Hong Kong’s Future Fund, the city’s de facto sovereign wealth fund, will set up a new HK$22 billion ($2.82 billion) investment portfolio to diversify its investments and directly support the city’s economy, the territory’s government has announced.
“We must make good use of the Future Fund to continuously invest for the future of Hong Kong. The government agrees with the recommendations of the group [of advisors], including the establishment of a new Hong Kong growth portfolio to make strategic investments in projects with a Hong Kong nexus,” financial secretary Paul Chan said in the government’s 2020-2021 budget speech on Wednesday (February 26).
He said that the government will proceed with the preparatory work to establish the Hong Kong growth portfolio, which will be seeded with the equivalent of about 10% of the Future Fund’s assets.
The Future Fund currently has HK$224.5 billion in assets, which is comprised of an initial endowment of HK$219.7 billion from the Land Fund and a periodic top-up of HK$4.8 billion from the government’s general revenue account. In the three years of establishment since 2016, the fund recorded an annual composite rate of return of 4.5%, 9.6% and 6.1%, respectively.
With the announcement, the Hong Kong’s government is effectively earmarking some of the fund's assets to support its strategic and political objectives.
A spokesman for the Financial Services and Treasury Bureau told AsianInvestor that the new portfolio is designed to improve the Future Fund’s ability to diversify its investments and enhance its investment return, while also consolidating Hong Kong’s status as a financial, commercial and innovation centre. He did not indicate what the return target would be for the new fund.
He added that the proposed portfolio would make strategic investments with a “Hong Kong nexus”, meaning projects that would bring benefits to the people or economy of Hong Kong.
“A project that would be undertaken by a Hong Kong-based company, or would take place in Hong Kong, or both would be a good starting point, but merits and relevance of individual projects will also be considered,” he said.
Currently, all of the Future Fund’s assets are placed with the Exchange Fund, which is overseen by the Hong Kong Monetary Authority. The Exchange Fund invests mostly offshore and 60% of the Future Fund’s assets is put in its long-term growth portfolio (LTGP), which invests in alternatives such as private equity and foreign property investments.
AsianInvestor reported last year that the Future Fund looks set to invest heavily into alternative assets.
“It has been an established practice that the Exchange Fund (including the LTGP) does not invest in Hong Kong assets or projects with a Hong Kong nexus due to actual or perceived conflicts, as well as monetary stability and market impact concerns. This explains why setting up a new Hong Kong growth portfolio to invest part of the Future Fund would better serve the expanded purposes,” the spokesman said.
HONG KONG OUTLOOK
Chan also painted a gloomy economy outlook for Hong Kong, which is fighting against the coronavirus epidemic even as it reels from the economic pain caused by the months of social unrest.
The rapid spread of the novel virus, which can cause pneumonia, has dealt a severe blow to both economic activity and consumer sentiment in Hong Kong. Its near-term economic impact could possibly be greater than that of the Sars outbreak in 2003, Chan said.
The city’s economy is forecasted to grow by -1.5% to 0.5% in real terms in 2020. It is estimated to the improve to an average of 2.8% growth per annum in real terms from 2021 to 2024, slightly lower than the trend growth of 2.9% over the past decade, he said.
To help the economy recover, Chan said the government will implement counter-cyclical measures, via HK$120 billion in fiscal measures. That includes a cash payout of $10,000 to all Hong Kong permanent residents aged 18 or above, a tax rebate and other relieve measures.
However, the measures mean the government will record a fiscal deficit of around HK$37.8 billion for the fiscal year ending March 2019, the first deficit the city will have recorded for the past 15 years.
It is also forecast to record deficits for the next five years too. The fiscal deficit for next year is estimated to be $139.1 billion, accounting for 4.8% of GDP. The city sits on a fiscal reserve of HK$1.13 trillion by March 31.
*The story is updated to show that the Exchange Fund has Hong Kong exposure.