Bond oversupply looms large for deficits

Recently, many institutions related to the Hong Kong administration have been experiencing financial pressure.

They need to raise funds in the short term, such as by selling properties, mortgaging assets and issuing bonds.

They include MTR Corp and West Kowloon Cultural District, with the amounts involved amounting to hundreds of billions of dollars.

However, a significant reduction in negotiating room for US rate cuts this year will further impact a property market in the doldrums, leading to a decrease in revenue from property sales by the two agencies.

It will also increase interest costs when mortgaging properties or issuing bonds.

Furthermore, it could reduce demand in the bond market.

These factors may hinder the agencies' efforts to resolve their cash flow issues.

The administration too needs to issue bonds to address issues such as deficits.

The People's Bank of China issued central bank bills eight times in Hong Kong last year, raising 275 billion yuan (HK$292 billion), up from 190 billion in 2023.

Its issuances in Hong Kong this year, the market believes, will keep rising.

With so many parties planning bond issues, can the market absorb them?

Recent SAR infrastructure bonds were only 89 percent subscribed, making it the first time that an administration's retail bond was undersubscribed.

That, an official said, might have been influenced by the potential slowdown in the pace of US rate cuts.

On Friday, the latest US economic data showed a favorable jobs situation, which suggests the Federal Reserve is likely to pause rate cuts, at least in the first half.

Against this backdrop, unless the interest rate on retail bonds is raised, how can investors be motivated when the return on the administration's issues is lower than those from bank fixed deposits?

If the cost of issuing bonds rises, it will make the deficit even harder to address.

If the funding from bonds is insufficient, it may affect daily expenditure needs. After all, the administration has yet to find a suitable solution for its structural deficit.

There are challenges to both increasing revenue and cutting expenditures.

Currently, the hope is for a property market recovery to increase land-sale revenue. But, if rates remain high, the market's sluggishness is likely to continue.

Therefore, it seems the administration has no choice but to issue bonds.

However, as some sectors are troubled by liquidity issues, all parties are hoping to sell properties and land or issue bonds.

This will only trigger a vicious cycle, leading to an oversupply in the property market, further pressuring prices.

At the same time, bond supply will increase but not so the number of investors.

Consequently, bond yields are likely to rise, affecting the cost of issuances and potentially leading to undersubscriptions.

This means that whether it is the SAR administration or the two agencies, the difficulty of resolving fiscal issues in the next two to three years will be much greater.

Of these, the administration's issues are particularly concerning, as they will impact Hong Kong's overall credit rating and future development.

Andrew Wong is a veteran

independent commentator