Exchange Fund's gains slump 28 per cent to US$21.9 billion in 2021 as Hong Kong market rout hits investment returns

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Hong Kong Monetary Authority

Hong Kong’s Exchange Fund, the war chest used to defend the local currency, saw its earnings slump 28 per cent in 2021, as its performance was hit by a slump in the city’s stock market.

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The fund made a gain of HK$170.5 billion (US$21.9 billion) last year compared with HK$262.2 billion in 2020, according to the Hong Kong Monetary Authority, which is responsible for investing the city’s fiscal reserves. The fund had total assets of HK$4.58 trillion as of November.

The Exchange Fund made a gain of HK$30.8 billion in the second half of last year, far lower than HK$139.7 billion earned during the first half. The fund’s rate of investment return of 3.6 per cent in 2021 was the worst since it made 0.3 per cent in 2018. It was also lower than the 5.3 per cent in 2020 and 6.6 per cent in 2019.

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“The global investment markets were very volatile in 2021, a trend that is likely to continue this year,” said Eddie Yue Wai-man, chief executive of the HKMA, in a media briefing to announce the results on Thursday. “The US is likely to increase interest rates amid rising inflation pressure, which is likely to lead to adjustments in stock and bond markets worldwide.”

Hong Kong Monetary Authority

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Eddie Yue Wai-man, the chief executive of the Hong Kong Monetary Authority, pictured in September 2021. Photo: Winson Wong

The fund’s performance was affected by the stock market slump in Hong Kong in the second half of last year after Beijing launched a regulatory crackdown to rein in the technology and private education sectors.

The Hang Seng Index fell 14 per cent in 2021, making Hong Kong the worst-performing market out of 92 major indices tracked by Bloomberg. The Hang Seng China Enterprises Index, which tracks the performance of Chinese companies, fared far worse, declining 23.3 per cent last year.

The Exchange Fund’s investment income in 2021 was dented by the HK$21 billion valuation loss of its Hong Kong stock portfolio versus a gain of HK$4 billion a year earlier.

The Exchange Fund invested 70 per cent of its assets in debt securities, 11 per cent in foreign equities, 7 per cent in overseas properties and infrastructure projects, and 4 per cent in Hong Kong stocks, according to its 2018 annual report. The rest was held in cash deposits.

The fund’s overseas equities earned HK$68.4 billion in 2021, similar to a gain of HK$69.9 billion a year earlier.

Foreign exchange gains stood at HK$16.8 billion versus a gain of HK$9.6 billion a year earlier, reflecting the impact of currency translation on the fund’s holdings of foreign assets.

Its investments in bonds generated HK$12.4 billion of gains in 2021 compared with HK$92.7 billion in 2020.

Hong Kong Monetary Authority

The Exchange Fund’s returns were affected by a slump in Hong Kong’s stock market last year. Photo: EPA-EFE

The Exchange Fund’s outlook is rosier this year as the lower valuation of Hong Kong stocks makes them attractive, according to Kenny Ng, securities strategist at China Everbright Securities International.

“While overseas markets outperformed Hong Kong stocks in 2021, the imminent US interest rate rise and other geopolitical issues have dragged US and European stocks down this year,” Ng said. “On the other hand, Hong Kong stocks, which fell substantially last year, have become very attractive to investors.”

Ng believes the benchmark Hang Seng Index could rise to the 27,500 level this year, 16 per cent higher than Thursday’s close of 23,807.00. This will help the Exchange Fund to post better returns in 2022, he added.

The government received HK$34.4 billion for 2021 from the Exchange Fund. The treasury places its fiscal reserves with the Exchange Fund as part of its assets and earns a share of the profit from its investments.

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