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Hong Kong Monetary Authority (HKMA)

Hong Kong’s Exchange Fund has best first quarter on record, as stocks rally bolstered income

The Exchange Fund’s investment income surged to HK$57.1 billion in the first quarter, more than double the same quarter last year, as stock market rallies bolstered returns.

PUBLISHED : Monday, 29 May, 2017, 11:33am
UPDATED : Monday, 29 May, 2017, 11:23pm

Hong Kong’s Exchange Fund, the city’s reserves and cash arsenal for defending the currency, reported its best first quarter on record, after investment gains in global equity markets more than doubled its returns for the first three months of 2017.

The fund’s investment income surged to HK$57.1 billion (US$7.33 billion) in the first quarter, bolstered by market rallies on the Hong Kong Stock Exchange and abroad, compared with HK$24.1 billion last year, according to the Hong Kong Monetary Authority (HKMA).

The city’s government invests its reserves with the Exchange Fund and shares its profits and losses, using the fund to buy or sell Hong Kong dollars to maintain the currency’s peg to the US dollar, defending it against speculation.

The result is a strong performance for the fund, extending last year’s financial turnaround from a 2015 investment loss, helped by rallies in the different stock markets that the Exchange Fund invests in.

“The stock markets in Hong Kong and the US have risen in the first quarter,” said Christopher Cheung Wah-fung, a broker and Hong Kong legislator who represents the city’s financial services sector. “The bond markets are also doing well. But the US interest rate increases expected next month may lead some investors to sell in the markets. This could hurt the stock market performance and affect the performance of the Exchange Fund.”

Hong Kong’s benchmark Hang Seng Index rose 9.4 per cent in the first quarter, while the China Enterprises Index advanced 9.1 per cent, both outperforming the 7 per cent average return among 96 global primary indices tracked by Bloomberg. The Dow Jones Industrial Average rose 4.6 per cent in the same period.

The majority of the Exchange Fund’s gains in investment income were from overseas equities, with HK$24.5 billion earned from non-Hong Kong stocks and HK$14.3 billion in gains from the city’s stocks, according to the HKMA’s data. The fund reported HK$6.4 billion in income gains from investing in bonds.

Its foreign exchange investment income swung to a gain of HK$11.9 billion in the quarter, compared with losses last year and in 2015, boosted by the 1.3 per cent increase in the value of the renminbi, while the Hong Kong dollar fell 0.5 per cent.

The city’s de facto central bank, the HKMA has invested HK$3.363 trillion in the Exchange Fund, comprising the city government’s fiscal reserves and other Hong Kong assets, global equities, bonds and overseas properties.

For its investment, the Hong Kong government received HK$5.6 billion in dividends for the quarter.

Still, the US Federal Reserve has foreshadowed raising interest rates this year, heralding the end of the era of easy financing for the global financial system.

That may lead to turbulence and declines in the equity, bond and currency markets, affecting the returns of the Exchange Fund.

“We are not sure if such strong momentum can continue in the second quarter and the rest of the year,” said the monetary authority’s CEO Norman Chan Tak-lam, during a regular meeting on Monday. “It depends how stock and bond markets worldwide respond to higher US interest rates.”