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Hong Kong Monetary Authority

Exchange Fund rounds to HK$41.2b gain in third quarter

Market turnaround and gains in currencies and bonds lead third-quarter reversal from HK$41.7 billion loss in the same period last year

PUBLISHED : Tuesday, 20 November, 2012, 12:00am
UPDATED : Tuesday, 20 November, 2012, 4:01am

The Exchange Fund turned around earlier losses to return HK$41.2 billion in the third quarter, thanks to a rebound in the stock market and gains from currencies and bonds.

The third-quarter profit compared to a loss of HK$5.6 billion in the second quarter and a loss of HK$41.7 billion in last year's third quarter, said the Hong Kong Monetary Authority (HKMA).

Investment income in this year's first nine months was HK$80.1 billion, compared with HK$5 billion in the same period last year.

The fund, which is mandated to support the Hong Kong dollar's fixed exchange rate to the US dollar, made HK$9.3 billion from Hong Kong stocks, HK$14.4 billion from other stocks, HK$6.6 billion from currencies and HK$10.8 billion from bonds.

Globally, stocks performed better in the third quarter as investor sentiment improved after the European Central Bank said in September that it was prepared to make "unlimited purchases" in euro members' bond markets. The move triggered a rally in shares globally.

The Hang Seng Index gained 7.2 per cent in the third quarter, compared with a 5.4 per cent decline in the second.

HKMA chief executive Norman Chan Tak-lam told a Legislative Council Financial Affairs Panel meeting yesterday that the investment return of the exchange fund this year was good but advised caution.

"Due to unstable global conditions, especially the fiscal cliff after the presidential election in the United States, as well as the conflict in the Middle East, stock-market volatility will increase," he said. "It is difficult to predict the full-year performance of the Exchange Fund."

He believes the Democrats and the Republicans in the United States will come to an agreement to avoid the so-called fiscal cliff - a looming expiry of major tax reductions and implementation of government spending cuts due in early January that threatens to throw the US back into recession.

Chan said the HKMA is doing a "stress test" on the banking industry for assessing the potential impact of a worst-case scenario if the US fails to reach agreement.

Besides risks emanating from the US, the European Union has entered its second recession in three years, mostly as a result of the austerity measures in the region's heavily indebted nations.

"The euro-zone debt crisis, combined with persistently high unemployment and depressed demand in the US as well as faltering growth in emerging markets have all contributed to a perfect storm for the world economy," Financial Secretary John Tsang Chun-wah told a forum yesterday.

Meanwhile, Chan warned potential investors in local residential properties to be cautious because of uncertainties on how long the ultra-low interest rates in the US and Hong Kong will persist, despite the US Federal Reserve's indication that they will stay low until mid-2015.

"While the mortgage repayment-to-income burden is lower than in 1997, the local property market's risk is no smaller," he said. "In 1997, interest rates were on a downtrend whereas nowadays, with mortgage rates averaging 2.3 per cent, there is a lot of room for them to go up."

He also said the HKMA will ask banks to tighten lending to investors in industrial and commercial properties if there are signs of excessive speculation following the government's clampdown on residential property speculation.

Additional reporting by Ray Chan