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Exchange Fund Position at the end of December 2011

The following is issued on behalf of the Hong Kong Monetary Authority:

     The Hong Kong Monetary Authority (HKMA) announced today (January 19) the Exchange Fund results (Note 1) for 2011.

     The Exchange Fund recorded an investment income of HK$26.7 billion in 2011.  The main components were (Annex 1):

- a total return from bonds of HK$71.9 billion;
- a valuation loss, net of dividends, on Hong Kong equities amounting to HK$24.2 billion;
- a valuation loss, net of dividends, on other equities amounting to HK$12.2 billion;
- an exchange valuation loss of HK$9.1 billion, mainly a result of depreciation of other currencies against the US dollar; and
- a valuation gain on other investments (Note 2) amounting to HK$0.3 billion.

     After deducting interest and other expenses, the net investment income in 2011 was HK$22.3 billion.  The fee payments to the Fiscal Reserves amounted to HK$37.0 billion.  The fee payments to placements by HKSAR government funds and statutory bodies amounted to HK$5.6 billion.  The Accumulated Surplus (Note 3) recorded a decrease of HK$23.6 billion (Annex 1).
     The Abridged Balance Sheet (Annex 2) shows that the total assets of the Exchange Fund increased in 2011 by HK$147.7 billion, from HK$2,345.0 billion at the end of 2010 to HK$2,492.7 billion at the end of 2011.  The increase is mainly attributable to an increase in Certificates of Indebtedness and placements received from fiscal reserves, HKSAR government funds and statutory bodies.

     The 2011 Exchange Fund investment return is 1.1% (Chart 1) (Note 4).  To reflect the long-term nature of the Fund, the HKMA is also releasing the average investment returns of the Exchange Fund over a number of different time horizons.  The average return was 3.5% over the last three years, 3.2% over the last five years, 4.9% over the last ten years, and 5.6% since 1994 (Note 5).

     Commenting on the Exchange Fund results for 2011, the Chief Executive of HKMA, Mr Norman Chan, said, "As I pointed out early last year, the macro financial environment and investment markets in 2011 were overshadowed by instability and uncertainty.  There were huge market volatilities beyond the expectation of many people.  Following the second round of quantitative easing and fiscal stimuli launched in the U.S. earlier, we saw strong global equity markets in the first quarter.  But the markets were hit by the Greek sovereign debt crisis again in May and increased volatilities set in.  The Exchange Fund performed quite well in the first half of 2011, bringing in an investment income of HK$46.4 billion."

     "As the European debt crisis intensified, risk appetite declined sharply and market confidence weakened considerably in the third quarter last year.  A sell-off frenzy to retreat from risky assets followed the downgrade of the U.S. sovereign credit rating in August.  This drove equity markets sharply down while the U.S. dollar strengthened in the third quarter, which wiped out most of the investment income gained by the Exchange Fund in the first half of the year. The fourth quarter of 2011 was marked by some positive developments in Europe, including the agreement on a fiscal compact and the long-term refinancing operation launched by the European Central Bank.  Thereafter, financial markets began to stabilise and the Exchange Fund managed to recoup in the fourth quarter part of its losses incurred in the third quarter.  Despite the very difficult investment environment last year, the Exchange Fund achieved an investment income of HK$26.7 billion for the full year in 2011, translating to an investment return of 1.1%.  This rate of return is quite low, but one should note that in such a volatile and extremely difficult market environment, it was quite a challenge for the Exchange Fund to preserve capital and attain a positive investment return."

     On the outlook for the coming year, Mr Chan said, "Looking ahead into 2012, Europe still faces great uncertainties arising from the European sovereign debt problem and lack of growth momentum.  And the U.S. will continue to be troubled by high unemployment, a subdued housing market and fiscal problems.  At the same time, we also need to watch the geopolitical risks around the world.  Overall speaking, I expect that confidence of the investment market will remain very fragile in 2012, capital flows will be unpredictable and markets will continue to be volatile."

     "Facing these volatile and difficult global financial conditions, the HKMA will continue to manage the Exchange Fund in a cautious and prudent manner.  The HKMA has been expanding into various classes of investments, including emerging markets equities and bonds, renminbi assets, private equity and investment properties overseas and we will continue the diversification of investment.  The aim is to increase medium- and long-term return while ensuring that the Fund has sufficient liquidity to maintain monetary and financial stability," Mr Chan said.

Note 1: Unaudited figures.
Note 2: This is the valuation change of investment held by investment holding subsidiaries of the Exchange Fund.
Note 3: This includes loss from the Strategic Portfolio (HK$3.0 billion) but excludes income from the investment holding companies.
Note 4: This return excludes the performance of the Strategic Portfolio.
Note 5: Averages over different time horizons are calculated on an annually compounded basis.

Ends/Thursday, January 19, 2012
Issued at HKT 19:11


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