Exchange Fund earnings fall 32pc on bond investment losses

HK$3.03 trillion fund generates returns of 2.7pc last year, versus 4.4pc in 2012

PUBLISHED : Friday, 24 January, 2014, 12:47am
UPDATED : Friday, 24 January, 2014, 3:35am

A loss of more than HK$19 billion on bond investments last year has seen the Exchange Fund report a 32 per cent drop in earnings, with its payment to the government reduced by 2.65 per cent as a result, the Hong Kong Monetary Authority (HKMA) said yesterday.

The HKMA manages the HK$3.03 trillion fund that it uses to defend the local currency. It invests the reserve, which includes the government's HK$734 billion in fiscal reserves and other assets, in stocks, bonds, property and currencies.

The fund earned HK$75.9 billion, down from HK$111.6 billion in 2012, with its 2.7 per cent returns down from 4.4 per cent in 2012. The payment made to the government from the earnings fell to HK$36.8 billion from HK$37.8 billion in 2012.

Democratic Party legislator Sin Chung-kai said the fall in government revenue from the Exchange Fund should not be used as an excuse to raise taxes in next month's budget.

"The government should find other ways to solve the problem of decreased investment income and an ageing population," he said. "It should not raise taxes but should, instead, reduce taxes in the budget to help ease the burden on middle-class families."

In his budget speech, Financial Secretary John Tsang Chun-wah is expected to say the city's fiscal reserves will run dry in about 20 years if nothing is done to ease the financial problems caused by the ageing of the population. Last month, Tsang said on his official blog that the government needed to raise revenue by raising taxes.

Broker Ben Kwong Man-bun, chief operating officer of KGI Asia, said equities would outperform bonds this year and that the HKMA could adjust its investment allocation to enhance returns.

"The HKMA could not invest too much in equities as stock markets worldwide also face a lot of uncertainties," he said. "The Exchange Fund investment needs to be conservative and cannot be too risky. As such, it would be hard for the Exchange Fund to produce a high return for the government this year."

HKMA chief executive Norman Chan Tak-lam said the fall in earnings was mainly due to a HK$19.1 billion loss on bond investments. The fund earned HK$71.6 billion from overseas equities last year and HK$10.1 billion from Hong Kong equities.

"Looking ahead, the investment market is full of uncertainties this year," Chan said. "Global bond markets will continue to be affected by the US exit from the quantitative easing programme and the consequent reactions of US and global interest rates."