HK Government Bond - Not that Safe

It appears that the HK Government will press ahead with the issuance  of bonds. The Government has stepped on the wrong paths, which are (a) a government should not be a leveraged hedge fund and  (b) government resources can be better spent on the development of the major currencies bond markets in HK. ( This is particularly  important given the competition from Shanghai ).

 To fulfil my civic duty, I now urge the HK Government to give adequate disclosures  to the general public in the bond offering documents. The following  three risk factors should be highlighted in the offering documents:

(1) The secondary market liquidity of the HK Government Bond may be limited. Trading through the HK Stock Exchange may be inactive ( as  evidenced by the listed EFNs and other HK$ bond issues ). Trading over the counter with the custodian bank may also be disadvantaged in terms of pricing as there would be just one bid.

(2) Average inflation rate, as measured by the increase in Composite Consumer Price Index for the last 15 years ( 1984 to 2008 ) is 4.1%.The yield on the HK Government Bond may not be able to beat inflation  rate and the purchasing power of the holder of the bond may be impaired.

 (3) The average 1-month deposit rate on deposits less than HK$100,000 from 1984 to 2008 is 3.6%. The return from holding the HK Government Bond may be lower than continuing rollover of 1-month deposits.

The risk factors (2) and (3) are particularly important after the US adopted the quantitative easing policy.

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