Hong Kong $457 Billion Fund Weighs Investing in Infrastructure

(Bloomberg) -- The Hong Kong Monetary Authority is considering investing some of the city's financial reserves in infrastructure to boost returns at a time when many government bonds have negative yields, according to Executive Director Vincent Lee.

The city's de facto central bank is reviewing proposals for infrastructure investments, and aims to conclude deals in the coming months, Lee said. The HKMA's Exchange Fund, which protects the stability of the Hong Kong dollar, had total assets of HK$3.54 trillion ($457 billion) at the end of June.

“A lot of central banks and sovereign wealth funds invest into very safe products like government treasuries, but look at the returns," Lee said in an interview on Friday. "Some even give you a negative return,” Lee added. "Not just us, but a lot of investors are looking into alternative investments.”

The Exchange Fund could invest in a range of infrastructure debt, equity or physical assets, said Lee, who is also deputy director of the HKMA's Infrastructure Financing Facilitation Office. Partners could include the World Bank's International Finance Corp. as well as private equity funds, Lee added, without giving further details.

Many sovereign wealth funds have looked to alternative assets such as infrastructure and private equity to boost returns at a time of low interest rates. Singapore's GIC Pte was an early investor in infrastructure projects as it sought to diversify its portfolio, which is worth about $354 billion according to the London-based Sovereign Wealth Centre.

The Hong Kong Exchange Fund is divided into a so-called backing portfolio, which invests in highly-liquid U.S. dollar assets and is used to back the local currency, and the investment portfolio, which primarily holds equities and bonds from member countries of the Organization for Economic Cooperation and Development.

The Exchange Fund declined 0.6 percent last year, after a gain of 1.4 percent in 2014, according to the HKMA. No details on alternative asset classes such as infrastructure were revealed.

The HKMA hopes any Exchange Fund infrastructure deals will have a “demonstration effect” in encouraging investment in projects connected to China's “One Belt, One Road” initiative, Lee said. The Asian Development Bank has estimated that the region will need to invest $8 trillion in its infrastructure between 2010 and 2020.

Last week, the HKMA said it added 13 new partners to its platform intended to share information on China's initiative, including AIA Group Ltd., Citigroup Inc. and Zurich Insurance Co.

To contact the reporter on this story: Alfred Liu in Hong Kong at aliu226@bloomberg.net. To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Sree Vidya Bhaktavatsalam