Successful Hong Kong Tap Issue Strengthens Market

by Mary Swire, Tax-News.com, Hong Kong

19 April 2002

After Hong Kong's Hang Seng Index rose 2.8% on Wednesday, responding to Wall Street's strong overnight performance, fund managers rushed to buy up the remains of a Tracker Fund tap issue on Thursday. After several quarters of weak demand for the tap, the Government had put an increased HK$6bn worth of units into the tap for this quarter, and within the first month all 530m units were sold.

Market turnover jumped to a six-week high of HK$9.4 billion as investors took the news of the sale as a vote of confidence in the market

The Tracker Fund, which represents Government holdings of a wide range of market securities, originated in 1998 when the Government sought to dispose of shares it bought in a market support operation in 1998.

In August 1998, the Hong Kong Government acquired a substantial portfolio of Hong Kong shares with part of its enormous reserves. Much criticised at the time, the operation was highly successful both in underpinning the market, and as a trading success for the Government, which has made massive gains on its holdings.

The Exchange Fund Investment Limited (EFIL) was established in October 1998 by the Government to advise on the disposal of this portfolio in an orderly manner. The Government chose a stock neutral solution that would create minimal disruption to the market. An Exchange Traded Fund, the Tracker Fund of Hong Kong (TraHK), which met these requirements and added depth to Hong Kong's capital markets, was launched in November 1999 as the first step in the Government's disposal programme.

State Street Global Advisors Asia Ltd was appointed as the Fund Manager and State Street Bank and Trust Company was appointed as the Trustee of TraHK. These appointments provided the Tracker Fund with a comprehensive solution to its needs, including portfolio management, custody, fund administration and compliance monitoring functions.

With an issue size of HK$33.3 billion (approximately US$ 4.3 billion), TraHK's Initial Public Offering (IPO) was the largest IPO ever in Asia ex-Japan at the time of launch. Since the IPO, approximately HK$ 121.4 billion (by 9 January 2002) in Hang Seng Index constituent stocks has been returned to the market through TraHK's unique tap mechanism.

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