Hong Kong's Reserves Make Good First Half Profit

by Mary Swire, Tax-News.com, Hong Kong

15 July 2002

Reporting on the performance of Hong Kong's Exchange Fund last week, Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong said that when the preliminary figures are published later this month, they will probably show total investment income for the first half of the year at about HK$22.8 billion. This is more than three times the corresponding figure for the whole of last year. Net investment income for the first half of the year will be about HK$19.6 billion.

Mr Yam said that the Exchange Fund incurred losses on holdings of foreign equities, amounting to HK$10.9 billion, and on holdings of Hong Kong equities, amounting to HK$4.6 billion, after adjusting for dividend income. But interest income received in the first half on bond holdings, together with appreciation in bond prices when the bonds are marked to market, amounted to about HK$20.9 billion. The Exchange Fund's exposure to foreign currencies other than the US dollar benefited from the US dollar's recent weakness, particularly against the euro. Exchange gains for the first half of the year (although unrealised) amounted to HK$17.4 billion, which is more than the exchange loss for the whole of last year of HK$13 billion, when the US dollar was strong.

Mr Yam was however cautious about prospects for the second half of the year, saying that the investment environment in the second half of the year will most probably be different from that in the first half. 'Market sentiment points to the possibility of higher interest rates,' he says, 'given the recent weakness of the US dollar and the economic recovery in the US, if it is in the event sustainable, although there are some doubts on this score. This would adversely affect bond prices and possibly result in losses in the bond portfolio, no matter how defensively we have positioned the portfolio in order to minimise the losses.'

The Government will receive HK$8.1 billion from the fund's first half profits which it can set against its budget deficit, currently a major cause of concern with a projected level of HK$45.6 billion for the present financial year. The government's target is to receive HK$13 billion from the Exchange Fund for the financial year to March 31.

The fund, which stood at HK$968.7 billion at the end of May, is the SAR's reserve to defend the Hong Kong dollar. The HKMA invests fund resources in stocks, bonds and foreign currencies.

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