The Hong Kong Monetary Authority (HKMA) was formed in 1993 following the merger of the Commissioner of Banking and the Exchange Fund. The Exchange Fund’s reserves currently stands at around half a trillion USD, making it one of the world’s largest central bank reserves and one of the most significant asset owners.
The HKMA Exchange Fund (HKMA EF) is split in two: the Backing Portfolio ensures that the Monetary Base is fully backed by high-quality, liquid assets; and the Investment Portfolio invests in debt and equity securities, together with the Long Term Growth Portfolio, which invests in private equity and real estate.
Despite the heavy weight of debt and liquid instruments, the HKMA EF has maintained an annualized return of 4.5% p.a. since 1994. The Long-Term Growth Portfolio has yielded 11.5% since its inception in 2009. Reportedly from market sources, investments during these years include office towers in San Francisco, Los Angeles, New York, London and Sydney, and various private equity and venture capital commitments. In 2024, it signed an MoU with Saudi Arabia’s PIF to anchor a new investment fund, with a target size of US$ 1.0 billion.
The HKMA received in 2016 an additional uplift from the Land Fund with US$ 28 billion to seed the Future Fund (HKFF) for securing higher investment returns over a ten-year period. In 2022, the investment period was further extended for five years, and separately, the Hong Kong Investment Corporation (HKIC) was established to cover the Hong Kong Growth Portfolio, Greater Bay Area Investment Fund, Strategic Tech Fund, and Co-Investment Fund – with significant support from HKMA in the organization’s inception.
Interview with Mr. Leong Cheung, Chief Strategy Officer, Exchange Fund Investment Office, HKMA:
[GSWF] Since HKMA’s inception in 1993, Hong Kong has faced several crises including the Asian Financial Crisis, the GFC and Covid-19 – how important has the HKMA been in protecting the HK financial system?
[HKMA] HKMA was established to do exactly that, and one of its primary objectives is to keep the financial system and the HKD stable. Our currency is pegged to the USD, and we need to act as a buffer against any potential banking crisis. In addition to monetary and financial stability, providing confidence to international investors is very important given the significance of Hong Kong as an international financial center. For instance, back in 1998, the HKMA mobilized the Exchange Fund to safeguard our market from financial predators attacking our money and stock markets. Lastly, we act as a liquidity buffer for financial institutions in the context of any operational disruption in market stress. A good example was Covid-19, when we provided timely liquidity support to banks.
[GSWF] The Exchange Fund assets peaked at HKD 4.6 trillion at the end of 2021 and are today HKD 4.1 trillion. What sort of growth rates are you expecting for the next five years?
[HKMA] Given our mandate of defending the currency and maintaining monetary and financial stability, the Exchange Fund does not pursue a specific growth rate, but we adhere to the principle of “capital preservation first while maintaining long-term growth”. We follow a strategic asset allocation (SAA) process, which is set up at Board level and directs our medium to long term strategy, with a focus on defensiveness, liquidity and diversification. We also use tactical asset allocation (TAA) to adjust investment positions to capture short term market opportunities.
[GSWF] Can you please explain how is the Exchange Fund split into its different portfolios?
[HKMA] The Exchange Fund has two major portfolios that help us meet our mandate:
-The Backing Portfolio is about 50% of the portfolio and focused on highly liquid USD-denominated assets. Its mandate is to provide liquidity, and its assets are between 105%-112.5% of Hong Kong’s monetary base.
-The Investment Portfolio serves the objective of capital preservation and maximization, so we have a diversified allocation, including bond and equity markets in both developed and emerging market economies.
-The Investment Portfolio also includes investments in private equity, infrastructure and real estate under the Long-Term Growth Portfolio. LTGP’s internal rate of return since inception in 2009 is 11.5%.
-Lastly, there is also a Strategic Portfolio, which was set up in 2007 to hold shares in Hong Kong Exchanges and Clearing Limited for the Hong Kong SAR Government for strategic purposes..
[GSWF] What % of your portfolio is global, and what is the criteria when pursuing investments overseas?
[HKMA] We are a reserve manager whose main mandate is to protect our currency and maintain stability in our financial systems; for this reason most of our investments are overseas. As of December 31, 2023, 82% of our holdings were in US dollar, less than 4% in HK dollar, and the rest in euro, renminbi, pound sterling, and yen.
[GSWF] We understand that the initial 10-year period of Future Fund placements by the Land Fund finishes this year. How successful has the HKMA been in generating yield for these placements?
[HKMA] It has gone reasonably well. The Land Fund endowed the Future Fund with an initial HKD 220 billion (US$ 28 billion) in 2016. The placements are divided into two portions linked to the performance of the Investment Portfolio and Long-Term Growth Portfolio. The agreement has been extended for another five years, up to December 31, 2030.
[GSWF] In 2021, the HK government established the Hong Kong Investment Corporation (HKIC) – how do you expect it to interact or collaborate with HKMA, or will both entities operate independently?
[HKMA] The HKIC was established as an independent entity. That said, HKMA provided significant assistance during the set-up process, including secondment of executives and support on investment, logistics and operational matters. Currently, senior executives of HKMA sit on HKIC’s board of directors, but the two organizations serve different mandates.
[GSWF] Do you maintain dialogue with other central banks and peers around the world?
[HKMA] The Central Bank community is closely interconnected through organizations like IMF, BIS, IFC, allowing us to regularly collaborate and share insights on various issues of interests, such as digitalization experiences, market trends, etc. In addition, we maintain a strong network with asset owners and asset managers globally. In the context of geopolitics, market uncertainty and technological disruptions, our dialogue with other reserve managers helps us shape our efforts and keep pace with market developments.
[GSWF] HKMA has been a signatory member of the UN Principles for Responsible Investing since 2019 – how important is sustainability for a central bank such as HKMA?
[HKMA] We are very committed to Sustainability, and to a 2050 net zero target. We were one of the first central banks to announce a specific net zero target, which is quite ambitious, but we are taking the right steps with the set-up of our Sustainable Finance Action Agenda a few months ago. About 10% of the EF’s Investment Portfolio are sustainable investments, and since 2017, we have reduced the weighted average carbon emissions in our public equities portfolio by 46%.
[GSWF] Operationally, how has the HKMA changed since the set-up of the EFIO in 2018? What is the headcount of EFIO today? Do you maintain your offices overseas in New York and London?
[HKMA] The Exchange Fund Investment Office (EFIO) has grown modestly to around 150 at the moment. We continuously upgrade ourselves and adapt our core investment practices to incorporate technological disruptions and sustainability developments. In terms of overseas office, the HKMA maintains a small setup in New York City to monitor developments in the foreign exchange and fixed income markets during the New York time zone.
[GSWF] What is HKMA’s role in the development of the Greater Bay area?
[HKMA] As a financial center, Hong Kong plays a unique role within the Great Bay and Mainland China, and at HKMA we do our best to maintain its role and relevance. For example, we focus on enhancing financial infrastructure, developing payment gateways and supporting banking sector developments. The HKMA is pivotal in the Greater Bay Area’s development by facilitating financial integration through initiatives like the Bond Connect and Stock Connect, which enhance cross-border investment flows, and by promoting Hong Kong as the largest offshore RMB center, thereby supporting economic collaboration and access to Mainland markets for investors. Both the Greater Bay Area and Belt and Road initiatives are key strategies aimed at enhancing economic connectivity and collaboration. In 2023 we also established a Belt and Road Investment Platform in collaboration with Silk Road Fund, including the creation of a HK Flagship Impact Fund with a commitment of US$ 1 billion.
