How HKMA plans to enhance Exchange Fund liquidity

The de facto central bank plans to increase the liquidity level in its portfolio. Experts say this could mean cutting its alternative asset exposure while raising its allocation to bonds.
How HKMA plans to enhance Exchange Fund liquidity

The Hong Kong Monetary Authority (HKMA) may reduce its exposure to alternative investments and invest more in overseas bonds to increase the level of liquidity in its portfolio amid the coronavirus pandemic.

Eddie Yue, HKMA

The de facto central bank said it plans to increase the liquidity of its portfolio in its latest reply to AsianInvestor. In July, chief executive Eddie Yue said that the bank would preserve the liquidity of its investment portfolio, as “the global economy was still very fragile, and the timing and speed of recovery remained highly uncertain”.  

Amid the pandemic, the HKMA has focused on liquidity and defensive investments when managing the HK$4.19 trillion ($541.26 billion) Exchange Fund’s investments, a spokeswoman told AsianInvestor.

She added that the bank plans to increase the liquidity in its portfolio to ensure that the fund could liquidate assets to provide funds to maintain Hong Kong’s monetary and financial stability while “meeting the government’s needs in withdrawing fiscal reserve deposits to deal with the epidemic”.

The spokeswoman declined to comment on specific investment strategies.

An investment expert who is familiar with HKMA's investment portfolio but declined to be named said: “this should mean the Exchange Fund will likely reduce its exposure to alternatives and increase investments in liquid assets like overseas bonds on a gradual basis”.

The potential move could impact future investment returns, but the Exchange Fund's top priority is to maintain the city's financial stability, he added.

Jayne Bok,
Willis Towers Watson

There are many ways to increase liquidity other than holding cash or short-term bonds. However, any change to the liquidity profile of a large pool of capital takes time, Jayne Bok, head of investments for Asia at Willis Towers Watson, told AsianInvestor.

The Exchange Fund recorded an investment loss of HK$10.6 billion in the first half of the year. Overseas bonds delivered a return of HK$74.7 billion and were the only asset that provided a positive investment income, while all other asset classes registered investment losses.

The fund's fee payment to fiscal reserves and to Hong Kong's government funds and statutory bodies were HK$18.6 billion and HK$5.8 billion respectively in the first half of the year, much higher than the HK$15.3 billion and HK$4.5 billion in the same period last year.


The Exchange Fund is not the only sovereign wealth fund (SWF) to have sought to increase its liquidity. Most SWFs in the region are doing the same.

SWFs do not usually have explicit liabilities and have greater flexibility in how they manage their capital, allowing them to have higher cash balances and deploy them quickly when opportunities arise, Bok said.

Each SWF is unique in terms of its mandate and raison d'être. While some, such as Indonesia's planned SWF, are foreign investment-focused vehicles, others are essentially state-run surplus funds that can serve to smooth volatility from market cycles and allow governments the flexibility to spend at the very times when markets and economies need government support, said Bok.

Many SWFs have done extremely well over the last decade, generating large amounts of wealth for their stakeholders. Bok noted that these funds typically support governments by successfully accumulating wealth and redistributing this wealth through dividends and distributions during difficult economic times such as those being experienced this year.

Indeed, some sovereign funds have acted as ‘rainy day funds’, helping to fund government stimulus programmes or taking over distressed companies in strategic industries such as airlines in times of crisis, according to a report released by think tank the Official Monetary and Financial Institutions Forum (Omfif) in July.

This makes them invest differently from other asset owners in Asia Pacific, many of which are increasingly keen to raise their private asset investments into private equity, private debt and infrastructure property, said to a survey by Schroders released last week.

This is due to a broad-based belief that a global post-Covid-19 economic slowdown will hurt their ability to hit investment return targets, the survey showed.

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