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Let's talk about Silver Bond

It was the Mid-Autumn Festival yesterday and the beginning of a long weekend. The streets were more alive and filled with a festive atmosphere. As we celebrate the festival and enjoy the holiday, I hope we could all maintain vigilance and remember to protect ourselves and our families against the epidemic.

Last Friday, we announced the subscription and allocation results of the latest batch (the seventh batch) of Silver Bond. This time, we received a record-high number of valid applications close to 290 000, representing a 13% increase when compared with that of last year, while the total subscription amount reached nearly HK$62.5 billion. Among the applicants, about 65% were aged 60 to 69, and 35% over 70. The most senior applicant was 104 years old. In view of the overwhelming response, we decided to raise the final issuance amount to HK$45 billion, which was 50% higher than the issuance size last year, in order to meet the demand of our senior citizens as far as possible. We always bear in mind that our residents should share the fruits of the development of Hong Kong's financial markets. Eligible applicants who applied for 20 or fewer units were allocated the full amount for which they applied, amounting to around 68% of all eligible applicants.

Since the first issuance of Silver Bond in 2016, the issuance size has gradually increased from HK$3 billion to HK$45 billion, while the number of subscribers has climbed from some 70 000 to nearly 290 000. It reflects that our senior citizens have gradually accepted Silver Bond to be a safe and reliable investment option with steady returns. This sits well with our direction of promoting financial inclusion. The interest rate floor of Silver Bond has been raised from 2% at the inaugural issuance to 4%. In determining the interest rate of Silver Bond, we would follow closely the rising trends of interest rates and inflation so that the elderly can truly benefit.

It is worth noting that even if the interest rate floor of Silver Bond rises, the stability and sustainability of the Bond Fund would not be affected. Since the Bond Fund does not form part of the fiscal reserves and is managed separately from other Government accounts, the proceeds received from the issuances and the interest costs are independent from the Government's finances. This mechanism has been in place for years, and is applicable to iBond as well. As for the proceeds raised from green bond issuances, we have clearly confined the use of them to funding green infrastructure projects. Hong Kong is a small, fully open economy where funds can flow in and out freely. It is of paramount importance that the exchange rate be kept stable. We must uphold fiscal discipline: bond issuances would not fund the Government's recurrent expenses.

Maintaining strict fiscal discipline and avoiding a long-term and structural deficit are fundamental to maintaining the security and stability of public finance, as well as ensuring that the Government has the capability to cope with potential economic and financial volatility. Nonetheless, looking around the world, governments of many major foreign economies have already accumulated huge amounts of debt, and continued rise in global interest rates will add to their burden in debt repayment. Moreover, in light of elevated energy prices and rising inflation, some governments have chosen to provide subsidies to citizens, or control prices through other means, so as to ease the hardship faced by the local community. Yet, at the same time, a weak economy will lead to lower tax revenues, and thus the public finances of these economies will be under pressure from both ends. In fact, the risks associated with the external economic environment and the financial markets have risen further. With inflation in the Eurozone reaching a record high of 9.1%, the European Central Bank has recently raised interest rates by 0.75%, the highest single rate hike ever. In the United States, having regard to comments made by Federal Reserve officials, the market is expecting another interest rate hike of 0.75% to be announced at the Federal Open Market Committee (FOMC) meeting in a fortnight's time, thereby bringing the total increase in the federal funds rate to 3% this year.

The impact of rising interest rates elsewhere on Hong Kong's has been emerging. For instance, the one-month Hong Kong Interbank Offered Rate (HIBOR), which is commonly linked to mortgage rates, has risen from around 0.13% at the beginning of the year to over 2% now. Faced with increasing costs of funding, many banks have raised the interest rate cap on newly approved HIBOR-based mortgage loans, and this has unavoidably increased the mortgage servicing burden of mortgagors. Following the cumulative increase in interest rates in the United States, banks in Hong Kong may also have to adjust their deposit and lending rates, including the prime rate, which is the basis for interest rates for bank loans to many small to medium enterprises (SMEs). Rise in interest rates will add to the operational pressure shouldered by SMEs.

Dampened by a range of factors such as the fluctuating local epidemic situation, tighter financial conditions and a worsening external environment, the property market has gone though some adjustments lately. Up to July this year, residential property prices have come down by over 5% from the high in September 2021. Transactions during the first eight months this year fell by nearly 40% compared with the same period last year. Together with the relatively weak Hong Kong stock market performance, these will adversely affect the willingness to spend and the economic atmosphere. Even though our unemployment rate has gradually been coming down, many businesses and enterprises are still facing considerable pressure on their operations, and dare not hold high hopes for their business during the Mid-Autumn Festival. Under the current circumstances, we hope that consumption vouchers can boost the economy. The next round of consumption vouchers will be disbursed on 1 October, injecting more than $15 billion of spending power into the market. We are hopeful that this will support the retail and catering sectors.

In the past few years, Hong Kong's economy has been hit by the epidemic and weathered ups and downs. We all understand that effective control of the epidemic is most fundamental to stabilising the economy. The current anti-epidemic approach is based on science and evidence, and comes with precision. It aims to achieve the greatest efficacy at minimum social and economic costs. It is true that striking a balance between keeping the epidemic under control on the one hand, and facilitating travel and maintaining the economy on the other, is extremely challenging. But the current-term Government has been steadily moving towards this direction. Only by working together and further enhancing vaccination coverage would we have the greatest flexibility to restore exchanges with other places, stabilise the economy, and regain the momentum of economic development.

September 11, 2022