The Exchange Fund recorded a $35 billion investment loss in the first half of the year, while its total assets stood at $1.409 trillion at the end of June, down $5.2 billion on the end of last year.

The Hong Kong equities portfolio and other equities recorded losses of $32.1 billion and $25.4 billion in valuation netted dividends respectively, part of which was offset by an $11.6 billion exchange valuation gain due to the appreciation of other currencies against the US dollar and a $10.9 billion total return from bonds and other investments.

The fee payment to the Fiscal Reserves was $23.6 billion and the Strategic Portfolio dropped $6.5 billion in value (net of dividends). These, together with interest and other expenses, resulted in a $68.4 billion fall in the Accumulated Surplus.

Commenting on the Exchange Fund results, authority Chief Executive Joseph Yam said the deepening of the sub-prime mortgage crisis and the ensuing credit crunch, fears of a global recession and concerns about inflation have all exerted pressures on financial markets rarely seen in recent years.

"Under these unfavourable market conditions the Exchange Fund recorded an investment loss of $35 billion in the first half of the year. Local and foreign equities alone accounted for a valuation loss of $57.5 billion, part of which was offset by gains from bond and currency investments. Even so, bond prices were also affected by the rise in yields since April as inflation expectations rose," Mr Yam said.

Mr Yam forecast the investment environment to remain unfavourable, saying the global economy may be weighed down by concerns about higher commodity prices, pressures on corporate profitability, potentially tighter monetary policies to tackle inflation expectations and dampened consumer sentiment.

He added the authority will manage the Exchange Fund prudently to preserve Hong Kong's monetary and financial stability.

To read Mr Yam's full statement on the fund's position click here to view his latest Viewpoint column.