Hong Kong’s Exchange Fund Position at End-December 2008

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Melissa Ng /David Hsieh at 212-752-3320
Daniel McAtee at 202-238-6360
Wing Yan Tong at 415-835-9315

January 21, 2009 - The Hong Kong Monetary Authority (HKMA) announced today the position* of the Exchange Fund at the end of December 2008.

The Exchange Fund recorded an investment loss of HK$74.9 billion (US$9.6 billion) in 2008. The main components were:
- a valuation loss, net of dividends, on the Hong Kong equities portfolio amounting to HK$77.9 billion (US$9.98 billion);
- a valuation loss, net of dividends, on other equities amounting to HK$73.2 billion (US$9.38 billion);
- an exchange valuation loss of HK$12.4 billion (US$1.58 billion), mainly as a result of the depreciation of other currencies against the U.S. dollar;
- a total return from bonds and other investments of HK$88.6 billion (US$11.35 billion).

The fee payment to the Fiscal Reserves was HK$46.4 billion (US$5.94 billion) and the Strategic Portfolio decreased in value (net of dividends) by HK$8.9 billion (US$1.14 billion). These factors, together with interest and other expenses, resulted in a reduction in the Accumulated Surplus of HK$136.3 billion (US$17.47 billion).

The Abridged Balance Sheet shows that the total assets of the Exchange Fund increased in 2008 by HK$143.3 billion (US$18.37 billion), from HK$1,414.4 billion (US$181.33 billion) at the end of 2007 to HK$1,557.7 billion (US$199.7 billion) at the end of 2008. The increase is mainly attributable to the increase in the Aggregate Balance.

In 2008 the Exchange Fund recorded a negative investment return of 5.6%. The calculation excludes the performance of the Strategic Portfolio. Since 1994 the Exchange Fund has generated an annual return** of 6.1%, compared with the annual inflation rate** of 1.5% over the same period.

Commenting on the Exchange Fund results for 2008, Chief Executive of the HKMA Mr. Joseph Yam, said that the financial markets experienced an exceptionally turbulent and perilous year in 2008. “The world financial crisis weighed heavily on global business sentiment and investor confidence. Flight-to-quality trades, credit deterioration and balance-sheet de-leveraging in the financial markets led to significant downward adjustments in asset prices and extreme market volatility during the year. Following a very difficult third quarter, the Exchange Fund made a positive return in the fourth quarter as markets stabilized somewhat, resulting in an overall investment loss of HK$74.9 billion (US$9.6 billion) for the year. If the Hong Kong equities, which are held for long-term investment purposes, are excluded the Fund achieved a HK$3 billion (US$384.61 million) investment income. The prudent investment strategy of the Exchange Fund has helped minimize the investment loss in 2008.”

Commenting on the outlook for the year ahead, Mr. Yam said that the investment environment would continue to be uncertain and difficult. “The global financial system remains unsettled. Whether monetary easing and large fiscal stimulus packages in major economies will be effective in restoring investor confidence remains to be seen. Financial markets are under immense stress and we expect volatile conditions to continue for some time,” he said. “The HKMA, in accordance with the Fund’s investment objectives set by the Financial Secretary on the advice of the EFAC, will continue to be vigilant in this challenging environment and manage the Exchange Fund prudently.”

* Unaudited figures
** Compounded