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Hong Kong Monetary Authority (HKMA)

Exchange Fund third quarter investment return drops 97 per cent on year to HK$1.6 billion

  • The Exchange Fund returned HK$1.6 billion (US$204.3 million) during the quarter, substantially lower than HK$61.8 billion a year earlier
  • The major drag on returns during the quarter was a foreign currency valuation loss of HK$16.2 billion
PUBLISHED : Monday, 05 November, 2018, 12:14pm
UPDATED : Monday, 05 November, 2018, 11:00pm

The Exchange Fund, Hong Kong's war chest to defend the currency, reported a 97.4 per cent year-on-year decline in its investment return in the third quarter, as a result of its heavy loss in Hong Kong stocks and foreign currency-related holdings, according to the Hong Kong Monetary Authority on Monday.

The fund returned HK$1.6 billion (US$204.3 million) during the quarter, substantially lower than HK$61.8 billion a year earlier. However the result was still better than the second quarter return of HK$100 million.

The major drag on returns during the quarter was a foreign currency valuation loss of HK$16.2 billion. The Exchange Fund does not invest in foreign currencies but its overseas assets suffered a valuation loss when converted to Hong Kong dollars.

Hit by stock rout, Hong Kong war chest makes risky belt and road bet

Another major factor in the third quarter is the fund’s Hong Kong equity holdings, which suffered a loss of HK$4.7 billion as the benchmark Hang Seng Index tumbled 4 per cent during the quarter.

This was offset by a HK$9.7 billion gain in bonds and a HK$12.8 billion gain in overseas equity investment.

For the first nine months, the Exchange Fund reported a gain at HK$36.7 billion, down 81 per cent from HK$198 billion a year earlier.

The Exchange Fund was worth HK$4.033 trillion (US$514.87 billion) as of the end of September.

Norman Chan Tak-lam, chief executive of Hong Kong Monetary Authority said the Exchange Fund investment suffered from a volatile market amid the ongoing trade war between China and US.

“If the trade war between China and the US could not be resolved, the volatilities of the financial markets in Hong Kong, mainland China and other Asian and overseas markets would continue to increase. There is no winner in this trade war,” Chan said.

The Exchange Fund transferred HK$10.7 billion to the government in the third quarter and HK$32.9 billion in the first nine months this year.

Chan said the Exchange Fund has invested in two infrastructure projects, including two clean energy power plants, one located in Northern Europe and the other in South America. He said these infrastructure projects would bring in stable returns.

Several lawmakers have expressed concern the Exchange Fund will invest in projects related to the Belt and Road Initiative based on political concerns.

Hong Kong’s currency war chest reports 80 per cent decline in income

“Some of the Belt and Road Initiative infrastructure projects are in trouble. Will the Exchange Fund invest in these projects and put the Hong Kong people’s money at the Exchange Fund at risk?” lawmaker Alvin Yeung said.

HKMA’s Chan said the Exchange Fund would continue to invest in infrastructure projects including those in the belt and road initiatives.

“The investment however would be the focus on commercial return and risk levels and would not invest into these projects due to political concerns,” Chan said.

Ben Kwong Man-bun, a director at brokerage KGI Investment, said there is little chance of the Exchange Fund turning around any time soon.

“The Exchange Fund investment this year has been hard hit by the volatile stock markets worldwide due to the US-China trade war and the US interest rate rises,” he said.

“These two major factors will not disappear any time soon. The trade war is likely to be a long-term game while the US interest rate is set to increase several times more between December and next year. The mainland economy has been affected, and this has been reflected in the slump in A shares and the weakening of the yuan.

“The HKMA is likely to continue with a defensive investment approach to avoid losses in the near term.”

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