Blog
Developing green and sustainable finance
Climate change is a common issue of worldwide concern. On the one hand, it brings about risks and challenges; on the other hand, it creates opportunities for the financial industry to develop green and sustainable finance.
In my 2018-19 Budget, I announced the launch of the Government Green Bond Programme with a borrowing ceiling of HK$100 billion. The inaugural green bond, with a size of US$1 billion, was issued in May 2019 and the market response was enthusiastic. In the 2020-21 Budget, I announced the plan to issue a total of about HK$66 billion green bonds in the following five years.
Just last Tuesday (26 January), we completed the second offering of US$2.5 billion of government green bonds. The market response was again enthusiastic, with significant over-subscription and narrow yield spreads against the relevant US Treasuries. This green bond offering was significant in several aspects. Apart from being the largest ever USD-denominated government green bond deal globally, the 2051 green bond (i.e. the 30-year tranche) is also the longest tenor issued by the HKSAR Government and the longest-tenor USD-denominated green bond from an Asian government to date. Longer-tenor bonds provide institutional investors with more flexibility in their capital allocation, and help establish the bond yield curve in the long run, providing a benchmark reference for the market. The 30-year tranche attracted orders more than 7 times its issuance size, higher than the 5 times for the 5-year and the 10-year tranches respectively, with half of the allocation going to European and US investors. This is a testament of investor confidence in Hong Kong’s long-term credit strengths and economic fundamentals, as well as their positive outlook on Hong Kong’s long-term development.
To enhance the development of Hong Kong’s green and sustainable finance market and infrastructure, and enhance Hong Kong’s role as an international green finance hub, we have set up the world’s first government Global Medium Term Note Programme dedicated to green bond issuances. This also demonstrates the government’s clear commitment to regularise green bond issuance, so as to boost investors’ confidence towards the continued development of Hong Kong’s green bond market.
Green bond proceeds raised under the Programme will be credited to the Capital Works Reserve Fund to finance public works projects that provide environmental benefits and support the sustainable development of Hong Kong, which will complement Hong Kong’s efforts in striving towards the goal of carbon neutrality by 2050 under the Paris Agreement.
By issuing green bonds to support designated public works projects with economic benefits, we can promote the development of our local bond market and avoid the progress of such works projects being hindered by the government’s cash flow limitations in particular years. The early completion of works projects could also benefit our community, maintain a stable expenditure on public works projects, and support the employment in related industries. The financial strength and track record of the government provide the favorable conditions for us to issue bonds and raise funds for designated green projects.
There are also suggestions that the government may consider issuing bonds to raise funds to meet the recurrent expenditure. This approach will likely lead to greater negative impact and should not be taken on board lightly. If market participants misunderstand that the SAR Government intends to issue bonds to meet fiscal deficit and abandon its established fiscal discipline, their confidence in Hong Kong’s medium to long-term fiscal position, as well as that in Hong Kong dollar and the Linked Exchange Rate, will be shaken. This will in turn affect Hong Kong’s financial stability and security.
Under the Linked Exchange Rate System, funds can flow in and out freely with the exchange rate staying within the range of 7.75 to 7.85 Hong Kong dollars to one US dollar. According to the Currency Board system, the monetary base must be supported by an equivalent amount of US dollars, such that when Hong Kong dollars are converted into US dollars at any time, the exchange rate can still be maintained within this convertibility zone. On the one hand, the Linked Exchange Rate System has successfully maintained the stability of Hong Kong’s exchange rate, providing a favorable business and social environment; on the other hand, it means that we cannot actively adjust exchange rates or interest rates to cope with the ups and downs of the economic cycle. At the same time, the stability of the Hong Kong dollar is underpinned by the Foreign Currency Reserve and the fiscal strength of the HKSAR Government. If we raised substantial amounts of debt to finance government expenditures, like what some developed countries have done, the market is likely to speculate that the government might need to monetise debts in future, which will put greater pressure on the exchange rate of the Hong Kong dollar or even attract speculative attacks. It is therefore our belief that the government must maintain its transparent and credible fiscal discipline, which is essential to the financial stability and social stability of our city.
31 January 2021
