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Hong Kong Monetary Authority

Hong Kong Exchange Fund’s income more than doubles as stock gains surge

In the first three quarters of the year, fund posts an investment profit of HK$86.8 billion. Its total assets worth HK$3.57 trillion by end of September

PUBLISHED : Tuesday, 15 November, 2016, 12:36pm
UPDATED : Tuesday, 15 November, 2016, 10:59pm

The Exchange Fund, the reserve designed to defend the Hong Kong currency, has reported an investment gain of HK$42.5 billion in the third quarter, more than double that of the previous three-month period, thanks to a large increase in stock investment income.

The third-quarter investment income, reported on Tuesday, was a turnaround from a loss of HK$63.8 billion in the same period last year, data from the Hong Kong Monetary Authority showed.

For the first three quarters of the year, the fund posted an investment profit of HK$86.8 billion.

The HKMA invests the fund, which is worth HK$3.57 trillion fund and includes the government’s fiscal reserves and other assets, in stocks, bonds and properties. It is used to maintain financial stability, which includes defending the local currency’s peg of 7.80 against the US dollar.

The Exchange Fund’s turnaround in the third quarter was mainly driven by its performance in stock investments as gains from Hong Kong equities reached HK$16.8 billion in the period, a sixfold increase from the second quarter. Proceeds from other equities also rose to HK$18.5 billion.

In the three months to September, Hong Kong’s benchmark Hang Seng Index jumped 12 per cent, compared with a 21 per cent decline a year earlier.

The fund’s foreign-exchange investments swung to gains in the third quarter, earning HK$800 million.

However, income from its bond investments declined to HK$6.4 billion from HK$19.3 billion in the previous quarter.

Stock markets had performed better than expected since Donald Trump won the US presidential election as investors expected him to loosen regulations, HKMA chief executive Norman Chan Tak-lam told lawmakers at a financial affairs panel meeting on Tuesday.

In the meantime, the US bond market was volatile. The yield on the benchmark 10-year US Treasury note surged to the highest level in about a year on Monday as investors dumped government bonds amid worries that Trump’s plans to cut tax and boost infrastructure spending could spur inflation.

Bond yields rise when bond prices fall.

Chan said the volatility in bond markets might have a negative impact on the Exchange Fund’s bond investments. However, rising stock prices should favour its equity investments.

He said the HKMA would diversify its portfolio to reduce the financial risk.

Looking ahead, Chan expected the bond market to remain volatile for a while. Nonetheless, the future direction of financial markets still depends on how Trump and his transition team clarify his economic policies.

Chan also forecast the US Federal Reserve would increase interest rates by 25 basis points in December as markets have anticipated.

However, he warned of uncertainty about the future path of US rates and its impact on Hong Kong as Trump’s policies may accelerate US inflation.

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