Developing Macau SAR’s financial industry has been a major administrative policy since 2019. Macau SAR is determined to build up its financial infrastructure in a number of areas, including the bond market. We spoke with Hugo Maia Bandeira – Founding Partner of Macau-based law firm CFB Lawyers on how the Bond market in Macau has been developing.
Conventus Law: Would you consider Macau’s current relevant laws sufficient to allow or facilitate bond transactions? If not, which laws require further development to adapt and/or to facilitate the market further?
CFB Lawyers: Currently, bond issuance in Macau is regulated by the Macau Financial System Act (“FSA”), the Commercial Code and the guidelines issued by the Monetary Authority of Macau (“AMCM”).
The FSA was enacted in 1993, and the Commercial Code in 1999. Although these laws have served Macau well, an update to the local legal framework would be welcomed in order to create a competitive financial sector and, in particular, a strong bond market.
For instance, the current legislation in place leads to peculiar results, where foreign companies are subject to less stringent requirements to issue bonds than local companies.
The guidelines issued by AMCM are fairly recent and brought a breath of fresh air to the sector, nevertheless, a set of dedicated laws would certainly bring more certainty to all players in the market.
In this context, a revision of the FSA is in the works and new laws on equities, funds and trust are also being considered. These are all welcome developments to the local financial industry, specially taking into account that regional competition from more mature markets such as Hong Kong and Singapore is fierce.
In December 2021, the Macau Central Securities Depository (MCSD) was launched. What role will the MCSD play in the Macau Bond Market?
The launch of the MCSD was a much needed upgrade to Macau’s financial infrastructure and it surely is a step in the direction of modernization of Macau’s financial sector.
MCSD’s main functions are securities registration, clearing, settlement, depository, and other related services, which were lacking in Macau and are essential to the development of a healthy market as well as to attract institutional investors from abroad.
All in all, if Macau intends to establish itself as a reputed and mature jurisdiction for the bond market and, in some ways, as a gateway for international investors that wish to purchase bonds from mainland China companies through Macau, it could not live much longer without a professional infrastructure such as the one brought by MCSD.
What are the key benefits and challenges of issuing bonds in Macau?
“In my opinion, there may be a market in assisting Portuguese-speaking Countries in obtaining financing for sustainable development projects, i.e. green bonds, and Macau, with its familiar legal system and use of the Portuguese language, could be an interesting bridge to create channels between those countries and Mainland China institutional investors. ”
Hugo Maia Bandeira, Founding Partner, CFB Lawyers.
I would point out the stable business environment and the fact that the local commercial law is inspired in Portuguese Law (although adapted to the local reality) as key general benefits of operating in Macau.
Moreover, local governmental and banking institutions are quite helpful and friendly and will go the extra mile to support bond issuers in Macau.
These are all advantages of working in a market that, although in its inception in what concerns bonds, already has solid foundations and is familiar with big cross-border transactions.
In addition, as a show of support to the bond market in Macau, the Macau Budget Law has been granting every year exemptions (i) of stamp duty in transactions of issuance and sale and purchase of bonds issued in the Macau SAR; as well as (ii) of Income Tax on interest payments, or proceeds obtained from the sale and purchase, redemption or other forms of disposal of bonds issued in Macau.
As for challenges I would outline the lack of a mature market and consequently, the need to build a strong reputation for Macau in the international markets.
There is strong regional competition (e.g. from Hong Kong and Singapore) both with well established markets and with relatively lower costs of transaction, all of which are challenges in a market in its early stages.
Finally, even though there have been significant efforts to train locals, there is a lack of skilled manpower, and the Macau Government imposes significant difficulties in importing skilled professionals to Macau. Other regional markets are far less restrictive in what regards hiring foreign skilled professionals, and this imposes a very strong challenge to Macau, which needs to be able to retain the best talent if it wishes to affirm itself as an international player.
Nevertheless, with the appropriate support measures and long-term planning, I believe that all of these challenges can be surpassed.
Has the MSAR Government prioritised attracting entities from Mainland China and Portuguese-speaking countries to the securities market in Macau, as well as their participation in Renminbi financing operations, and if so, why?
The MSAR Government has continuously stated that the preferential jurisdictions for the Macau Bond Market are Mainland China and Portuguese-speaking Countries.
A fair amount of work has been done in attracting entities from Mainland China, and significant support has been shown by the Central Government, notably in promoting the issuance of sovereign, provincial government and State-Owned Enterprises (“SOEs”) debt in Macau.
Many of these deals have used RMB as the currency, the most significant of which are the issuance in 2019 of RMB 2 billion bonds by the Central Government and, in 2021, the RMB 2.2 billion bonds issued by the Guangdong provincial government.
I believe that the prospects for the development of Macau’s bond market in what concerns mainland Chinese entities are solid and we will probably continue to see growth in the years ahead.
However, in what concerns the Portuguese-speaking Countries there are significant challenges and I believe that the MSAR Government plays a key role in stimulating the growth of the market in this sector.
First and foremost, the use of Portuguese language (which is an official language in Macau) should be fostered and leveraged against regional markets that operate mainly in English (such as Hong Kong and Singapore), while at the same time serving as a competitive advantage. Unfortunately, this has not been the case, and we have been witnessing a constant decrease in the use of the Portuguese language.
Besides this basic institutional support, which could be significantly improved and used as a competitive advantage, there is also the issue of creating a market.
Most entities in Portuguese-speaking Countries do not have the dimension to issue bonds, nor do they have any benefit in issuing debt in a foreign currency which will significantly (and unnecessarily) increase their currency risks. As such, it is necessary to find a niche which would be attractive to these countries.
