Exchange Fund's income dives 27pc

Hong Kong's Exchange Fund reported a 27.7 drop in investment income to HK$170.5 billion last year, with a HK$21 billion loss from Hong Kong equities, according to the Hong Kong Monetary Authority.

The Exchange Fund is managed by the HKMA to protect the local currency and to maintain the stability and integrity of monetary and financial systems.

Specifically, the fund reported a gain of HK$12.4 billion from bonds investment, 86.6 percent lower than the previous year, as rising inflation expectations and tapering of asset purchases by the US Federal Reserve led to a rise in US Treasury yields and falling bond prices during the year, according to HKMA.

The fund recorded a loss of HK$21 billion from local equities in 2021, mainly driven by the HK$26.3 billion loss in the third quarter. The loss for the full year was a turnaround from a gain of HK$4 billion in 2020 and HK$22.1 billion in 2019 while investment in other equities still brought HK$68.4 billion in returns last year.

Gains from other investments were HK$93.9 billion up to the end of last September.

The overall investment return rate was 3.6 percent last year, but the preliminary result did not include the fourth quarter return of the other investments, which will be available later.

Looking ahead, HKMA chief executive Eddie Yue Wai-man said rising inflation pressure and monetary policy in many countries will be critical issues. Should inflation prove to be more persistent, central banks may need to accelerate the pace of interest rate hikes, which may lead to greater volatility and corrections in asset markets.

Global equity markets have risen sharply over the past three years with elevated valuations. As global economic recovery moderates with the slowing growth momentum of corporate earnings and lingering concerns over new Covid variants and geopolitical tensions, the investment environment will remain uncertain, Yue noted.

In case market sentiment takes a turn, global equity markets may undergo major adjustments. If bond yields also surge at the same time due to mounting inflation and policy shifts, there will be significant challenges to the investments of the fund, Yue further said.

Yue, however, reiterated that the Exchange Fund is a long-term investment, adding that the HKMA will remain flexible, implement defensive measures and maintain a high degree of liquidity.