The Exchange Fund, the war chest used to defend the Hong Kong dollar from attacks by short-sellers, reported the worst year on record in 2022 as it lost HK$202.4 billion (US$25.8 billion) during a historically bad year in the global financial market, according to the Hong Kong Monetary Authority (HKMA). The record annual loss, the first since 2015, compares with a gain of HK$191.9 billion in 2021. It is only the third time that the fund has reported an annual loss since the HKMA, which manages the fund, began disclosing annual results in 2000. The loss, announced on Monday, far surpasses the fund’s first annual loss of HK$75 billion in 2008 amid the global financial crisis, which was followed by a HK$15.8 billion loss in 2015 in the wake of the Chinese stock market crash. “Financial markets experienced an exceptionally volatile year,” HKMA CEO Eddie Yue Wai-man said at a press conference on Monday afternoon. Last year was the only year in almost 50 years that returns from equities, bonds and major currencies against the US dollar all recorded negative returns simultaneously, Yue said, citing the Russia-Ukraine conflict and ongoing pandemic measures that disrupted global supply chains, fuelled inflation and prompted central banks to tighten their monetary policies. “Looking ahead in 2023, financial markets will continue to face significant uncertainties, and asset prices are expected to remain volatile,” he said. “The monetary policies of major central banks will continue to dominate the investment outlook,” while lingering geopolitical tensions may further impact global economic growth and heighten risk-off sentiments. Amid this challenging environment, the HKMA CEO pledged that the Exchange Fund will remain flexible, implement defensive measures as appropriate, and maintain a high degree of liquidity. How the Exchange Fund has protected Hong Kong dollar peg, fought off Soros “We will continue to diversify investments to strive for higher long-term returns for the Exchange Fund,” he said. “We will also ensure that the Exchange Fund will continue to serve its purpose of maintaining monetary and financial stability in Hong Kong in an effective manner.” The fund gained HK$76.4 billion during the fourth quarter, bouncing back from a HK$113 billion loss during the three months that ended in September, which was the second-biggest quarterly loss in the 19 years since HKMA began reporting quarterly earnings in 2003. The fourth-quarter gain could not offset a record HK$265.5 billion investment loss in the first nine months in 2022, which is far higher than the HK$83.3 billion loss for the same period in 2008. <!--//--><![CDATA[// ><!-- !function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data["datawrapper-height"][a]+"px"}}}))}(); //--><!]]> However, the fourth-quarter performance spared the fund from suffering four consecutive quarterly losses for the first time. The fund also recorded three consecutive losing quarters after the 2008 global financial crisis. The outlook for this year is optimistic, according to stock brokers, as the Hong Kong market has rallied to an 11-month high amid a 13 per cent rally this month after China abandoned its zero-Covid policy and reopened its border on January 8. The fund’s investment income in 2022 was dented by the HK$19.5 billion valuation loss of its Hong Kong stock portfolio, slightly less than a loss of HK$21 billion a year earlier. Hong Kong’s benchmark Hang Seng Index lost 15 per cent in 2022, while the Hang Seng Tech Index tumbled by 27 per cent. FTX creditors list includes Hong Kong regulators, 50 other local entities Losses from equity holdings in markets outside Hong Kong amounted to HK$61.2 billion, from a HK$68.4 billion gain previously, amid the worst year since the 2008 crisis for major US indexes. The Dow Jones Industrial Average dropped 8.8 per cent, the S&P 500 lost 19.4 per cent and the technology-heavy Nasdaq Composite tumbled by 33 per cent in 2022. In the bond market, the Exchange Fund took a HK$53.3 billion hit last year, versus a HK$12.4 billion gain a year earlier. The Fed’s policy tightening since March, which has resulted in seven interest-rate increases totalling 425 basis points, roiled fixed-income assets while stoking recession fears. The rate increases strengthened the US dollar, causing a valuation loss in the Exchange Fund’s non-US dollar assets. The dollar advanced by 12 per cent against a basket of major currencies in 2022, according to the nominal broad dollar index , which is used to measure the value of the dollar against a basket of currencies. Hong Kong stocks sink while China’s onshore market sizzles on Goldman upgrade As a result, the Exchange Fund reported a foreign-exchange translation loss of HK$40.1 billion, compared with a HK$16.8 billion gain in 2021. The Fed’s rate increases have also fuelled capital flight, prompting the HKMA to intervene 41 times last year to buy HK$242.08 billion to keep the local dollar within its HK$7.75-HK$7.85 trading band. The HKMA disclosed returns from its long-term investments of HK$20.3 billion for the first nine months of 2022, compared with a gain of HK$93.9 billion in the same period a year earlier. The authority typically publishes whole-year data on such investments at a later date. The total assets of the Exchange Fund fell by HK$559.1 billion in 2022, reducing the size of the fund to HK$4.01 trillion as of the end of last year. Despite the loss, the Exchange Fund will still pay HK$35 billion to the government for the nine-month period, based on a preset formula. As of the end of 2021, the Exchange Fund allocated 72 per cent of its investments to bonds, 12.3 per cent to offshore equities, 6.6 per cent to deposits, 5.1 per cent to overseas property or other private-equity investments as long-term investments, and 4 per cent to Hong Kong stocks, according to HKMA data.