History

The Exchange Fund was established by the Currency Ordinance of 1935 (later renamed the Exchange Fund Ordinance) to provide backing to the issuance of banknotes.  In 1976, the role of the Exchange Fund was expanded to include the management of the official reserves, when the assets of the Coinage Security Fund and the majority of foreign currency assets held in the Government’s General Revenue Account were transferred to the Exchange Fund. During the same year, the Government also began to transfer its fiscal reserves to the Exchange Fund. In order to better manage risks and enhance returns, the Exchange Fund has been diversifying its investments into a wider variety of asset classes in a prudent and incremental manner since 2008. Over the years, the size of the Exchange Fund has expanded considerably. The below chart illustrates the growth in the total assets of the Fund:

Total Assets of the Exchange Fund

Total Assets of the Exchange Fund

Exchange Fund Milestones

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  • 1935
    Establishment of the Exchange Fund

    Hong Kong's Exchange Fund was established by the Currency Ordinance of 1935 (later renamed the Exchange Fund Ordinance). Since its inception, the Exchange Fund has held the backing to the note issuance of Hong Kong.

  • 1976
    Expansion of the Exchange Fund

    In 1976, the role of the Exchange Fund was expanded. The assets of the Coinage Security Fund (which held the backing for coins issued by the Government) as well as the majority of foreign currency assets held in the Government's General Revenue Account were transferred to the Exchange Fund.

  • 1976
    Transfer of fiscal reserves to the Exchange Fund

    In 1976, the Government began to transfer its fiscal reserves to the Exchange Fund. This arrangement was introduced to reduce the exchange risks that the fiscal reserves would have to bear from investments in foreign currency assets and to centralise the management of the Government's financial assets. The fiscal reserves are not permanently appropriated for the use of the Exchange Fund, but are repaid to the General Revenue Account when they are required to meet the obligations of the general revenue.

  • 1978
    Merger of the Coinage Security Fund with the Exchange Fund

    On 31 December 1978, the Coinage Security Fund was merged with the Exchange Fund.

  • 1993
    Investment in foreign equities

    The Exchange Fund started holding foreign equities by investing in US equities in the first half of 1993.

  • 1998
    Active management of the fiscal reserves

    Prior to 1 April 1998, fiscal reserves were placed with the Exchange Fund as Hong Kong dollar deposits to minimise market risk. Since the official reserves had grown dramatically over the years, it was decided that the fiscal reserves placed with the Exchange Fund should be more actively managed to achieve a higher long-term real rate of return. From 1 April 1998, the fiscal reserves previously placed as Hong Kong dollar deposits with the Exchange Fund became actively managed and the return of these official reserves was linked to the performance of the overall Exchange Fund.

  • 1998
    Re-organisation of the Exchange Fund portfolio composition

    In early September 1998, the Monetary Base was re-defined to include Exchange Fund Bills and Notes in addition to Certificates of Indebtedness, coins in circulation and the aggregate clearing balance maintained by banks with the HKMA. It was also decided to increase the transparency of the operation of the Currency Board arrangements by designating certain asset and liability items in the Exchange Fund’s balance sheets as those relating to the Currency Board operations. This led to the establishment of a Backing Portfolio to hold short-term, highly liquid US dollar denominated securities to fully back the Monetary Base. Accordingly, the portfolio composition of the Exchange Fund was re-organised into a Backing Portfolio and an Investment Portfolio.

  • 1998
    Merger of Land Fund Reserves into the Exchange Fund

    On 1 November 1998, the assets of the Land Fund, amounting to about HK$211.4 billion were placed with the Exchange Fund and managed in the same way as other fiscal reserves placed with the Exchange Fund.

  • 1998
    Acquisition of the Hong Kong Equity Portfolio

    As a result of the Government’s operations in the local stock market in August 1998, the Exchange Fund acquired a substantial portfolio of Hong Kong equities. The Exchange Fund Investment Limited (EFIL) was established on 14 October 1998 to manage and subsequently return to private sector hands (other than a long-term investment portfolio) the Hong Kong equity portfolio purchased in August 1998 and to manage the Hong Kong equities transferred from the Land Fund.

    In April 1999, EFIL developed a disposal programme which began with a unit trust replicating the Hang Seng Index named the Tracker Fund of Hong Kong (TraHK). Since then, TraHK has become an actively traded security on the Hong Kong Stock Exchange.

    With effect from January 2003, the management of the Hong Kong equity portfolio was transferred to the HKMA from EFIL. The HKMA currently manages this portfolio exclusively through external fund managers.

  • 2007
    Fee arrangement with the Government

    Since 1 April 2007, the Financial Secretary introduced a new fee arrangement on the fiscal reserves placed with the Exchange Fund.  The fee is based on a fixed rate for the year determined every January. The rate is the average annual investment return of the Exchange Fund's Investment Portfolio for the past six years, or the average annual yield of three-year Exchange Fund Notes (replaced by three-year Government Bond from 1 January 2016) for the previous year subject to a minimum of 0%, whichever is the higher.

  • 2008 - Present
    Enhancement in portfolio diversification

    To better manage risks and enhance returns in the medium and long term, the HKMA has been diversifying part of the Exchange Fund’s investments, in a prudent and incremental manner, into a wider variety of asset classes, including emerging market and Mainland bonds and equities, private equity, and overseas real estate. Emerging market and Mainland bonds and equities are held under the Investment Portfolio, while private equity and overseas real estate investments are held under the Long-Term Growth Portfolio.

  • 2009
    Acceptance of placements by Government funds and statutory bodies

    The Exchange Fund started accepting placements by Government funds and statutory bodies. The interest rate is generally linked to the performance of the Investment Portfolio.

  • 2016
    Establishment of the Future Fund

    The Future Fund, established on 1 January 2016, was placed with the Exchange Fund over a ten-year period.  Placements by the Future Fund comprise an initial endowment from the balance of the Land Fund and periodic top-ups from the General Revenue Account as directed by the Financial Secretary.  These placements are divided into two portions with one linked to the performance of the Investment Portfolio and another linked to the performance of the Long-Term Growth Portfolio (LTGP).  Interest income on the Future Fund placement is determined annually based on a composite rate calculated on a weighted average basis with reference to the rate under the 2007 fee arrangement and the annual rate of return linked with the performance of the LTGP.

  • 2018
    Establishment of the Exchange Fund Investment Office (EFIO)

    In order to support the continued expansion in the scale, diversity and complexity of Exchange Fund’s investments, the HKMA established EFIO on 1 August 2018 to house the Exchange Fund’s investment and related risk management functions.  EFIO is an integral part of the HKMA.

Last revision date : 26 August 2019