Hong Kong’s Inflation-Linked Bond Sale Boosted by Stock Slump

Hong Kong’s first inflation-linked bond sale may be boosted by faltering stock and property markets as residents of the city run out of options to protect their savings against surging consumer prices.

The government is selling as much as HK$10 billion ($1.3 billion) of the three-year iBonds to its citizens from this week until July 19. The first coupon due Jan. 30, 2012, may be 5 percent, compared with almost zero for time deposits at local banks, Credit Agricole CIB estimated on July 5.

“I’m definitely interested because we can hardly earn anything from our deposits,” said Tang Kit Ying, 62, a housewife in Hong Kong. “Equities may give better returns but are riskier too. The iBonds seem safer with the government’s backing.”

Hong Kong’s benchmark Hang Seng Index (HSI) lost 4.8 percent and the number of housing transactions fell this year as inflation breached 5 percent in May for the first time since July 2008. The risk on the new securities is “very, very low” as the government can afford to repay the debt, K.C. Chan, the city’s secretary for financial services and treasury, said in a six- minute video lecture.

Interest will be paid once every six months at the higher of either a floating rate equivalent to the average change in the consumer price index for the previous six months or a 1 percent fixed rate. HSBC Holdings Plc (HSBA), the city’s largest lender, pays interest of 0.2 percent on deposits of HK$1,000,000 or more placed with it for 12 months, according to the bank’s website. Hong Kong’s inflation-linked bonds will be listed on the city’s stock exchange from July 29, the government said.

Elderly, Retirees

The elderly, retirees and the middle class comprise the majority of iBond subscribers, with an average subscription amount of HK$70,000 to HK$100,000, according to Wendy Tsang, Hong Kong-based deputy general manager at Bank of China (Hong Kong) Ltd., which is lead managing the sale with HSBC.

“There’s a chance that the bonds could be oversubscribed,” she wrote yesterday in an e-mailed reply to questions.

Hong Kong is selling inflation-linked bonds for the first time as it grapples with an inflation rate that reached 5.2 percent in May, the most in 34 months, pushed up by escalating rents and food prices. Consumer prices are expected to rise 5 percent in 2011 and 4.5 percent in 2012, based on the median estimates in Bloomberg surveys of economists.

Protected Investment

“I would highly recommend buying these bonds to individuals living in Hong Kong, with the objective to hold them to maturity,” said Marion Le Morhedec, senior head of inflation funds in Paris at AXA Investment Managers, which oversaw assets of 516 billion euros ($727 billion) at the end of last year. “The performance won’t beat inflation, but at least these investments will be protected.”

The new debt will also encourage depositors to keep their savings in Hong Kong dollars as a strengthening yuan spurs demand for assets denominated in China’s currency.

The city’s Hong Kong dollar deposits rose 1.6 percent to HK$3.68 trillion in the first five months of this year, while its yuan deposits jumped 74 percent to 549 billion yuan, official figures show. Sales of yuan-denominated debt in Hong Kong, securities known as dim sum bonds, total 85.2 billion yuan so far this year compared with 35.7 billion yuan for all of 2010, according to data compiled by Bloomberg.

Yuan Deposits

The yuan has strengthened 1.9 percent to 6.4676 per dollar this year and, based on the median estimate of 27 analysts surveyed by Bloomberg, will appreciate 2.7 percent to 6.30 by the end of December. Hong Kong’s dollar is pegged to the greenback, which has weakened against 15 of the world’s 16 most- used currencies so far in 2011 following declines versus 12 or more in each of the two previous years.

Citic Bank International Ltd., a unit of China’s seventh- largest bank, is not charging iBond buyers any custodian and interest-collection fees, according to Felix Lau, its general manager for wealth management and consumer finance.

“We wish to attract new customers with the iBonds so we are waiving the fees,” he said. “There are more clients subscribing for iBonds than bought yuan-denominated bonds” when China’s government offered 3 billion yuan of notes targeted at individuals in December 2010.

To contact the reporters on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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