Exchange Fund faces ‘triple-whammy’, if equities, bonds and forex valuation all drop, HKMA’s Eddie Yue warns
4 min readThe head of Hong Kong’s de-facto central lender gave a rare gain warning, expressing the Trade Fund would encounter a “triple-whammy” problem with equities, bonds and overseas trade valuation falling at the same time if the US speeds up its fascination-amount improves.
“Moving into 2022, traders were treading on thin ice when running their belongings amid various uncertainties, ranging from the evolving pandemic situation and increasing inflation, to plan shifts by significant central banks,” mentioned Eddie Yue Wai-man, chief government of Hong Kong Financial Authority (HKMA), which manages the HK$4.6 trillion (US$586.14 billion) Trade Fund.
He claimed the conflict among Russia and Ukraine was the “very last straw” that induced massive swings in the stock, bond and forex markets, posing significant worries to traders all in excess of the earth, such as the Exchange Fund.
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Yue’s warning arrived in an post published on the HKMA’s web-site on Monday, just forward of the Trade Fund’s initial-quarter final results on Might 3.
A person walks near broken structures in the system of Ukraine-Russia conflict in the southern port city of Mariupol, Ukraine, on April 22. The war has affected stock, bond and forex marketplaces throughout the world. Picture: Reuters alt=A guy walks near damaged buildings in the system of Ukraine-Russia conflict in the southern port city of Mariupol, Ukraine, on April 22. The war has impacted stock, bond and currency markets throughout the world. Picture: Reuters>
The Exchange Fund is the war upper body utilized to protect the regional forex from assaults by shorter sellers. It invest in stocks in Hong Kong and abroad, bonds and abroad homes and other prolonged-time period tasks.
Whilst the Trade Fund’s earnings declined 28 per cent final yr to HK$170.5 billion, it showed a gain of HK$51.3 billion in the 1st quarter of 2021.
The fund posted its worst quarterly final result in the initially a few months of 2020 when it shed HK$112 billion, as it fell sufferer to the around the globe inventory market place slump when the Covid-19 pandemic started off to distribute.
As opposed to the earlier, exactly where the markets skilled the regular phenomenon of “equities down, bonds up”, Yue explained the very first quarter noticed a exceptional problem of “equities down, bonds down”.
“In anticipation of inflationary force and tightening monetary insurance policies by central financial institutions, significant sovereign bonds were less than sturdy marketing strain, triggering the bond rates to plummet,” Yue said, pointing to the Bloomberg US Treasury Index, which fell by 5.6 for every cent total in the quarter, the worst quarterly performance due to the fact 1973.
The city’s benchmark Dangle Seng Index misplaced 6 for each cent when the Cling Seng Tech Index plummeted 20 for every cent in the very first quarter. The US S&P500 index also declined by 5 for each cent. The US Greenback Index, in the meantime, has risen 6 for every cent this yr.
“If the US accelerates the speed of financial plan tightening relative to other economies, the US dollar could continue to improve in opposition to other important currencies,” Yue claimed. “In that scenario, the Exchange Fund would facial area a ‘triple-whammy’ circumstance with equities, bonds and foreign trade valuation all slipping at the very same time.”
The HK$1.2 trillion Mandatory Provident Fund (MPF) could demonstrate what is in shop for the Trade Fund. The MPF dropped HK$76.2 billion, or 6.2 per cent, during the initial quarter, according to MPF Scores, an unbiased pensions research firm.
“The 1st-quarter consequence of the Exchange Fund could unquestionably be its worst in current years,” reported Tom Chan Pak-lam, chairman of Hong Kong Institute of Securities Dealers. “It is a fact that both equally shares and bonds fell in the to start with quarter, when currencies are falling towards the US greenback. These kinds of poor momentum in shares, bonds and currencies may well not be just confined to the initial quarter but I dread that it may possibly past the rest of the year.”
The US greenback has appreciated drastically against other currencies this yr. Image: EPA-EFE alt=The US dollar has appreciated substantially in opposition to other currencies this 12 months. Photograph: EPA-EFE>
Yue claimed the HKMA has produced many adjustments to the Exchange Fund’s investments to cut down the influence of the interest-level rises and strengthening US greenback. This consists of escalating holdings of cash and floating-price bonds and modifying its foreign trade publicity of non-US dollar belongings.
The Trade Fund in current several years has also greater its Extended-Term Progress Portfolio that invests in serious estate and other prolonged expression tasks. The portfolio has proven an annualised inside charge of return of 15.3 per cent given that its inception in 2009 until eventually the conclusion of September previous 12 months.
The fund will also continue to improve the liquidity of the expenditure portfolios to make certain that it can retain Hong Kong’s financial and monetary steadiness, and to support the government’s want to attract on fiscal reserves to cope with the pandemic, Yue reported.
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