HONG KONG: The government plans to offer for sale over the next five to 10 years up to HK$100 billion worth of predominantly local currency bonds.

The debt issue, which may start later this year, is aimed at accelerating the development of the local debt market and helping local firms reduce their reliance on the stock market and bank loans to meet their funding needs, Secretary for Financial Services and the Treasury Chan Ka-keung said yesterday.

The bonds, which will have a tenor of two to 10 years, will be denominated mainly in Hong Kong dollars as the debt issue is aimed principally at boosting the development of the local bond market.

"This (proposed debt issue) could complement our banks and equity market as an effective channel of financial intermediation, promote efficient allocation and flow of funds, and strengthen Hong Kong's status as an international financial center," Chan said.

The funds raised from the debt issue are to be credited to a "Bond Fund" that will be separated from Hong Kong's fiscal reserves.

The proceeds will be used to repay the principal and other liabilities of the bond issues, as well as for investments.

Chan said the Hong Kong Monetary Authority (HKMA) will take charge of issuing the bonds to institutional and retail investors and managing the fund.

The HKMA is Hong Kong's de facto central bank.

News of the massive government debt issue was warmly greeted by analysts.

"Since these bonds will pay a higher yield than bank deposits, we expect a strong response from investors to this debt issue," Hong Kong Association of Banks (HKAB) Chairman Peter Wong said.

He noted that the sale of the bonds will eventually be coursed through the local banking system.

University of Hong Kong finance professor Frank Song said the government move will help local firms take its lead in issuing similar debt instruments and facilitate the development of the city's nascent bond market.

"Government bond issues provide price benchmarks in the local bond market and will encourage other issuers to take its lead," he said.

The pace of growth of Hong Kong's bond market has been much slower compared to other financial centers in the region, specifically Japan and Singapore, he said.

Entering the city's bond market at this time when it is still at its infancy is most ideal for investors in search of yields which are safe and more attractive than other investments or debt instruments, he said.

The last time the government undertook a large debt issue was in 2003 when it used proceeds of the fund-raising exercise to fund capital projects.

The first government bond issue was made in the early 1990s by HKMA's predecessor, the Office of the Exchange Fund.

Back then, the government raised a total of HK$3 billion from a series of bond issues, each one of which had a tenor of two years.

That move aimed to help promote the development of a local bond market.

But as the government generated budget surpluses almost every year and did not need to resort to borrowings, it decided to discontinue its debt issues.

Exchange Fund Notes were subsequently issued, replacing government-issued bonds, but the debt issue took on a different mandate, i.e. as an instrument for monetary management.

Earlier this month, the central government announced plans to launch yuan-denominated bonds in Hong Kong.

HKAB's Wong said the twin moves by the central and Hong Kong governments will help meet investors' needs even as they will also promote the development of the city's bond market.

"The two separate debt issuance, denominated in Hong Kong dollars and the yuan, will certainly satisfy varying needs of investors," he said.

(HK Edition 04/29/2009 page16)