Every penny of HK$3 trillion Exchange Fund needed for ‘crises’, says HKMA chief

HKMA chief Norman Chan says not one cent of the HK$3 trillion reserve can be spared for government spending on welfare or infrastructure

PUBLISHED : Tuesday, 29 July, 2014, 1:50am
UPDATED : Tuesday, 29 July, 2014, 2:55am

The head of Hong Kong's de facto central bank has rejected calls from some lawmakers to use part of the city's HK$3 trillion Exchange Fund to pay for infrastructure projects or welfare.

Norman Chan Tak-lam, the chief executive of the Monetary Authority, said the fund needed every cent to cope with unexpected financial crises.

Some HK$800 billion of the fund is kept in highly liquid low-risk assets so it can be deployed to back Hong Kong's monetary base and underpin the currency peg to the US dollar.

Most of the rest consists of the government's reserves and the fund's accumulated surpluses.

The fund has grown from HK$350 billion in 1993 to HK$3 trillion, prompting suggestions there is more than enough to maintain financial stability and that the surplus could be spent.

But Chan said the 2008 global financial crisis showed that the government should be ready for every eventuality.

The government decided to provide a full guarantee for the city's HK$5.8 trillion of deposits in 2008. The total assets of the local banking sector had grown to HK$17 trillion at the end of last year, Chan said.

"Without a sizeable Exchange Fund to back the blanket guarantee, we could not have restored the confidence of depositors and the market to maintain financial stability [in 2008]," he wrote in an article posted on the authority's website yesterday.

Chan also pointed out that in August 1998 the government intervened in the stock market to the tune of HK$118 billion in order to "drive away currency speculators". At the time the local market cap was HK$2 trillion; now it is over HK$24 trillion. Similar intervention now would need HK$1.4 trillion, Chan said.

"If the Exchange Fund did not hold sufficient assets we would not be in a position to undertake the necessary operation to protect Hong Kong against another speculative attack of this kind," he said.

The returns on the fund's investments have also been criticised. Last year it managed a return of 2.3 per cent, below the rate of consumer inflation.

In the first three months of this year, its return was down 64 per cent on the same period last year. Chan said the fund had to invest in a "conservative and prudent manner" and could not take "excessive risks".

The AAA sovereign rating Standard and Poor's gave to Hong Kong in 2010 was also due to the fund's assets, Chan said.

But Democratic Party lawmaker Sin Chung-kai said the HKMA should not "keep on saving like a never-ending story" and should study how much was really needed to handle a crisis.