Hong Kong’s Exchange Fund, the war chest used to defend the local currency from attacks by short-sellers, earned HK$11.6 billion (US$1.5 billion) from its investments in the first quarter as it benefited from a global rally in stock markets, according to the Hong Kong Monetary Authority (HKMA) . The gain was a turnaround from a record quarterly loss of HK$112 billion in the prior-year period, as equity markets around the world slumped last year against the backdrop of the coronavirus pandemic. The fund’s first-quarter returns this year, however, significantly trailed its gains throughout the remainder of 2020 as it suffered a HK$16 billion loss on its bond investments in the first three months of 2021. In particular, the fund’s results were sharply lower than the HK$145 billion earned in last year’s fourth quarter, the best quarterly performance on record. The preliminary results, revealed at a quarterly meeting with lawmakers at Hong Kong’s Legislative Council, were not audited and did not include financial results for the fund’s long-term “other investments”. Those figures are expected to be available later. Equities markets advanced broadly in the first quarter, supported by the roll-out of Covid-19 vaccines globally and a US$1.9 trillion fiscal stimulus package signed into law by US President Joe Biden in March. The Biden administration also proposed an additional package of US$2 trillion in infrastructure spending to help stimulate the US economy. In the first quarter, Hong Kong’s benchmark Hang Seng Index rose 4.2 per cent, compared with a drop of 16 per cent in the first three months of 2020. The Dow Jones Industrial Average rose 7.8 per cent in the first quarter, a sharp contrast to the 23 per cent drop a year earlier and its worst quarterly loss since 1987. On Monday, Eddie Yue Wai-man, the HKMA’s CEO, warned the sharp rebound in the US economy could spark inflation concerns and lead to a change in monetary policy, which could create “significant volatility in the financial markets and lead to an outflow of funds from Asia”. “Having said that, we have a strong financial system that is … resilient,” Yue said. “We are confident that the linked-exchange rate system will continue to operate efficiently.” Yue also expressed concern about the uptake of vaccinations in Hong Kong and how that could affect the city’s position as an international financial hub. Only about 10 per cent of the city’s 7.5 million people have been vaccinated, well below financial hubs in the US, the United Kingdom and Singapore, he said. “I’m worried if we don’t push up our vaccination rate our competitiveness will be affected,” Yue said. The Exchange Fund recorded a gain of HK$7.6 billion on its investments in Hong Kong stocks in the first quarter, compared with a loss of HK$28.4 billion a year earlier. The fund reported investment gains of HK$20.8 billion on Hong Kong equities in the first quarter of 2019. It earned HK$18.8 billion from its overseas stock investments in the first three months of this year, compared with a loss of HK$83.1 billion a year earlier and a gain of HK$49.9 billion during the corresponding quarter in 2019. The fund also reported a gain from foreign-exchange valuation changes on its assets of HK$12 billion in the first quarter, compared with a loss of HK$29 billion in the first three months of 2020 and a gain of HK$13.5 billion during the same quarter in 2019. The fund reported a loss of HK$16 billion on its bond investments in the first quarter, compared with gains on its bond investments of HK$54.4 billion in the year-ago period and a HK$36.7 billion increase in the first quarter of 2019. Yue said the fund emphasises liquidity, so it mostly holds one-year bonds. He said the fund’s portfolio has some flexibility in what kinds of bonds it holds, so it would make some adjustments based on “prevailing market conditions”. On Monday, HKMA officials did not report results on its long-term “other investments”. It suffered a loss of HK$25.9 billion in that category of investments in the first quarter of 2020, compared with a gain of HK$12.5 billion in the same period in 2019. Hong Kong’s government set up the Exchange Fund in 1935 to back the issuance of banknotes. Since the HKMA was established in 1993, it has invested the fund’s money in stocks, bonds and overseas property. The Exchange Fund, which stood at HK$4.54 trillion as of the end of March, protects the Hong Kong dollar, which is pegged to the US dollar. The HKMA intervened in the market 85 times in 2020, selling HK$383.5 billion to keep the local currency within its trading band of HK$7.75 to HK$7.85 per US dollar. The city’s treasury places its fiscal reserves with the Exchange Fund and earns a share of any profit from its investments. The government received HK$9.2 billion from the Exchange Fund in the first quarter, after receiving HK$32.6 billion for all of 2020. A strong return on both stocks and bonds last year helped the Exchange Fund report a gain of HK$235.8 billion last year as a whole, compared with a record full-year high of HK$262.2 billion in 2019.