On April 28, the Chief Executive in Council approved the implementation of the Government Bond Program. In addition, resolutions authorizing the borrowing of money and the establishment of a fund to manage sums raised under the program were introduced to the Legislative Council.
Hong Kong Secretary for Financial Services and the Treasury K. C. Chan said the program’s primary objective is to develop and promote a sustainable local bond market through systematic issuance of government bonds.
“By implementing the program, we seek to increase the breadth, depth and liquidity of the local bond market, so that it can complement our banking and equity markets as an effective channel of financial intermediation,” Professor Chan said.
“This will help promote efficient allocation and flow of funds, thereby promoting further economic development and financial stability, and strengthening Hong Kong’s status as an international financial center.”
The program will comprise bond issues for institutional and retail investors and will be issued mainly in Hong Kong dollars.
Professor Chan said that for diversification purposes and to meet market demand, initial bond maturities will range from two to 10 years. Eventually, consideration will be given to issuing bonds with longer maturities, say, 15 years or longer.
Analysts indicate the market may be able to initially digest government bonds of US$1.28 billion to US$2.56 billion over the course of a year. The government will subsequently solicit further market views and conduct a more detailed assessment to determine the appropriate size of individual bond issues, maturity, frequency of issues, etc. In the process, due consideration will be given to prevailing market conditions and the impact on other issuers in the market.
“The program’s borrowing ceiling is proposed to be set at HK$100 billion (US$12.8 billion) or equivalent. It represents a long-term target over a period of five to 10 years of program implementation, and fully reflects the long-term and ongoing nature of the program,” Professor Chan said.
The borrowing ceiling refers to the maximum amount of outstanding principal at any time under the program, i.e., principal amount of bonds issued minus that of bonds redeemed.
Professor Chan said sums raised under the program will be credited to a bond fund established under the Public Finance Ordinance.
The bond fund will not be treated as part of the fiscal reserves and will be managed separately from general revenue. It will be used to repay the principal of bonds issued, meet the financial obligations and liabilities associated with the program and make investments.
A long-term and conservative investment strategy will be adopted for the bond fund. Its objectives will be to preserve capital and generate reasonable investment returns for covering the financial obligations and liabilities under the program.
The Hong Kong Monetary Authority will coordinate the offering of the bonds and manage the bond fund.
“Subject to the Legislative Council’s approval for the relevant resolutions, we intend to implement the program as soon as possible,” Professor Chan said. “We will seek further views of the market and make necessary adjustments in the course of implementation having regard to prevailing market conditions. We will also seek listing status for the bonds to be issued under the program.”
The government has tentative plans to move the relevant resolutions in the Legislative Council on May 20.
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