Bonds to finance projects in Northern Metropolis

Ayra Wang

Bonds will be issued to finance infrastructure projects under the Northern Metropolis initiative, Financial Secretary Paul Chan Mo-po says, stressing the move will ensure development progress is not hindered by fiscal constraints.

Chan said on his blog yesterday that accelerating the development of Northern Metropolis is critical for Hong Kong to capitalize on technological innovation opportunities.

He argued the city has "ample capacity" to moderately increase debt issuance for strategic infrastructure, citing Hong Kong's low government debt-to-GDP ratio of 9.3 percent, compared to over 100 percent in some advanced economies.

"The bonds will strictly fund future investments and not daily expenditures," Chan wrote.

He said bond issuance needs would decrease as projects are completed while economic activity and tax revenues rising from the issuing of bonds would offset costs.

Long-term bonds would allow the cash flow period to match the needs of multiyear infrastructure projects, Chan added.

He also referred to overseas reports affirming that Hong Kong's debt levels remain low despite planned borrowing and a local university's report endorsing debt financing for public-benefit projects as "prudent."

Chan highlighted strong demand for previous bond offerings, such as green and infrastructure bonds this fiscal year that were oversubscribed by three to seven times by institutional investors.

"This reflects the huge market demand for high-quality assets that can provide fixed income, as well as confidence in Hong Kong's long-term development," Chan said.

Terence Chong Tai-leung, executive director of Chinese University's Lau Chor Tak Institute of Global Economics and Finance, called for prioritizing funding needs for urgent projects in the development area, such as rail links to Shenzhen Bay and the Hong Kong-Shenzhen Innovation and Technology Park.

He suggested creating special purpose vehicles - SPVs - to manage Northern Metropolis construction and debt issuance but warned of potential subsidies from the government if the SPVs underperform.

An SPV is a distinct company with its own assets and liabilities as well as its own legal status. Usually, it is created for a specific objective, often to isolate financial risk.

Billy Mak Sui-choi, associate professor at Baptist University's department of accountancy, economics and finance, said Hong Kong's low debt issuance ratio leaves room for expanded bond sales.

He advised the government to issue bonds in phases during a potential interest rate easing cycle while adjusting the maturity mix of its debt offerings to include more medium-term and long-term bonds.

ayra.wang@singtaonewscorp.com