Hong Kong's Exchange Fund suffers record annual loss

This photo shows the building of the Hong Kong Monetary Authority. PHOTO IC Hong Kong s Exchange Fund, the city's war chest to back the Hong Kong dollar, recorded its worst-ever investment loss of $202.4 billion $25.8 billion in 2022 as a deteriorating global market eroded investments in financial assets, according to the Hong Kong Monetary Authority.

The fund's losses last year came as a stark contrast to its investment income of HK $191.9 billion in 2021, marking its third annual loss since the first disclosure in 2000.

The Exchange Fund, which is managed by the HKMA, is under the control of the financial secretary and invests in equities, bonds, foreign exchange, and other assets, serving the purpose of maintaining monetary and financial stability in Hong Kong.

The Exchange Fund lost HK $80.7 billion on its portfolio of domestic and foreign bonds, while its shortfall on bonds was HK $53.3 billion, according to data from the HKMA. In 2022, it had a negative investment return of 4.4 percent.

The HKMA Chief Executive Eddie Yue Wai-manYue Wai-man attributed the record annual loss to an extremely volatile financial market.

The Russia-Ukraine conflict in the first year sent energy and commodity prices significantly higher, while the ongoing pandemic situation disrupted global supply chains and caused inflation to soar in major economies, prompting major central banks to tighten their monetary policies aggressively, Yue said.

In 2022, the US Federal Reserve initiated several sharp interest rate hikes of 425 basis points, leading to massive sell-offs in the global stock and fixed-income markets.

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Yue said the Exchange Fund could not stay unscathed amid the harsh investment environment, while the investment loss it sustained was smaller when compared to the performance of major market indices and mixed-asset funds, which registered losses of varying degrees.

The investment outlook for this year will continue to face significant uncertainties and asset prices are expected to remain volatile, Yue said at a news conference.

The monetary policies of major central banks will dominate the investment outlook, and financial markets will pay close attention to peak policy rates set by major central banks, he said.

On a positive note, Yue said the Exchange Fund is expected to capitalize on the Chinese mainland economic rebound, driven by the easing of COVID-prevention measures and the introduction of stimulus packages.

As yields of major government bonds are currently at multiyear highs due to market expectations of slowing inflation and more gradual rate hikes, fixed-income investments have become more attractive, Yue said.