June 7, 2022
Hong Kong’s – government has pledged to develop the city into a full-fledged international finance center by diversifying into other business sectors such as insurance-linked securities, green bond issuance and offshore renminbi financing, Financial Secretary Paul Chan Mo-po said in his Sunday blog.
“The pilot scheme is to fortify Hong Kong as the international risk management center,” Chan wrote, adding that every qualified application can obtain up to HK$12 million ($1.53 million) financial assistance under the pilot scheme.
“We have established a designated regulatory regime to create a robust ILS business ecosystem that can enhance the underwriting capacity, strengthen financial resiliency and narrow the coverage gap.”
Excluding Japan, Hong Kong registers the third-highest bond issuance volume in Asia after the Chinese mainland and South Korea.
Paul Chan, Financial Secretary, HKSAR
A mainland reinsurance company recently issued insurance-linked securities (ILS) worth $150 million in Hong Kong to provide financial protection related to industry losses because of typhoons in Japan.
This is the second issuance of ILS in Hong Kong since the announcement of the two-year Pilot Insurance-linked Securities Grant Scheme by the government in the 2021-22 Budget.
ILS are financial instruments that are sold to investors and whose value is affected by an insured loss event. For investors, ILS are investment assets generally thought to have little to no correlation with the wider financial markets. Insurance and reinsurance companies issue ILS to access the global capital market for liquidity and transfer risks to the global financial market.
The second priority is to develop the local bond market. The development of the bond market helps in cultivating a yield curve which is an importance reference for companies to gauge the long-term cost of capital. This can help investors to manage investment risks and channel long-term capital into the development of the real economy.
Saying that the government is striving to bolster the transparency of bond transactions and raise the transaction efficiency to invigorate the city’s bond market, he wrote: “We are pushing for bond issuances in different categories and multicurrency denominations, and leverage on tax measures to lure more financial institutions in Asia to use Hong Kong as their bond issuance platforms.”
In October 2021, the municipal government of Shenzhen issued the first offshore municipal bond worth 5 billion yuan ($752 million). Last year, the Hong Kong Special Administrative Region government also issued green bonds denominated in euro and renminbi for the first time.
“Excluding Japan, Hong Kong registers the third-highest bond issuance volume in Asia after the Chinese mainland and South Korea,” Chan said.
Among various segments of the bond market, Hong Kong hopes to become the Asian green finance hub, connecting overseas capital to support the nation’s objective of transiting into a green economy.
“Since 2019, the SAR government has issued some $10 billion in green bonds,” Chan noted.
Last year, the government launched a three-year Green and Sustainable Finance Grant Scheme as announced in the 2021-22 Budget in a bid to provide subsidies for eligible bond issuers and loan borrowers to cover their expenses on bond issuances and external review services.
We will refine the relevant market infrastructure to facilitate renminbi to have more circulation flows in the offshore market to hasten the renminbi internationalization process.
Paul Chan
“We already approved some 100 applications that involve a total subsidy amount of HK$100 million. Earlier, we further slashed the minimum loan amount threshold for applying for a financial subsidy to conduct external review services, from HK$200 million to HK$100 million, to benefit more corporations,” Chan said.
Promoting offshore renminbi financing business is the third major area.
“Looking ahead, we will adopt a multipronged approach to cement the development of the offshore renminbi financing business ecosystem in Hong Kong, providing more renminbi-denominated investment tools and channels, as well as providing more treasury services to manage foreign exchange risk and interest rate risk,” Chan said.
“We will refine the relevant market infrastructure to facilitate renminbi to have more circulation flows in the offshore market to hasten the renminbi internationalization process.”
Hong Kong is the world’s largest offshore renminbi financing hub, handling 75 percent of the world’s offshore renminbi settlement business, according to the finance chief.
Last year, renminbi trade settlement handled by banks in Hong Kong totaled over 7 trillion yuan. The offshore renminbi liquidity in Hong Kong amounted to over 800 billion yuan, accounting for about 60 percent of the world’s offshore renminbi deposits.
Since 2009, the Ministry of Finance had issued renminbi-denominated bonds in Hong Kong for the past 13 years, with a total issuance amount of 238 billion yuan. The People’s Bank of China also issued renminbi-denominated bills in Hong Kong since 2018, with an issuance amount of 500 billion yuan to date.