US$1.3 billion deficit recorded

The Hong Kong Special Administrative Region Government recorded expenditure of US$9.1 billion and revenue of US$7.8 billion for the period April to June 2010, the first three months of the 2010-11 financial year, resulting in a deficit of US$1.3 billion.

An HKSARG spokesman attributed the deficit mainly to some major types of revenue — including salaries and profits taxes — that was mostly received toward the end of the financial year.

The territory’s fiscal reserves stood at US$65.37 billion on June 30, 2010.

Pilot program begins for interbank bond market

On August 17, the People’s Bank of China (PBoC) promulgated a notice on a pilot program for the Renminbi (RMB) Clearing Bank and other eligible institutions outside mainland China to make use of their RMB funds to invest in the Mainland's interbank bond market.  
         
Under the pilot program, the Clearing Bank and Participating Banks of RMB Business in Hong Kong can conduct trading in the Mainland’s interbank bond market upon approval from the PBoC. The Hong Kong Monetary Authority (HKMA) will liaise closely with the PBoC on the implementation of the scheme, and will issue a circular to authorized institutions on the matter.

Welcoming the program, HKMA Chief Executive Norman Chan said, “The launch of the scheme has opened up a channel for RMB funds and financial institutions in Hong Kong to invest in the Mainland. This will further promote the development of RMB trade settlement in Hong Kong, and enhance the attractiveness of RMB offshore business in Hong Kong.”

Under the program, central banks and monetary authorities outside the Mainland can also invest in the Mainland’s interbank bond market. In this regard, Mr. Chan said, “The HKMA welcomes the new arrangement and will follow up with the PBoC accordingly.”

Exchange Fund assets total US$285.6 billion

Total assets of the Hong Kong Exchange Fund amounted to US$285.6 billion on June 30, 2010. This is US$4.5 billion higher than at the end of May 2010, according to the Hong Kong Monetary Authority.

Foreign currency assets increased by US$4 billion and Hong Kong dollar assets increased by US$448 million.

The rise in foreign currency assets was mainly due to increases in unsettled purchases of securities and Certificates of Indebtedness, while the rise in Hong Kong dollar assets was mainly due to valuation gains on Hong Kong equities.

The Currency Board Account shows that the Monetary Base at the end of June 2010 was US$131.2 billion, an increase of US$358 million, or 0.3%, from the end of May 2010. The rise was mainly due to an increase in Certificates of Indebtedness.

The Backing Assets increased by US$756 million, or 0.5%, to US$142 billion. The increase was mainly attributable to the rise in the Monetary Base, together with revaluation gains and interest from investments. In addition, the backing ratio increased from 107.92% at the end of May 2010 to 108.20% at the end of June 2010.

Exchange Fund records investment loss

The Hong Kong Exchange Fund recorded an investment loss of US$179 million in the first half of 2010, according to the Hong Kong Monetary Authority (HKMA). The main components were:

• a valuation loss, net of dividends, on Hong Kong equities portfolio amounting to US$987 million;
• a valuation loss, net of dividends, on other equities amounting to US$1.3 billion;
• an exchange valuation loss of US$3.1 billion, mainly as a result of the depreciation of other currencies against the U.S. dollar; and
• a total return from bonds and other investments of US$5.2 billion.

Fee payments to the Fiscal Reserves and to placements by the Hong Kong Special Administrative Region government funds and statutory bodies were US$2.3 billion. The Strategic Portfolio decreased in value (net of dividends) by US$115.3 million. These factors, together with interest and other expenses, resulted in a decrease in the Accumulated Surplus of US$2.9 billion.

The Abridged Balance Sheet shows that the total assets of the Exchange Fund stood at US$285.6 billion at the end of June 2010, an increase of US$10 billion compared with the end of 2009.

Commenting on the Exchange Fund results for the first half of 2010, HKMA Chief Executive Norman Chan said, “As I indicated when announcing the 2009 results of the Exchange Fund in January this year, there would be uncertainties in the global financial markets. The sustainability and momentum of economic recovery are far from assured and the underlying tone of the global financial system remains weak. It is expected that there would be significant volatility in the global asset markets in 2010.

“The rebound in the global equity markets since mid-February was short-lived. Risk aversion sentiment intensified in the second quarter amidst the European sovereign debt crisis. Despite efforts by the United States and European countries to stabilize the economic and financial systems, investor sentiment remained fragile. Due to the fall in valuation of its equities and the exchange loss, the Exchange Fund recorded an overall investment loss of US$179 million in the first half of the year,” Mr. Chan added.

As for the outlook for the second half of 2010, Mr. Chan said he maintained the same market assessment made earlier in the year: “Global financial markets are watching very closely whether the U.S. and the European countries are able to sustain the momentum of economic recovery and mitigate the adverse impact of the fiscal austerity measures at the same time. Given these uncertainties, the financial markets would still be turbulent. The HKMA will remain on high alert and manage the Exchange Fund cautiously and prudently in the second half of 2010.”

Foreign currency reserves at US$260.7 billion

Hong Kong’s foreign currency reserve assets amounted to US$260.7 billion at the end of July 2010, according to the Hong Kong Monetary Authority, compared with US$256.8 billion at end-June 2010.

There were no unsettled forward contracts at end of July and end of June.

Hong Kong is the world’s seventh-largest holder of foreign currency reserves based on the latest published figures, after mainland China, Japan, Russia, Taiwan, Korea and India.

The total foreign currency reserve assets of US$260.7 billion represent more than nine times the currency in circulation, or about 56% of Hong Kong dollar M3.