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Hong Kong Monetary Authority

Hong Kong’s Exchange Fund posts worst results since 2008 financial crisis

PUBLISHED : Friday, 22 January, 2016, 5:12pm
UPDATED : Saturday, 23 January, 2016, 1:45am

The Exchange Fund, the local reserve to defend the Hong Kong currency, reported a loss of HK$18.3 billion last year, its second worst performance ever and its first loss since global financial crisis in 2008, as heavy foreign exchange losses and poor returns from equity investments took a toll.

For the first time in a decade, the Hong Kong Monetary Authority (HKMA), which uses the HK$3.429 trillion Exchange Fund to defend the Hong Kong dollar peg to the US dollar, have been forced to intervene in the market in recent days to prevent the currency from weakening too much, according to currency traders.

The Hong Kong dollar hit an 8-year low at 7.8294 on Wednesday, dangerously close to the weak end of the peg band at 7.85. Capital outflow from the stock markets and concerns over economic weakness have put pressure on the Hong Kong currency.

The poor returns of the fund – announced by chief executive Norman Chan Tak-lam on Friday – and the weak currency have come as a double blow for the HKMA, the city’s de facto cental bank. The HKMA invests the fund, which includes the government’s fiscal reserves and other assets, in stocks, bonds and property.The fund is used to maintain financial stability including defending the Hong Kong dollar peg to the US dollar at 7.80.

“The HKMA has no intention to change the peg and we will defend the peg,” Chan said. He added that it was natural for the Hong Kong dollar to weaken as a portion of the US$130 billion hot money that has flowed into the city in the past few years begins to head for the exit, following the US interest rate hike in December.

Jasper Lo Cho-yan, a director of Tung Shing Futures, said the Hong Kong dollar would remain weak in the near term. “There are some speculators trying to attack the peg as the market sentiment is weak,” he said.

The weak dollar has resulted in the interbank interest rate rising to a five-year high on Wednesday, which will hurt the property market. Chan said it would monitor the situation before adjusting mortgage policy.

The fund lost HK$18.3 billion from its investments last year, or 0.6 per cent, compared with gains of HK$43.6 billion in 2014.

In 2008 the fund suffered a 5.6 per cent loss as asset markets across the globe crumbled in wake of the US housing market meltdown.

In 2014 the fund posted a return of 1.4 per cent.

Chan said the Exchange Fund’s loss is “relatively mild compared with major market indices.” The Hang Seng Index lost 7.3 per cent last year.

“With such an adverse financial environment last year, the performance of many investment funds disappointed, with some even incurring losses of varying degrees. Even the more conservative bond funds were no exception,” Chan said.

Chan said the fund in the past two years has been holding more cash and short term bonds, cutting down non-US dollar assets which Chan said has “helped mitigate some potential losses.”

Looking ahead, he warned of a challenging year ahead.

“Barely a few weeks into 2016, we have already observed further turbulence in the global financial markets, which once again underscored the imbalance and instability of current global financial conditions. We must therefore be prepared that financial markets may continue to see wide fluctuations for some time,” he said.

“Facing an even more complex and difficult investment environment, the HKMA will continue to manage the Exchange Fund prudently and make suitable defensive moves in response to market changes. “

The fund made a foreign exchange loss of HK$44.9 billion last year, narrowing from a HK$52.7 billion loss in 2014.

Losses on its investments in Hong Kong stock amounted to HK$5 billion, compared with a gain of HK$6.5 billion in 2014.

Gains from overseas stocks stood at HK$7.4 billion, down 78 per cent from HK$33.7 billion in 2014.

Other investments, including overseas property, were down 5.68 per cent to HK$8.3 billion, compared with a gain of HK$8.8 billion in 2014.

Bonds gained HK$15.9 billion, down 66 per cent from a gain of HK$47.3 billion in 2014 .

The fund paid HK$46.7 billion to the government last year, compared with HK$27.5 billion in 2014.

The total assets of the fund stood at HK$3.429 trillion at the close of 2015, up HK$279.9 billion from a year earlier.