Hong Kong’s Exchange Fund posts worst results since 2008 financial crisis

The Exchange Fund, the local reserve to defend the Hong Kong currency, reported a loss of HK$18.3 billion last year, its second worst performance ever and its first loss since global financial crisis in 2008, as heavy foreign exchange losses and poor returns from equity investments took a toll.

For the first time in a decade, the Hong Kong Monetary Authority (HKMA), which uses the HK$3.429 trillion Exchange Fund to defend the Hong Kong dollar peg to the US dollar, have been forced to intervene in the market in recent days to prevent the currency from weakening too much, according to currency traders.

The Hong Kong dollar hit an 8-year low at 7.8294 on Wednesday, dangerously close to the weak end of the peg band at 7.85. Capital outflow from the stock markets and concerns over economic weakness have put pressure on the Hong Kong currency.

The poor returns of the fund – announced by chief executive Norman Chan Tak-lam on Friday – and the weak currency have come as a double blow for the HKMA, the city’s de facto cental bank. The HKMA invests the fund, which includes the government’s fiscal reserves and other assets, in stocks, bonds and property.The fund is used to maintain financial stability including defending the Hong Kong dollar peg to the US dollar at 7.80.

“The HKMA has no intention to change the peg and we will defend the peg,” Chan said. He added that it was natural for the Hong Kong dollar to weaken as a portion of the US$130 billion hot money that has flowed into the city in the past few years begins to head for the exit, following the US interest rate hike in December.