Of all the areas of responsibility of the HKMA, the focus of attention in recent months has, understandably, been on the performance of the Exchange Fund.
It is time again next week for us to brief the Financial Affairs Panel of the Legislative Council on the work of the HKMA. We in the HKMA consider this to be a most important event. This is one of a few occasions during the year when we formally report our activities to the people of Hong Kong - the people we serve - through their representatives in the Legislative Council. The May meeting is also the occasion for the presentation of our Annual Report, in which our activities during the preceding calendar year are described in much greater detail.
It is also an occasion for us to receive comments on our performance in the achievement of the various important policy objectives set for us by the Financial Secretary with the advice of the Exchange Fund Advisory Committee. We very much look forward to that. We hope also to receive suggestions on how we might improve our performance to enable us to serve the community better. And if there are views, arising perhaps out of the changing aspirations of the community, concerning the appropriateness of the policy objectives themselves, as defined by the Financial Secretary, we would be happy to engage in discussion on them and offer our professional opinions.
In the meeting next week, I suspect that Legislative Council Members will have views on our performance in the investment management of the Exchange Fund. Indeed, we have noticed that there is a lot more public attention to this than to the other three areas of responsibility of the HKMA - the stability of the currency, the safety and soundness of the banking system, and the efficiency of the financial infrastructure. This is perhaps understandable. The Exchange Fund belongs to the people of Hong Kong. The community expect their money to be properly managed. The other areas, while important, are of less immediate concern, particularly when, I hope, we have been more obviously successful in achieving the relevant objectives. Furthermore, given that the public finances have become rather heavily dependent upon the return on the fiscal reserves and that we are running large budget deficits, the investment return of the Exchange Fund, shared by the fiscal reserves, is a matter of considerable interest.
There is no doubt that the rate of investment return of the Exchange Fund in the year 2001, at less than one per cent, is low in absolute terms. It is also a fact, however, that this is higher than the rate of return of the investment benchmark determined by the Financial Secretary with the advice of the Exchange Fund Advisory Committee. It is also higher than the rate of return of most similar investment funds. Readers, I am sure, have noticed that most investment funds incurred significant losses in 2001.
But, as some commentators have pointed out, if the money were placed in, for example, five-year US Treasury paper at the beginning of 2001, "an investment return" of 5.0 per cent would have been achieved. This is an interesting comparison, which ignores the fact that the 5.0 per cent is really the interest income received per annum if you were to lock in the money for five years. (Incidentally, the average annual rate of investment return of the Exchange Fund for the past five years is 6.9% per cent, which is significantly higher.) The comparison also assumes that there is no need for investments to be marked to market and that there is no liquidity requirement over the five-year period. But it is a comparison often put forward by commentators. Whether or not it is a fair comparison does not matter. It is a reflection of public expectation, although there is no way of gauging whether this is a majority or a minority view. And, as investment manager of public funds, we respect it and we need to respond to it.
One way of responding may be to try and explain the rationale even more clearly, as we are now doing, behind our approach to investment management, which has been built up over the years, on the basis of considerable research. I am sure those familiar with fund management will realise that there is a trade-off among return, risk and liquidity. In order to achieve, for example, a positive rate of return for the Exchange Fund, year by year, the approach to investment management would necessarily involve the taking of less risk, the acceptance of a lower average rate of return for the longer term and lower liquidity.
But if it is the stability of the return to the fiscal reserves that is of concern, then perhaps it is the arrangement for the fiscal reserves sharing the (higher trend average) rate of return of the Exchange Fund that needs to be reviewed.
Joseph Yam
2 May 2002
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