Despite a huge loss last quarter, Hong Kong's Exchange Fund is for the long term

PUBLISHED : Saturday, 07 November, 2015, 1:36am
UPDATED : Saturday, 07 November, 2015, 1:36am

Hong Kong's foreign exchange reserves have delivered a shocking loss of HK$63.8 billion in the last quarter.

Officials from the Hong Kong Monetary Authority tried hard to prepare the public, having warned more than a month ago that the Exchange Fund was not doing as well in the third quarter as the one before.

Still, the losses, though only on paper, amount to almost 2 per cent of total assets. And it's the worst on record, exceeding even the HK$48.3 billion HKMA lost in the third quarter of 2008 around the time of the collapse of Lehman Brothers, which helped trigger the global financial crisis. The fund has been profitable in the past three years, despite several quarterly losses. Most of the latest losses stemmed from Chinese and overseas equities as a result of the mainland's stock market rout during that time. The bond market, traditionally viewed as a safe haven, failed to return much profit due to the low-interest environment. Meanwhile, the resurgent greenback undermined the value of transferring assets back into Hong Kong dollars because of the currency peg. So, is it the end of the world? Hardly.

HKMA chief executive Norman Chan Tak-Lam blamed global market volatility for the losses. But he added that returns should return to normal when market conditions improve. Indeed, they already have. Stocks in Shanghai and Shenzhen lost about a third of their value between hitting a peak in mid-June and their trough in late August. During the last quarter, the Shanghai benchmark dropped 29 per cent while the local Hang Seng plunged by 21 per cent. The MSCI World Index fell 8 per cent over the same period. Yet, as the US Federal Reserve unexpectedly decided to hold rates last month, the equity markets have been recovering lost ground. The current quarter for the HKMA is almost certain to perform better than the last one and likely to turn a reasonable profit.

Still, local finance officials have rightly warned of more volatility ahead as US central bankers look set to start pushing up interest rates. As the world exits the historic low interest rate environment following the global financial crisis, investors should fasten their seatbelts. But funds managed by governments such as the Exchange Fund invest for the long term so their quarterly ups and downs are less significant than those of commercial funds for investors. HKMA's conservative investment strategy remains unquestioned.