As part of yesterday's annual budget announcement, the Hong Kong government announced it was seeking to raise up to HK$20 billion ($2.6 billion) in the local and international bond markets. Hong Kong has never issued in the international bond markets before and the Exchange Fund issues the only quasi-government Hong Kong bonds through its notes programme.
In a press briefing after the budget speech, Financial Secretary Henry Tang confirmed that his department had sent out RFPs to international investment banks yesterday morning seeking their help with the issue. He said he was looking to raise bonds denominated in Hong Kong dollars and other international currencies up to a maximum of HK$20 billion.
The proceeds of the bonds would be used to fund capital expenditures rather than operational expenses and would be issued by the Government of the HKSAR itself. "This will give us the flexibility to fund non-recurrent expenditures and capital expenses," said Tang.
The move will also give the government more leeway in its plans to sell off government assets. "It will mean we will not have to sell off assets if we cannot get the right price," he added.
The move comes as part of a wider push to develop Hong Kong's bond markets, which Tang said only equated to 45% of Hong Kong's GDP. In Singapore that figure is 65% and in the US it is 150%.
"We want to develop our bond markets," he said. "We have the infrastructure and the software to do this." An added incentive is that bonds issued to retail investors would give those investors returns much better than the almost zero rates they get in bank deposits.
"This will give small investors an alternative source of investment," said Tang. Such largesse would also presumably give the government some much needed political capital. The bond issue will have to be approved by Hong Kong's legislative council before the process can start in earnest.
However Frederick Ma, Secretary for the Treasury and Financial Services told reporters he had already been in touch with the rating agencies. "One of our first meetings after delivering the budget [yesterday] afternoon was with the rating agencies," he said.
He added that his team would be on the phone to rating agency analysts in New York later that night. The deal that eventually comes out will be highly sought after both from a lead managers' and investors' point of view. The rarity value and kudos that goes with bringing a debut issuer of the caliber of Hong Kong to market would be enormous for any bank.
Investors too will be attracted to the rarity value of any international bond from Hong Kong. They would also be buying a credit whose fundamentals are improving rapidly. Yesterday's budget saw the deficit come in almost HK$30 billion short of expectations at HK$49 billion. Economic growth for 2004 is forecast to jump to 6%.
Expenditure is being cut. A new GST tax is being mooted and investment income from the fiscal reserves shot up to HK$25 billion in the last year. Tang and Ma were understandably upbeat about the economic performance.
"It is now springtime when flowers are coming into bloom and we can see the early dawn of our economic recovery," said Tang, in the closing remarks of his budget speech. Having planted the seeds, it will be up to the market whether the Bauhinia bonds will bloom.
