Put simply, notwithstanding the gloom of global recession, the future of Hong Kong is bright. Bond market development Let me turn quickly now to bond market development. There are a few points that I would like to make immediately. The first point is a basic and obvious one, so obvious that it is often overlooked. This is that the bond market is a channel of financial intermediation for the purpose of mobilising savings into productive investment that promotes economic growth and development. There is a need for those involved in the bond market those responsible for its development and those making a profit or a living from it to be frequently reminded of this basic purpose. This is particularly so when considering the introduction of sophisticated products derivatives and the like. I have nothing against sophisticated financial engineering, or against the engineers being well remunerated, provided that the regulators and the market participants, both at the wholesale and retail levels, are capable of appreciating and coping with the associated risks. This may not often be the case. It is possible that, while these products theoretically make the market more efficient, in terms of spreading and managing risks, in practice the risks may be magnified, to the extent of creating systemic instability and disrupting the crucial flow of funds through that basic and important channel of financial intermediation.
Between the low risk-return bank deposits and the high risk-return equity market, there should be a risk-return profile that fits that of debt instruments. The trick is how this latent demand, involuntarily trapped at the two ends of the spectrum, can be brought out and satisfied. Investor education and the creation of a retail network to market debt will help. But the costs of the latter can be quite substantial and possibly prohibitive, particularly in a low interest environment, if the retail banking system cannot be relied upon to support this wholeheartedly (which I am glad to add is not the case in Hong Kong). Furthermore, when government debt is used by the banking system as assets for acquiring liquidity support, the demand from the banks may easily crowd out the retail demand. Nevertheless, the institutionalisation of savings, if this could be organised, through for example the introduction of professionally managed provident fund schemes, should be quite effective in harnessing this demand. This would, at the same time, enable the retail demand to be transformed into a level of sophistication that, with the appropriate supply response, will greatly enhance the efficiency and robustness of the debt market as a channel of financial intermediation. The seventh point I wish to make concerns the supply side. For an economy with a continuing need to finance budget deficits there is of course a natural supply of debt instruments, unless, like Hong Kong, it has surpluses to spend. But the story does not end there.