Hong Kong’s Exchange Fund saw its first-quarter investment income triple year-on-year as it “unusually” recorded investment gains across all different assets.

The HK$4.17 trillion ($531.64 billion) fund, which is managed by Hong Kong’s de-facto central bank Hong Kong Monetary Authority (HKMA), posted total investment income of HK$120.9 billion for the first three months of 2019, more than three times the HK$35 billion for the same period last year.

It was an impressive return. During the full year of 2018 the Exchange Fund only reported an investment income of HK$10.9 billion, according to a May 6 presentation from the HKMA to the Legislative Council.

Simultaneous rallies of bonds, equities and foreign exchange in the first quarter are “rarely seen” and “unusual”, HKMA chief executive Norman Chan said in a speech at the financial affairs panel of the city’s legislative council.

As of the March 31, the fund had 69% of its assets invested in debt securities, 17% in equities (nearly 5% in Hong Kong equities and 12% in 'other equities', or stock investments outside the territory). It placed nearly 8% in deposits and the remaining 6% in other assets.

Other equities registered the highest gains among all of Exchange Fund's assets (see table), delivering an investment income of HK$49.9 billion as the global stock market rebounded in the first quarter. The S&P 500 Index rose 13% in the first three months of 2019.

Source: HKMA


Norman Chan


Despite the strong quarter Chan remained prudent about the fund's investment outlook, citing the market volatility seen towards the end of last year and possible fallout in the trade negotiations between China and the US.

US president Donald Trump announced on Twitter on Monday (but Sunday US time) that he intended to raise tariffs on $200 billion of Chinese goods from 10% to 25% on May 10, despite repeated claims by the White House that trade negotiations with Beijing were progressing on track.

The latest round of tweets from the notoriously dramatic president were seen by most observers as an attempt to pressurise China for better terms as trade negotiations near their end. But Chan cautioned that it cannot be certain whether both sides can strike a deal.

“We see that the equity market assumes that China and the US will reach consensus very soon. This is the general market assumption. If this assumption does not turn out to be true, which means the negotiations break down, there will be huge potential risk for the global financial market and the corrections may be extremely large,” he said.

Trump's renewed tariff threats sent Hong Kong's Hang Seng Index down 2.9%, caused the Shanghai Composite Index to fall 5.6% and led the Shenzhen Composite Index to drop 7.5% on Monday.


Another potential issue facing the fund is its size. Its total assets of the Exchange Fund reached HK$4.01 trillion at the end of 2018, leading some to claim it has become too big to efficiently invest. 

But in an emailed reply to AsianInvestor, HKMA said the size of the exchange fund serves its purpose of maintaining the stability and integrity of Hong Kong's monetary and financial systems, as well as regulating the exchange rate to maintain the peg with the US dollar.

The size of the Exchange Fund is partly determined by the size of Hong Kong's monetary base, which stood at around HK$1.7 trillion as of end-2018. The fund also accepts placements from HKMA's fiscal reserves, as well as from Hong Kong government funds and statutory bodies, which respectively amounted to HK$1.2 trillion and HK$300 billion as of end-2018. The remainder was mainly the fund's accumulated surplus.

The Exchange Fund is managed as three distinct portfolios. The backing portfolio ensures that Hong Kong’s monetary base is fully backed by highly liquid US dollar-denominated securities, while the investment portfolio invests primarily in the bond and equity markets of the member countries of the Organisation for Economic Co-operation. The long-term growth portfolio (LTGP) holds private equity and real estate investments to enhance long-term return, its 2018 annual report shows.

An HKMA spokesman noted that Hong Kong is a small open economy so the Exchange Fund needs to maintain a level of foreign reserves that is commensurate with the scale of the financial system, to address unforeseen financial distress.

One example is what happened in the 2008 global financial crisis. At that time the fund provided a full guarantee for all deposits in Hong Kong as well as liquidity and capital support to banks to stabilise the financial system and restore public confidence, the spokesman said.