* Applicants favor using fixed income as collateral
* Equity volatility, property ban prompt choice
* Trend blamed for spike in five-year corporate bonds
By Nethelie Wong
HONG KONG, May 30 (IFR) - The shrinking Hong Kong dollar bond market is again drawing the attention of wealthy overseas investors, but not necessarily for the most obvious reason.
Shut out of the property market and increasingly disillusioned with equities, foreign applicants looking for a Hong Kong residents’ visa have been turning their attention to local debt.
Bankers in the special administrative region have noticed increased demand for local bonds to support visa applications. Overseas investors, including mainland Chinese, can apply for Hong Kong residency if they commit to maintaining investments of HK$10m (US$1.3m) in the special administrative region, to be held in Hong Kong dollar-denominated securities or in selected local funds.
“We have seen more investors, through our private banks, taking up Hong Kong dollar-denominated bonds and notes to fulfill the requirements of the scheme,” said a banker on the MTN/private placement desk of a European bank.
Hong Kong’s capital investment entrant scheme allows foreigners to take up residency without working in the city, and has proven especially popular among mainland Chinese investors. After seven years in Hong Kong, foreigners can apply for permanent residency and, if eligible, a Hong Kong passport.
The scheme is providing some renewed interest in local-currency bonds, a market that has been shrinking since the opening of the offshore renminbi market in 2010.
Total Hong Kong dollar bond issues over three years had fallen from HK$75bn in 2009 to HK$73bn in 2013, according to the Hong Kong Monetary Authority.
However, sales of Hong Kong dollar corporate bonds at five-year maturities or longer have spiked to HK$11bn in the first quarter of 2014 from HK$2bn in fourth quarter of 2013, according to the Hong Kong Monetary Authority.
“It is nice to see the recent interest in high-yielding long-tenor corporate new issues, which helps to boost the primary market, usually packed with CDs and small private placements,” said a trader with a foreign bank.
“Many banks have shrunk their Hong Kong dollar desks and shifted their resources to offshore renminbi because of the low margin of the Hong Kong dollar market and dominance of the three note-issuing banks in that market.”
Hong Kong introduced the capital investment entrant scheme in October 2003 in the wake of the SARS outbreak. The demand was so large that, in October 2010, the government raised the threshold to HK$10m, up 54% from HK$6.5m.
At the same time, real estate was excluded from the list of qualifying investments, part of the government’s measures to cool property prices.
At the end of September 2010, 93% of the HK$19bn of real-estate investments accumulated under the scheme was in residential properties.
Real estate made up 42.3% of the collateral applicants listed in the first nine months of 2010, with equities next at 40.6%.
The government has not released any breakdown since October 2010, but bankers have indicated that a growing number of applicants are choosing bonds over shares.
“As investments have to stay under the scheme for at least seven years, applicants are relatively conservative and more willing to put money in instruments with decent interest income and some principal protection, because of the poor performance in stocks lately,” said Henry Shin, chief distributions officer at Convoy Financial, a financial planning company that advises on the capital investment entrant scheme.
Since November 7 2010, the Hang Seng Index has gained only 4.7% on aggregate, while the Schroders Hong Kong dollar bond fund has gained 10.7% in the past five years.
Sources say higher-yielding corporate issues have become especially popular, suggesting that a rise in longer-tenor bonds may, in part, reflect increased demand from people seeking investment visas.
Fourteen companies and one bank issued Hong Kong dollar bonds with tenors of over five years and coupons above 4% in the first five months of this year, raising HK$4.9bn from 15 deals. That is almost two thirds of last year’s HK$7.6bn annual total, according to HKMA data.
Stocks are also acceptable, but bankers say that the weakness of the Hong Kong stock market in the past few years has made bonds the preferred investment form for those seeking investment visas.
“Applicants tend to stay away from equities lately as the Hong Kong stock market has remained in weakness in the past few years. They opt to invest in debt securities and collective investment schemes,” said Shin. (Reporting By Nethelie Wong; editing by Christopher Langner and Steve Garton)