How does the local bond market affect me?
Although you may not hold HK dollar bonds in your personal investment portfolio, you can be affected by the local bond market in one way or another. For instance, you can have indirect exposures to HK dollar bonds via your HK dollar insurance policies or participating in pension schemes such as Mandatory Provident Fund (MPF) schemes or the Occupational Retirement Saving Ordinance (ORSO) schemes. Insurance companies usually use the premiums they receive from the HK dollar insurance policy holders to buy HK dollar bonds so as to ensure sufficient assets are available to meet the insurance claims as they come due. Pension funds can invest in HK dollar bonds if they are mixed-asset funds such as Stable Funds, Balanced Funds, Lifecycle Funds, etc. Thus, the HK dollar bond market can affect the return of your savings through your insurance policies or pension plans. An understanding of the local bond market will help you make better choices with your savings and investments.
(Source of information: Hong Kong Monetary Authority)
What is lifecycle investing and how bonds are usually used in portfolio building?
An individual's investment strategy usually changes across different stages of life. For instance, young people's working life and hence income stream are expected to be long. This usually allows for greater tolerance for risks, and hence the tendency to invest in higher-risk assets. As for the more mature generation, their expected working life is shorter and the risk-taking ability would usually decline. In light of this, a typical strategy for personal investment would be a shift from higher-risk assets in the early parts of one's life to lower-risk assets in the later parts. Such a strategy which depends on an investor's stages of life and ability to take risk is often referred to as "lifecycle investing".
As an asset class, bonds are often considered as relatively low-risk because it provides regular income and is typically less volatile than assets with higher capital appreciation prospects, such as equities. Such characteristics make them a relatively low-risk asset class, which tends to be more appropriate for those with less tolerance for risks.
(Source of information: Hong Kong Monetary Authority)
Is bond investment covered by the Investor Compensation Fund?
Presently, investors can make a claim against the ICF, if the bond is traded on the Stock Exchange of Hong Kong or Hong Kong Futures Exchange, and the investors suffer pecuniary losses as a result of default of a licensed intermediary or authorised financial institution in relation to such bonds, eg, misappropriation of that bond held in the custody of a licensed broker firm or bank that provides securities and futures contracts trading services.
What are the characteristics of renminbi bonds?
As their names imply, renminbi bonds are settled in renminbi. This means that their denomination (principal), coupon (interest) and price are denominated in renminbi. Read the offering document of a renminbi bond carefully to understand the background and credit rating of the bond issuer, the terms and conditions of the bond such as its denomination, duration, coupon rate and frequency of interest payment, as well as the risk factors of the bond, etc.
Renminbi bonds may be issued by different institutions such as the Central Government, state policy banks or commercial banks. What are the differences in the objectives of these institutions?
Generally, the primary objective of commercial banks is to maximise their profits, whereas the Central Government and policy banks mainly seek to facilitate government policies. Although policy banks are in the process of commercialisation, profit maximisation may still not be their primary objective at this stage. You should take this into account before making investment decisions.
Is renminbi freely convertible in Hong Kong?
There is no limit on the amount of renminbi that can be purchased or sold by individuals and companies with banks in Hong Kong.
Where can I subscribe for renminbi bonds? Do I need to complete any application forms for my subscription?
Generally speaking, retail renminbi bonds are offered to the public through distributing banks. The bond issuer will not issue any application form. You will be required to complete and sign on an order form prepared by a distributing bank with which you open a renminbi account for settling your investment in a renminbi bond. You will also need to make a number of acknowledgements and confirmations, for instance, to confirm that you have read and understood the description of the terms of a bond set out in the offering document and agree to be bound by such terms. Some distributing banks may also provide other channels for applying for the bonds, such as on-line and telephone applications.
How do I trade renminbi bonds in the secondary market?
Renminbi bonds can be either listed or unlisted. This will be disclosed in the relevant offering document. Listed renminbi bonds are traded on the Stock Exchange of Hong Kong (SEHK) whereas unlisted renminbi bonds are traded on secondary market. Ask your brokerage or bank if it provides trading services for listed and/or unlisted bonds.
Before you decide to trade a listed renminbi bond, you should check with your intermediary whether it is suitable for you as the listed renminbi bond concerned may not be intended for retail investors.
With unlisted renminbi bonds, distributing banks may provide a secondary market, but they may not be able to provide quotes or may even decide to terminate such a service in the future. Thus, you need to consider your own liquidity needs before investing in them.
As always, you should read and understand the offering documents, and know about the fees related to trading and settlement before making your decision.
What are the risks of investing in renminbi bonds?
Similar to investing in other types of bonds, you are subject to the credit risk of the bond issuer who may fail to make timely principal or interest payments. As bond price changes with the credit risk, you may refer to the credit ratings assigned by international rating agencies on the bond issuer from time to time to assess the credit risk. Although sovereign bonds may be guaranteed by the Central Government, you should note that unless specified otherwise, other renminbi bonds will not be guaranteed by the Central Government.
As renminbi bonds are settled in renminbi, exchange rate risk is inevitable. Even if the RMB/HKD exchange rate remains steady, you may not get back the same amount of Hong Kong Dollars upon maturity of the bond due to the spread between buying and selling renminbi. Renminbi bonds are not an investment instrument for you to speculate on movements of the RMB/HKD exchange rate.
Since an interest rate hike may cause bond prices to decline, you are also prone to interest rate risk as well.
In addition, an active secondary market may not be available even if a renminbi bond is listed. Therefore, you need to face a certain degree of liquidity risk.
Also, renminbi is subject to foreign exchange control. Although the central government has relaxed the restrictions by allowing banks in Hong Kong to conduct some forms of renminbi business, renminbi is still not freely convertible in Hong Kong. Should the central government tighten the control, the liquidity of renminbi or even renminbi bonds in Hong Kong will be affected and you may be exposed to higher liquidity risks. Be prepared that you may need to hold a renminbi bond until maturity.
All investments carry risks and bonds are not an exception. In order to have a full understanding of the risks involved in holding a renminbi bond, read the "Risk Factors" section of a particular offering document carefully.