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September 2023
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Hong Kong’s Exchange Fund recovers as markets rebound

Exchange Fund
By Hui Ching-hoo   
July 29, 2021

Hong Kong’s Exchange Fund reported an investment income of HK$102.7 billion (US$13.16 billion) in the first half of 2021, recovering from a HK$10.6 billion loss in the same period last year as global financial markets bounced back from the coronavirus crisis.

The Exchange Fund is the city’s foreign reserves for defending the value of the local dollar, which is pegged at HK$7.8 per US dollar but allowed to trade between HK$7.75 and HK$7.85.

The fund’s investment gain in the first-half brought its accumulated surplus to HK$834.6 billion as of end-June, the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, says in a statement on July 27.

Assets climbed to HK$4.57 trillion from HK$4.19 trillion in June 2020.

“Driven by the continued implementation of loose monetary policies and fiscal measures as well as rising vaccination rates, the global economy started to recover gradually in the first half of 2021,” HKMA Chief Executive Eddie Yue says in the statement.

The Exchange Fund’s non-Hong Kong equity investments, which account for around 12.2% of its overall assets, posted an investment gain of HK$46.4 billion between January and June, recovering from a HK$15.4 billion loss in the first half of 2020.

Yue note that US stocks has reached new highs, with the S&P 500 Index rising 14.4% in the first half of the year.

The rest of the Exchange Fund’s assets are in Hong Kong stocks, bonds and a catch-all category called ‘other investments’.

Bonds, the fund’s single largest category, accounting for around 68.7% of assets, took a hit from rising US inflation.

The investment gain from bonds was just HK$1.3 billion, sharply down from HK$74.7 billion in the first half of 2020 as concerns about inflation weighed on US government bond prices.

“Rising inflation expectation has led to a sharp increase in the long-term US Treasury yields in the first quarter,” Yue says. “Despite slight downward adjustments in yields in the second quarter, bond prices have decreased across the board, resulting in the relatively lacklustre performance of the bond portfolio.”

He says HKMA will continue managing the Exchange Fund “prudently” and remain “flexible”.

“We will also implement defensive measures as appropriate and maintain a high degree of liquidity to deal with possible financial disruptions,” he adds.