Income drops to HK$79b in 2010 compared with HK$107.7b in 2009

The Hong Kong Monetary Authority (HKMA) said Wednesday that it plans to diversify the investment portfolio of the Exchange Fund as it seeks to boost its returns.

The fund managing Hong Kong's foreign exchange reserves will diversify into the stocks and bonds of emerging markets, private equity funds and overseas property. The announcement comes as the fund's investment income in 2010 slumped 26.65 percent to HK$79 billion compared with HK$107.7 billion in 2009 - its lowest level in three years.

Meanwhile, although the HKMA said the fund's performance achieved a "better than expected" return in 2010, its rate of return was lower. It rose just 3.6 percent in 2010 after gaining 5.9 percent the year before.

"The investment market in 2011 will still be volatile and uncertain, so the HKMA will remain cautious and prudent," said HKMA Chief Executive Norman Chan. He added that diversification would be a gradual and orderly process.

Spending on assets including emerging-market securities, private equity funds and overseas real-estate has already started, Chan said.

"Yuan investment on the mainland will be another diversification strategy for the HKMA to pursue and the HKMA has been approved by the People's Bank of China (PBoC) to invest 15 billion yuan in the mainland inter-bank bond market," Chan said, adding that its investment was on a long-term basis.

The PBoC gave its approval to the HKMA to invest in the mainland inter-bank bond market in December 2010. Separately, the China Securities Regulatory Commission also gave a green light for the HKMA to invest in the mainland's stock and bond markets through the QFII program in October.

The HKMA is still waiting for the State Administration of Foreign Exchange to set the quota for the QFII program, Chan said.

"Today's comments may be intended to show that the HKMA supports the internationalization of the yuan," Kevin Lai, an economist at Daiwa Capital Markets in Hong Kong, said Wednesday. "The (Exchange Fund's) over-reliance on the US dollar is an inevitable reality."

Foreign equities accounted for HK$27 billion of the latest return total, compared with HK$11.6 billion for Hong Kong equities. The return from bonds was HK$42.1 billion. Currency movements led to a valuation loss of HK$3.1 billion.

The payment to the government's fiscal reserves amounted to HK$33.8 billion and the fund's accumulated surplus was increased by HK$37.9 billion to a total of HK$591.4 billion.

The fund's total assets have swelled to HK$2.35 trillion in 2010 from HK$2.14 trillion in 2009, registering a hike of 9.81 percent.

"The notably high unemployment rate, very soft housing market, the households' de-leveraging process and the US federal and municipal governments' debt problems may affect the sustainability of US economic recovery; while Europe will continue to be affected by sovereign debt problem and fiscal sustainability," Chan cautioned.

"Moreover, further macroeconomic tightening policies will be envisaged in the emerging markets because of the capital inflows, rising inflation and asset price surges in these regions," Chan added.

Eddie Yue, HKMA deputy chief executive, added that the HKMA will inject more capital into its subsidiary company - the Eight Finance Investment Company (EFIC) - to pursue more alternative investments in 2011. The EFIC was formed in 2009 as the HKMA's investment arm in alternative investments.

Hong Kong's foreign-exchange reserves were $268.7 billion at the end of 2010, ranked after the mainland, Japan, Russia, Taiwan, India, South Korea and Brazil, making the city the owner of the world's eighth-largest foreign-exchange reserves.

Bloomberg contributed to this story.

China Daily

(HK Edition 01/27/2011 page2)