HKMA Exchange Fund backs bonds, China recovery after record $25bn loss

The de facto sovereign wealth fund of Hong Kong on Monday reported an investment loss of HK$202.4 billion ($25.8 billion), or 4.4%, for 2022 - the worst performance since 2008.
HKMA Exchange Fund backs bonds, China recovery after record $25bn loss

Hong Kong Monetary Authority's (HKMA) Exchange Fund is hoping fixed income investments and mainland China’s economic rebound will help investment performance this year, after it posted a record investment loss for 2022.

The fund lost HK$202.4 billion ($25.8 billion), or 4.4% on investment in 2022. As a result, total assets under management (AUM) shrank by HK$559.1 billion to HK$4.01 trillion ($511.8 billion) at the end of 2022 from HK$4.57 trillion at the end of 2021.

The de facto sovereign wealth fund of Hong Kong will “remain flexible, implement defensive measures as appropriate, and maintain a high degree of liquidity” going into 2023 and continue to diversify the portfolio for higher long-term returns, said Eddie Yue, chief executive of the HKMA, Hong Kong’s de facto central bank on January 30.

Yue made the remarks when HKMA announced the Exchange Fund’s annual investment results.

Exchange Fund Abridged Balance Sheet in HKD billion (Source: HKMA)

Yue said financial markets will continue to face significant uncertainties in 2023 and asset prices are expected to remain volatile amid uncertainties around inflation, interest rate, global economic growth, and geopolitical tensions.

Eddie Yue, HKMA

Nevertheless, on a more positive note, with the relaxation of Covid-prevention measures and the introduction of economic stimulus measures in mainland China, the mainland economy may rebound strongly this year, Yue said.

“At the same time, amid market expectation of slowing inflation and therefore more gradual rate hikes, bond investments have become more appealing. With yields of major government bonds currently at multi-year high levels, investing in bonds would give investors a higher interest income,” he added.

Carlos Casanova, senior economist at Union Bancaire Privée, believes investment grade especially shorter duration bonds of high-quality issuers could also be something the Exchange Fund could consider.

“I think it's quite critical for them to potentially look at some tactical opportunities but remain cautious about the lower quality names in line with its defensive stance,” Casanova told AsianInvestor in a earlier interview in late November.

TOUGH 2022

The fund's 2022 performance is its worst investment result since 2008, and the second worst since data was available from 1994. In 2008, it recorded a 5.6% investment loss, or HK$75 billion.

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Since 1994, there have only been three times when the Exchange Fund posted investment losses. Besides 2022 and 2008, it posted a HK$15.8 billion, or 0.6% loss in 2015.

Investment Return of the Exchange Fund from 1994 to 2022 (Source: HKMA)

Equities were the worst performers in the Exchange Fund’s portfolio in 2022, with Hong Kong equities losing HK$19.5 billion, while other equities lost HK$61.2 billion.

The annual losses occured despite a HK$76.4 billion gain in the fourth quarter of 2022 as Hong Kong equities staged a major rebound since November after China started to drop Covid restrictions.

In 2022, the fund also recorded annual losses of HK$53.3 billion on bonds, and HK$40.1 billion foreign exchange losses on non-Hong Kong dollar assets after deducting currency hedging.

As he warned earlier in 2022, HKMA chief Yue again cited the challenging global market environment last year - when returns from equities, bonds and major currencies against the US dollar all recorded negative returns simultaneously - as a backdrop of the Exchange Fund record losses. 

Exchange Fund Results (Source: HKMA)


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