Supplementary Question on Legislative Council Meeting – Q3 Making good use of the assets of the Exchange Fund

Q3 Making good use of the assets of the Exchange Fund

MR CHAN CHUN-YING (in Cantonese):

President, with regard to the part of the question on the level of the total EF assets which needs to be kept, the Secretary has in fact not given us an answer in the main reply. As described by Mr CHUNG Kwok-pan just now, apart from defending the Linked Exchange Rate, the EF assets were also used in 1998 to successfully fend off major speculators in the market. However, information reveals that the total value of the assets of EF at the end of 1997 was $636.7 billion and in that same year, the Hong Kong stock market had a total market capitalization of $3,200 billion, five times of the total value of the EF assets. Although the total value of the assets of EF has already increased to $4,500 billion now, the total market capitalization of the Hong Kong stock market surged to $47,500 billion last year, which is 10.5 times of the value of the EF assets.

In other words, if the need to fend off major speculators in the market arises again today, the actual influence that EF can exert has in fact diminished. I would therefore like to ask if the Bureau has considered this factor for the management of the asset size of EF. For example, will resources from more government funds or subvented non-governmental organizations be encouraged to be pooled together along with EF for collective management, thereby expanding its asset size?

SECRETARY FOR FINANCIAL SERVICES AND THE TREASURY (in Cantonese):

As I have already pointed out in my reply to part (1) of Mr CHUNG’s question, when it comes to the financial market and external confidence in our market, a dynamic relationship is actually involved and this can also be reflected in the changes in market capitalization as pointed out by Mr CHAN just now. From another perspective, the market capitalization of our stock market now is about 13 times of our GDP, and this is a far cry from the previous figures.

This is exactly the reason why we must maintain the reserves at a certain level in the long run, and ensure that certain resources are available forresponding to changes in the financial market. As I have mentioned just now, changes in the financial market are instant, and they are also very anticipatory and forward-looking, involving a lot of predictions. Hence, we need to have sufficient resources, so we must adopt the investment objectives of capital preservation for long-term growth when managing the EF assets.

On the other hand, as far as the composition of EF is concerned, we have made it clear in the relevant announcement that it includes certain supporting asset portfolios as well as the Long Term Growth Portfolio, and this serves to explain from the perspective of asset management where we have put our public money. However, from the perspective of liability, government funds and deposits of statutory organizations are also included, and the arrangements suggested by Mr CHAN are in fact already in place. Furthermore, EF is used for the purpose of withstanding challenges in the financial market on the one hand, but it is also expected to achieve the objectives of capital preservation and growth. We will continue to work along this direction.