US$3.1 billion deficit recorded

The Hong Kong Special Administrative Region Government announced its financial results for the three months ended June 30.

Expenditure for the period April to June amounted to US$8.06 billion and revenue US$4.96 billion, resulting in a deficit of US$3.1 billion.

A government spokesman said that the deficit for the period was mainly because some major types of revenue including salaries tax and profits tax were mostly received toward the end of a financial year.

The fiscal reserves stood at US$60.2 billion as of June 30.  

Exchange Fund assets increase since May

Total assets of the Hong Kong Exchange Fund amounted to US$235.02 billion on June 30. This is US$9.37 billion higher than at the end of May 2009, according to the Hong Kong Monetary Authority (HKMA).  

Foreign currency assets increased by US$6.7 billion and Hong Kong dollar assets increased by US$2.66 billion.

The rise in foreign currency assets was due mainly to an increase in securities purchased but settled in the following month and purchases of foreign currencies with Hong Kong dollars.  The rise in Hong Kong dollar assets was due mainly to increases in Exchange Fund Bills and Notes issued but not yet settled and bank borrowings.  These increases were partly offset by fiscal drawdowns.

The Currency Board Account shows that the monetary base at the end of June was US$90.34 billion, an increase of US$1.84 billion, or 2.1%, from the end of May.  The rise in the monetary base was due mainly to an inflow of funds into the Hong Kong dollar.  The issuance of additional Exchange Fund paper during the month reduced the level of the Aggregate Balance which represented a change in the composition of the Monetary Base.

Backing assets rose US$1.79 billion, or 1.9%, to US$95.88 billion.  The increase was attributable mainly to the rise in the monetary base together with interest from investments.  These increases were partly offset by revaluation losses.  Reflecting this, the backing ratio declined from 106.32% at the end of May 2009 to 106.13% at the end of June.

Exchange Fund records investment gain

The Abridged balance sheet of the Exchange Fund shows that the total assets stood at US$235.02 billion at the end of June, an increase of US$34.98 billion, compared with the end of 2008.

The Exchange Fund recorded an investment gain of US$3.2 billion in the first half of 2009. The main components were:

• a valuation gain on, and dividends from, Hong Kong equities portfolio amounting to US$3.34 billion
• a valuation gain on, and dividends from, other equities amounting to US$1.17 billion
• an exchange valuation gain of US$256.4 million
• a valuation loss, net of interest, on bonds and other investments of US$1.57 billion

After deducting interest and other expenses, the net investment income for the first half of 2009 was US$2.98 billion. Taking into account fee payments to the fiscal reserves and placements by Hong Kong government bodies of US$2.29 billion, and adding the valuation gain and dividend income on the Strategic Portfolio of US$397.4 million, the accumulated surplus recorded an increase of US$1.08 billion.            

Chief Executive of the Hong Kong Monetary Authority Joseph Yam said that the investment environment had remained challenging since the last quarter of 2008. Bond and equities markets had declined markedly in the first two months of 2009 on concerns about continuing global economic difficulties. Since March, stimulus packages in the major economies have led to a rebound in equities markets. But the reprieve in the bond market has been short-lived as concerns over the supply of U.S. government bonds and the timing and pace of the exit from monetary easing have driven yields on long-term U.S. treasuries higher.

“It is encouraging that, despite difficult market conditions, the Exchange Fund recorded an investment gain of HK$25 billion (US$3.2 billion) in the first half of the year,” Mr. Yam said.

Looking ahead, Mr. Yam commented that recovery in the developed economies would take time. Although the stimulus packages had restored liquidity to the global financial system, credit availability remained limited. “The HKMA, with the guidance of the Exchange Fund Advisory Committee and its Investment Sub-Committee, will continue to be vigilant in this difficult environment and to manage the Exchange Fund prudently,” he said.

Interest rates remain low

The conditions in the financial market improved over the past few months. With large amount of capital inflow, the Hong Kong Interbank Offered Rate (HIBOR) across all tenors softened further in the past few months. The aggregate balance reached US$28.33 billion during July.  In overseas money markets, the TED spread fell back to the level close to that in early 2007 before the emergence of the subprime mortgage crisis.  Locally, loans for use in Hong Kong increased by 1.7% during the second quarter as supported by the buoyancy in the residential property market, rebound in external trade and resurgence in stock market and IPO activities.

Hong Kong dollar weakened in July
 
The U.S. dollar weakened in recent months against other major currencies with the increasing concern on impacts of the Fed’s quantitative easing policies. The Hong Kong dollar weakened in tandem under the Link Exchange Rate System. The Effective Exchange Rate Index of the Hong Kong dollar showed a depreciation of 3.2% in July compared to the recent peak in March. 

In tandem with the global stock market developments, the local stock market further rebounded in recent months. The Hang Seng Index rose 1.1% and 11.9% in June and July respectively.  Trading activity likewise turned more active, with an average daily turnover of US$8.88 billion in July.

Routing and settlement service launches

The Hong Kong Monetary Authority (HKMA) announced the launch of the CMU Fund Order Routing and Settlement Service on August 11.

This new service provided by the Central Moneymarkets Unit (CMU) of the HKMA is designed to make fund order routing and settlement safer and more efficient by streamlining the processing of investment fund transactions among market participants.  The new service provides a standardized platform for processing subscription and redemption orders and settlement and custody of investment funds among CMU members: these include investment houses, distributors, or custodians initiating the orders, and transfer agents receiving them.

Leveraging on the existing infrastructure, the new service will further expand the service coverage of the CMU and contribute to the safety and efficiency of Hong Kong’s multi-dimensional financial infrastructure, thereby reinforcing Hong Kong’s role as the regional settlement hub and an international financial center.