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Hong Kong’s Exchange Fund incurs biggest loss since 2008 in once in 50-year bear market

Exchange Fund
By Hui Ching-hoo   
February 1, 2023

Hong Kong’s Exchange Fund investments swung to a HK$202.4 billion (US$25.94 billion) loss last year, the largest since 2008, as rate hikes, supply chain snarls and the war in Ukraine caused a once in half-century bear run in global markets that drove nearly all asset classes into the red.

Prospects for 2023 are cloudy. Financial markets are likely to continue facing “significant uncertainties” in a “complicated and challenging” investment environment, warns Eddie Yue, chief executive of the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank and supervisor of the Exchange Fund.

The Exchange Fund is Hong Kong’s foreign reserves for defending the value of the local dollar, which is kept within a HK$7.75-HK$7.85 range against the US dollar.

The 2022 loss, which translates into a minus 4.4% return, wiped out the fund’s HK$170.5 billion investment gain in 2021.

Its investments in non-Hong Kong equities and bonds swung to losses of HK$61.2 billion and HK$53.3 billion, respectively, while losses in Hong Kong equities narrowed modestly to HK$19.5 billion from HK$21 billion in 2021, the Exchange Fund says in a statement on January 30.

Its total assets dropped to around HK$4.01 trillion as of end-2022 from HK$4.57 trillion a year ago.

Yue points out that the Russia-Ukraine war, supply chain disruptions and rate hikes by global central bank to curb inflation combined to create an “exceptionally volatile year” for global markets.

“This investment environment not only undermined the conventional complementary effects of bonds and equities, but has also marked 2022 as the only year in almost half a century during which returns from equities, bonds and major currencies against the US dollar all recorded negative returns simultaneously.”

“Looking ahead in 2023, financial markets will continue to face significant uncertainties and asset prices are expected to remain volatile,” Yue says in the statement. “Despite the complicated and challenging investment environment, the Exchange Fund will remain committed to the principle of capital preservation first while maintaining long-term growth.”

He adds that HKMA will continue the manage the fund “prudently” and diversify its investments for higher long-term returns.