* 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
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
"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
Real estate made up 42.3% of the collateral applicants
listed in the first nine months of 2010, with equities next at
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
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
"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