,459 19,368 221,266
(-5.3%) 444,787 (-2.0%)
2008 285,875 0 285,875
(27.9%) 67,524 5,966 3,000 37,687 24,308 138,485
(-37.4%) 424,360 (-4.6%) 2009 1,047,728 5,500 1,053,228
(268.4%) 74,836 13,861 13,145 57,152 29,852 188,846
(36.4%) 1,242,073 (192.7%) 2010 1,816,752 18,500 1,835,252
(74.3%) 102,913 15,464 315 30,841 11,187 160,720
(-14.9%) 1,995,972 (60.7%) 2011 1,841,278 27,500 1,868,778
(1.8%) 134,638 22,429 0 25,304 20,195 202,566
(26.0%) 2,071,345 (3.8%) 2012 1,851,575 26,000 1,877,575
(0.5%) 190,833 16,512 790 32,640 12,027 252,802
(24.8%) 2,130,377 (2.8%) 2013 2,123,448 30,000 2,153,448
(14.7%) 143,978 19,638 940 28,105 10,665 203,326
(-19.6%) 2,356,774 (10.6%) 2014 2,177,293 30,800 2,208,093
(2.5%) 124,248 28,871 1337 57,818 9,647 221,921
(9.1%) 2,430,015 (3.1%) 2015 2,242,206 30,400 2,272,606
(2.9%) 136,350 12,481 0 60,564 12,015 221,410
(-0.2%) 2,494,017 (2.6%) 2016 2,689,622 29,400 2,719,022
(19.6%) 180,346 15,431 5529 111,339 20,898 333,543
(50.6%) 3,052,565 (22.4%) 2017 3,000,429 19,600 3,020,029
(11.1%) 185,892 9,316 3,230 95,292 21,542 315,271
(-5.5%) 3,335,300 (9.3%) 2018 3,232,955 19,600 3,252,555 342,541 34,618 9,048 430,313 23,702 840,221 4,092,776
2019 3,393,971 20,400 3,414,371 323,152 39,380 6,295 376,214 24,585 769,625 4,183,996
Table B2: Outstanding size of Hong Kong dollar debt instruments (in HK$ million)
(A) Exchange
Fund
(B) Government
(A) + (B) Public Segment (year-on-
year rate of change)
(C) Authorized Institutions
(D) Local corporates
(E) MDBs
(F) Non-MDB
overseas issuers
(G) Statutory bodies &
government- owned corporations
(C) to (G) Non-public
Segment (year-on-
year rate of change)
Total (year-on-
year rate of change)
1998 97,450 0 97,450 175,286 10,283 69,402 29,356 11,366 295,693 393,143
1999 101,874 0 101,874
(4.5%) 186,036 15,477 61,287 54,402 20,117 337,319
(14.1%) 439,192 (11.7%)
2000 108,602 0 108,602
(6.6%) 192,990 13,027 57,062 80,193 20,047 363,319
(7.7%) 471,921 (7.5%)
2001 113,750 0 113,750
(4.7%) 182,682 11,402 51,104 98,758 35,873 379,819
(4.5%) 493,568 (4.6%)
2002 117,476 0 117,476
(3.3%) 190,520 16,156 40,834 117,819 48,212 413,541
(8.9%) 531,018 (7.6%)
2003 120,152 0 120,152
(2.3%) 199,295 13,905 27,855 139,777 56,441 437,273
(5.7%) 557,426 (5.0%) 2004 122,579 10,250 132,829
(10.6%) 209,401 18,914 24,735 161,816 60,186 475,052
(8.6%) 607,880 (9.1%) 2005 126,709 10,250 136,959
(3.1%) 237,942 28,723 21,535 180,648 57,712 526,560
(10.8%) 663,520 (9.2%)
2006 131,788 7,700 139,488
(1.8%) 246,890 47,734 19,555 237,578 56,876 608,633
(15.6%) 748,121 (12.8%)
2007 136,646 7,700 144,346
(3.5%) 255,491 57,632 13,155 234,344 58,476 619,098
(1.7%) 763,443 (2.0%)
2008 157,653 5,000 162,653
(12.7%) 209,089 57,973 14,253 207,616 64,618 553,550
(-10.6%) 716,202 (-6.2%)
2009 534,062 7,000 541,062
(232.6%) 195,915 62,547 24,348 216,777 66,643 566,229
(2.3%) 1,107,291 (54.6%) 2010 653,138 25,500 678,638
(25.4%) 218,641 65,445 15,513 206,521 60,592 566,712
(0.1%) 1,245,350 (12.5%) 2011 655,413 49,500 704,913
(3.9%) 229,416 66,211 14,731 194,323 51,034 555,716
(-1.9%) 1,260,629 (1.2%) 2012 657,384 68,500 725,884
