There is no doubting Hong Kong’s role as a leading financial hub when it comes to arranging and executing bond issuance.
Data from the International Capital Market Association (ICMA), for example, showed Hong Kong as the largest centre for arranging Asian international bond issuance in 2020. The market captured 34% (or $196 billion) deals during the year – way ahead of the US (18%), the UK (17%) and Singapore (5%)1. The territory is also well ahead when it comes to arranging first-time bond issuance.
To complement this, there are emerging signs that ongoing efforts to develop the HKD bond market are starting to come to fruition.
This is certainly high on the government’s agenda. In a speech earlier in 2021, Eddie Yue, chief executive of the Hong Kong Monetary Authority, referenced the Bond Connect scheme plus the desire for more green and sustainable debt in helping to craft a roadmap to promote HKD bonds.
In conjunction with these initiatives, other positive factors suggest that local and global asset owners will pay more attention to HKD bonds. These include the launch of the Southbound Bond Connect, portfolio diversification opportunities and the robustness of the asset class.
“Bond investors are looking for yield and quality, and an important advantage of the HKD bond market is that it boasts high-quality issuers,” said Geoffrey Lunt, director and senior investment specialist in the Asian fixed income team at HSBC AM.
He also believes demand for long-dated HKD bonds should stay intact amid solid appetite from asset owners such as life insurers.
Movement of Hong Kong and US yield curves
Multi-pronged drivers of demand
The potential for the HKD bond market to grow and evolve is based on three key considerations:
- Meeting the needs of investors for quality and diversification in their fixed income allocations
- The Southbound Bond Connect opening up a new route for mainland investors to access the global bond market via Hong Kong
- Government support for Hong Kong as a more prominent platform from which international investors can raise green capital
1. Stability to breed new appetite and issuance
While HKD bonds clearly appeal to locally-based institutions seeking a relatively straightforward way to match their HKD liabilities, the stability of HKD bond issuance amid an uncertain macro landscape offers a reliable option to lure a wider array of investors, regardless of yield levels.
“Issuers of HKD bonds typically have a relatively high credit rating and have shown some resilience in periods of high volatility such as today,” explained Lunt.
Higher quality also translates to a lower probability of default. Taking the property market as an example, Hong Kong ‘s developers have strong balance sheets and are conservative in terms of leverage.
This bolsters demand among long-term investors for HKD bonds as longer-term assets. Accelerating this will be the need to finance the development of the government’s proposed new ‘Northern Metropolis’ near the mainland China border.
At the same time, since some international issuers might find the funding cost of HKD bonds can be attractive after the currency swap, this will give investors in this asset class further geographical diversity, added Lunt.
2. Southbound access to boost demand
The launch of the Southbound Bond Connect in September 2021 is also expected to provide a boost to the HKD bond market.
“This will allow professional investors in mainland China to trade in offshore debt through Hong Kong, including HKD bonds,” said Lunt.
In particular, it gives these investors the opportunity to diversify their portfolios, especially given differences with domestic corporate bonds in liquidity, risk-return profiles and variety.
Judging by the success of the Northbound Bond Connect scheme in the four years since it was launched in 2017, it now attracts over 2,400 institutional investors worldwide. Further, it has facilitated Chinese sovereign bonds to be included into various major global bond indices such as Bloomberg-Barclays Global Aggregate Index and JPMorgan Government Bond Index - Emerging Markets.
3. Growth in green bonds to extend to HKD
Although green bond issuance to date in Hong Kong has been focused on US dollars, in May 2021, the Hong Kong government launched a three-year Green and Sustainable Finance Grant Scheme. In short, it aims to attract more bond issuers and borrowers to use Hong Kong’s fundraising platform and professional services, boosting more green finance activities locally.
This and other initiatives are positive for the future of green bonds in HKD. And once a sovereign-issued HKD green bond comes to market, more HKD green bond supply is expected from quasi-sovereign institutions and corporates.
“As green bond issuance becomes more common, we expect to see more HKD green bonds,” explained Lunt. “They offer a good way to diversify sources of funding.”
This reflects the ever-increasing issuer and product diversity in the green bond issuance landscape more broadly over the past couple of years. In addition, given ambitious carbon neutrality targets announced over the past year or so across Asia, Hong Kong seems well-suited among options for raising green capital from international investors.
Investors are likely to follow. “We believe the demand for HKD green bonds will be significant, whether from a sovereign or other highly-rated issuer,” added Lunt.
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