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Hong Kong Leads in Digital Assets Liquidity

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Despite some international doomsayers, Hong Kong is not down and out. This is the Year of the Dragon after all – signifying a renewed sense of purpose, endeavour and achievement.

This is apparent in capital markets. The Hong Kong Government's HK$6 billion digital green bond issuance on blockchain in February did not go unnoticed by global investors, who flocked to invest in it.

It was the largest digital bond issuance to-date as well as the first multi-currency digital bond offering in the world (in HK dollars, renminbi, US dollars and euros).

Significantly, the renminbi tranche of the bond issuance tapped into Hong Kong’s status as the world’s largest offshore renminbi hub, which the Government continues to develop. According to the latest budget, Hong Kong wants “to promote the internationalisation of the RMB in a steady and prudent manner.”

Hong Kong, as ever, is the linchpin between mainland China and global financial markets – particular for “dim sum” bonds that enable Hong Kong and global investors to finance companies operating in mainland China, or Chinese companies wanting to expand overseas using renminbi. Last year alone, dim sum bonds issued in Hong Kong grew by 65% to 550 billion yuan1.

The success of this digital bond issuance is also testament to the Government’s vision for transforming Hong Kong into a global digital assets hub, in line with the Hong Kong Monetary Authority’s (HKMA) “Fintech 2025” development strategy.

It was this vision that enabled HSBC to deploy its digital assets platform, HSBC Orion, for use by the HKMA’s Central Moneymarkets Unit (CMU) in this groundbreaking digital green bond issuance. The CMU is Hong Kong’s central securities depository, which enables issuance of new securities in a book-entry system, where the bond is recorded, as well as settlement – when bonds change hands between issuer and investor.

Because of the way HSBC Orion has been integrated into Hong Kong’s market infrastructure for bond issuance and post-trade clearing, it opened up Hong Kong’s HK$6 billion digital bond issuance to global investors who bought the bonds via the CMU’s international links to other central securities depositories, namely Euroclear and Clearstream.

HSBC Orion also provides much faster settlement time: for the first time in Hong Kong’s history, the green bonds are digitally native, meaning they were directly issued via the CMU on HSBC’s Orion private blockchain. There is no paper or replication of the bonds. What used to take five days to settle a bond issuance now takes one day, reducing costs and risk of settlement failures. It has the potential, therefore, to change the market structure.

This is a watershed moment because now a global investor can access a digital bond in much the same way as a conventional bond, which will drive liquidity in the digital bond market, where Hong Kong currently has taken a lead. Already, we have seen secondary trading of these digital green bonds, as well as using them as collateral against which they can be used for short-term financing purposes – otherwise known as a “digital bond repo”.

The Hong Kong government’s recent HK$6 billion digital green bonds issuance not only strengthens the city’s position as a global financial hub, but also signposts the future of capital markets. In due course, we will see digital bond issuance not just from government entities and banks, but corporates.

For the first time, there is now a real liquid market for digitally native blockchain bonds – and Hong Kong stands to benefit, connecting East with West. Enter the Year of the Dragon.

John O’Neill is Global Head of Digital Assets Strategy at HSBC. He is speaking at the HSBC Global Investment Summit in Hong Kong on 8-10 April 2024.

HSBC Global Investment Summit

The inaugural HSBC Global Investment Summit will take place on the 8 to 10 April 2024 in Hong Kong, bringing together over 2,000 delegates to discuss the global trends and topics shaping our world.

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