Facilitating MPF investments into Bonds issued by the Central People's Government and Mainland Policy Banks

Following the earlier announcement made by the Chief Executive in her 2021 Policy Address about Mandatory Provident Fund (MPF) investments into bonds issued by the Central People’s Government (CPG) and Mainland policy banks, Financial Services and the Treasury Bureau and Mandatory Provident Fund Schemes Authority have completed the review on this matter. The implementation plan and timetable are set out as follows.

The MPF System, which came into operation in 2000, aims to assist Hong Kong’s working population in making savings for retirement. With assets under management currently amounting to about HK$1.2 trillion, the MPF provides mandatory retirement protection for the more than 4 million working population under the multi-pillar retirement protection system in Hong Kong. The investment returns of the system will directly affect the assets available for people’s retirement. Therefore, it is necessary for us to review and increase from time to time the products for MPF investments. As bonds issued by the CPG and Mainland policy banks are interest-yielding, stable and low-risk, the facilitation of MPF investments into these bonds will make available more diversified and secure investment options and returns to the MPF system.

Continuous progress has been achieved in the opening up of Mainland bond market over recent years, and its market size currently ranks 2nd globally and 1st in Asia. A number of international benchmark indexes have recently included Mainland onshore bonds, and the latest average daily turnover of Northbound Trading of Bond Connect has reached RMB 29.3 billion (involving over 3,200 institutional investors) while the amount of foreign holdings of Mainland bonds has exceeded RMB 3.85 trillion. After we relaxed the restrictions on MPF investment in shares listed on the stock exchanges in Shanghai and Shenzhen last year, the amount of MPF investments in Mainland A-shares has soared to over RMB 20 billion, representing a more than twofold increase in a short span of one year. For the initiative this time to facilitate MPF investments into bonds issued by the CPG and Mainland policy banks, we are also confident that it will be well-received by the market.

To implement this initiative, we will amend the current legislation governing MPF investments to include the CPG and three policy banks [1] in the scope of “exempt authority”. At present, “exempt authority” includes the HKSAR Government, as well as any governments, the central or reserve bank of a country or territory, or any multilateral international agencies with the highest credit rating. Bonds not issued by the “exempt authority” must have a certain level of credit rating at the individual bond level to become the permitted investment subjects of MPF. Since the individual bonds issued by the CPG and policy banks may not all receive a credit rating, the above prevailing requirement has limited MPF investments in such bonds. As at 30 September 2021, the relevant investments only accounted for 0.27% (RMB 2.6 billion) of MPF’s total asset value, far less than its investment in bonds issued by commercial institutions in the Mainland (RMB 23 billion or 2.41% of MPF’s total asset value).

As the HKSAR is an inalienable part of our country, the CPG should be exempted in the same way as the HKSAR Government from the investment restrictions in respect of credit ratings as stipulated in the relevant legislation governing MPF investments. Given that the three policy banks are established and provided with credit support by the CPG, and that they all serve the objective of implementing the economic and social policies of the CPG, it is also justified for granting them such exemption.

Upon inclusion of the CPG and Mainland policy banks in the scope of “exempt authority”, each MPF fund may invest up to 30% of its funds in their bonds of the same issue. It may also choose to invest all of its funds in such bonds of at least six different issues.

This policy initiative involves amendments to subsidiary legislation. If it is supported by the new Legislative Council, the amended legislation will come into force upon completion of the amendment exercise by the middle of next year the earliest. We will relax the relevant investment restrictions in a progressive manner, with a focus on bonds issued by the CPG and three policy banks at the current stage. Depending on the implementation of the initiative and market feedback, we will keep an open mind on the future inclusion of bonds issued by other Mainland Government institutions in the scope of exemption.

[1] - The China Development Bank, the Export-Import Bank of China and the Agricultural Development Bank of China

22 December 2021