Hong Kong's Exchange Fund may post a loss for the second quarter, the city's central bank head said yesterday.

Joseph Yam, chief executive of the Hong Kong Monetary Authority, told reporters yesterday that the stock and bond markets have been weak, and he is concerned about how the US interest-rate trend will affect financial markets. The US Federal Reserve decided Wednesday to keep the interest rate unchanged, but Yam noted that rates have been under pressure to rise, but haven't.

"In a situation like that, it will certainly affect the financial markets," he said.

The performance of Hong Kong's Exchange Fund has also been affected. "It will possibly post a second-quarter loss," Yam said.

The Exchange Fund posted an investment loss of HK$14.6 billion in the first quarter, its worst quarter in seven years. The losses came mainly from Hong Kong and overseas equity investments.

In April, Yam told legislators during a Financial Affairs Panel meeting that earnings in that month should offset all the first-quarter losses. But the stock market has remained down in May and June.

The benchmark Hang Seng Index has given up nearly 13 percent, or 3,300 points, since May. And in the US, the Dow Jones Industrial Average lost about 8 percent, or more than 1,000 points.

"The US stock markets and the bond markets were poor in the second quarter," said Patrick Shum, an executive director at Karl Thomson Investment, noting that the exchange fund has both equities and bonds in its portfolio.

The fund's reserves are used to defend the local currency's peg to the US dollar, and it is under the control of the Financial Secretary and investments should be made after consulting the Exchange Fund Advisory Committee.

Shum said the weakening US dollar has dragged the Exchange Fund's performance, and bond prices also fell in the second quarter.

"I don't know the portion of US treasuries in the fund's portfolio, but there is no doubt that there is a loss in treasuries investments, based on the market conditions in the second quarter," Shum said.

(HK Edition 06/27/2008 page2)