The Hong Kong Monetary Authority (HKMA) today (Monday) published the unaudited financial position of the Exchange Fund at end-December 2017.
The Exchange Fund recorded an investment income of HK$252 billion in 2017. The main components were:
Fees on placements by the Fiscal Reserves and placements by HKSAR government funds and statutory bodies were HK$23.5 billion (Note 3) and HK$8.6 billion respectively in 2017 (the rate of fee payment for 2017 is 2.8%). After deducting all expenses and fees, the Accumulated Surplus of the Exchange Fund recorded an increase of HK$168.4 billion
The Abridged Balance Sheet shows that the total assets of the Exchange Fund increased by HK$404.8 billion, from HK$3,618.7 billion at the end of 2016 to HK$4,023.5 billion at the end of 2017. The increase was mainly attributable to the increase in investment income and placements by the Fiscal Reserves.
The Exchange Fund recorded an investment return of 7.1% in 2017(Note 4). Specifically, the Investment Portfolio achieved a rate of return of 12.1%, while the Backing Portfolio gained 1.8%. The Long-Term Growth Portfolio (LTGP) recorded an annualised internal rate of return of about 13.5% since its inception in 2009 up to the end of September 2017.
Commenting on the performance of the Exchange Fund in 2017, Mr Norman Chan, Chief Executive of the HKMA, said, “The global economy and financial markets in 2017 performed much better than expected. Momentum in the US economy strengthened, while the outcomes of the national elections in France and Germany eliminated some of the political uncertainties. Economic performance in Japan and emerging market economies was also better than expected. Furthermore, while the US Federal Reserve did raise interest rates three times as expected and began to reduce its balance sheet in October, the US dollar exchange rate went down (instead of up) and the US yield curve did not shoot up. Under such a favourable environment, the Exchange Fund recorded decent gains across the board.”
Looking ahead, Mr Chan said, “Moving into 2018, market optimism continues to prevail currently. However, as asset valuations in many financial markets have already surpassed their historical highs, the sustainability of the upward momentum will hinge crucially on whether some of the markets’ current optimistic expectations will materialise. At present, it seems that the markets may have under-priced some risk factors, including whether the pace of US interest rate normalisation will need to quicken if inflationary pressure is greater than expected, whether the US government’s trade policy and protectionism will have adverse effects on global trade and economy, and whether geopolitical tensions will flare up. If the actual outcomes do not tally with the markets’ optimistic expectations, it could easily trigger significant corrections and volatilities in asset markets.
The investment environment this year remains complex. The HKMA will continue to manage the Exchange Fund prudently. We will remain agile and nimble, monitor market developments closely and deploy some defensive measures as and when appropriate. We will also continue to further expand our investments under the LTGP, with a view to achieving better returns for the Exchange Fund in the medium to long run within acceptable risk levels.”
Note 2: This is the valuation change of investments held by investment holding subsidiaries of the Exchange Fund. This figure represents valuation changes up to the end of September 2017. Valuations of these investments from October to December are not yet available.
Note 4: This return excludes the performance of the Strategic Portfolio and only includes the performance of LTGP up to the end of September 2017. The audited full year return will be disclosed in the annual report of 2017 to be released later this year.
Annex 1: Exchange Fund Results
Annex 2: Exchange Fund Abridged Balance Sheet
Chart 1: Investment Return of the Exchange Fund (1994 to 2017)
Powerpoint Presentation (PDF File, 377KB)
Remarks by Mr Norman T.L. Chan, Chief Executive of Hong Kong Monetary Authority (PDF File, 18KB)
Hong Kong Monetary Authority
29 January 2018