Exchange Fund loses $13.2 billion

Top News | Aiden He and Reuters 19 Oct 2021

Aiden He and Reuters

Hong Kong's Exchange Fund, which backs the local dollar, posted a third-quarter investment loss of HK$13.2 billion, its first after five quarters of gains.

That compares with an HK$81.2 billion investment gain in the same period a year earlier.

The Exchange Fund recorded investment income of HK$126.5 billion in the January-September period this year, which is still higher than the HK$90.8 billion in the first three quarters of last year, even excluding other investment income, the Hong Kong Monetary Authority said yesterday.

The performance in the third quarter was mainly dragged down by equities.

Among investment income, the loss from Hong Kong equities was at HK$26.3 billion in the third quarter after three straight quarters of gains. It amounted to a HK$13.8 billion loss for the first nine months of 2021.

The loss from other equities for the third quarter was HK$700 million, compared to a HK$45.7 billion gain for the first three sessions.

The income from bond investment last quarter fell 4 percent year-on-year to HK$8.2 billion, but that was a 53 percent plunge from the second quarter. During the third quarter, foreign exchange investment income was HK$5.6 billion yuan, a surge of 2.5 times quarterly, but the figure was still about 62 percent less than that of a year ago.

In addition, the fee payment to the financial reserves from July to September was HK$8.3 billion and that to the Hong Kong Special Administrative Region government funds and statutory bodies was HK$4.5 billion.

The HKMA chief executive, Eddie Yue Wai-man, said the investment performance of the Exchange Fund in the fourth quarter was difficult to predict, depending on factors like the recovery of the global economy, the Federal Reserve's views on future interest rate trends and inflation.

Yue emphasized that the investment portfolio of the Exchange Fund has become more diversified, with Hong Kong stocks accounting for only a relatively small portion, so although the Hang Seng Index fell 15 percent during the quarter, the loss of the Exchange Fund was also relatively small.

The HKMA is also preparing for tapering in the United States, Yue said.

The authority has reduced the investment period for bonds in recent years to deal with the possible rise in long-term interest rates and the fall in bond prices, as well as increasing its position in cash holdings.

Yue said Hong Kong's financial system has the strength to withstand the potential risks.

He also pointed out that if the US gradually reduced bond-buying and raised interest rates slowly to above Hong Kong's level next year, the interest rate differentials will cause funds to flow back to the US dollar at a slow pace.

Once the Hong Kong dollar touches the weak-side convertibility undertaking of HK$7.85 to the US$1, the HKMA will buy the Hong Kong dollar. He emphasized that Hong Kong has a high level of US dollar foreign exchange reserves that can cope with the potential money outflow.

Yue believes tapering may hinder the economic recovery in Asia, but the impact may be milder than in 2013.

Meanwhile, the HKMA deputy chief executive, Howard Lee Tat-chi, said the authority did not deliberately increase or decrease the investment portfolio in Hong Kong stocks despite the sluggish performance.

Lee believes that long-term investment returns should be considered instead of a single quarter's performance, especially as the mainland has great long-term growth potential and Hong Kong stock investment can have benefits from it.

The authority said Hong Kong's financial system is robust and the banking system has sufficient capital and liquidity. It also said it would ensure the stability of the local currency through the linked exchange rate system.

The HKMA is the key manager of the Exchange Fund, which is under the control of the financial secretary and invests in equities, bonds, foreign exchange and other securities and assets.

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