Editorial | Hong Kong’s Exchange Fund has done well but it’s still too early to celebrate

The Exchange Fund – the war chest for defending the city’s currency – tends to reflect the performance of the markets. A diversified strategy helps it ride investment waves and smooth out the bumps. As a result, it is well placed to profit when the markets rally. An example is to be found in its latest results, showing one of its best quarterly returns as stock markets rallied in Hong Kong and the United States.

The fund’s investment return more than doubled to HK$224.7 billion in the first nine months of this year, making it the best return on record, according to the Hong Kong Monetary Authority (HKMA). The fund earned HK$114.6 billion during the quarter ended in September, a turnaround from a loss of HK$10.5 billion in the same period last year.

The outcome invited comparison with unrelated figures showing the government’s budget was running a deficit of HK$183.9 billion in the first five months of the current financial year beginning in April, thanks partly to the effect of slow economic recovery on revenue and expenditure.

Unsurprisingly this prompted several lawmakers to ask whether the Exchange Fund could share more of its investment returns with the government to address its deficit. This is on top of the HK$10 billion the Exchange Fund paid to the government’s fiscal reserve in the first nine months of the year, based on a formula of the average investment return of the past six years.

However, it has to be remembered that the fund is there to meet demands on the city’s reserves on a “rainy day” – such as a financial crisis or a pandemic – and from attacks on the Hong Kong dollar peg to the US dollar by hedge funds and speculators. In that role, the HKMA has intervened from time to time to buy a local dollar under selling pressure as rising interest rates abroad sparked capital flight.

Its investment performance tracks the directions of the overall market and interest rates. With interest rates up, bonds have been doing well, offsetting a slump in the stock market. With the recent 50 basis-point rate cut in the US, equities have recovered strongly. Locally, the Exchange Fund’s Hong Kong equity investments gained HK$21.9 billion in the third quarter, tracing a 19 per cent rebound in the Hang Seng Index, from last year’s HK$5.6 billion loss. In the first nine months, local equities earned HK$28.5 billion for the fund, compared with a HK$10.5 billion loss in the same period a year ago.