Exchange Fund Position at the end of June 2008

The Hong Kong Monetary Authority (HKMA) today (Thursday) published the position of the Exchange Fund at the end of June 2008.

The Exchange Fund recorded an investment loss of HK$35.0 billion in the first half of 2008. The main components were (Annex 1)

• a valuation loss, net of dividends, on the Hong Kong equities portfolio amounting to HK$32.1 billion
• a valuation loss, net of dividends, on other equities amounting to HK$25.4 billion
• an exchange valuation gain of HK$11.6 billion, mainly as a result of the appreciation of other currencies against the US dollar
• a total return from bonds and other investments of HK$10.9 billion.

The fee payment to the Fiscal Reserves was HK$23.6 billion and the Strategic Portfolio decreased in value (net of dividends) by HK$6.5 billion. These factors, together with interest and other expenses, resulted in a reduction in the Accumulated Surplus by HK$68.4 billion (Annex 1).

The Abridged Balance Sheet (Annex 2) shows that the total assets of the Exchange Fund stood at HK$1,409.2 billion at the end of June 2008, a decrease of HK$5.2 billion compared with the end of 2007.

Commenting on the Exchange Fund results for the first half of 2008, Mr Joseph Yam, Chief Executive of the HKMA, said that the deepening of the sub-prime mortgage crisis and the ensuing credit crunch, fears of a global recession, and concerns about inflation had all exerted pressures on financial markets rarely seen in recent years. "Under these unfavourable market conditions, the Exchange Fund recorded an investment loss of HK$35.0 billion in the first half of the year. Local and foreign equities alone accounted for a valuation loss of HK$57.5 billion, part of which was offset by gains from bond and currency investments. Even so, bond prices were also affected by the rise in yields since April as inflation expectations rose." Mr Yam said.

Looking ahead, Mr Yam said that the global economy was likely to continue to be weighed down by concerns about higher commodity prices, pressures on corporate profitability, potentially tighter monetary policies to tackle inflation expectations, and dampened consumer sentiment. The investment environment would therefore continue to be unfavourable. "The HKMA, under the guidance of the Exchange Fund Advisory Committee and its Investment Sub-Committee, and in accordance with the Fund's investment objectives, will continue to manage the Exchange Fund prudently to preserve monetary and financial stability in Hong Kong." he said.

Annex 1: Exchange Fund Results
Annex 2: Exchange Fund Abridged Balance Sheet
Annex 3: Supplementary Figures

For further enquiries, please contact:
Thomas Chan, Senior Manager (Press), at 2878 1480 or
Lilian Goh, Officer (Press), at 2878 8246

Hong Kong Monetary Authority
31 July 2008