Exchange Fund faces downturn

The investment returns of the Exchange Fund in the second quarter will be hit hard by the euro-zone crisis and the Hong Kong Monetary Authority will accordingly adjust its portfolio to diversify risks, says authority chief executive Norman Chan Tak-lam.

'We are closely monitoring the sovereign debt crisis and will adjust our currency and investment portfolio when needed,' Chan told legislators at the monthly financial affairs panel meeting yesterday.

The investment income of the Exchange Fund, which has a mandate to support stability of the Hong Kong dollar under the oversight of the HKMA, increased 76.6 per cent year on year in the first quarter to HK$43.8 billion as a result of a bull run in Hong Kong and overseas stock markets.

The fund's income from overseas stocks stood at HK$28.2 billion, the return from Hong Kong stocks was HK$13.6 billion, while earnings from foreign-exchange transactions amounted to HK$4.1 billion during the quarter, offsetting a loss of HK$2.9 billion incurred in bond investments.

The government, which puts its reserves in the Exchange Fund for investment, will receive HK$9.7 billion in the first quarter.

Despite the strong first-quarter performance, Chan warned of tough times ahead in the second quarter. Markets across the world have slumped this month over the deepening euro-zone debt crisis and this would naturally dent the earnings of the fund.

'People should a take a more long-term view of the performance of the Exchange Fund, rather than focusing on short-term figures.'

The Hang Seng Index has lost more than 10 per cent in the past two weeks, almost wiping out gains it made in the first quarter, when it once stood above 21,000 points. The index was down to 18,922 yesterday.

Chan said investments in traditional stocks and bonds had fared badly and were getting riskier, so the Exchange Fund had increased its other investments to diversify risk.

The fund last year invested HK$83.6 billion in property, private equities and yuan-denominated shares and bonds, along with emerging-market bonds. Chan said these investments brought a better return but the fund would only invest up to one-third of the accumulated surplus into these assets to minimise risk.

Chan said the HKMA would also closely monitor the property market. 'It's hard to predict how the property market will perform in future. However, if property prices continue to rise, the HKMA may introduce more policies to cool down the market.'

Chan said the local banking sector did not hold Greek sovereign debt and local lenders were well prepared to cope with the euro-zone sovereign debt crisis.