In my opinion, there may be a market in assisting Portuguese-speaking Countries in obtaining financing for sustainable development projects, i.e. green bonds, and Macau, with its familiar legal system and use of the Portuguese language, could be an interesting bridge to create channels between those countries and Mainland China institutional investors.
Are there specific industries that the Authorities intend to develop in priority?
Although the bond market is naturally open to all industries, we can find some guidance in the policy address of the Chief Executive of Macau for 2022 and from the plans that Macau and Mainland China have for the Hengqin In-Depth Cooperation Zone.
In this context, it is known that the development of Traditional Chinese Medicine, Cutting-edge technologies, green finance and cross-border finance are preferential targets.
I believe that green finance and cutting-edge technologies will play a decisive role in Macau’s bond market in the years to come. We have also seen significant efforts in attracting issuance of debt by Mainland China’s central and regional authorities and SOEs as well as companies linked with the sustainable development of the Greater Bay Area.
On a separate note, and even though such priority has not been publicly voiced, I would expect that with the passing of time and the maturing of the Macau bond market, the gaming and tourism industries will also play a key role in the strengthening of the market.
Recently SJM, MGM, Studio City, all with involvement in the local gaming industry, have either issued bonds locally or registered foreign issued bonds in Macau via their group companies.
This is a clear indication that companies with enormous capital needs (such as gaming operators) are becoming more confident in the local bond market and hopefully it sets the trend for increasing local issuances.
All in all, there is great potential to be explored over the coming years.
What measures has the Executive Committee of the In-Depth Cooperation Zone issued to encourage commercial companies to use the Macau Bond Market to get financing?
In order to encourage companies incorporated in the Hengqin In-Depth Cooperation Zone to use Macau’s bond market for direct financing and assist in reducing their costs of issuing bonds in Macau, a set of measures was implemented on December 30th, 2021, and came into force on 1 March 2022.
In summary, companies incorporated in the Hengqin In-Depth Cooperation Zone will get a subsidy up to a maximum of RMB 5.5 million, when successfully issuing corporate bonds in Macau, and intermediary institutions will be supported with a subsidy of RMB 100 thousand for each bond issuance.
Additional support is also granted to green bond deals, by means of a RMB 500 thousand subsidy to cover external review expenditure to companies incorporated in the Hengqin In-Depth Cooperation Zone issuing green bonds.
These measures are temporary and will remain in force until 1 March 2023. It is expected that, by then, a more robust plan to support bond issuances in Macau by companies operating in the Hengqin In-Depth Cooperation Zone is in place and that a boost is given to the local market.
More importantly, these measures are a clear sign of a substantial political (and economic) commitment to the development of a mature bond market in Macau.
“Following similar pilot schemes implemented in other cities such as Shanghai, Shenzhen, Beijing, Guangzhou, Zhuhai and Hainan, on 29 December 2021, the Qualified Foreign Limited Partnership (“QFLP”) pilot scheme was launched for the Hengqin In-Depth Cooperation Zone. In short, the QFLP pilot scheme aims to encourage foreign investors to set up funds in the Hengqin In-Depth Cooperation Zone and raise money from both domestic and foreign investors. Funds set up under the QFLP scheme will let foreign investors buy shares in start-ups and other unlisted companies, as well as to take part in private placements by listed companies, private equity, and venture capital products. ”
Hugo Maia Bandeira, Founding Partner, CFB Lawyers.
In 2020, MOX and the Luxembourg Stock Exchange (LuxSE) signed a Memorandum of Understanding for cooperation. Are you expecting to see similar additional MoUs signed with other stock exchanges?
In the meantime, MOX has also established a partnership with China Central Depository & Clearing Co. Ltd (“CCDC”), which resulted in the “Gateway to the Chinese Bond Market” and the “CCDC-MOX Bond Information Platform”.
In summary, both these initiatives provide more efficient and transparent information channels regarding the Chinese bond market for international investors.
MOX also established a partnership with the Climate Bonds Index in July 2021 and was the first financial institution in Macau to do so.
I believe that with the steady development of the Bond Market in Macau and with the further development of the Hengqin In-Depth Cooperation Zone, other MOUs / Partnerships may be expected, as MOX seeks to cement Macau’s position in the international markets.
I would also expect MOX to increase its presence in Mainland China, notably through the opening of some type of representation office, eventually in Hengqin.
As part of its strategy to promote the securities market development in Macau, the Finance Bureau of the Guangdong-Macau SAR in Hengqin launched a pilot scheme for Qualified Foreign Investors. Can you tell us a bit more about this?
Following similar pilot schemes implemented in other cities such as Shanghai, Shenzhen, Beijing, Guangzhou, Zhuhai and Hainan, on 29 December 2021, the Qualified Foreign Limited Partnership (“QFLP”) pilot scheme was launched for the Hengqin In-Depth Cooperation Zone.
In short, the QFLP pilot scheme aims to encourage foreign investors to set up funds in the Hengqin In-Depth Cooperation Zone and raise money from both domestic and foreign investors. Funds set up under the QFLP scheme will let foreign investors buy shares in start-ups and other unlisted companies, as well as to take part in private placements by listed companies, private equity, and venture capital products.
This pilot scheme also entails significant tax benefits for companies and individuals in the Hengqin In-Depth Cooperation Zone such as (i) a reduced corporate income tax (“CIT”) rate at 15% for eligible companies; (ii) CIT exemption on income derived from new foreign direct investments (“FDI”) in tourism, modern services, and high-tech businesses established in the Hengqin In-Depth Cooperation Zone; and (iii) tax exemption on the portion of individual income tax (“IIT”) that exceeds 15% of the taxable income for eligible local and foreign high-end and scarce talents.
The QFLP pilot scheme is again a sign of strong political support to the Herculean effort of diversification of Macau’s economy as well as of the will to create a healthy business environment in Hengqin to attract meaningful foreign investment.