Hong Kong's Exchange Fund reports US$1.7 billion third-quarter loss as Beijing's big tech crackdown batters stock market

Asia's Tech News Daily

Hong Kong’s Exchange Fund, The fund’s performance, regulatory crackdown by the mainland authorities, hurt by Beijing’s crackdown

Hong Kong’s Exchange Fund, a war chest used to defend the local currency, lost HK$13.2 billion (US1.7 billion) in the third quarter as it fell victim to a slump in the local stock market.

The loss in the July-to-September period compares with a gain of HK$81.2 billion a year earlier. The last time the fund suffered a loss was in the first quarter of 2020 when it dropped HK$112 billion, the worst result in the 17 years it has been reporting its quarterly performance.

The fund’s performance has hurt by the stock market slump in Hong Kong amid the regulatory crackdown by the mainland authorities on certain sectors, causing the Hang Seng Index to fall by about 15 per cent during the quarter,” said Howard Lee, deputy chief executive of the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank. Lee reported the Exchange Fund’s performance during a Legco financial affairs panel meeting on Monday.

The Exchange Fund’s investment income during the quarter was dented by the valuation loss of its Hong Kong stock portfolio at HK$26.3 billion, a far deeper loss than the HK$300 million it shed a year earlier.

The disappointing results followed two strong quarters in which the fund reported gains of HK$51.3 billion and HK$51.4 billion. Lee said the Exchange Fund performance remained solid on a nine-month basis, its cumulative income totalling HK$126.5 billion, 40 per cent higher than a year earlier.

Lawmaker Abraham Shek Lai-him, however, worried that its performance would continue to be hurt by Beijing’s crackdown on the tech and private tutoring sectors.

“The overseas stock and bond markets have outperformed the Hong Kong market during the third quarter. Should we reconsider the investment mix to prevent holding too many Hong Kong stocks, and increase other investments to achieve a better return?” Shek said.

Eddie Yue Wai-man, chief executive of the HKMA, who also attended the Legco meeting, pointed out that the fund has a diversified portfolio that already includes stocks, bonds and other assets based in Hong Kong and abroad.

“The Hong Kong stock portfolio … only represents a small portion of the Exchange Fund. Although the Hang Seng Index fell about 15 per cent during the quarter, the fund did not lose that kind of level, because it has other investments,” he said.

Based on the Exchange Fund’s 2018 annual report, it invests 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. The balance is held in cash deposits.

The fund’s overseas equities lost HK$700 million during the third quarter, compared with a gain of HK$29.9 billion a year earlier.

Foreign exchange gains stood at HK$5.6 billion, down from HK$14.7 billion a year earlier, reflecting the impact of currency translation on the fund’s holdings of foreign assets.

Its investments in bonds generated HK$8.2 billion of gains in the third quarter, similar to the HK$8.5 billion it made during the corresponding period of 2020.

The government will receive HK$8.3 billion in the third quarter and HK$26.3 billion for the nine-month period from the Exchange Fund. The treasury places its fiscal reserves with the Exchange Fund as part of its assets and earns a share of a profit from its investments.

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