HONG KONG: The government may launch in September its first sovereign bond issue under its HK$100 billion bond program announced earlier this year as part of its efforts to help develop the local bond market, sources said.

The city's government seeks to launch HK$50 billion worth of sovereign bonds, the biggest-ever Hong Kong dollar bond issue, an industry source told Reuters yesterday.

The issue will have maturities of between two and 10 years, with expected coupons starting at below 1 percent per annum, the source added.

Two-year Exchange Fund notes issued by the Hong Kong Monetary Authority, the de facto central bank of Hong Kong, yielded 0.699 percent at noon yesterday.

"The size is big, as the government would like to make an impact on the market," the source said.

However, in reply to media inquiries, a spokesman for the Financial Services and the Treasury Bureau said the report that the government plans to issue HK$50 billion worth of bonds is "inaccurate".

But he admitted that the government has consulted market players on its planned bond program.

An initial consensus indicates that the local market can only absorb HK$10 billion to HK$20 billion worth of government bonds annually, the spokesman said.

He said the government needs to consult more market players to determine the size of issue in the first year after the launch of the bond program.

The city's government announced earlier that it planned to issue Hong Kong dollar-denominated bonds up to four times a year or one bond issue every quarter under a proposed bond program.

The government will sell around HK$10 billion of bonds annually until it raises up to HK$100 billion. The funds raised will be credited to a bond fund to separate it from the general government revenue pool, and will be used for making investments.

Earlier this year, Financial Secretary John Tsang said that the market could absorb HK$10 billion to HK$20 billion of government bonds per year.

Some lawmakers and market players urged the government to launch a bigger bond issue in order to make an impact on the market.

The government has raised the proposed amount to HK$50 billion and will seek approval, either this month or next, from the Legislative Council, the source said yesterday.

"If the resolution is passed, the bonds can be launched in September," the source said.

The city's efforts to develop a sufficiently large and mature bond market have been unsuccessful so far due mainly to the absence of an effective pricing mechanism, analysts have noted.

The government has issued only a limited quantity of bonds. The last time was in 2004, when it sold HK$20 billion worth in a one-off issue and another HK$6 billion to fund tunnel and bridge construction projects.

China Daily - Agencies

(HK Edition 06/18/2009 page4)