Hong Kong’s search for higher returns leads Exchange Fund down risky belt and road plan

  • The city’s de facto central bank has proposed using cash from the Exchange Fund to back infrastructure projects under Beijing’s ‘Belt and Road Initiative’
  • The Exchange Fund is expected to announce its first quarterly loss in two years as global stock markets take a nosedive
PUBLISHED : Thursday, 01 November, 2018, 8:00am
UPDATED : Thursday, 01 November, 2018, 10:59pm

The Exchange Fund, Hong Kong’s war chest of roughly HK$4 trillion (US$500 billion) in reserves, is about to report its first quarterly loss in two years as stock markets around the world tank, according to analysts.

The gloomy prediction comes as the city’s de facto central bank mulls the idea of seeking higher, longer term returns by using part of the fund to back infrastructure projects under Beijing’s “Belt and Road Initiative”.

But that proposition is facing criticism from some brokers and lawmakers, who say it is far too risky and ultimately would not guarantee better investment returns.

HKMA chief executive Norman Chan Tak-lam will report to lawmakers on November 5 on the fund’s results for the third quarter and the first nine months of the year.

“The Exchange Fund is likely to report a loss for its third-quarter investment return as its portfolio has been hit hard by the Hong Kong stock market slump,” said Gordon Tsui Luen-on, managing director of Hantec Pacific.

“The benchmark Hang Seng Index lost 4 per cent in the third quarter, which is the worst quarterly performance since the fourth quarter of 2016. That would lead the Exchange Fund to suffer a loss.”

In the last quarter, the Exchange Fund reported a return of just HK$100 million, the worst performance since the last three months of 2016 when it suffered a loss of HK$23.3 billion.

“One can expect that [the fund’s performance] has been affected by both rising US interest rates and the sell-off in global and Asian equities,” said Mark Konyn, AIA’s group chief investment officer.

The figure for the first nine months may also fall substantially from a gain of HK$245.1 billion in the same period a year earlier.

Is this just the beginning of ‘belt and road’ disputes between China and its partners?

The announcement that the HKMA may start to invest in belt and road projects was made by its deputy chief executive, Eddie Yue, in an article on the authority’s website on Monday.

“There are more than 80 jurisdictions along the belt and road, covering both developed and emerging markets,” Yue said. “Many of them have strong demand for infrastructure development, and some are viewed by seasoned investors with much optimism.

“It would only be natural that the Exchange Fund ends up investing in projects located in some of these countries.”

President Xi Jinping’s “Belt and Road Initiative” aims to create modern-day Silk Road trading routes across Eurasia and Africa by building railways, roads and ports.

But the ambitious strategy, which covers more than 65 countries across Asia, Africa and Europe, has faced its share of setbacks recently, with several countries cancelling projects under the scheme.

“Investment in the infrastructure projects may be risky because some of them may not be able to be completed or may suffer losses. Even the successful ones may need 10 to 20 years to reach completion,” said Kenneth Leung Kai-cheong, a Hong Kong lawmaker who represents the accountancy sector.

Botched Chinese railway project in Africa is a warning to belt and road investors

Robert Lee, executive director of brokerage firm Grand Finance Group, said the Exchange Fund should only invest a relatively small amount in belt and road projects, as an alternative investment.

“The higher risk may be compensated for by higher returns in the longer term that may beat the returns from traditional equities and fixed-income investments,” Lee added.

The Exchange Fund’s total infrastructure investments amount to about US$2.2 billion currently, a small proportion of the HK$235 billion (US29.96 billion) it allocates to long-term investments such as property, Yue said.

“We are here to create value – assess and select investment projects with prudence and a discerning eye, yet do not tie our own hands and pass up good opportunities,” he added.