Every penny of HK$3 trillion Exchange Fund needed for ‘crises’, says HKMA chief

Lawmakers had argued there is enough money to maintain financial stability and that surplus could be spent on social welfare and infrastructure

PUBLISHED : Monday, 28 July, 2014, 4:31pm
UPDATED : Tuesday, 29 July, 2014, 1:31pm

The head of Hong Kong’s de facto central bank has rejected calls from some lawmakers to use part of the city’s HK$3 trillion Exchange Fund to pay for infrastructure projects or social welfare.

Norman Chan Tak-lam, the chief executive of the Monetary Authority, said the fund needs every penny to cope with unexpected financial crises.

Some HK$800 billion of the fund is needed to back Hong Kong’s monetary base and underpin the currency peg to the US dollar.

Most of the rest consists of the government’s reserves and the fund’s own accumulated surpluses.

The fund has grown from HK$350 billion in 1993 to HK$3 trillion, prompting suggestions that there is more than enough money to maintain financial stability and that the surplus could be put to use now.

But Chan said the experience of the global financial crisis in 2008 showed that the government should be ready for every eventuality.

The government decided to provide a full guarantee for HK$5.8 trillion of deposits in 2008. The total assets of the local banking sector had grown to HK$17 trillion at the end of last year, Chan said.

“Without a sizable Exchange Fund to back the blanket guarantee, we could not have restored the confidence of depositors and the market to maintain financial stability [in 2008],” he wrote in an article posted on the authority’s website on Wednesday.

Chan also pointed out that in August 1998 the government intervened in the stock market to the tune of HK$118 billion in order to “drive away currency speculators”. At the time the local market cap was HK$2 trillion, now it is over HK$24 trillion.

Similar intervention now would require HK$1.4 trillion, Chan said.

“If the Exchange Fund did not hold sufficient assets we would not be in a position to undertake the necessary operation to protect Hong Kong against another speculative attack of this kind,” he said.

The returns on the fund's investments have also been criticised. Last year it managed a return of 2.3 per cent, below the rate of consumer inflation.

In the first three months of this year, its return was down 64 per cent from the same period last year.

Chan defended the returns, saying the fund had to invest in a “conservative and prudent manner” and could not take "excessive risks".

The AAA sovereign rating Standard and Poor’s gave to Hong Kong in 2010 was also due to the funds assets, Chan said.