Hong Kong’s Exchange Fund recorded an investment income of US$13.67 billion in 2009, according to the Hong Kong Monetary Authority (HKMA).

The main components included:

• a valuation gain on, and dividends from, Hong Kong equities amounting to US$6.26 billion;
• a valuation gain on, and dividends from, other equities amounting to US$6.24 billion;
• an exchange valuation gain of US$1.25 billion, mainly as a result of the appreciation of other currencies against the U.S. dollar; and
• a valuation loss, net of interest, on bonds and other investments of US$89.7 million.

After deducting interest and other expenses, the net investment income in 2009 was US$13.23 billion.  Taking into account fee payments to the fiscal reserves and placements by Hong Kong Special Administrative Region Government funds and statutory bodies of US$4.44 billion, and adding back the valuation gain and dividend income on the Strategic Portfolio of US$551.2 million, the accumulated surplus recorded an increase of US$9.33 billion.           

The Abridged Balance Sheet shows that the total assets of the Exchange Fund increased in 2009 by US$75.82 billion, from US$200.03 billion at the end of 2008 to US$275.85 billion at the end of 2009.  The increase is mainly attributable to capital inflows into the Hong Kong dollar.           

The 2009 Exchange Fund investment return is 5.9%.  To reflect the long-term nature of the Fund, the HKMA is also releasing the average investment returns of the Exchange Fund during a number of different time horizons.  The average return was 3.8% over the last three years, 4.8% over the last five years, 5% over the last 10 years and 6.1% since 1994.  These returns compare favorably with the average inflation rate during the corresponding period.           

Commenting on the Exchange Fund results for 2009, the Chief Executive of the HKMA, Norman Chan, said that major financial markets recovered in 2009 from the market turbulence in 2007 and 2008.             

“The investment return of US$13.67 billion for the Exchange Fund in 2009 is the second highest on record in terms of amount,” Mr. Chan said. “Looking back, the investment environment last year remained extremely uncertain and volatile. Major equity markets were still under pressure in the first quarter, but started to recover from the turbulence created by the financial crisis from the second quarter because of the positive impact of stimulus packages and greater investor optimism.  U.S. bond yields, on the other hand, saw a sharp rise during the year, especially at the long end, with concerns over the supply of U.S. government bonds and uncertainties about the timing and pace of the exit from monetary easing.”           

Regarding the outlook for the year ahead, Mr. Chan added that the prospects for the global financial markets are far from certain.             

“While there is a modest recovery in the global economy, its sustainability remains to be seen.  The global financial system has stabilized but its recovery is not without fragility.  In particular, global banks are expected to face increasing pressure to meet capital and other financing needs in the coming two to three years. In addition, the performance of the financial markets is clouded by the considerable uncertainty about the timing of the exit from monetary easing.             

“In sum, I expect that the uncertainties surrounding the movements of interest rates, international fund flows and exchange rates may lead to considerable volatility in global asset markets in 2010,” Mr. Chan said. “The HKMA will continue to be vigilant and manage the Exchange Fund prudently in accordance with the Fund's investment objectives set by the Financial Secretary on the advice of the Exchange Fund Advisory Committee.”