Hong Kong Monetary Authority Investment Portfolio

 One of the portfolios that used to be managed by the Hong Kong Monetary Authority's Exchange Fund.

The Hong Kong Monetary Authority Investment Portfolio is one of the portfolios that used to be managed by the Hong Kong Monetary Authority's Exchange Fund (HKMA). 

Hong Kong Monetary Authority Investment Portfolio

In addition, Hong Kong's state-owned investment fund is in charge of monetary policy and maintains monetary stability. Also, the exchange fund finances, which function as a sovereign wealth fund, are used to fund the investment portfolio's activities.

The banking portfolio and investment portfolio are considered two separate portfolios within the Exchange Fund managed by the Hong Kong Management Authority.

The investment portfolio of the Hong Kong Authority is made up of holding money, obligations, and accumulated surplus, all of which are held in the form of Hong Kong dollars, foreign currencies, gold, or silver.

In this article, we will understand more about Hong Kong's monetary authority's investment portfolio, its responsibilities, portfolio segregation, portfolio composition, and its relation to the US dollar.

Understanding the Hong Kong Monetary Authority Investment Portfolio (HKMA)

The Exchange Fund of the Hong Kong Monetary Authority has just two investment portfolios. It has also managed a backing portfolio that supports the Hong Kong Currency Board's activities. 

hongkong

On the other hand, taking into consideration that the backing portfolio is often not considered a part of the sovereign wealth fund because it is primarily invested only in highly liquid US government securities. 

According to the Sovereign Wealth Fund Institute, as of 2021, the investment portfolio had control of $580.54 billion in assets, making it the world's fourth-largest sovereign wealth fund. In addition, the financial secretary receives direct reporting from the organization.

The HKMA is the de facto central bank and currency board for the region. Also, when the office of the Exchange Fund and the office of the commissioner of banking merged on April 1, 1993, it became the office of the commissioner of banking. 

500 dollar

One of the Hong Kong Monetary Authority's principal goals that go under the Exchange Fund Ordinance is to ensure the stability of the region's currency and banking system. It is also in charge of supporting the financial system's efficiency, integrity, and development.

The Exchange Fund's assets are handled in-house to a large extent. The entire backing fund, as well as a portion of the investment portfolio, is handled internally.

On the other hand, the Exchange Fund hires outside managers in order to manage its equity portfolios and other specialty investments. Also, the Exchange Fund's investment benchmark is made up of 75 % bonds and 25 % stocks (equities).

The Hong Kong Monetary Authority's investment portfolio consists mostly of OECD Organisation for Economic Co-operation and Development countries' bond and equity markets. 

In addition, the target allocation for bonds makes up 73 % of the portfolio, while stocks make up 27 %. The intended currency mix is 89 % assets denominated in USD and HKD, with 11 % assets denominated in other currencies.

The Exchange Fund's investing methodology is guided by two types of asset allocation decisions:

  •  Strategic 
  •  Tactical

Given the Exchange Fund's investment objectives, the strategic asset allocation indicated in the investment benchmark represents the long-term optimal asset allocation. 

In addition, assets are tactically allocated in an attempt to achieve an excess return over the benchmark, guided by strategic allocation. As a result, actual allocation is frequently different from the benchmark or strategic allocation.

On the other hand, the Exchange Fund was founded in 1935 and began investing and became effective in private equity and private real estate in 2009 as part of the Long-Term Growth Portfolio (LTGP).

Also, the Long-Term Growth Portfolio's main function is to support the Hong Kong dollar. The Exchange Fund ensures that the financial and monetary systems of the special administrative region are highly stable and have a high level of integrity.

The resources available to regulate the exchange value of Hong Kong SAR have been concentrated in the Exchange Fund since the transfer of foreign exchange assets from the Government's General Revenue Account and assets from the Coinage Security to the Fund.

Taking into consideration that members of the Exchange Fund Advisory Committee (EFAC) serve as the Financial Secretary on financial policies and other aspects of the Exchange Fund's operations. 

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Furthermore, the HKMA issues four news statements on Exchange Fund data each month. In addition, the HKMA also publishes the Exchange Fund's annual financial accounts in its annual reports.

Portfolio Segregation

One of the main two Exchange Fund portfolios is the Hong Kong Monetary Authority Investment Portfolio.

In order to reserve the Exchange Fund's value and long-term purchasing power, the investment portfolio, which is managed by HKMA, invests in bonds and equities markets in Organization for Economic Cooperation and Development (OECD) countries.

OECD

On the other hand, the backup portfolio manages a backing portfolio and satisfies the commitments of Convertibility Undertakings under the Linked Exchange Rate System. 

However, the reason behind its investment in high-quality and highly liquid US dollar-denominated assets, the backing portfolio is not considered part of a sovereign wealth fund. 

The remaining assets of the Exchange Fund are managed by external fund managers designated by the HKMA.

The Exchange Fund's investment objectives of diversifying many risks and improving medium-to-long-term returns, as well as regular assessments, guided HKMA. 

Above all that, the Hong Kong Monetary Authority had approximately $509.4 billion in assets under its control during the 2019 year. It is also considered the world's fifth-largest foreign wealth fund at the moment.

Hong Kong Monetary Authority Investment Portfolio Composition

The Investment Portfolio of the Hong Kong Monetary Authority consists of retained assets in the Exchange Fund, obligations, and accumulated surplus. The securities are held in Hong Kong Dollars (HKD) or foreign currencies, gold or silver. 

