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LCQ5: Management of the Exchange Fund
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     Following is a question by the Hon Mrs Regina Ip and a reply by the Financial Secretary, Mr John C Tsang, in the Legislative Council today (April 28):

Question:

     According to the latest information of the Hong Kong Monetary Authority ("HKMA"), the official foreign currency reserve assets amounted to US$258.8 billion as at the end of March 2010, which ranked seventh in the world.  Yet, there have been comments that HKMA has always adopted a relatively conservative investment strategy and, as a result, the compounded annual return of the Exchange Fund from 1994 to 2008 was 6.1% only, which was in general lower than the investment return rate of sovereign wealth funds.  In this connection, will the Government inform this Council:

(a) given that it is clearly stated in the Articles of Association of the China Investment Corporation ("CIC"), the sovereign wealth fund of the Motherland, that the company's business objectives are to carry out an active and steady operation and endeavour to "maximise" the interests of the shareholders (i.e. the country and the people) within an acceptable scope of risks, of the measures adopted by the Hong Kong SAR Government to maximise the interests of Hong Kong people in respect of their assets (i.e. foreign exchange reserves);

(b) given that there have been comments that the Government does not need to use all the foreign exchange reserves to maintain the Linked Exchange Rate System, plus the fact that Hong Kong may obtain short-term liquidity support through participation in the "Chiang Mai Initiative Multilateralisation", whether the Government will reconsider allocating a small portion of the Exchange Fund (such as one-tenth or US$25 billion) to set up a sovereign wealth fund and establish a new company to manage the fund independently, so as to seek higher returns and make strategic investments which dovetail with those Hong Kong industries which enjoy competitive edge; and

(c) given that when CIC was established in September 2007, the Ministry of Finance raised RMB1.55 trillion through the issuance of treasury bonds and acquired foreign exchange reserves equivalent to US$200 billion to form CIC's registered capital, whether the Government will consider raising funds in a similar manner?

Reply:

President,

     My reply to the question is as follows:

(a) The statutory purpose of the Exchange Fund is to maintain monetary and financial stability, and its primary investment objectives are capital preservation, ensuring that the entire Monetary Base is fully backed by highly liquid US dollar-denominated assets at all times and that there is sufficient liquidity.  The Hong Kong Monetary Authority (HKMA) manages the Exchange Fund prudently.  Subject to investment strategies, HKMA is also prepared to pursue opportunities to diversify the Fund's investments for the purposes of better risk management and yield enhancement, in order to preserve the long-term purchasing power of the Exchange Fund.

(b) The HKSAR Government has no intention to establish a sovereign wealth fund.  Subject to the investment objectives and strategies for the Fund, the HKMA reviews the asset and currency mix of the Exchange Fund regularly to seek diversification to pursue a higher investment return.

(c) There is no intention to raise funds.

Ends/Wednesday, April 28, 2010
Issued at HKT 12:52

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