June 2021
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Hong Kong's Exchange Fund recovers in second quarter

HK Flag and US currency
By Hui Ching-hoo   
July 28, 2020

Hong Kong’s Exchange Fund posted a HK$101.4 billion (US$13 billion) investment gain in April through June, bouncing back from a record quarterly loss in the first three months, but warned that the second half of 2020 remains “challenging” amid “very fragile” global economic recovery.

The second quarter rebound wasn’t enough to erase the HK$112 billion loss in January through March.

The Exchange Fund recorded a HK$10.6 billion investment loss in the six months through June compared to a HK$170 billion gain in the same period of 2019, the Hong Kong Monetary Authority (HKMA) says in a statement on July 24.

Eddie Yue, chief executive of the de facto central bank, notes that the coronavirus pandemic caused “wild swings” in financial markets in the first half of 2020, with sharp corrections in global stocks in the first quarter.

“With the easing of the Covid-19 situation in some places in the second quarter, coupled with monetary and fiscal stimulus measures introduced globally, major equity markets have rebounded significantly,” he says in the statement.

According to Mr. Yue, the Exchange Fund’s bond portfolio achieved “decent return” in the second quarter as rate cuts and quantitative easing by major central banks drove up bond prices. He did not provide the return figure.

“Looking ahead, the investment environment in the second half of the year remains challenging. While many governments have begun to relax their anti-epidemic measures, the global economy is still very fragile, and the timing and speed of recovery remain highly uncertain,” he says.

The Exchange Fund’s bond investments posted a gain of HK$74.7 billion in the six months to June, but its equities investments lost HK$35 billion. The fund also reported a HK$50.3 billion loss from currency exchange and other investments.

Government funds like the Exchange Fund generally become more conservative with asset allocation in uncertain markets and tend to raise their exposure to less risky assets, says Linus Yip, chief strategist of Hong Kong’s First Shanghai Securities.

“With the funds’ risk aversion and long-term investment objectives, they are believed to further reallocate their equity investments to bonds although the bond yields are not very attractive currently,” Mr. Yip tells Asia Asset Management.

The Exchange Fund is Hong Kong’s foreign reserves for defending the value of the local dollar.

The Hong Kong dollar is pegged at HK$7.8 per US dollar, but is allowed to trade in a range within HK$7.75 and HK$7.85.

The Exchange Fund had HK$4.195 trillion of total assets as of June 2020, down from HK$4.206 trillion at the end of 2019.