HONG KONG: The Exchange Fund posted an investment gain of HK$25 billion ($3.2 billion) in the first half of the year, thanks to the strong rally in global equity markets during the second quarter, the Hong Kong Monetary Authority (HKMA) said.

The fund, which is managed and used by the HKMA to back the territory's currency peg with the U.S. dollar, suffered a HK$33.5 billion loss in the first quarter after posting a HK$75 billion loss last year because of poor financial market performance following the global financial crisis. That translated into a gain of HK$58.5 billion in the second quarter.

During the first six months, the fund gained HK26.1 billion from its holdings of Hong Kong stocks, said the HKMA, the city's de facto central bank.

It also posted a gain of HK$9.2 billion from its holdings of other equities, and a gain of HK2.0 billion from foreign exchange translation.

The gains more than offset a HK$12.3 billion loss from its holdings of bonds and other investments, the HKMA said.

"It is encouraging that, despite difficult market-conditions, the Exchange Fund recorded an investment gain of HK$25.0 billion in the first half of the year," said Joseph Yam, Chief Executive of the HKMA.

Stimulus packages in major economies have led to a rebound in equities markets since March, he said, commenting on the performance of the fund.

However, he noted, the reprieve in the bond market has been short-lived as concerns over the supply of U.S. government bonds and the timing and pace of the exit from monetary easing have driven yields on long-term US treasuries higher.

Kevin Lai, senior economist at Daiwa Institute Research, said the choppy investment performance of the Exchange Fund mirrored the volatility of financial markets.

"The volatility, which is manageable, will in no way affect its capability to defend the dollar peg, as it has 100 percent coverage for the Hong Kong dollar," he said.

The HKMA has been sticking to a conservative strategy in managing the fund's assets, he said.

The Exchange Fund's accumulated surplus increased by HK$8.5 billion in the first half after decreasing by HK$136.5 billion in 2008, the HKMA noted.

The total assets of the fund stood at HK$1,833.2 billion at the end of June, an increase of HK$272.9 billion compared with the end of 2008, it said.

(HK Edition 07/31/2009 page3)