The Exchange Fund, which is used by the Hong Kong Monetary Authority (HKMA) to back the local currency's peg to the US dollar, posted an investment loss of HK$1.4 billion in the first half of 2010, due to unfavorable conditions in financial markets.

This compares with a profit of HK$25 billion one year earlier and HK$106.9 billion for the whole 2009, stated the HKMA on Friday.

The Exchange Fund gained HK$10.8 billion in investment in the first quarter. This means that it lost about HK$12.2 billion in the second quarter, during which financial markets plunged after the European debt crisis caught investors by surprise.

"The rebound of global equity markets since mid-February was short-lived. Risk aversion sentiment intensified in the second quarter, during the European debt crisis. Despite US and European efforts to stabilize economic and financial systems, investor sentiment remained fragile," said Norman Chan, Chief Executive of the HKMA.

The fund invests in bonds and stocks denominated in US dollars and other currencies, including the euro, yen, sterling and Hong Kong dollar. Fluctuations in currency and equity markets could affect the value of the fund's assets. However, the HKMA has repeatedly emphasized that the fluctuations in the value of the fund do not affect its capability to defend the Hong Kong dollar peg.

The fund lost HK$7.7 billion from its investment in Hong Kong equities in the first half of 2010, compared with a HK$26.1 billion profit one year ago, the HKMA said in the Friday statement.

It also lost HK$10.2 billion on non-Hong Kong equities, compared with a profit of HK$11.3 billion one year ago.

However, its biggest hit was a foreign exchange loss of HK$24.3 billion, against a gain of HK$2.0 billion one year earlier.

Fortunately, a HK$40.8 billion gain from its bond holdings helped keep the total net loss to HK$1.4 billion, the HKMA noted.

The sustainability and momentum of economic recovery are far from certain, and the global financial system remains weak at the base, Chan said.

"Many expect significant volatility in the global asset markets in 2010," he warned, citing doubt over the US and European economies' ability to simultaneously sustain recovery momentum and mitigate the adverse impact of fiscal austerity measures.

Official foreign-currency reserve assets stood at $256.8 billion at the end of June, the HKMA data showed.

The benchmark Hang Seng Index and the Standard & Poor's 500 Index fell eight percent in the first half of the year.

The total assets of the Exchange Fund were HK$2.2279 trillion at the end of June, the HKMA said on Friday.

China Daily

(HK Edition 07/31/2010 page2)