HONG KONG: The government's plan to issue bonds regularly will go a long way in facilitating the development of a sufficiently large and mature bond market in the city that will match its status as an international financial center, bankers said.

HSBC executive director Peter Wong, however, said the government should do more than its current plan of offering for sale only HK$10 billion worth of bonds every year as this volume is unlikely to meet strong demand in the market.

He said the current scale of the government's planned bond issue program should be expanded and it should also kickstart its bond issue program as soon as possible.

The Hong Kong government plans 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 for a bond fund under the Public Finance Ordinance.

"The government's bond sales program will serve as a strong driver for the development of the local bond market," said Anita Fung, head of Global Markets (Asia-Pacific) at HSBC.

"If the program adopts a mechanism, as planned, to issue bonds regularly with different maturities, it will continuously provide benchmarks for bond pricing," she told reporters at a press briefing on Friday.

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 total worth of bonds issued by the government stood at HK$230 billion at the end of 2008 while those issued by non-government institutions amount to HK$560 billion currently, HSBC's Fung said.

The amount of bond issues pales in comparison with a total deposit of HK$3 trillion in the city's banking system.

The lack of pricing mechanism, in turn, was due to the low liquidity in the secondary bond market, they said, adding that the lack of pricing mechanism has hindered companies' moves to raise funds through bonds.

"Previously, investors, who bought bonds, tended to hold the bonds up to maturity, therefore causing illiquidity in the secondary market," explained Daniel Chan, a senior investment strategist at DBS Bank.

"Now, the government's plans to issue bonds quarterly will provide an effective pricing mechanism," he said.

Meanwhile, bankers said currently strong demand for bonds from investors who wish to diversify their investment portfolios amid uncertainties in equity markets also creates a favorable environment for the government to succeed in its renewed efforts to fully develop the local bond market.

Figures from HSBC showed that demand for bonds from retail investors doubled in the first three months of this year.

"The strong demand was probably due to investors' desire to diversify their investment in risk-aversion moves," HSBC's Fung said.

She said institutional investors, such as insurers and MPF fund managers, also have strong demand for bonds.

Another favorable factor that will likely give a boost to the government's latest drive to develop the local bond market is the keen desire of companies to raise funds for future expansion when the global economic downturn ends.

(HK Edition 05/16/2009 page2)