Exchange Fund results for 2006

The Hong Kong Monetary Authority (HKMA) announced today (Thursday) the investment results* of the Exchange Fund for 2006.

The Exchange Fund recorded an investment income of HK$103.7 billion in 2006. The main components of this income were (Annex 1)

• a valuation gain on, and dividends from, the Hong Kong equities portfolio amounting to HK$35.9 billion
• a valuation gain on, and dividends from, other equities amounting to HK$20.0 billion
• an exchange valuation gain of HK$17.3 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$30.5 billion.

After deducting interest and other expenses, net investment income in 2006 was HK$93.5 billion. The share attributable to Fiscal Reserves amounted to HK$28.9 billion. An amount of HK$64.6 billion, being the net investment income after deducting the Fiscal Reserves' share, was added to the Exchange Fund's Accumulated Surplus for 2006 (Annex 2). At the end of 2006 the Accumulated Surplus stood at HK$507.7 billion.

Commenting on the Exchange Fund results for 2006, Mr Joseph Yam, Chief Executive of the HKMA, said that the investment environment was challenging in 2006, with global financial markets experiencing a volatile year. "While the bond markets benefited from expectations of a deceleration in growth in the US, the equity markets experienced a late rally from positive earnings and mergers and acquisitions activities. Record initial public offering activities and a generally strong domestic and regional economy took the Hong Kong stock market to new highs. The US dollar weakened against European currencies while remaining flat against the Japanese yen. Against this environment, the Exchange Fund outperformed the benchmark by 63 basis points, compared with 24 basis points in 2005." (Chart 1)

The Abridged Balance Sheet (Annex 3) shows that the total assets of the Exchange Fund increased in 2006 by HK$109.9 billion, from HK$1,066.8 billion at the end of 2005 to HK$1,176.7 billion at the end of 2006.

In 2006 the Exchange Fund achieved an investment return of 9.5%, compared with the investment return of 8.9% for the benchmark portfolio determined by the Financial Secretary after consultation with the Exchange Fund Advisory Committee. Since 1994 the Exchange Fund has generated an annual return** of 6.6%, compared with the annual inflation rate** of 1.3% over the same period (Chart 2).

Commenting on the outlook for the year ahead, Mr Yam said that the investment environment was likely to be a complex one in 2007. "It is unlikely that the Exchange Fund will achieve the same high return seen in 2006. The rise in equities markets that we benefited from in 2006 makes the prospects for those markets in 2007 more uncertain. Economic buoyancy and excess liquidity have led recently to some volatility in asset markets, and this may well increase. Uncertainties in the global economy, and particularly in the outlook for inflation in major economies, also make it difficult to predict trends in interest rates," Mr Yam said. "Working under the guidance of the Exchange Fund Advisory Committee and its Investment Sub-Committee, the HKMA will continue to be vigilant in this challenging environment and to manage the Exchange Fund in a prudent manner," Mr Yam added.

* Unaudited figures
** Compounded

Annex 1: Exchange Fund Performance

Annex 2: Exchange Fund - Change in Investment Income and Accumulated Surplus

Annex 3: Exchange Fund - Abridged Balance Sheet

Chart 1: Exchange Fund Performance Against Investment Benchmark (1999 - 2006)

Chart 2: Investment Return of the Exchange Fund (1994 to 2006)

Powerpoint Presentation

For further enquiries, please contact:
Ying-ying Cheng, Manager (Press), at 2878 1687 or
Thomas Chan, Senior Manager (Press), at 2878 1480

Hong Kong Monetary Authority
18 January 2007