Temasek-like sovereign fund 'not for HK'

PUBLISHED : Saturday, 07 July, 2012, 12:00am
UPDATED : Saturday, 07 July, 2012, 12:00am


Hong Kong does not need to follow Singapore's example and set up a state-owned investment company to achieve high returns for its currency reserves, a minister and an analyst have said.

Their comments poured cold water on a suggestion that a sovereign wealth fund might be the best option for the city.

Secretary for Financial Services and the Treasury Chan Ka-keung (pictured) said the HK$2.43 trillion Exchange Fund, which is tasked with maintaining the stability of the Hong Kong dollar under the oversight of the Monetary Authority, could achieve higher returns the way sovereign funds did.

'The Exchange Fund has started diversifying its investments to achieve higher returns,' Chan said on radio yesterday.

Traditionally, the fund has invested mainly in bonds as well as in Hong Kong and overseas stocks, and has generated a lower return than most sovereign funds. During his election campaign for chief executive earlier this year, Leung Chun-ying suggested setting up a Temasek-like state-owned investment fund to invest Hong Kong's reserves in local businesses to boost the city's economy. Separately, lawmakers have called for a sovereign investment fund, which tends to invest more aggressively and achieve higher returns.

Since 2008, the Exchange Fund has been diversifying its portfolio. Last year, it invested HK$83.6 billion in property, private equity and yuan-denominated shares and bonds, along with emerging-market bonds, to achieve a return of 7 to 9 per cent, higher than the 1 per cent return generated from bonds and stocks.

But the Exchange Fund's average 5.6 per cent return from 1994 until the end of last year significantly lags the 17 per cent annual average return from Temasek since its establishment in 1974. But the Exchange Fund's returns are more stable.

'A sovereign fund is not a magic wand,' Chan said, adding that many saw volatile investment returns. This may not be suitable for the Exchange Fund, whose returns represent about 10 per cent of government income.

Mark Konyn, chief executive of Cathy Conning Asset Management, said a state-owned investment fund needed well-defined aims to prevent conflicts of interest. 'A challenge in Hong Kong is to ensure sufficient investment in strategic projects that benefit the community longer term.' Financial-services legislator Chim Pui-chung said: 'The HKMA is managing the Exchange Fund and setting up such a fund would create duplication. The HKMA needs to abandon its excessively conservative approach and invest more aggressively.'