Hong Kong’s First Quarter Exchange Funds Lose in Billions, GDP Declines: HKMA

A woman walks beneath a sign for the Hong Kong Monetary Authority on December 20, 2012. Dale de la Rey/AFP via Getty Images

Hong Kong is seeing an omen of economic retreat in the first quarter of this year, with foreign exchange funds at an never-seen loss of $7.2 billion from two years ago, and the GDP devalued by 4 percent.

A May 3 advanced estimate released by the Hong Kong government suggested that in the first quarter, the region’s GDP is estimated to drop by 4 percent due to fragile demands, both domestically and internationally. Among them, private consumption expenditure fell by 5.4 percent year-on-year, while exports and imports plummeted by 4.5 percent and 5.9 percent, respectively.

Affected by the COVID-19 outbreaks, especially the Omicron variant wave, Hong Kong’s economy faced tremendous pressure in the first quarter of 2022. Cross-border transportation cuts severely dragged down exports, inflation was rampant, and economic development encountered a headwind, according to the official website of the Hong Kong government.

Hong Kong Monetary Authority (HKMA) on May 3 said that in the first quarter of 2022, the unaudited exchange funds lost HK$55 billion (about $7.2 billion), a deficit for the first time since 2020.

On the same day, at the meeting of the Hong Kong Legislative Council, HKMA confirmed that all the declared investments suffered a loss, including: Hong Kong stocks lost HK$9.4 billion ($1.2 billion), surpassing last fourth quarter’s loss of HK$72 billion (about $9 billion); other stocks lost HK$24.6 billion ($3.2 billion); and bonds lost HK$34.7 billion (about $4.5 billion).

The exchange fund for the first quarter did not include other investments, such as private equity and real estate. If incorporate interest and other expenses were added, the net loss of the exchange fund would reach HK$56.6 billion (about $7.4 billion).

Besides the persistent threat of COVID-19 in Hong Kong, a global economic hub, its financial market was impacted by the Russia-Ukraine war, as well as the shock of the Fed’s interest rate hike on the liquidity of the U.S. dollar and the global economy, among which capital was flowing out of Hong Kong, said Eddie Yue, president of the HKMA, at the meeting.

However, Howard Lee, senior executive director of the HKMA, suggested that the performance of a single quarter should not be the sole focus in explaining the losses of the Exchange Fund given that the exchange fund is used for long-term capital reserves and value-added.

Looking back at the statistics for the past three years, Hong Kong’s annual income of the exchange fund from 2019 to 2021 shows a gradual downward trend, having fallen from HK$262.2 billion (about $34 billion) in 2019 to an unaudited HK$191.3 billion (about $24.9 billion) in 2021.

The HKMA speculated that GDP growth forecasts for 2022 covering six countries or regions such as the United States, the Eurozone, Japan, China, Hong Kong, and other Asian areas, among them, Hong Kong’s GDP growth for 2022 is estimated to be the lowest at 1.2 percent, with Japan’s 2.1 percent and the Eurozone’s 2.8 percent in the second and third last places. China’s GDP growth is predicted to be 4.9 percent, lower than the official GDP target of 5.5 percent set by the Chinese Communist Party (CCP.)

Policemen wearing protective gear stand at an entrance to a locked down apartment block, while residents are tested for COVID-19 after the building's sewage samples tested positive for the causative virus, in Hong Kong on March 4, 2022. Dale de la Rey/AFP via Getty Images

Likewise, Fitch Ratings, a U.S.-based credit rating agency, devalued its forecast for China’s GDP growth in 2022 to 4.3 percent from its previous estimate of 4.8 percent.

But if the CCP will gradually abandon its “dynamic zero-COVID” policy next year, China’s 2023 GDP growth could be expected to get to 5.2 percent from 5.1 percent, assumes Fitch Ratings.

On April 26, Fitch Ratings sharply downgraded its forecast for Hong Kong’s GDP growth to 1.0 percent from 6.4 percent in 2021 after considering broader restrictions taken to control the Covid virus, and the uncertain future of the “dynamic zero-clearance” campaign that limits social activities.

This downgrading reflects the ripple effect of Beijing’s anti-pandemic policy on Hong Kong. Fitch Ratings said.