Exchange Fund results for 2004

The Hong Kong Monetary Authority (HKMA) announced today (Thursday) the investment performance¹ of the Exchange Fund for the year 2004.

The Exchange Fund recorded an investment income of HK$56.7 billion in 2004. The main components of this income were (Annex 1)

• total return from bonds and other investments of HK$25.0 billion
• valuation gain on, and dividends from, the Hong Kong equities portfolio amounting to HK$12.0 billion
• valuation gain on, and dividends from, other equities amounting to HK$11.2 billion
• an exchange valuation gain of HK$8.5 billion, mainly as a result of the appreciation of the euro against the US dollar.

After deducting interest and other expenses, net investment income in 2004 was HK$52.1 billion. Of this, the Fiscal Reserves' share amounted to HK$14.5 billion, which exceeded the amount budgeted (HK$12.3 billion) in the fiscal year 2004-05. An amount of HK$38.5 billion, being the net investment income after deducting the Fiscal Reserves' share (HK$37.6 billion) together with part of a premises revaluation surplus² (HK$0.9 billion), has been added to the Exchange Fund's Accumulated Surplus for 2004 (Annex 2). At the end of 2004 the Accumulated Surplus stood at HK$423.4 billion.

Commenting on the Exchange Fund results for 2004, Mr Joseph Yam, Chief Executive of the HKMA, said that the investment environment in 2004 had been volatile. "In the first half of the year, bond and equity markets retreated on fears of aggressive monetary tightening in the US. Losses were recouped when equity markets and currencies rebounded in the last few months of the year," Mr Yam said.

The Abridged Balance Sheet (Annex 3) shows that in 2004 the total assets of the Exchange Fund increased by HK$50.3 billion, from HK$1,011.6 billion at the end of 2003 to HK$1,061.9 billion at the end of 2004.

In 2004 the Exchange Fund achieved an investment return of 5.7%, which met the investment return of the benchmark portfolio determined by the Financial Secretary after consultation with the Exchange Fund Advisory Committee. Since 1999 the Exchange Fund has achieved a 6.2% annual return³, or an annual out-performance of 1.4% above the benchmark's 4.8% annual return³ for the same period. Since 1994 the Exchange Fund has generated an annual return³ of 6.6%, compared with the annual inflation rate³ of 1.3% over the same period (Chart 1).

Commenting on the outlook for the year ahead, Mr Yam warned that the investment environment in 2005 would be difficult. "The markets have begun the year in a highly volatile way, and this volatility is likely to continue," Mr Yam said. "The HKMA will exercise vigilance in this erratic environment and will continue, under the guidance of the Exchange Fund Advisory Committee, to manage the Exchange Fund in a prudent manner," Mr Yam added.

Annex 1: Exchange Fund Performance

Annex 2: Exchange Fund - Change in Accumulated Surplus

Annex 3: Exchange Fund - Abridged Balance Sheet

Annex 4: Supplementary Figures - Market Performance (2003 and 2004)

Chart 1: Investment Return of the Exchange Fund (1994 to 2004)

Powerpoint Presentation

For further enquiries, please contact:

Jasmin Fung, Manager (Press), at 2878 8246 or
Kevin Ip, Manager (Press), at 2878 1687

Hong Kong Monetary Authority
20 January 2005

¹ Unaudited figures for 2004.

² The revaluation gain on premises in 2004 is HK$1.1 billion. According to Statement of Standard Accounting Practice 17, only HK$0.9 billion, being the revaluation loss in 2003, can be added back to the Accumulated Surplus. The balance (HK$0.2 billion) goes into a Premises Revaluation Reserve Account.

³ Compounded.