Hong Kong will issue up to HK$13 billion in debt, doubling the guaranteed minimum interest rates on some inflation-linked bonds to 2 per cent as it looks to give residents a chance to benefit from financial markets as the economy struggles with the twin blows of Covid-19 and looming sanctions by the West.
Financial Secretary Paul Chan Mo-po disclosed the deal, equal to US$1.67 billion, on his official blog on Sunday, highlighting the importance of allowing residents greater involvement in the local financial market and a bigger share of its fruits.
“The financial services sector is also a pillar industry of Hong Kong, contributing to about 20 per cent of gross domestic product,” Chan wrote.
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“The development of the financial market can of course drive Hong Kong’s economy. And it would be better if it could let the general public take part.”
In 2018, the financial services sector employed about 263,000 people, accounting for about 7 per cent of total employment in Hong Kong, according to the Census and Statistics Department.
Chan added that after the issuance of the iBonds, the government would also release more Silver Bonds, targeting people aged 65 and above.
The total issue size of the two types of bonds would be up to HK$13 billion, but Chan said the government could consider issuing more if demand was strong.
There have been brewing concerns about Hong Kong’s dim economic outlook.
Dealt a severe blow by the economic fallout of the Covid-19 pandemic, Hong Kong’s economy shrank 9 per cent year on year in the second quarter in real terms. Meanwhile, measures imposed by the United States aimed at sanctioning officials and financial institutions involved in the development and implementation of the new Beijing-imposed national security law also generated uncertainty around the city’s status as an international financial hub.
Chan said that preparatory work for the comeback of the iBond issue was “all set”, with the Hong Kong Monetary Authority expected to announce details on Monday.
It has almost been four years since the government issued the last batch of iBonds in 2016, while Silver Bonds were last issued in 2019.
Previous iBonds offered half-yearly interest payments linked to the average year-on-year inflation, subject to a pre-specified minimum rate, which was just 1 per cent in the past. The principal will be repaid in full at maturity. For Silver Bonds issued last year, the fixed rate ranged from 2 per cent to 3 per cent.
Chan explained that the government decided to issue iBonds again because there was a good chance the global low interest rate environment would persist.
“The risk of inflation brought about in the medium and long term by the easing of monetary policies in major overseas markets should not be overlooked either,” he said.
“Against this backdrop, the iBond’s design can take care of both … We have upgraded certain provisions of [iBond], including the minimum interest rate, which is to be set at a higher-than-before level of 2 per cent.”
Even if inflation rose, Chan said, the dividend would match the inflation rate.
The move represents one of the world’s wealthiest governments coming up with plans for helping residents protect their savings against adverse interest rate movements.
“Politically, all economic developments should strive to keep relevance with the interest of the general public,” said one source familiar with the arrangement.
“The contribution of the financial sector to the GDP is about 20 per cent ...[But] there is still room to improve. Under the national security law, the government should act more proactively and do its best.”
Francis Lun Sheung-nim, chief executive of Geo Securities in Hong Kong, said the guaranteed 2 per cent interest rate was the bond’s “most important feature”.
“In these days of zero interest rates, you will make the iBond much more attractive than a bank deposit,” he said.
Hong Kong’s government is seeking to issue the new bonds after saying last month that its projected budget deficit for the 2020-21 financial year would exceed more than HK$300 billion as a result of stimulus measures put in place to help the public weather the economic fallout from the pandemic.
“The government needs the money,” Lun said. “It needs all the money it can get its hands on to pay for all these things, to pay for the special programmes to combat the pandemic. They better sell more bonds to replenish the treasury.”
Simon Yuen, founder of Hong Kong investment manager Surich Asset Management, also said the timing was right to relaunch the iBond programme, as the economies of mainland China and Hong Kong were likely to recover at a faster rate than their Western counterparts.
“We anticipate the inflation is going to get back on track,” Yuen said. “It depends on the recovery from the pandemic.”
Consumer prices fell 0.4 per cent in Hong Kong in August when compared with a year ago, after a 2.3 per cent decline in the consumer price index in July, according to the latest government figures.
Hong Kong’s bond market for retail investors also remained “underdeveloped” when compared with other financial markets globally, and a new series of iBonds could encourage companies in Hong Kong to undertake their own bond programmes for small investors, Yuen said.
“The act of the government launching the iBond provides a better environment and culture for the Hong Kong retail investor,” he added.
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