The Exchange Fund's asset allocation strategy is guided by the investment benchmark, which takes into account the Fund's potential risks, required liquidity, and long-term investment return.

As I mentioned above, in terms of asset composition, the Fund's current benchmark allocation is 75 % bonds and 25 % equities.

The Exchange Fund's investment process is underpinned by strategic and tactical asset allocation TAA decisions. Also, assets are allocated in a way that aims to exceed the benchmark in terms of accumulated surplus. 

The Monetary base is an important part of the Exchange because it shows liabilities and includes certificates of indebtedness, which also are used to back currency notes, clear account balances, bills and notes, and coins issued.

On the other hand, the government's fiscal reserves are also an important part of the obligations. The accumulated surplus, which represents the Fund's total net profit from its inception, is also included in the HKMA composition.

HKMA Responsibilities

Maintaining currency stability is one of HKMA's core responsibilities. The Linked Exchange Rate System (LERS) is intended to keep the exchange rate between the Hong Kong dollar (HKD) and the US dollar stable (USD).

The fixed-rate exchange system aims to keep the HKD in a close range of parity with the US dollar, allowing note-issuing banks to issue new banknotes only after depositing an equivalent amount of US dollars with the authorities.

In addition, the exchange rate usually fluctuates within a set range. In terms of its economy, the HKMA has one of the world's greatest currency reserves. The Exchange Fund is also managed by the authority. 

However, one of the Fund's main objectives is to influence the exchange value of Hong Kong's currency, either directly or indirectly.

The Fund may also be used in order to help Hong Kong preserve its status as an international financial centre by ensuring the stability and integrity of its monetary and financial systems.

The HKMA is responsible for promoting the financial system's stability and integrity, particularly the banking system. One of the most important ways the authority accomplishes this is by purchasing HKD in order to maintain parity with the US currency within the designated range. 

Interest rates in Hong Kong have remained ultra-low since 2021 thanks to the fixed-rate regime, which has encouraged expansion and investment. On the other hand, low borrowing rates have fostered a record-breaking property price boom in the territory, causing affordability issues.

Since the Hong Kong Monetary Authority makes use of the market's as greatest investment skills, with the support of external managers, the HKMA diversifies the Exchange Fund into more complex asset markets. 

hongkong city

The portfolio's long-term returns are improved. Custodians are also appointed to provide services and assist in the valuation of externally managed assets. The reason the commercial sector is replete with conflicts of interest is that HKMA prefers to invest in the public sector.

In order to avoid such a problem in the public sector, it assigns all of its equity portfolios to outside managers and creates firewalls between its banking systems and other departments.

In addition, external managers are chosen based on a combination of qualitative and quantitative criteria. The fund then distributes different classes of assets in such a way that each portfolio manager's skills and knowledge are fully used.

The relationship between HKD and HKMA

The Hong Kong dollar is made up of 100 cents and is frequently denoted by the prefix HK$ to distinguish it from other dollar-denominated currencies. Hong Kong is a major leading global financial center with one of the freest economies in the world.

In 1863, the Hong Kong dollar was introduced as a separate currency. Various foreign currencies have been used prior to the HKD's inception, and they continued to be used even after the HKD's inception. 

In addition, the Japanese puppet government abolished the Hong Kong dollar in 1943, but it was reintroduced after World War II in 1945. The Hong Kong Monetary Authority now has sole jurisdiction over the printing and administration of the currency in Hong Kong (HKMA).

On the other hand, the Hong Kong dollar was tied to the US dollar at HK$5.65 to $1 USD in 1972. It has remained tied to the dollar since then, with the HKMA changing its value on a regular basis.

In addition, the Hong Kong dollar is now tied to a narrow trading band, ranging from HK$7.7500 to HK$7.8500 per US dollar. 

Also, the HKMA used to operate as the de facto central bank, intervening in order to stabilize the currency if and when the HKD reached either the upper or lower bound.

flags of hongkong and china

Furthermore, the top and lower bounds of this trading band for the U.S. dollar have been modified on a regular basis since 1983. In order to counter any attempts to break the peg with the USD, the HKMA holds approximately $450 billion in foreign reserves. 

In 1998, legendary hedge fund manager George Soros made a major notable attempt. He created the Soros Fund (later known as Quantum Endowment Fund), a hedge fund that went on to inspire a number of related businesses.

However, the HKD is considered the ninth most traded currency, and it has no strong, distinctive relationships with other currencies because it is tied to the U.S. dollar with higher and lower restrictions.

Hong Kong and Shanghai Banking Corporation Limited, Bank of China (Hong Kong) Limited, and Standard Chartered Bank (Hong Kong) Limited are three Chinese note-issuing banks that are permitted to print Hong Kong dollars, according to the Hong Kong government regulations.

On the other hand, some banknotes are then passed through a government exchange fund, which keeps U.S. dollars in reserve and keeps track of all transactions in the two currencies' general ledgers.

money

Lastly, according to capital control requirements, a bank can only spend HK dollars if it has an equal value in US dollars on deposit.

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Researched and authored by Naden Ahmed | LinkedIn

Reviewed and edited by Aditya Salunke | LinkedIn

Uploaded and revised by Omair Reza Laskar | LinkedIn

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