TNAG-2475-FCO40-3605-Hong-Kong-exchange-fund-report-and-accounts-for-1991-1992 — Page 101

mg1.ph/McInt92/23.3.138

HM Treasury

CONFIDENTIAL

LT MOR

DRUIT

Peter Ricketts Esq Hong Kong Department

Foreign & Commonwealth Office

Whitehall

LONDON

SW1A 2AF

Parliament Street

London SWIP 3AG

Telephone 071-270 4699

Has b2/s

M. Stone.

Pretty face-sitting!

вы

For a tel to Mk, pre

23 March 1992

3

23/m

Dear Peter.

HONG EXCHANGE FUND : INVESTMENT IN EQUITIES

I am sorry not to have commented earlier on Hong Kong telno 718 of 9 March seeking the Secretary of State's approval for the investment of up to 10 per cent of the foreign currency assets of the Exchange Fund in the US equity market. I have since seen Oliver Page's letter of 11 March to you.

I have some sympathy with the Bank's view that it would preferable to delay a decision on this change until the review of the Hong Kong monetary arrangements has been completed and conclusions drawn from it.

As for the principle of the Exchange Fund investing in US equities, I think this is very much a matter of judgement for the Hong Kong authorities. They must take a view on whether investing up to 10 per cent of the Fund's assets in this way would leave the Fund sufficiently liquid to carry out its main functions and that this kind of investment would be likely to produce an appropriate return for the risk involved. Another consideration is whether the Fund has the necessary manpower and technical resources to implement a change of this kind, though I see that it is intended that managers should be appointed in the United States to act on behalf of the Fund and that a passive approach to investment is envisaged, under which investment would be in the component shares of particular share indices.

In weighing the merits of this proposal, I see that the Exchange Fund Advisory Committee has advised that "initially" the Fund should invest solely in US equities to avoid exchange risk. This suggests that the Committee had it in mind to invest in other equity markets at a later stage. On the one hand, this could mean incurring some exchange risk; on the other, it would have the advantage of diversifying the investment in more than one equity

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