2005 Exchange Fund Position
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11
2005 Exchange Fund Position
Press Conference
19 January 2006
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22
Investment Objectives ofThe Exchange Fund
Investment objectives of the Exchange Fund are:
(1) to preserve capital;
(2) to ensure that the entire Monetary Base at all times will be fully backed by highly liquid short-term US dollar denominated securities;
(3) to ensure sufficient liquidity for the purpose of maintaining monetary and financial stability; and
(4) subject to (1) – (3) above, to achieve an investment return that will preserve the long-term purchasing power of the assets.
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33
Markets in 2005
• Exchange rates:– Yen vs USD : -13.2%– Euro vs USD : -13.2%
• Equity markets:– US (S&P500) : +3.0%– Europe (MSCI Europe) : +21.6%– Japan (Topix) : +43.5%– Hong Kong (HSI) : +4.5%
• Interest rates:– USD (Fed funds target rate) : +2.0%– Euro (ECB repo rate) : +0.25%– Yen (BoJ call rate) : no change
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44
Investment Income
I 2005 I 2004 2003 2002 2001
(HK$ billion)Full
year* Q4 Q3 Q2 Q1Full
yearFull
yearFull
yearFull
year
Gain/(Loss) on Hong Kong equities^ 7.0 (2.7) 8.1 5.1 (3.5) 12.0 21.2 (11.8) (27.1)
Gain/(Loss) on other equities^ 20.5 7.9 10.1 3.4 (0.9) 11.2 26.8 (22.7) (3.3)
Exchange gain/(loss) (19.5) (3.4) (2.4) (10.7) (3.0) 8.5 22.9 27.2 (13.0)
Total return from bonds, etc 30.1 5.8 3.2 15.8 5.3 25.0 18.8 54.3 50.8
Investment income 38.1 7.6 19.0 13.6 (2.1) 56.7 89.7 47.0 7.4
* Unaudited figures for 2005
^ Including dividends
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55
Exchange FundChange in Accumulated Surplus
I 2005 I 2004
(HK$ billion)Full year(unaudited)
Q4 Q3 Q2 Q1 Full year
Investment income 38.1 7.6 19.0 13.6 (2.1) 56.7
Other income 0.2 0.1 0.0 0.1 0.0 0.2
Interest and other cost (7.9) (2.6) (2.2) (1.8) (1.3) (4.8)
Net investment income 30.4 5.1 16.8 11.9 (3.4) 52.1
Treasury’s share (10.0) (2.3) (4.9) (3.5) 0.7 (14.5)
Write back of revaluation loss on premises 0.0 0.0 0.0 0.0 0.0 0.9
Carry to accumulated surplus 20.4 2.8 11.9 8.4 (2.7) 38.5
Adjustment to accumulated surplus
Effect of implementation of HKAS 39(1) (0.6) 0.0 0.0 0.0 (0.6) N/A
Increase/(Decrease) in EF accumulated surplus 19.8 2.8 11.9 8.4 (3.3) 38.5
Note (1): The effect of changing from using mid-price to using bid-price for valuing securities held, and using ask-price for valuing securities issued.
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66
Exchange FundHistorical Change in Accumulated Surplus
* unaudited figures for 2005
(HK$ billion) 2005* 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
Investment income 38.1 56.7 89.7 47.0 7.4 45.1 103.8 93.8 35.6 25.4 46.7
Other income 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.3
Interest and other cost (7.9) (4.8) (5.6) (7.0) (10.5) (11.0) (10.0) (16.0) (18.4) (12.9) (12.6)
Net investment income 30.4 52.1 84.3 40.2 (2.9) 34.3 94.0 78.0 17.4 12.7 34.4
Treasury’s share (10.0) (14.5) (25.7) (15.6) (1.6) (18.1) (45.4) (26.0) N/A N/A N/A
Revaluation gain/(loss) on premises 0.0 0.9 (0.9) N/A N/A N/A N/A N/A N/A N/A N/A
Carry to accumulated surplus 20.4 38.5 57.7 24.6 (4.5) 16.2 48.6 52.0 17.4 12.7 34.4
Adjustment to accumulated surplus
Effect of implementation of HKAS 39 (0.6) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Increase/(Decrease) in EF accumulated surplus 19.8 38.5 57.7 24.6 (4.5) 16.2 48.6 52.0 17.4 12.7 34.4
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77
Exchange FundAbridged Balance Sheet
(HK$ billion)2005
(unaudited)2004 Change
ASSETS
Deposits 89.1 63.5 25.6
Debt securities 736.2 772.1 (35.9)
Hong Kong equities 87.9 82.4 5.5
Other equities 123.8 123.2 0.6
Other assets 31.9 20.7 11.2
Total assets 1,068.9======
1,061.9======
7.0===
LIABILITIES AND FUND EQUITY
Certificates of Indebtedness 149.3 146.8 2.5
Government-issued currency notes & coins in circulation 6.7 6.3 0.4
Balance of the banking system 1.6 15.8 (14.2)
Exchange Fund Bills and Notes 118.1 125.9 (7.8)
Placements by other HKSAR government funds 297.1 280.1 17.0
Other liabilities 52.9 63.4 (10.5)
Total liabilities 625.7 638.3 (12.6)
Accumulated surplus 443.2 423.4 19.8
Premises revaluation reserve(1) - 0.2 (0.2)
Fund equity 443.2 423.6 19.6
Total liabilities and fund equity 1,068.9======
1,061.9======
7.0===
Note (1): Before 2005, premises were stated at valuation less depreciation. From 2005, premises are stated at cost less depreciation. The revaluation surplus on premises is therefore reversed.
