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The Hong Kong Monetary Authority (HKMA) announced today that the Exchange Fund Advisory Committee (EFAC) has approved a new long-term asset allocation strategy for the Exchange Fund. The new investment benchmark is as follows:

              New Investment          Previous Investment

              Benchmark               Benchmark

   Bonds      80%                     90%

   Equities   20% (Hong Kong: 5%)     10% (Hong Kong: 0%)

   Currencies 80% US$-bloc            70% US$-bloc

              15% European-bloc       20% European-bloc

              5%  Yen                 10% Yen

The investment benchmark, which directs the long-term strategic investment of the Exchange Fund, is derived having regard to the investment objectives of the Exchange Fund. In April 1998, a new arrangement was adopted to determine the return on the fiscal reserves placed with the Exchange Fund. These fiscal reserves now enjoy a return achieved by the Exchange Fund as a whole. In November 1998, the assets of the Land Fund were merged into the Exchange Fund. In view of these developments, a review of the investment objectives and asset allocation strategy of the Exchange Fund was necessary and timely.

The new investment benchmark of the Exchange Fund is an optimal mix of assets designed to meet the following investment objectives:

(a) to preserve capital;

(b) to ensure that the entire monetary base will be at

all times fully backed by highly liquid short-term US

dollar denominated securities;

(c) to ensure sufficient liquidity for the purpose of

maintaining monetary and financial stability; and

(d) subject to (a) - (c) above, to achieve an investment

return that will preserve the long-term purchasing

power of the assets.

"In order to achieve a return that will preserve the long term purchasing power of the assets of the Exchange Fund, the new investment benchmark includes a 20% allocation to equities, of which 5% will be allocated to the Hong Kong equity market," said Mr. Joseph Yam, Chief Executive of the HKMA.

In the course of the Government's operation in the stock market last August, the Exchange Fund acquired a portfolio of Hong Kong equities which, together with the Hong Kong equities transferred from the Land Fund, account for about 17% of the Exchange Fund's total assets. This Hong Kong equity portfolio is presently managed by the Exchange Fund Investment Limited (EFIL) and the HKMA will also ask EFIL to manage, through external managers, the Hong Kong equities to be held as a long term investment portfolio. EFAC has already approved a set of investment guidelines which require the investment portfolio to be managed basically as an index-linked portfolio. It is intended that half of this portfolio will be managed as a passive portfolio replicating the Hang Seng Index whereas the remaining half will be allowed some moderate deviations from the Hang Seng Index. The external managers will be subject to guidelines that will prevent them from taking excessive risks or adopting overly aggressive trading strategies which may de-stabilise the market.

As at December 31 1998, assets of the Exchange Fund totalled about HK$910 bn. The 5% allocation to Hong Kong equities means that some HK$46 bn of the current HK$150 bn Hong Kong equity portfolio will be kept as a long-term investment portfolio. This also means that a smaller amount of shares than originally envisaged will need to be disposed in an orderly manner. EFIL is presently in the process of appointing a panel of financial advisers to assist in the design and implementation of detailed plans for the orderly disposal of these shares.

"The pace of re-balancing the asset mix of the Exchange Fund from 17% in Hong Kong equities to the 5% in the investment benchmark will obviously depend on market conditions and may take some time. The Government is not in a hurry to offload the shares and is confident that EFIL will take great care in executing the disposal programme in an orderly manner without disrupting the market," Mr. Yam added.

END/Wednesday, March 3 1999

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