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Following is a question by the Hon Tony Tse and a written reply by the Financial Secretary, Mr John C Tsang, in the Legislative Council today (December 18):
Question:
It was reported last month that the Hong Kong Monetary Authority (HKMA) decided to use about HK$1,258 million of the Exchange Fund (EF) to form a joint venture with a London developer to jointly undertake a real estate project in Mayfair, London. Regarding the investment management of EF, will the Government inform this Council:
(a) of the Hong Kong industries (including professional services) that HKMA expects to have the opportunities to participate in or benefit from the aforesaid real estate project, as well as the relevant details and economic benefits;
(b) of the respective total investments in and total income from the local and overseas investment projects of EF in each of the past five years, broken down by category of investment projects;
(c) of the respective maximum, minimum and average differentials between the projected and actual investment returns of the local and overseas investment projects of EF in the past decade; whether HKMA has reviewed why such differentials arose; if it has reviewed, of the results as well as the improvement measures and proposals; if it has not, the reasons for that;
(d) of the criteria and considerations based on which HKMA decides whether to use EF to invest in individual projects, and whether HKMA has adopted different criteria and considerations for local and overseas investment projects; if so, of the details and the reasons for that; whether HKMA, in making investment decisions, has taken into account the relevant impacts on and benefits to various industries in Hong Kong; and
(e) whether HKMA has conducted regular reviews on the economic benefits brought about by the investment projects of EF to the overall economy of Hong Kong and the local industries; if so, of the details, as well as the improvement proposals that have been implemented and those yet to be studied?
Reply:
President,
The Exchange Fund (EF) is established under the Exchange Fund Ordinance. Its statutory purposes are to maintain the stability and integrity of the monetary and financial systems of Hong Kong.
The investment objectives of the EF include: preserving capital, ensuring full backing of the entire Monetary Base at all times by highly liquid US dollar-denominated assets, ensuring the availability of sufficient liquidity for the purpose of maintaining monetary and financial stability, and, subject to these objectives, achieving an investment return that will help preserve the long-term purchasing power of the EF.
The EF has three major portfolios, namely the Backing Portfolio, the Investment Portfolio and the Long-term Growth Portfolio (LTGP). As required under the Currency Board arrangements, the Monetary Base has to be fully backed by US dollar-denominated assets. Therefore, the Backing Portfolio only holds high quality, short-term and highly liquid US dollar debt instruments. Assets in the Investment Portfolio are more diversified than those in the Backing Portfolio but they must maintain a high degree of security and liquidity in order to provide sufficient liquidity to achieve the statutory purposes of maintaining monetary and financial stability. As for LTGP, on the premise that the stability and integrity of the monetary and financial systems of Hong Kong can be maintained, it aims to enhance the medium- to long-term investment return of the EF.
Given the EF's statutory purposes, its investment mainly focuses on overseas financial and real assets. Apart from strategic needs like the acquisition of Hong Kong equities in 1998 to cope with the Asian financial crisis, and the purchase of the Hong Kong Monetary Authority (HKMA)'s office premises, the EF basically has no investment in Hong Kong.
My response to the questions is as follows:
(a) Same as for all the EF's overseas investment projects, the HKMA, before making the investment decision, must have gone through thorough due diligence, stringent risk control and prudent project management. The EF has also appointed independent legal, tax and property consultants who are familiar with the local business environment for professional advice.
(b) and (c) The EF basically has no investment in Hong Kong.
For overseas project investments under the LTGP, the HKMA conducts a comprehensive and in-depth analysis of the risk and return, including expected investment return, of each project. The HKMA also monitors and reviews the progress and performance of the investment projects regularly and undertakes appropriate follow-up actions. Since the inception of the LTGP in 2009 till end-2011 and end-2012, the annualised internal rates of return were 9 per cent and 10 per cent respectively. Total value of investment of LTGP as of end-2011 and end-2012 amounted to HK$34.2 billion and HK$60.6 billion respectively. We do not consider that it is appropriate to comment on the expected and actual return of specific projects.
(d) and (e) The HKMA makes investment decisions based on the EF's investment objectives. The HKMA does not assess benefits that are not related to the EF's investment objectives.
Ends/Wednesday, December 18, 2013
Issued at HKT 15:10
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