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Exchange Fund results for the first nine months in 2007 The figures so far are encouraging although financial markets remain extremely volatile. I gave a briefing today to the Financial Affairs Panel of the Legislative Council on the work of the HKMA in the past few months. The briefing included the investment results of the Exchange Fund for the first nine months in 2007 and the Fundˇ¦s financial position at the end of September 2007. The investment income of the Exchange Fund in the first nine months of the year amounted to HK$114.6 billion. This is the highest ever recorded, not just for the first nine months of any year but also for any whole calendar year, assuming always, of course, that the fourth quarter does not turn out to be a big disappointment. Before this year, the highest annual investment income was HK$103.8 billion recorded in 1999 when, after the purchase of Hong Kong stocks in August 1998, we benefited from the stock-market rebound. The second highest figure was recorded just last year when we had an investment income just a shade below that of 1999, at HK$103.7 billion. I must confess that I had not expected to record over HK$100 billion in investment income in two consecutive years. But I doubt if anybody expected the bull run in the Hong Kong stock market to be so sharp and sustained for so long, and yields of long-dated US Treasuries to have stayed so low (and prices so high) under the influence of the interest rate cuts necessitated by the sub-prime crisis in the US. We did correctly anticipate a weakening US dollar, given the continuing, large external imbalance. But then the year is not over yet and financial-market volatility remains the highest we have seen since the financial crisis of 1997-98. We are in fact seeing very large intraday fluctuations in our stock market, to which the Exchange Fund is exposed. According to the investment benchmark of the Exchange Fund approved by the Financial Secretary on the advice of the Exchange Fund Advisory Committee (EFAC), around 23% of the Exchange Fund is invested in foreign and local equities ˇV the actual percentage of exposure, under the allowed tactical deviations also approved by the Financial Secretary on the advice of EFAC, can be slightly different from the benchmark in order to give flexibility to earn as much return for the Exchange Fund as possible without undermining the Fundˇ¦s principal purpose. At the end of September, there were HK$377.7 billion of fiscal reserves deposited with the Exchange Fund. Under the new arrangement introduced on 1 April 2007, under which the Exchange Fund pays a fee as investment return on the fiscal reserves for the use of the money in pursuing the objectives of the Exchange Fund, the fiscal reserves will be getting a rate of return, regardless of the actual investment performance of the Exchange Fund this year, of 7% in 2007/08. This is the average rate of investment return for the Investment Portfolio of the Exchange Fund in the past six years. The six-year moving average next year will obviously take account of the performance in 2007 while that of 2001 will drop out. Readers may recall that 2001 was a year in which the investment income of the Exchange Fund was the lowest on record, returning only HK$7.4 billion that year, hardly covering interest and other expenses. We therefore expect the fiscal reserves to be charging a fee higher than 7% next year, again regardless of the actual investment performance of the Exchange Fund in 2008. I mentioned earlier the "Investment Portfolio" of the Exchange Fund. There are currently three portfolios in the Exchange Fund, namely, the Backing Portfolio providing full US-dollar backing for the Monetary Base in accordance with the requirements of the Linked Exchange Rate system; the Investment Portfolio in which the fiscal reserves are "invested"; and the newly established Strategic Portfolio holding all of the shares of HKEx, including those acquired earlier for investment purposes and those acquired more recently for strategic purposes by the Financial Secretary using the Exchange Fund. Under the guidance of the Financial Secretary and EFAC, we at the HKMA will continue to do our best to ensure that the Exchange Fund is managed in the best possible ways to earn as much return as possible for the people of Hong Kong, while fulfilling its primary purpose of backing the Hong Kong dollar. ˇ@ Joseph Yam ˇ@ Click here for previous articles in this column. ˇ@ |
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