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sectors of the financial market(banking,equity,and debt)must grow andbecome more sophisticated.A more interesting question is how the relative importance of thesethree sources of corporate financing changes over the course of economic development.
3In the case of Hong Kong,bank finance has continued to be important.Even in 2000(afterthe Asian financial crisis),domestic credit provided by the banking sector was 158 percent ofGDP(compared with 100 percent in Singapore,109 percent in Japan,128 percent in the UK,
and 73 percent in the United States).Bank credit is so significantperhaps because Hong Konghas long had a modern and advanced banking system under extremelyprudent governmentregulation and supervision.Corporate governance regulations have alsobeen elaborate.In
accordance with Diamond(1984),bank finance can be as effective as other sources of financingif it is possible for banks to minimize the agency problems arising from information asymmetry.The stock market has played an increasingly important role in corporate financing in Hong
Kong in line with the theory of economic development.In 2000,the capitalisation of HongKong's stock market was 377 percent of GDP(c.f.Singapore’s 247 percent,Japan’s 71 percent,
UK’s 185 percent,and the United States’157 percent).On the other hand,Hong Kongcorporations'use of the debt markets as a source of financing remains relatively insignificant.The reasons for this are discussed in the next section.Development of the Bond Market
Unlike the equity market,the debt market in Hong Kong is relatively small and the bond marketappears inactive when compared to the markets in other developed economies.From 1994 to2000 the bond market grew from 8 percent of GDP to only 37 percent(HKTDC 2001b).
Following the classification of the International Federation of Stock Exchanges(IFSE),theHong Kong bond market consists of domestic public,domestic private,and foreign bonds.Domestic public bonds are Exchange Fund Bills and Notes,which are issued and managed bythe Hong Kong Monetary Authority(HKMA).Domestic private bonds are mainly issued by
commercial banks and large corporations such as the Mass Transit Railway Corporation(MTR)and the Kowloon Canton Railway Corporation(KCR)(HKTDC 2001b).The foreign bondslisted on the SEHK are issued by non-resident institutions,including foreign companies,foreign
governments,international banks,and supranational organisations such as the World Bank4group and the Asian Development Bank.
Foreign bonds comprised from 83 to 93 percent of the market value of all bonds listed inHong Kong from 1997 to 2000,while domestic private bonds represented less than 3 percent ofthe market(Table 1).In contrast,foreign bonds comprised only around 3 percent of the marketvalue of the bonds listed on the New York Stock Exchange.While the great preponderance ofthe value of the NYSE bond market was public issues,private domestic bonds still representedaround ten percent of the market value.Thus,we can see that the domestic bond market inHong Kong is inactive compared with the markets for domestic bonds in highly developedeconomies.
TABLE 1
Market Value of Bonds Listed in Hong Kong and New York,1997-2000
Domestic
Private Bonds
Domestic
Public Bonds Foreign Bonds All Listed Bonds
US$
million
%of all
bonds
US$
million
%of all
bonds
US$
million
%of all
bonds
US$
million
%Change
from 1997
Stock Exchange of Hong Kon