The city's Exchange Fund, which had its second-best investment gain on record in 2012, will invest more in yuan-denominated bonds and shares this year.
The Hong Kong Monetary Authority (HKMA) uses the fund, which has HK$2.782 trillion in assets, to ensure the stability of the Hong Kong dollar. The fund reported investment earnings of HK$108.6 billion last year, the best year since the HK$142.2 billion made in 2007. Last year's return is almost four times the HK$27.1 billion it earned in 2011.
HKMA chief executive Norman Chan Tak-lam said the fund's performance was due to strong Hong Kong and overseas stock markets in the second half.
But he warned of tough times ahead, and said the fund would put more money into yuan and other emerging markets' shares and bonds to achieve a better return. The fund's yuan and emerging markets investments made an 8 per cent return last year, higher than the 4.4 per cent from investments in advanced markets' bonds and shares.
"I expect global financial markets will continue to be subject to many uncertainties in 2013," Chan said yesterday.
"Although Europe has earned some respite from its debt crisis, the outlook for the real economy and jobs situation in the euro zone does not provide any grounds for optimism. As for the US, the momentum for growth remains lacklustre."
The fund has invested in yuan and emerging markets in recent years but they, together with the property and private equity investments, are subject to a combined cap of HK$200 billion. Chan said from this year there would be no cap on yuan and emerging market investments. "The yuan and other emerging markets' … have good liquidity and performance," he said.
But Chan said the HKMA needed to negotiate with the mainland authorities for higher investment quotas because the fund had already used up its 30 billion yuan allowance for the mainland interbank bond market and US$1 billion limit for the A-share market. China still has capital controls and only allows foreign investors, including the HKMA, to invest in mainland markets through a quota system.
Sun Hung Kai Financial executive director Joseph Tong Tang said the HKMA was making the right move. "The yuan and emerging markets are looking positive and these investments will enhance the Exchange Fund's returns," he said. "It would be better for the Exchange Fund to invest more in stocks than in bonds in these markets as the bond yields are not looking good this year."
The value of the fund's overseas stocks increased HK$42.6 billion last year while its Hong Kong stock portfolio gained HK$30.7 billion. Its investment in bonds increased by HK$33.1 billion. This was offset by a valuation loss of HK$1.4 billion in foreign exchange.
The fund has HK$46.9 billion invested in yuan bonds and shares, and HK$41.4 billion in emerging markets' bonds and shares. It also has HK$47.1 billion invested in private equity and HK$13.5 billion in property, which both had a 10 per cent return last year.
The government will receive a fixed return of 5.6 per cent, or HK$8 billion, on the fiscal reserves deposited in the fund.