The Hong Kong dollar debt market continued to grow in 2002. Outstanding debt increased by 8 per cent to $532 billion at year-end. The Exchange Fund accounted for about 22 per cent of the total outstanding debt. Other issuers included AIs, statutory bodies or government-owned corporations, multilateral development banks (MDBs), non-MDB overseas borrowers and local corporations.

    New issuance of Exchange Fund paper, mainly for rollover purposes, amounted to $216 billion in 2002, accounting for about 55 per cent of the total new issuance. Demand for Exchange Fund Notes remained strong, with an average over-subscription rate of about 4 times in 2002. In line with the movement of the 10-year US Treasury yield, the yield of 10-year Exchange Fund Notes declined to 4.4 per cent at the end of 2002 from 6.2 per cent in 2001. The yield spread tightened to about 57 basis points in 2002, compared with 119 basis points in 2001. The daily turnover of Exchange Fund paper in 2002 averaged $22 billion.

    Issuance activities of non-Exchange Fund paper increased in the year, given the low interest rate environment and ample liquidity in the financial system. Hong Kong dollar debt issues launched in 2002 totalled $180 billion, compared with $152 billion in 2001. Of this amount, $71 billion or 40 per cent was issued by AIs, $73 billion or 41 per cent was issued by non-MDB overseas borrowers, and $22 billion or 12 per cent was issued by statutory bodies or government-owned corporations. Alongside the rise in issuance activity was an expansion in the product range. The year saw the launch of a significant number of structured deals, such as step-up bonds with callable features and floating-rate issues with caps and/or floors. Retail interest in fixed income securities was also strong. Following the Hong Kong Mortgage Corporation retail bond issue of November 2001, a number of entities, including the Airport Authority, the MTR Corporation Limited and Wharf Holdings, issued retail bonds, while a number of banks issued retail certificates of deposit. Fixed-rate debt continued to dominate the market and constituted about 80 per cent of total new issues in 2002. The average maturity profile of all outstanding fixed-rate debt at year-end increased slightly compared with the previous year.

    To improve secondary market liquidity of Exchange Fund paper, the HKMA commenced the reopening of 5-year Exchange Fund Notes for rolling over 3-year notes, from the fourth quarter. To enhance market transparency, the HKMA began to publish at its website, from November, the monthly statistics on turnover and outstanding amount of Exchange Fund paper and non-Exchange Fund paper lodged with the CMU, categorised by remaining maturity and fixed/floating rate issue. In addition, the HKMA launched an official Exchange Fund Bills and Notes (EFBN) fixings scheme in December to enhance the credibility of the Hong Kong dollar benchmark yield curve. The EFBN fixings are posted on major news wires as well as at the HKMA's website.

    The HKEx reduced the listing fees for debt securities from July to encourage bond listings. As part of the effort to streamline the regulations and procedures in issuing and listing debt securities, the Government will implement a three-phase approach in 2003. The first phase will include allowing awareness advertisements to be issued prior and subsequent to the registration of a prospectus, streamlining the disclosure requirements imposed on debt security issuers under the Companies Ordinance, and providing for programme offerings by permitting a 'dual prospectus' structure. In the second phase, amendments to the Companies Ordinance will be made to anchor these new practices in legislation. In the third phase, the SFC will conduct a comprehensive review of the existing laws and procedures against international standards, with a view to facilitating the issuance and listing of securities.