MPF: Hong Kong's pension regulator mulls allowing members to invest in sovereign bonds

Asia's Tech News Daily

Mandatory Provident Fund

Hong Kong’s pension regulator is considering changing rules to allow members of the Mandatory Provident Fund scheme to invest in sovereign bonds, according to a senior executive.

Plans are afoot to include sovereign bonds issued by the Chinese government and those of other countries, but the rule changes will explicitly exclude debt issued by city-level municipal governments.

Currently, the MPF’s 4.5 million members cannot invest in sovereign bonds as the rules require the bonds to be rated. While these bonds are not usually rated, it is the countries that are rated at the sovereign level.

“We are now reviewing our investment rules and are considering making a change to allow MPF funds to invest in Chinese and other countries’ sovereign bonds,” said Joseph Lee, director of product regulation at the Mandatory Provident Fund Schemes Authority (MPFA).

Mandatory Provident Fund

China is issuing 5 billion yuan of sovereign bonds in Hong Kong on Wednesday. Photo: Sun Yeung

One of the possible solutions the MPFA was looking at was to use the sovereign credit rating instead of the bond ratings. If the proposed rule change is implemented after the review, sovereign bonds would qualify for investment by MPF funds as long as a country’s sovereign rating meets the MPFA’s investment grade requirement, Lee said.

The regulator’s proposed rule change was aimed at meeting demand of fund managers, who have been urging it to relax restrictions that would allow them to invest in Chinese bonds, commodities and other high-yield products to enhance returns for MPF members.

While the MPFA has carried out many reforms since the MPF’s introduction 20 years ago, their speed leaves a lot to be desired, critics said. One of the issues addressed by the regulator is the high management fees charged to members, but others such as low investment returns and insufficient protection for members have yet to be addressed.

“We want investors to have more investment choices, but we also do not want to expose them to high risks,” said Cheng Yan-chee, the MPFA’s acting managing director.

He said that the proposed rule change would only cover sovereign bonds but not those issued by city-level governments, as regional or municipal governments have a higher risk of defaulting.

China’s 10-year sovereign bond yields have climbed recently, hovering in the 3 per cent range, and are almost twice the 1.5 per cent yield of US Treasury. Bank deposits in Hong Kong, on the other hand, offer next to nothing.

If the rules are changed to allow fund managers to invest in sovereign bonds, it would be another breakthrough for the MPF. After years of lobbying by MPF fund managers, the MPFA last November relaxed rules, allowing them to invest in onshore shares of Chinese companies.

The proposed changes also come at a time when Beijing is introducing policies to boost Hong Kong’s bond market.

China’s Ministry of Finance on Wednesday will issue 5 billion yuan (US$780 million) of sovereign bonds in the city. It is the second of three tranches totalling 20 billion yuan to be issued in Hong Kong this year. The first batch of 8 billion yuan proved popular with investors.

The MPF funds will be able to invest in such bonds after the rule change takes effect.

The MPFA’s proposal to relax the rule is a move in the right direction, said Louis Tse Ming-kwong, managing director of Wealthy Securities.

“China’s sovereign bonds have low risks and can offer higher returns to MPF providers,” Tse said.

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