Banking & Finance

Don’t get your hopes up about the Exchange Fund’s 2015 performance, says John Tsang

Financial Secretary’s blog highlights roller-coaster ride last year

PUBLISHED : Sunday, 17 January, 2016, 7:40pm
UPDATED : Sunday, 17 January, 2016, 7:40pm

After spending a year buying US dollars and selling down assets to defend the Hong Kong dollar peg, Financial Secretary John Tsang is now attempting to guide down public expectations about the Hong Kong Exchange Fund’s full-year performances in 2015.

In a blog post on Sunday he said it was “difficult to be optimistic” ahead of the official release of the fund’s accounts.

Tsang disclosed the fund’s performance had been mostly unstable in 2015. It managed to gain HK$27 billion in profits over the first half, then lost HK$63.8 billion amid the global market turmoil in the third quarter. The performance in October was strong, erasing previous losses; only to be followed by poor returns again in the final months of 2015.

Markets were still living under the shadow of the 2008 global financial crisis, with its after-effects explaining much of the huge gyrations still seen as markets entered 2016, Tsang said.

“The markets over the past years had been flooded with hot money from the US and European quantitative easing,” he said. “Assets in many economies were overheated. Investors react or even overshoot like frightened birds with the slightest change in markets, making big ups and downs in markets a more frequent phenomenon. Just the market expectations on the US rate hike and performances of emerging markets alone were enough to ignite huge swings. Even hedge funds specialising in short-term management recorded 3 per cent losses across the board.”

The US$359 billion Exchange Fund is maintained primarily for the purpose of defending the peg, with three quarters of its assets allocated to low-yielding US treasuries and other US dollar-denominated assets, about 8 per cent in Hong Kong dollars and the remainder in other currencies for strategic gains.

The Hong Kong Monetary Authority buys US assets and sells Hong Kong dollars to suppress the Hong Kong dollar rate every time it touches close to the 7.74 mark against the US dollar, with 7.75 being its acceptable upper limit. The fund’s losses had coincided with the five rounds of strong inflows into Hong Kong in 2015, when expectations for the US rate increases along with Chinese currency reform unleashed extreme gyrations in global markets.

After previous gains, the Hong Kong dollar experienced weakness at the 7.79 lower limit last week, as money left the city because Hong Kong banks decided not to follow the US rate increase.

Goldman Sachs said the peg was not under stress and the current weakness was not a cause for concern.