Source:
https://scmp.com/article/1007824/exchange-fund-cast-wider-net

Exchange Fund to cast wider net

The Exchange Fund plans to cast a wider investment net to lift returns after suffering a HK$6.3 billion investment loss in the second quarter.

The fund said it would put more money into property and yuan-based products.

Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority (HKMA), which handles the fund's investments, said the loss resulted from the deepening of the euro-zone crisis in May that dragged down global markets. The second-quarter loss offset a HK$44.4 billion profit in the first quarter.

In the first half, the fund earned HK$38.1 billion, down 17.9 per cent from a year earlier. The government, which puts its reserves in the fund for investment, will receive HK$19.3 billion for the half-year.

The fund had HK$2.55 trillion in total assets as of June 30 and has a mandate to stabilise the Hong Kong dollar under the HKMA's supervision. Its core investments in low-risk bonds and stocks give stable but low returns, so it started investing in property and yuan products from 2009 to lift returns.

The HKMA's Exchange Fund has about HK$100 billion in property, private equity and yuan-denominated shares and bonds, along with emerging-market bonds. It plans to increase this by another HK$60 billion, bringing the total to HK$160 billion - close to the HK$190 billion ceiling for such investments.

The HKMA is considering lifting the ceiling so it can put more money into major overseas property markets, emerging markets and yuan products, which offer better long-term returns than stock and bonds.

The authority has just been granted a new US$700 million qualified foreign institutional investors (QFII) quota to invest in A-share markets, brining its total QFII quota to US$1 billion. Although Shenzhen and Shanghai have been among the world's worst-performing markets, the HKMA said it might be a good time to buy.

The fund lost HK$14.5 billion from foreign-exchange transactions in the second quarter, HK$10.3 billion from overseas stocks, and HK$4 billion from Hong Kong stocks. This was offset by a HK$22.7 billion gain from bond investments.

Kenny Lee Yiu-sun, chief executive of First China Securities, expected further Exchange Fund losses in the third quarter. 'The stock markets worldwide are still haunted by the European sovereign bond crisis, which has no signs of a quick solution. Many investment funds suffered losses and the Exchange Fund is likely to continue to suffer a loss in the third quarter,' Lee said.

But Lee did not think the fund should substantially increase its investment in overseas property and yuan products. 'The overseas property markets are also facing high volatility while the mainland stock markets are not doing well. It would be too dangerous for the Exchange Fund to have a big exposure on these investments,' Lee said. 'The HK$190 billion ceiling on these types of investments is already very high and it should not increase further. The Exchange Fund is aimed at defending the local currency and it is the money of the Hong Kong people. The HKMA had better to stick to a more conservative investment strategy.'

Chan also said the outlook was uncertain. 'There will be great uncertainties and risks in the investment environment and sentiment of the global financial markets in the second half of the year,' Chan said.