The Exchange Fund's investment income rose to $30.7 billion in the first half of this year, up 167% on the same period last year, the Monetary Authority says. The figure is equivalent to 81% of the investment income for last year.

This investment income includes a $10.7 billion gain on the Hong Kong equities portfolio, a $3.5 billion gain on other equities, a $12.3 billion exchange gain from the appreciation of foreign currencies against the US dollar, and a $4.2 billion gain from bonds and other investments.

Interest and other costs of $5 billion were incurred during the period, predominantly in the form of interest paid on the Exchange Fund paper issued. The share of investment income for the fiscal reserves placed with the Exchange Fund was $8.7 billion. After deducting these two items from investment and the $100 million income, which consisted mainly of bank licence fees, the Exchange Fund's accumulated surplus recorded a surge of $17.1 billion.

Total assets

The Exchange Fund's total assets stood at $1.1 trillion at the end of June, up 3.6% or $38.4 billion over the figure for the end of last year. Over 90% of the Exchange Fund was held in foreign currency assets.

Monetary Authority Chief Executive Joseph Yam said the Exchange Fund has clear statutory purposes centring on the maintenance of monetary and financial stability. It should therefore not be regarded as purely an investment fund.

Noting the sharp volatility seen in international financial markets, Mr Yam said in his Viewpoint column that the Exchange Fund's investment results may have large month-to-month or even day-to-day fluctuations. With the exception of Hong Kong, and despite a sharp rebound at the end of June, the major equity markets around the globe fell in the second quarter, substantially reducing the gains recorded in the first quarter.

Encouraging result

"It is nevertheless encouraging that, against such a challenging investment climate, the Monetary Authority has been able to earn an investment income of $30.7 billion for the Exchange Fund in the first half of the year," Mr Yam said.

"The sharp rebound in markets at the end of June, and movements since then, underlines the importance of viewing the performance of the Exchange Fund over the longer rather than the shorter term. Had the half year ended a few days earlier, or indeed a week or so later, the investment return would have been somewhat lower. These volatilities also prompt the standard caution: do not expect the full-year results to be a figure that is double the half-year results."

Looking ahead, Mr Yam said anxieties about rising inflation amid slowing economic activity in the US have clouded the interest rate outlook, and concerns about a tightening of global liquidity and rising geopolitical tension have also increased uncertainties in the equity, bond and currency markets.

Prudent mangement

"The volatility in international financial markets is likely to continue and may possibly intensify, but the authority will continue to manage the Exchange Fund in a prudent manner under the guidance of the Exchange Fund Advisory Committee," he said.

"The share of the investment income for the fiscal reserves placed with the Exchange Fund is $8.7 billion. Despite the strong performance of the fund in the first half of 2006, this is some distance away from the budget estimate of $18.2 billion for the investment return on the fiscal reserves for the whole of 2006.

"Whether or not we can meet this budgeted return will, of course, depend very much on financial market conditions for the remainder of the year."