Historical Market Constraints .
Bond markets have assumed important roles in the capital markets of most developed countries. Issuing bonds allows large corporations to raise long-term funds at reasonable costs. Bonds also offer investors an alternative to bank deposits with prospects of capital appreciation at lower risks than equities. Debt market in Hong Kong, both the primary and the secondary market had been underdeveloped for various reasons, which could be categorized into supply and demand constraints. .
Supply constraints.
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, in addition to the lack of government bonds, creates also a lack of risk-free benchmark interest rate for fixing corporate bond yields. Stamp duty and unfavourable tax treatment of corporate bond discourages debtor companies to finance through bond issuance. Together with the dominance banking sector, bank lending was much preferred by these companies. .
Demand constraints.
On the demand side, the majority of retail investor is risk and yield craving. This drove investments and development in equity markets instead of debts. The lack of mandatory provident scheme prior to 2000 together with the absence of bond rating had kept demand for bond investment down.
Earlier attempts and current constraints.
In view of the underdevelopment of the bond market, the government has launched a variety of measures to tackle the problem during the 1990's. Like many other economies in East Asia, Hong Kong debt market gained a major boost with the introduction of government debt paper, the Exchange Fund Bills and Notes (EFBN), in 1990. From 1990 to 1995, gross issues of debt papers tripled to HK$247 billion, of which nearly almost half are private sector issues.