(3.0%) 264,696 76,486 10,271 186,094 45,159 582,705
(4.9%) 1,308,590 (3.8%) 2013 751,151 91,500 842,651
(16.1%) 252,053 88,896 10,214 185,790 39,816 576,769
(-1.0%) 1,419,420 (8.5%) 2014 752,630 98,000 850,630
(0.9%) 233,444 96,486 6,101 182,161 40,990 559,181
(-3.0%) 1,409,812 (-0.7%) 2015 828,421 100,400 928,821
(9.2%) 239,870 95,581 5,301 204,114 43,351 588,216
(5.2%) 1,517,037 (7.6%) 2016 963,098 102,791 1,065,889
(14.8%) 271,352 99,424 10,550 233,342 50,010 664,677
(9.6%) 1,730,566 (14.1%) 2017 1,048,479 106,320 1,154,799
(8.3%) 241,071 99,020 9,854 243,697 53,647 647,290
(-2.6%) 1,802,089 (4.1%) 2018 1,062,715 107,368 1,170,083 319,663 113,856 17,917 442,763 54,787 948,986 2,119,069
2019 1,082,063 100,135 1,182,198 331,269 116,806 21,222 458,466 55,904 983,666 2,165,864 Note to the tables:
The debt securities statistics from 2018 are reclassified in accordance with the latest international statistical standards set out in the Handbook of Securities Statistics published by the Bank for International Settlements, the International Monetary Fund and the European Central Bank. Hence, they
CHART B1
Proportions of Hong Kong dollar debt issuance activities (by type of issuers)
CHART B2
Proportions of outstanding Hong Kong dollar debt instruments (by type of issuers)
Notes:
1. Authorized institutions include licensed banks, restricted licence banks and deposit-taking companies.
2. Multilateral Development Banks (MDBs) refer to the Asian Development Bank, the Council of Europe Development Bank (formerly known as the Council of Europe Social Development Fund), the European Company for the Financing of Railroad Rolling Stock, the European Investment Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank, the International Bank for Reconstruction and Development, the International Finance Corporation, the African Development Bank, the Nordic Investment Bank, and the CAF - Development Bank of Latin America. Income earned on Hong Kong dollar debt securities issued by the MDBs is exempt from profits tax.
3. Statutory bodies and government-owned corporations include Bauhinia Mortgage-backed Securities Limited, The Hong Kong Mortgage Corporation, Airport Authority Hong Kong, Hong Kong Link 2004 Limited, Kowloon-Canton Railway Corporation, MTR Corporation Limited, Hong Kong Interbank Clearing Limited, Urban Renewal Authority, Hong Kong Housing Society, and the Hong Kong Science and Technology Parks Corporation. It should be noted that while the issuers are public bodies in the legal sense, they are typically considered as non-public issuers by the market. Hence, they are categorised under the “non-public”
segment in the tables above.
4. Figures may not add up to total because of rounding.
5. The debt securities statistics from 2018 are reclassified in accordance with the latest international statistical standards set out in the Handbook of Securities Statistics published by the Bank for International Settlements, the International Monetary Fund and the European Central Bank. Hence, they may not be comparable with those for the previous years.
