HONG KONG: The Exchange Fund posted a HK$33.5 billion loss in the first quarter because of unfavorable conditions in the global equity, bond and foreign exchange markets, outgoing Hong Kong Monetary Authority (HKMA) Chief Executive Joseph Yam told legislators during a briefing yesterday.

However, he assured legislators that the souring of the Exchange Fund's investments was temporary.

By the middle of this month, the Exchange Fund has recovered all the losses that it incurred in the first quarter, due mainly to the rebound of global financial markets since the beginning of the second quarter.

He said the fund suffered an HK$4.2 billion loss from its holdings of Hong Kong stocks, some HK$16.7 billion in other equities, as well as foreign currencies and bonds.

The fund, which is managed by the HKMA, is used to support the Hong Kong dollar's peg to the US greenback and for the defense of the local currency against speculative attacks.

DBS Bank senior investment strategist Daniel Chan said the community should not be concerned with the choppy investment performance of the Exchange Fund as this merely reflected volatile conditions of the global financial and equity markets early this year.

"The Exchange Fund's investment showing in the first quarter will in no way adversely affect the HKMA's proven ability to defend the Hong Kong dollar peg to the US currency and from any speculative attack," he said.

Yam said there is no ample reason to de-peg the Hong Kong dollar from the US dollar as the scheme continues to work in the city's favor.

In his briefing to legislators, Yam also warned that the continuous inflow of "hot money" into Hong Kong might have created some distortions in the financial market, such as rises in asset prices that might not be justified by economic fundamentals.

The large capital inflows into the city, caused by quantitative easing policies by monetary authorities around the world, have pushed up asset prices recently, he said.

"There could be a mismatch between the financial market and economic fundamentals in the short term," he said.

Since September last year, the HKMA has purchased around $44 billion as hot money continued to flow into Hong Kong in search of higher investment returns.

Hot money refers to large amounts of capital which speculative investors plow into different markets in search of high yields. Those monies can be pulled out quickly by their managers, thereby causing significant volatility in affected markets.

Yam said Hong Kong's foreign reserves have risen to $200 billion, the seventh largest in the world, as a result of the large capital inflows into the city's markets.

Yam cautioned investors against potential corrections in asset prices once hot money is pulled out by their managers from the local market.

He said that it is hard to predict when this pullout could happen.

(HK Edition 05/22/2009 page16)