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Exchange Fund Position at end-June 2012

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

     The Hong Kong Monetary Authority (HKMA) today (July 26) published the position of the Exchange Fund at end-June 2012.

     The Exchange Fund recorded an investment income of HK$38.1 billion in the first half of 2012.  The main components were (Annex 1):

ĄD a total return from bonds of HK$19.8 billion;
ĄD a valuation gain on, and dividends from, Hong Kong equities amounting to HK$9.6 billion;
ĄD a valuation gain on, and dividends from, other equities amounting to HK$17.9 billion;
ĄD an exchange valuation loss of HK$10.4 billion, mainly a result of depreciation of other currencies against the US dollar;
ĄD a valuation gain on other investments (Note 1) amounting to HK$1.2 billion.

     After deducting interest and other expenses, the net investment income in the first half of 2012 was HK$35.9 billion.  The fee payments to the Fiscal Reserves amounted to HK$19.3 billion.  The fee payments to placements by HKSAR government funds and statutory bodies amounted to HK$3.7 billion.  The Accumulated Surplus (Note 2) recorded an increase of HK$10.9 billion (Annex 1).

     The Abridged Balance Sheet (Annex 2) shows that the total assets of the Exchange Fund stood at HK$2,554.4 billion at the end of June 2012, an increase of HK$66.4 billion compared with the end of 2011.

     Commenting on the Exchange Fund results for the first half of 2012, the Chief Executive of the HKMA, Mr Norman Chan, said, "Global financial markets continued to fluctuate significantly in the first half of 2012.  As the liquidity squeeze faced by European banks was relieved by the Longer-Term Re-financing Operations introduced by the European Central Bank at the end of 2011, and the US economic data were better than expected, major equity markets around the world rebounded markedly in the first quarter.  However, market conditions changed in the second quarter.   Greece's failure to form a coalition government after the May election dealt a significant blow to investors' confidence, and this also affected market confidence in other countries in the Euro-zone, in particular Spain and Italy.  As risk aversion sentiment intensified in May, investors sold off riskier assets, bringing yield on 10-year US treasuries to a historical low of 1.45%.  Markets only stabilised towards the end of June, after the formation of a pro-austerity coalition government in Greece in mid-June and the announcement by the European Union of injecting 100 billion euros into the Spanish banking system through the European Financial Stability Facility.  All in all, the Exchange Fund recorded a small loss in the second quarter but managed to achieve an investment income of HK$38.1 billion in the first half of 2012."

     Looking ahead, Mr Chan said, "In the second half of 2012, the global economy and financial markets will still be facing downside risks brought about by possible continued deterioration of the European sovereign debt crisis.  As for the US economy, its growth momentum will continue to be constrained by a depressed housing market, persistently high unemployment and the negative impact of possible occurrence of the 'fiscal cliff' in 2013.  The continued weaknesses in Europe and the US have begun to dampen exports and growth of emerging economies.  As a result, there will be great uncertainties and risks in the investment environment and sentiment of the global financial markets in the second half of the year.  The HKMA will continue to manage the Exchange Fund prudently and pursue investment diversification in a gradual and orderly manner with a view to providing a relatively stable medium- to long-term return for the Fund."

Note 1: This is the valuation change of investment held by investment holding subsidiaries of the Exchange Fund.
Note 2: This includes losses from the Strategic Portfolio (HK$0.8 billion) but excludes gains from the investment holding subsidiaries.

Annex 1: Exchange Fund Results
Annex 2: Exchange Fund Abridged Balance Sheet
Annex 3: Supplementary Figures

Ends/Thursday, July 26, 2012
Issued at HKT 17:05


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