Hong Kong's Exchange Fund posts fourth best annual returns in 2023 on bond and overseas stock market rallies: HKMA

Hong Kong's Exchange Fund, the war chest used to defend the local currency, rebounded strongly in 2023, as rallies in bond and overseas stock markets cancelled out a loss in domestic equities.

The fund's investments gained HK$212.7 billion (US$27.27 billion), compared with a record loss of HK$205.4 billion in 2022, according to data released by the Hong Kong Monetary Authority (HKMA) on Friday. The earnings were the fourth best on record, after HK$264 billion in 2017, HK$262.2 billion in 2019 and HK$235.8 billion in 2020.

The profit in the October-to-December period stood at HK$106.8 billion, versus a gain of HK$73.4 billion in the year-earlier period.

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This comes after a loss of HK$10.5 billion in the third quarter and gains of HK$108 billion and HK$8.4 billion in the first and second quarter, respectively.

Hong Kong Monetary Authority CEO Eddie Yue said the Exchange Fund performed admirably last year. Photo: Jonathan Wong alt=Hong Kong Monetary Authority CEO Eddie Yue said the Exchange Fund performed admirably last year. Photo: Jonathan Wong>

"The market is full of uncertainties due to the geopolitical tension and also the timing of the interest-rate cuts," Eddie Yue Wai-man, the HKMA CEO, said at a media briefing. "The Exchange Fund is aimed at defending the currency and financial stability. We have to invest in overseas assets and keep an eye on long-term investment."

Established in 1935, the fund provides backing to the issuance of banknotes in the city and defends the Hong Kong dollar from attacks by hedge funds and currency traders. The HKMA, the city's de facto central bank, invests the Exchange Fund in stocks in Hong Kong and abroad, global bonds, overseas real estate and other long-term projects.

While Hong Kong's businesses have returned to normal since the pandemic-related restrictions were lifted in January last year, the local stock market lost steam from the second quarter onwards on concerns about mainland China's sputtering economic recovery.

The Exchange Fund allocates 72 per cent of its investments to bonds, 12.3 per cent to offshore equities, 6.6 per cent to deposits, 5.1 per cent to overseas property and other private-equity investments, and 4 per cent to Hong Kong stocks, based on HKMA data at the end of 2021.

The fund's Hong Kong stock investments posted a loss of HK$5 billion in the fourth quarter, compared with a profit of HK$16.3 billion a year earlier when the stock market rallied on moves by the mainland Chinese and Hong Kong governments to relax Covid-19 restrictions.

For the whole of 2023, the fund's Hong Kong equity investments lost HK$15.5 billion, slightly lower than the loss of HK$19.4 billion a year earlier. This reflected the performance of the benchmark Hang Seng Index, which dropped 4 per cent in the fourth quarter and almost 14 per cent in 2023.

Howard Lee, deputy CEO of HKMA, rejected some lawmakers' call for the Exchange Fund to buy Hong Kong stocks to support the market.

"The purpose of the Exchange Fund is to maintain the stability of the Hong Kong dollar, while buying Hong Kong equities does not meet that goal," Lee said in a media briefing on Friday.

The loss in Hong Kong stocks was, however, offset by overseas stock and bond investments.

The fund made HK$32.7 billion from overseas stock investments during the fourth quarter, compared with a gain of HK$31.4 billion a year earlier. In 2023, overseas stock investments gained HK$73.2 billion, a turnaround from a loss of HK$61 billion in the previous year, echoing the performances of the S&P 500 and Nasdaq, which jumped 24 per cent and 43 per cent, respectively, last year.

Bond investments gained HK$70.3 billion in the fourth quarter, compared with a profit of HK$25.5 billion a year earlier. Bonds earned a record high HK$144 billion in 2023, compared with a loss of HK$53.2 billion last year.

The increase in foreign-exchange depreciation on non-US dollar assets came in at HK$8.8 billion in the fourth quarter, compared with a gain of HK$3.6 billion last year. For 2023, the war chest's forex-related losses amounted to HK$500 million, far lower than the HK$40 billion in 2022.

The ICE US Dollar Index, which tracks the unit against a basket of currencies, dropped 4 per cent in the fourth quarter, but only 3 per cent overall in 2023.

The valuation change of the Exchange Fund's investments in overseas property and other long-term projects in the first nine months of 2023 was a positive HK$11.5 billion, compared with a loss of HK$28.3 billion a year earlier. The HKMA reports the full-year performance of its long-term investments after a gap of a few months.

Royalties to the government's fiscal reserves amounted to HK$17.5 billion in 2023.

The fund's total assets rose by HK$9.8 billon to HK$4.018 trillion at the end of last year.

Fee payments to the government's fiscal reserves amounted to HK$17.5 billion in 2023

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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