Tse Kwok Leung

The issuance of RMB sovereign bonds totalled 6 billion by the Chinese Ministry of Finance in Hong Kong involves both bond market and RMB businesses. This should help boost investor confidence amid the gradual recovery of Hong Kong's economy and financial markets. Hong Kong has had high expectations of the issuance.

Steady Growth of Hong Kong's RMB Bond Market

Hong Kong has not had a sovereign bond market so far. As for RMB bonds, they have only been introduced for two years since July 2007 when China Development Bank issued 5 billion RMB bonds in Hong Kong. During these two years, the RMB bond market grew steadily. The extension of issuing entities in July this year to include Mainland's locally-incorporated foreign banks from Hong Kong and the Ministry of Finance marked a major breakthrough. Taking into account the RMB 6 billion sovereign bonds currently launched, there have been 13 issues of RMB bonds in Hong Kong so far, with total volume of issuance amounted to RMB 38 billion, involving 8 issuers (see chart below).

Hong Kong's RMB Bond Market

Source﹕BOCHK Research.

Currently, Hong Kong's RMB bond market can be characterised by the followings: (1) The tenor of bonds issued is restricted to 2-5years; (2) Coupon interest rates range between 2.45-3.4%; (3) Volume of issue ranges between 2-6 billion, with average at around 3 billion; (4) Issuers involve Mainland policy banks, state commercial banks, Hong Kong banks incorporated in the Mainland and the Ministry of Finance; (5) Concerning liquidity, there is over-subscription for each issue, but the secondary market remains inactive. RMB bonds are not listed in the stock exchange at present and can only be traded through banks.

High Development Potential for RMB Sovereign Bonds

The Chinese government has started to issue sovereign bonds as early as the 1950s. Nevertheless, considering the sovereign bond market in modern sense, it only commenced in the 1990s. By the end of 2008, the outstanding sovereign bonds issued totalled RMB 5,327.2 billion. Since the Chinese government is currently implementing proactive fiscal policy, the sovereign bond market has bright prospects. Issuance of sovereign bonds in 2009 is estimated to reach RMB 1.4 trillion, which nearly doubles that in 2008. Looking ahead, the following factors would further support the development of the RMB sovereign bond market.

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