After border reopening, Hong Kong Exchange Fund gains US$12.5 billion.

With surging stock markets following the reopening of the city's border with mainland China, Hong Kong's Exchange Fund, the war chest meant to protect the local currency, maintained its comeback in the first quarter, earning a return of HK$97.9 billion (US$12.5 billion).

According to information released by the Hong Kong Monetary Authority on Monday, it is the fourth best quarterly result since the authorities started reporting them in 2003, the best since the second quarter of 2020, which came in at HK$121.6 billion, and a turnaround from a loss of HK$48.8 billion in the same period a year ago.

"Since the borders reopened earlier this year, the overall economy in Hong Kong has recovered well during the first quarter, driven by increasing consumption and an influx of tourists in the past several months," said Eddie Yue Wai-man, chief executive of the de facto central bank, during his quarterly meeting with the lawmakers on the financial affairs panel.

"The collapse of four US regional banks has added pressure to the markets but they have had no big impact to Hong Kong."

Following a HK$73.4 billion return in the final three months of 2022, the Exchange Fund's investment performance has been recovering, as seen by the significant gains in the first quarter.

The gradual relaxation of Covid-19 restrictions in Hong Kong starting in September before the complete reopening of its borders with mainland China in January has rekindled the market and economy.

In 2022, the Exchange Fund reported its worst year ever, losing HK$205.4 billion during a historically terrible year for the world's financial markets.

The fund's investments in Hong Kong stocks saw a gain of HK$3.3 billion from January to March 2023, compared to a loss of HK$9.4 billion the previous year. This increase was due to the 3% growth of the Hang Seng Index and the 4% growth of the Hang Seng Tech Index during this time period.

In contrast to a HK$24.6 billion loss a year earlier, it made HK$25.5 billion during the quarter from its investments in foreign stocks, mirroring the 7% growth in the S&P500 index in New York.

The Exchange Fund made money on bonds as well, repaying HK$43.9 billion versus a loss of HK$34.7 billion the previous year.

In the first quarter, the fund reported a HK$25.2 billion gain from foreign exchange appreciation on its non-US dollar holdings, outpacing the HK$13.7 billion gain from the same period last year. When compared to a basket of currencies, the US dollar index has down 2% this year.

According to its custom of revealing them later, the HKMA did not declare its returns on long-term investments during the quarter.

The first quarter saw HK$5.4 billion in fee payments to the government's fiscal reserves, down from HK$26 billion for the entire previous year, according to the HKMA.

The US Federal Reserve has increased interest rates ten times since March 2022 for a total of 500 basis points. The latest increase is expected to be followed by a pause.

The HKMA intervened eight times this year to buy HK$51.54 billion after doing so 41 times last year to buy HK$242.08 billion to maintain the local currency within its HK$7.75-HK$7.85 trading band. The Fed's rises have fueled capital flight from Hong Kong dollar assets.

"The intervention is part of the normal operation of the peg,” Yue said. “We have still reported that total deposits increased by 0.9 per cent and Hong Kong dollar deposits rose by 1.2 per cent, which showed there is no capital outflow from the Hong Kong financial market," according to Yue.

By fLEXI tEAM