In 1993 Hong Kong became the first Asian market to offer a securitisation transaction. It was immediately recognised as the Asian financial centre for securitisation with the necessary professional infrastructure: lawyers, tax advisers, auditors and trustees.

However, in recent years, Hong Kong's securitisation market has virtually fallen into extinction. There were three transactions in 2004, two last year and none so far this year. However, markets such as Japan, Korea, Taiwan and Singapore continue to have an increasing volume of new securitisation issuance across various asset types.

What has been causing Hong Kong's position to be eroded by these other countries? There are several explanations, but two generally accepted reasons.

First, Hong Kong's banking industry is awash with excess liquidity. In mid-1997, Hong Kong's loan-to-deposit ratio was 157 per cent. As of March, banks in Hong Kong can only lend out 55 per cent of their deposits. This 65 per cent reduction in the loan-to-deposit ratio largely explains the fierce competition for loans by banks in Hong Kong and the lack of interest in securitising its financial assets (especially mortgages). In comparison, the securitisation markets in Japan, Taiwan and Singapore have further developed due in part to their significantly higher loan-to-deposit ratios (see table).

Second, Hong Kong's debt capital markets continue to be used as an arbitrage market, with many foreign entities issuing Hong Kong dollar bonds and then swapping the proceeds into American dollars or another currency. In other words, the bond issuance is secondary to the arbitrage on the interest rate/currency swaps, which ultimately offers the issuer a lower cost of funds in the foreign currency.

For Hong Kong to become a true debt capital markets centre and help mainland Chinese companies issue debt in the future, similar to its successful role in facilitating the vast number of Chinese initial public offerings, the city needs to enhance its debt market structure by developing a commercially viable risk-free curve. Currently, more than 80 per cent of all government bonds are owned by banks with limited secondary market trading.

The best example of securitisation not being used in Hong Kong is in the growing reit (real estate investment trust) market. Thus far, the financing for every listed reit in Hong Kong has utilised bank loans rather than CMBS (commercial mortgage-backed security). However in Singapore, the majority of the reits have been leveraged with a corresponding CMBS. The reason for the lack of securitisations accompanying the Hong Kong reits is apparent - bank financing is cheaper given the massive amount of excess banking liquidity.

As a Hong Kong market practitioner, I hope Hong Kong enhances its local debt capital markets structure and improves the attractiveness for entities to securitise. Otherwise, I am concerned that we may be marginalised by other financial market centres in the region as a financial intermediary for cross border and local currency Asian debt issues and securitisations.

Leland Sun Li-hsun is the chief executive of Pan Asian Mortgage

LOAN-TO-DEPOSIT RATIO

(March 2006)

Hong Kong - 55 per cent

Japan - 76 per cent

Taiwan - 78 per cent

Singapore - 74 per cent

Source: Bank of Japan, People's Bank of China, Monetary Authority of Singapore