The Exchange Fund, Hong Kong's financial war chest for defending the currency peg, reported a loss for the fourth quarter because of falling bond prices and a valuation loss on non-US dollar assets.
For the full year, the fund reported its fifth-best annual return, as a diversified investment approach paid off. The investment return in 2024 fell 3 per cent year on year to HK$219 billion (US$28 billion), the Hong Kong Monetary Authority (HKMA) said on Monday.
The Exchange Fund reported its best-ever results for the first nine months of 2024, but that was offset by a loss of HK$20.1 billion in the fourth quarter, ending four consecutive profitable quarters. In the October to December period, Hong Kong equities lost HK$6.7 billion, while foreign exchange valuation loss reached HK$27.4 billion, offsetting a gain of HK$11.3 billion in bonds and HK$2.7 billion in overseas equities.
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The weak performance of the stock markets in the fourth quarter and falling bond prices affected the performance of the Exchange Fund, Eddie Yue Wai-man, CEO of HKMA, said at a media briefing. A stronger US dollar also affected the fund's returns, he added.
Hong Kong Monetary Authority CEO Eddie Yue said many factors affected the Exchange Fund's performance in the fourth quarter. Photo: Jonathan Wong alt=Hong Kong Monetary Authority CEO Eddie Yue said many factors affected the Exchange Fund's performance in the fourth quarter. Photo: Jonathan Wong>
The Exchange Fund's total assets increased by HK$65.9 billion to HK$4.082 trillion at the end of last year.
Since the Hong Kong dollar was pegged to the US dollar in 1983, the fund has become a financial war chest for the HKMA to use to defend the local currency's value.
The Exchange Fund paid HK$13.2 billion to the government's fiscal reserves, compared with HK$17.5 billion a year earlier. The payment amount is based on a formula tracking the average return for the past six years to smooth out market volatility. Some lawmakers have urged the HKMA to change its formula so it can increase its payment to plug a budget deficit, but the authority has rejected the idea.
Hong Kong's budget shortfall for the current financial year is expected to reach HK$100 billion. The economy grew 1.8 per cent in the third quarter of 2024, slowing from 3.2 per cent in the preceding three months.
"The current arrangement is more predictable and avoids uncertainty of payments from the Exchange Fund to the government," Yue said. "The Exchange Fund is aimed at protecting the local currency. While section 8 of the Exchange Fund Ordinance allows a one-off fund transfer to the government, the authorities may need to consider the impact when exercising such power carefully. The ordinance requires any such one-off transfer must not affect monetary stability, although it is worth noting overseas markets remain volatile."
The provision allows the Exchange Fund to transfer funds to the government after the financial secretary consults the Exchange Fund Advisory Committee and gains the approval of the Chief Executive and the Executive Council.
The HKMA, the city's de facto central bank, invests the Exchange Fund's money in global bonds and equities in Hong Kong and abroad, as well as other long-term projects.
"Looking ahead, we should continue to adopt a diversify investment approach for the Exchange Fund," Yue said.
For all of 2024, the fund's Hong Kong equity investments gained HK$21.8 billion, swinging from a year-earlier loss of HK$15.5 billion.
This was a reflection of the Hang Seng Index's performance. It rose 18 per cent in 2024, snapping a record streak of four annual losses after Beijing unveiled a rescue package in September to support the stock and property markets. US and Hong Kong stocks also rallied after the US Federal Reserve started cutting interest rates.
The Exchange Fund, which also invests in overseas stocks - mainly US blue chips - saw a strong gain from these holdings, which earned HK$68.7 billion in 2024, 6 per cent lower than HK$73.6 billion a year earlier.
That echoes the performance of the S&P 500 Index, which rose 23 per cent in 2024.
Bond investments gained HK$135.6 billion in 2024, 6 per cent lower than a record high HK$144 billion in 2023.
The foreign-exchange depreciation on non-US dollar assets resulted in a loss of HK$35.6 billion, much higher than a loss of HK$500 million a year earlier.
The change in valuation of the Exchange Fund's investments in overseas property and other long-term projects in the first nine months of 2024 gained HK$28.5 billion, compared with a gain of HK$11.5 billion a year earlier.
The HKMA will report the full-year performance of its long-term investments a few months later.
