HKMA warns of potential 2017 losses from Exchange Fund amid volatile market

Hong Kong government expected to see a lower return of 3.3 per cent for 2016, down from 5-6 per cent in previous years

PUBLISHED : Tuesday, 10 January, 2017, 4:29pm
UPDATED : Tuesday, 10 January, 2017, 11:50pm

The Hong Kong government should brace itself for a lower interest rate returns from the Exchange Fund or even potential losses due to the volatile investment environment, according to Hong Kong Monetary Authority deputy chief executive Eddie Yue Wai-man.

Yue issued the warning in an article posted on the de facto central bank’s website, which described the challenges faced by the Exchange Fund and the potential for the government to earn income from it.

The HKMA uses the HK$3.57 trillion fund, which includes the government’s fiscal reserves and other assets, to invest in stocks, bonds and property. The fund is also used to maintain financial stability, which includes defending the Hong Kong dollar’s peg of HK$7.80 against the US dollar.

The government receives interest payments from the Exchange Fund based on average returns over the past six years, which contributes significantlyto the government’s income.

Yue warned that the government may need to expect lower income from the fund.

“As the investment portfolio recorded relatively high returns before 2010, the government and the relevant statutory bodies enjoyed an annual rate of interest payment of 5 to 6 per cent in the past few years. However, in 2016 the rate dropped to 3.3 per cent due to the inclusion in the formula of relatively lower investment returns in recent years,” Yue said.

“As we enter the post-quantitative easing era, the investment outlook has become highly unpredictable,” he warned.

As we enter the post-quantitative easing era, the investment outlook has become highly unpredictable
Eddie Yue, HKMA deputy chief executive

Yue said the short-term return of the Exchange Fund on a quarterly or annual basis “will be subject to greater pressure and may even record short-term loss, which may further lower the rate of interest payment”.

“The outlook is far from sanguine. We will continue to adhere to the investment principle of ‘capital preservation first, long-term growth next’. While remaining prudent, we will also be flexible and proactive in managing the Exchange Fund with a view to achieving a better long-term return for the wealth of the Hong Kong people,” Yue said.

The Hang Seng Index posted a modest growth of 0.4 per cent in 2016, while the strong US dollar – which has risen to its highest level in 14 years against other currencies – will result in valuation losses on Exchange Fund assets in other currencies.

The Exchange Fund is expected to report its full year results later this month. In November, the fund reported that its first nine months of profit from investment returns stood at HK$86.8 billion, a turnaround from a net loss of HK$36.8 billion in the same period in 2015.

The Exchange Fund reported a loss of HK$18.3 billion in 2016 – its second-worst performance ever and its first loss since the global financial crisis in 2008 – as heavy foreign-exchange losses and poor returns from equity investments took a toll.