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88
Exchange Fund Performance Against Investment Benchmark
3.8%
0.4%
3.9%
2.9%
10.8%
4.8%
0.7%
5.1%
5.7%
9.5%
5.5%
3.1%
5.7%
10.2%
0%
2%
4%
6%
8%
10%
12%
1999 2000 2001 2002 2003 2004 2005(unaudited)
Investment Return of ExchangeFund's Investment Benchmark*
Investment Return of Exchange Fund*
• Investment return from 2000 computed in accordance with CFA Global Investment Performance Standards
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99
2.4%
10.8%
5.1%
6.1%
12.1%
10.8%
4.8%
0.7%
10.2%
1.3%
6.3%
3.1%
5.7%
5.1%
0%
2%
4%
6%
8%
10%
12%
14%19
94
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
200
5(u
naud
ited)
Com
poun
ded
Ann
ual
Inve
stm
ent R
etur
n*(1
994-
2005
)
Com
poun
ded
Ann
ual
Hon
g K
ong
CPI
-A(1
994-
2005
#)
Investment Return* of the Exchange Fund
# Hong Kong CPI-A at end-November 2005* Investment return from 2000 computed in accordance with CFA
Global Investment Performance Standards
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1010
Treasury Return Against Estimate
45.4
1.6
14.5
31.6
12.514.1
25.7
15.6
26.0
18.1
10.012.312.1
13.8
22.2
26.7
0
10
20
30
40
50
1998 1999 2000 2001 2002 2003 2004 2005(unaudited)
Treasury's share of Exhange Fund return
Treasury's estimated return
HK$bn
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1111
Outlook for 2006
Global economy - strong growth momentum but doubtful sustainability
Inflation - currently benign but expectations for increase
Oil & commodity prices
- markets remain tight with implications for inflation
Monetary policy - accommodative / neutral / tightening (?)
Global imbalance - possible disorderly adjustments
Housing market - weakening may impact on consumption and growth
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1212
Currencies
102.0
104.2
106.4
108.7
111.1
113.6
116.3
119.0
121.9
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1313
Currencies
121.9
119.0
113.6
108.7
116.3
111.1
102.0
104.2
106.4
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1414
Bond yields
121.9
119.0
113.6
108.7
116.3
111.1
102.0
104.2
106.4
10-year UST, Bund & JGB yields
2.0
3.0
4.0
5.0
Jan-0
4
Feb-0
4
Mar-
04
Apr-
04
May-0
4
Jun-0
4
Jul-04
Aug-0
4
Sep-0
4
Oct-
04
Nov-0
4
Dec-0
4
Jan-0
5
Feb-0
5
Mar-
05
Apr-
05
May-0
5
Jun-0
5
Jul-05
Aug-0
5
Sep-0
5
Oct-
05
Nov-0
5
Dec-0
5
Jan-0
6 1.0
1.5
2.0
10-year JGB yield (RHS)
10-year UST yield (LHS)
JGB yield (%)UST & Bund yield (%)
10-year Bund yield (LHS)
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1515
Bond yields
121.9
119.0
113.6
108.7
116.3
111.1
102.0
104.2
106.4
2-year UST, Bund and JGB yields
0.0
1.0
2.0
3.0
4.0
5.0
Ja
n-0
4
Fe
b-0
4
Ma
r-0
4
Ap
r-0
4
Ma
y-0
4
Ju
n-0
4
Ju
l-0
4
Au
g-0
4
Se
p-0
4
Oct-
04
No
v-0
4
De
c-0
4
Ja
n-0
5
Fe
b-0
5
Ma
r-0
5
Ap
r-0
5
Ma
y-0
5
Ju
n-0
5
Ju
l-0
5
Au
g-0
5
Se
p-0
5
Oct-
05
No
v-0
5
De
c-0
5
Ja
n-0
6 0
0.1
0.2
0.3
0.4
0.5
UST & Bund yield (%) JGB yield (%)
2-year UST yield (LHS)
2-year Bund yield (LHS)
2-year JGB yield (RHS)
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1616
Equities
10000
11000
12000
13000
14000
15000
16000
Ja
n-0
4
Fe
b-0
4
Ma
r-0
4
Ap
r-0
4
Ma
y-0
4
Ju
n-0
4
Ju
l-0
4
Au
g-0
4
Se
p-0
4
Oc
t-0
4
No
v-0
4
De
c-0
4
Ja
n-0
5
Fe
b-0
5
Ma
r-0
5
Ap
r-0
5
Ma
y-0
5
Ju
n-0
5
Ju
l-0
5
Au
g-0
5
Se
p-0
5
Oc
t-0
5
No
v-0
5
De
c-0
5
Ja
n-0
6
1000
1050
1100
1150
1200
1250
1300
Hang Seng Index (LHS)
S & P 500 Index (RHS)
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1717
Equities
80
90
100
110
120
130
140
150
160
Ja
n-0
4
Fe
b-0
4
Ma
r-0
4
Ap
r-0
4
Ma
y-0
4
Ju
n-0
4
Ju
l-0
4
Au
g-0
4
Se
p-0
4
Oc
t-0
4
No
v-0
4
De
c-0
4
Ja
n-0
5
Fe
b-0
5
Ma
r-0
5
Ap
r-0
5
Ma
y-0
5
Ju
n-0
5
Ju
l-0
5
Au
g-0
5
Se
p-0
5
Oc
t-0
5
No
v-0
5
De
c-0
5
Ja
n-0
6
Hang Seng Index
S & P 500 Index
MSCI Europe
TOPIX Index
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1818
2005 Exchange Fund Position
Press Conference
19 January 2006