Hong Kong’s Future Fund likely to have fallen short of investment target

Slowdown in global market dashes hopes of a 5pc return in first year

PUBLISHED : Tuesday, 03 January, 2017, 10:13pm
UPDATED : Wednesday, 04 January, 2017, 11:10pm

A major fund set up a year ago to generate higher investment returns for government fiscal reserves might not have performed as well as hoped in its first 12 months due to lower-than-expected yields and low interest rates, Hong Kong’s top financial official has warned.

Acting Financial Secretary Chan Ka-keung did not provide figures on Tuesday as he gave lawmakers a heads-up on the performance of the “Future Fund”, which is designed to help cushion any deficits to come.

Chan said the investment returns from the Exchange Fund – the reserve used to defend the Hong Kong currency peg to the US dollar – were lower then expected, averaging around 3 per cent per annum, instead of the expected 5 to 6 per cent in the last few years.

Future Fund plan cringe-making and embarrassing

Before the establishment of the Future Fund, advisers to then finance minister John Tsang Chun-wah used a threshold of 5 per cent annual investment return – also the expected return rate for the Exchange Fund – to promote it. At that rate, the Future Fund was expected to reach HK$510 billion by 2026.

The Future Fund was established on January 1, 2016, with an initial injection of HK$219.7 billion and a HK$4.8 billion top-up in July. It was expected to yield returns on par with or higher than the Exchange Fund to sustain it and tackle anticipated increasing expenditure.

“The reason for the lowered expectation is because of the slowdown in the global market,” Chinese University academic Chong Tai-leung said. “It’s difficult to find an investment that returns 5 or 6 per cent right now.”

Chan said the return target for the Future Fund would be “somewhat higher” than the Exchange Fund, and details would be provided to lawmakers “in due course”. Investing in long-term goal portfolio items with higher return rates would help achieve better results, he added.

Lock up Hong Kong future fund for at least 10 years, government advisers say

Chong said the government should be realistic and lower the return target to anywhere between 3 and 4 per cent growth per annum.

Accountancy sector lawmaker Kenneth Leung was not concerned about lower returns, but urged the government to focus on how to increase productivity in the face of an ageing population.

“Apart from building up a [budget] buffer you also need to better restructure our economy to cater for the decrease in the working population by increasing our productivity,” he said. “You need to do both.”

At the same meeting, government economist Helen Chan stressed that fiscal conservatism was needed due to expected falls in revenue, rising expenditure, unfunded liabilities, an ageing population and a decreasing labour force, among other challenges.

By 2026 the government forecasts that for every three people of working age, there will be one person aged 65 or above, which will put pressure on funding of health and support services for the elderly.

The government expects a budget deficit of HK$29 billion in 2018-2019 and HK$22.5 billion in 2019-2020.