Latest round of Hong Kong iBonds could rise to HK$15 billion, available for subscription on October 23
Enoch Yiu and Chad Bray enoch.yiu@scmp.com; chadwick.bray@scmp.com
6 min read
Retail investors will be able to subscribe to the latest iteration of Hong Kong's inflation-linked government debt, known as iBonds, beginning October 23, according to the Hong Kong Monetary Authority (HKMA).
The iBonds, the seventh series issued since 2011, will make an interest payment every six months based on the average rate of the consumer price index over that six-month period, with a guaranteed minimum payment of 2 per cent. That is double the minimum guaranteed rate for the last series of iBonds issued in 2016.
Hong Kong identity card holders will be able to subscribe in HK$10,000 (US$1,290) increments at placing banks, securities brokers or the Hong Kong Securities Clearing Company beginning at 9am on October 23, according to the city's de facto central bank. The subscription period will run through 2pm on November 5, with the bonds being issued on November 16 and listed on the Hong Kong stock exchange the next day.
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The city plans to issue HK$10 billion worth of three-year bonds, but could increase the total issue to HK$15 billion depending on popularity, according to Edmond Lau, senior executive director of the HKMA. At HK$15 billion, it would be the highest iBond offering to date, he said.
"We believe the extremely low interest rate environment will stay on for a long time. We want to offer stable investment returns to investors and to attract them to the bond market," Lau, who was speaking in Cantonese, said at a press conference on Monday. The latest batch of iBonds were unveiled on Sunday in a blog post by Financial Secretary Paul Chan Mo-po, and come as historically low interest rates globally have pushed savings rates lower.
"The iBond usually offered an interest rate higher than the minimum guarantee rate. Now the minimum guarantee has increased to 2 per cent, which will make it more attractive, as it is much higher than the bank saving rate," said Tom Chan, chairman of the Hong Kong Institute of Securities Dealers.
The guaranteed interest rate is 100 percentage points higher than what is being offered by a crop of new virtual banks that began operating in the city in recent months, and much higher than savings rates at the city's biggest traditional lenders.
Most investors have held earlier iterations until maturity in the past to enjoy a stable return, Lau said. The first interest payment on the newest iBonds will be due on May 17 next year.
The debt raising comes at a time when the city's projected budget deficit for the 2020-21 financial year is expected to exceed HK$300 billion, as a result of stimulus measures put in place because of the economic fallout from the coronavirus pandemic. The proceeds of the latest iBond offering, however, will not be used for general expenses by the government, but will instead be placed in the city's Exchange Fund for investment, Lau said.
The city's economy contracted by 9 per cent in the second quarter and gross domestic product is expected to shrink by 6 per cent to 8 per cent this year after the government revised downwards its forecast for the year in August.
As Hong Kong's economy shrunk this year, the city's inflation rate also declined, with consumer prices falling 0.4 per cent in August when compared with a year ago, according to the latest government figures. That followed a 2.3 per cent decline in the consumer price index in July.
Hong Kong's government issued its first iBonds in 2011 to promote the development of the city's retail bond market, and to provide a steady source of income for everyday investors. The city has raised more than HK$60 billion through six series of iBonds since 2011, with the last issued four years ago.
Prior issues paid a minimum interest rate of 1 per cent, but often exceeded 2 per cent depending on changes in the consumer price index. For example, the last iBond interest payment in June of last year was 2.43 per cent and the highest interest rate offered was 6.08 per cent in 2011.
In 2016, the city introduced a second inflation-linked bond for retail investors aged 65 or above known as silver bonds. The next round of silver bonds is expected to be announced soon.
Bank of China (Hong Kong) and HSBC, the joint lead managers, as well as Citibank, one of the 20 placement banks, will waive certain fees for customers who subscribe. BOCHK will also offer a mobile banking app to make it easy for customers to subscribe quickly.
"The pandemic is hitting the economy hard and the inflation rate as well. The 2 per cent guaranteed interest rate for the iBond is attractive, and the current offering is expected to be popular," Arnold Chow Kwok-Cheong, BOCHK's deputy general manager for investment and insurance, said at the press conference.
Despite the popularity of government bond programmes for small investors, brokers said the city's retail bond market remained underdeveloped when compared with other advanced economies, such as the United States and Japan.
According to a February report by Hong Kong Exchanges and Clearing, there were 1,388 bonds listed in Hong Kong at the end of 2019, but the vast majority were only available to professional investors, rather than the general public.
Overall, the amount of outstanding debt securities in Hong Kong stood at US$532.1 billion in the fourth quarter of 2019, according to the Bank for International Settlements, a financial institution owned by 62 of the world's central banks. In comparison, the amount of debt securities outstanding topped US$41.2 trillion in the US, US$14.7 trillion in mainland China and US$12.8 trillion in Japan at the end of last year, according to BIS.
"An enthusiastic market response is expected, as retail investors will find the 2 per cent guaranteed return attractive amid the prevailing low interest rate environment," said Wong Tsz Cheuk, managing director and head of Greater China fixed income at HSBC. "The issuance will also provide retail investors with an opportunity to participate in the upside when the local economy recovers in the future."
