The next step in the process is likely to be the issuance by the SFC of a consultative paper. Another area which we are looking at is taxation. We acknowledge that there are serious anomalies in the current arrangements for taxing interest income in Hong Kong but, given the uniqueness of Hong Kong’s overall tax structure, and the conflicting aims of retaining international competitiveness on the one hand and preserving fiscal revenue on the other, there is no very easy solution. What we are doing is to sponsor, under the auspices of the Hong Kong Institute for Monetary Research, a fundamental study of the taxation of financial intermediation in Hong Kong. This study will hopefully further inform the debate on this tricky subject. I would not at this stage wish to guess as to the direction in which our advice will eventually point. BIS Review 57/2000  2  We are also overseeing the development of a US dollar payment clearing system for Hong Kong, which will provide an enhanced framework within which the market in US dollar debt securities could develop if issuers and investors so wished. There are also two initiatives on which we are actively engaged in collaboration with others in the region, though each is still very much in its early stages. One is the question of a possibly wider role for credit rating agencies.
Thus, although overall private sector issuance may increase as a means of closing the sector’s financing gap, there is some evidence - perhaps not conclusive - that this may be at the cost of some hardening of yields relative to government yields, at least for lesser names. Of course, in some cases the increase in yields may just be the more straightforward consequence of a rising level of corporate gearing. There are also indications that increased debt market activity may have been more evident in the floating rate sector than for longer-dated fixed rate issues, where it may have been difficult to establish appropriate new benchmarks. Thus, although crowding-in may be occurring, the process is more complex than the simple like-for-like substitution of corporate for government paper. Another consideration for certain investors is that they increasingly have to accept that a strategy based simply on purchasing the paper of top-rated issuers such as governments or multinational organisations may no longer be feasible or economic. Yet, if they are going to embrace lesser-rated paper in their portfolios, they may need to shift their approach towards a somewhat more sophisticated 1  BIS Review 57/2000  portfolio strategy, which permits the holding of lower-rated paper at prices which appropriately reflect the risks, with the risks balanced across the whole portfolio. This may necessitate changes in the ways in which fund managers are instructed to address their task and in the tools which they need to perform it.