Hong Kong Wealth Fund Hit by $7 Billion Quarterly Loss

(Bloomberg) -- Hong Kong's wealth fund suffered a HK$55 billion ($7 billion) loss in the first quarter as stocks and bonds declined, opening a difficult year for the financial hub as it seeks to recover from years of economic turmoil.

The Exchange Fund, managed by the Hong Kong Monetary Authority, lost HK$34 billion on its portfolio of domestic and foreign stocks in the first three months of 2022, HKMA's deputy chief executive Howard Lee told lawmakers Tuesday. Bonds lost HK$34.7 billion, while foreign exchange earned HK$13.7 billion. The quarterly investment income loss was the biggest since a HK$112 billion shortfall in the first quarter of 2020.

“The quarterly loss was about 1% of the fund's portfolio size, versus the stock market's 5% loss in the same period,” said Lee. “We strive for a conservative and defensive approach to weather through good and bad market conditions.”

The former British colony is bracing for a difficult year as it seek to bounce back from an exodus of people and tight social distancing and travel restrictions that are now being loosened. The government has spent more than HK$102 billion over the past two years in the form of “consumption voucher” to stimulate the local market.

In an article on the HKMA's website last week, Chief Executive Eddie Yue described the start of the year as “triple whammy” with equities, bonds and foreign exchange valuations all declining and the Russia invasion of Ukraine as the “last straw.”

To counteract volatile stock and bond markets and a tightening in U.S. monetary policy, the fund has increased holdings of cash and floating-rate bonds, adjusted foreign exchange exposures on non-U.S. dollar assets to maintain sufficient liquidity and guard against the potential loss from a further strengthening U.S. dollar, Yue said.

H.K. Exchange Fund Increased Cash, Floating-Rate Bond Holdings

The HK$4.6 trillion fund served as backstop to ensure stability of Hong Kong's currency and financial system. HKMA has used the war chest to support local lenders and defend the Hong Kong dollar's peg to the U.S. currency.