What Future for the Hong Kong Dollar Corporate Bond Market?

There have been persistent calls for development of bond markets in Asia. This study focuses, in particular, on prospects for the corporate bond market in Hong Kong. The distinctive approach has been to elicit the views of the actual or prospective end-users of the market, or those representing their interests, since, without the corporate issuers and the ultimate investors, the market could not be expected to mature further. The market lacks sufficient mass to generate the liquidity, fine pricing and narrow spreads observable in, say, the US market; but it is in all other respects efficient. There is little evidence of unsatisfied demand to issue or to invest. This reflects the limited population of companies which could, given size, credit standing, costs, etc, realistically aspire to issue; the limited investor appetite for such paper; and the competing attractions of the US dollar market for both sides. A comparison of the characteristics of bank finance and the bond market suggests that the purported advantages of the latter in providing a ¡¥spare tyre¡¦ for times of crisis may be exaggerated. In particular, many of those who have argued, notably since the 1997 Asian financial crisis, for action to develop the corporate bond market, have seemingly failed to appreciate that only a minority of firms can realistically expect to access the market, and that the market itself, especially at sub-investment grade, can, if existing at all, be extremely capricious. Regardless of how the Hong Kong dollar market fares, Hong Kong institutions should continue to contribute value added to the economy through the arrangement, distribution, etc of bond issues more generally, and should be well placed for involvement in renminbi bond business, once that is permitted to develop further.