Hong Kong’s Exchange Fund earnings tumble 74% as HKMA warns of more market turbulence

The Exchange Fund’s earnings fell sharply because financial markets became highly uncertain. It earned HK$18.6 billion in the third quarter, a 74 per cent drop from HK$70.8 billion a year earlier. This matters because the fund supports Hong Kong’s currency system and manages a large investment portfolio.

The decline continued across the first nine months of 2026. Total earnings reached HK$171.9 billion, down 39.6 per cent from the same period in 2025. Bond income fell 56 per cent to HK$49.4 billion, while the Hong Kong equities portfolio lost HK$2.7 billion.

Some areas provided support. Foreign currency translation gains rose 39 per cent to HK$42 billion. Overseas equity returns plunged 95.3 per cent in the third quarter, contributing HK$1.5 billion. HKMA chief Eddie Yue warned that market volatility could persist in the fourth quarter.

The Exchange Fund is a pool of assets managed by the Hong Kong Monetary Authority, the city’s de facto central bank. It backs Hong Kong’s issuance of banknotes and helps safeguard the Hong Kong dollar from speculative attacks. Its performance therefore matters to both financial stability and public confidence.

The fund invests across several markets. The article lists Hong Kong equities, overseas stocks, global bonds, international property, and other long-term assets. This broad portfolio gives the fund multiple sources of potential income rather than relying on one market or one currency.

Its results vary with market conditions. In the first nine months of 2026, Hong Kong equities lost HK$2.7 billion, while bond income fell to HK$49.4 billion. The HKMA has gradually reduced US dollar assets and increased other holdings to make the portfolio more resilient.

The Exchange Fund earns returns from investments such as stocks and bonds. When those assets produce less income or fall in value, the fund’s earnings decline. Market uncertainty can worsen both effects because investors reprice assets quickly as expectations about rates, growth, inflation, and company profits change.

The article gives clear examples. Bond income fell from HK$112.6 billion to HK$49.4 billion in the first nine months, a 56 per cent decrease. The Hong Kong equities portfolio recorded a HK$2.7 billion loss. Overseas equity returns also plunged 95.3 per cent in the third quarter.

These weaker results overwhelmed the benefit from foreign currency translation gains, which rose 39 per cent to HK$42 billion. The Hang Seng Index fell more than 9 per cent in the first 10 months. Eddie Yue said sharp daily swings made the fourth quarter challenging.

The Exchange Fund is Hong Kong’s financial war chest for defending its currency. The article says it safeguards the Hong Kong dollar from speculative attacks and backs the city’s issuance of banknotes. This role makes the fund more than an investment portfolio: it is part of Hong Kong’s monetary stability framework.

In practical terms, a strong pool of assets gives the monetary authorities resources to respond when pressure builds against the currency. The fund invests in liquid and long-term assets, including global bonds, equities, property, and other holdings. Those assets can help maintain the financial resources behind the currency system.

The article does not describe a specific intervention operation or give reserve figures. It does show the HKMA managing the fund for resilience. Eddie Yue said diversification across regions and currencies should support long-term returns and help the fund withstand sharp market movements.

Regional and currency diversification spreads the fund’s exposure across different markets. This matters because one region, currency, or asset class can perform poorly while others hold up better. The approach is designed to make returns and the fund’s overall financial position more resilient during unsettled markets.

The article says the HKMA gradually reduced its US dollar asset allocation from the end of last year. It increased holdings of other assets instead. Eddie Yue also urged the fund to focus on long-term returns while maintaining adequate regional and currency diversification.

The decision comes during unusually uncertain conditions. The Hang Seng Index fell more than 9 per cent in the first 10 months, and markets were swinging sharply each day. Yue cited the Middle East, US midterm elections, energy prices, inflation, interest rates, and AI investment concerns as possible sources of continued volatility.

The Exchange Fund was established in 1935 to support Hong Kong’s monetary system. Its enduring responsibilities include backing the city’s banknote issuance and safeguarding the Hong Kong dollar from speculative attacks. Those functions remain central to its role today.

The article also describes a modern investment operation managed by the HKMA. The fund now invests in Hong Kong equities, overseas stocks, global bonds, international property, and other long-term assets. Its holdings extend across regions and currencies, rather than being limited to domestic assets.

The article does not provide a year-by-year history of this development. It does show the current strategy becoming more globally diversified. The HKMA has reduced US dollar exposure and increased other assets, while seeking long-term returns amid uncertainty over rates, inflation, geopolitics, AI spending, and corporate earnings.

Interest rates affect investments because they change the return available from safer assets and the cost of borrowing. When rates rise, existing bonds with lower fixed payments become less attractive, so their market prices usually fall. New bonds can offer higher income. Falling rates generally have the opposite effect on existing bond prices.

Stocks can also react to rates. Higher borrowing costs may reduce company profits, while future earnings become less valuable when discounted at a higher rate. Property and other assets can face similar pressure because financing becomes more expensive. These mechanisms help explain why markets often move when rate expectations change.

The article does not provide this detailed explanation, but it reports that interest-rate concerns weighed on the Hang Seng Index and contributed to uncertainty. The HKMA is therefore managing diversification and long-term asset allocation as rate movements continue affecting bonds, equities, currencies, and other investments.