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Hong Kong Monetary Authority (HKMA)

Exchange Fund, Hong Kong’s war chest, reports 80 per cent decline in investment income as trade war, US interest rates bite

Exchange Fund posts an investment income of HK$27.3 billion for period through to June end, down from HK$136.2 billion in the same period a year ago

PUBLISHED : Friday, 27 July, 2018, 9:05pm
UPDATED : Friday, 27 July, 2018, 11:41pm

Hong Kong’s Exchange Fund, the city’s reserves and war chest used for defending the Hong Kong dollar, on Friday posted investment income for the first half of 2018 that was 79.96 per cent lower than a year ago. The decline was attributed to stock investment losses caused by the US-China trade war, as well as interest rate increases put in place by the US Federal Reserve.

Norman Chan, chief executive of the Hong Kong Monetary Authority, the city’s de facto central bank, said: “Asset prices in the global financial markets were in general at their historical highs, and the markets might have underpriced some risk factors, including the pace of US interest rate normalisation and the US government’s trade policy.

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“These factors could easily trigger significant corrections and volatility in asset markets.”

The Exchange Fund posted an investment income of HK$27.3 billion (US$3.48 billion) for the period through to June end, 2018, compared with a revised income of HK$136.2 billion in the same period a year ago, said the HKMA.

Losses of HK$3.4 billion arose from Hong Kong equities, while losses of HK$2.7 billion came from “other equities”. Gains of HK$19.5 billion were recorded from bonds, and HK$5 billion from foreign exchanges, where there was a positive currency translation effect on non-Hong Kong dollar assets. The remaining HK$8.9 billion in gains was from “other investments”, it said.

The global investment environment will become even more complex and challenging in the second half of the year
Norman Chan, CEO, Hong Kong Monetary Authority

“Looking ahead, the global investment environment will become even more complex and challenging in the second half of the year,” said Chan. “If the trade war continues to heat up, the global economy and financial markets will be taking a hit. At the same time, the US Federal Reserve might step up the pace and magnitude of its monetary policy tightening amid rising inflation, leading to volatility in financial markets.”

The city’s benchmark Hang Seng Index is trading at about seven-month lows, dropping in line with China’s stock market. The Shanghai Composite Index has fallen by more than 20 per cent from a peak in January, therefore, technically a bear market.

The Dow Jones Industrial Average, on the other hand, closed the first half of 2018 up by about 3.5 per cent.

Chan said the Exchange Fund would employ defensive measures and investment diversification in such an environment. The fund, which is controlled by the HKMA, invests in domestic and international stocks, bonds and overseas assets. Its total assets rose to HK$4.1 trillion as of end June, an increase of HK$85.4 billion from the end of 2017.

Hong Kong’s bill for defending city’s currency since April stands at HK$52.9 billion

In the five weeks through to mid-May, it spent HK$70.35 billion to support the Hong Kong dollar as the currency weakened and more investors shifted into US dollars to profit from the gap between interest rates in Hong Kong and the US.