Before looking at different aspects of expansion of the debt market, one question should be thought carefully, ¡¥Why do we need a debt market?¡¦ The following figures which are quoted from 1995 World Bank study can give a rough idea about the situation,

„X rapid economic growth ¡V forecast to be 7.7% per annum between 1994 and 2004

„X huge amount of investment required to sustain the rapid growth, estimated to be around US$8 trillion between 1994 and 2004

Bond issuers are still subject to certain restrictions in their bond issuing. Firstly, the size of Exchange Fund cannot be expanded indefinitely. Under the currency board arrangements, Exchange Fund papers can only be issued when there is an inflow of funds so that Hong Kong's foreign currency reserves will have to grow before new bonds can be issued. Since its size and supply will not go up dramatically, its market share will be relatively limited. Even with the emergence of huge fiscal deficit these years, the government is inclined to tap the fiscal reserve and to set goals in achieving budget balance. It is unlikely that the government will issue bonds to finance the fiscal deficit directly which deviates from strict fiscal discipline as required by a currency board system and exerts negative impacts on financial stability that outstrips the benefits of developing a bond market . Also, local statutory suppliers such as the Mass Transit Railways (MTRC), Kowloon-Canton Railways (KCRC), and Airport Authority (AA) have to weigh their operational needs when considering bond issuance. Thus bond supply can only grow steadily. Asset backed securities such as mortgage backed securities (MBS) issued by the Hong Kong Mortgage Corporation (HKMC), and other private corporations constitutes only a very small sum compared with the banking sector's huge mortgage loan portfolios so that room for expansion is huge. Promoting corporate bond issuance is most difficult with the credit rating issue. According to the Standard & Poor, only 17 local blue chip companies are rated with ratings B or higher. Strict financial disclosure requirements and high compliance costs, exceeding those of bank lending, discouraged local corporations from seek credit ratings and to finance through bond issuance.

Supply of bonds from government and corporations, had long been limited. Hong Kong Government's fiscal policy had been conservative and had accumulated huge surpluses prior to 1997. There was no need for the government to issue government debts securities for deficit financing. This

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