Hong Kong's Exchange Fund first-half earnings fall 37% on equity slump, softer bond income

From a Record Year to a Sharp Reversal

The Exchange Fund's first-half return of HK$134.7 billion (US$17.17 billion) marks a steep 37% retreat from the HK$214 billion earned in the same period of 2025, which had been a record half-year performance. The fund is the war chest the Hong Kong Monetary Authority deploys to defend the local currency peg, meaning its investment performance is not merely a portfolio question but a direct measure of the city's financial cushion. A swing of this magnitude in a single half-year underscores how exposed the fund remains to equity beta, particularly when Hong Kong-listed stocks turn south.

According to HKMA chief executive Eddie Yue Wai-man, the period was not without turbulence. March delivered a bout of heightened volatility tied to geopolitical tensions in the Middle East, before global sentiment staged a "notable recovery" in the second quarter as those tensions moderated. That recovery, however, was not enough to prevent the headline earnings from falling by more than a third.

Hong Kong Equities Lead the Pain

The most visible drag came from the fund's Hong Kong stock portfolio, which swung to a HK$11.8 billion loss from a HK$22.9 billion gain a year earlier — a roughly HK$34.8 billion negative swing on a single asset bucket. The Hang Seng Index fell 11% in the first six months of 2026 amid worries over rising interest rates and softer corporate earnings, the HKMA said. The fund's overall equity holdings, by contrast, "achieved solid gains" thanks to strong performance in non-Hong Kong equities, a reminder that the fund's diversification cushioned what could otherwise have been an even steeper result.

Softer bond income compounded the equity hit. The lack of detail in the report on fixed-income components leaves open the question of whether duration positioning or credit spread moves drove the drop, but the combination of equity losses and weaker bond returns was enough to erase the bulk of last year's surplus.

AI Corrections and the US Rate Path Cloud the Second Half

Yue used the results announcement to warn of risks ahead, pointing specifically to potential corrections in AI-related assets and uncertainty over the US rate path as the two threats most likely to shape the second half. Both are global in nature but land directly on Hong Kong because the city remains a listing hub for Chinese tech companies, many of which sit at the centre of the AI investment narrative, and because the Hong Kong dollar's peg to the US dollar transmits American monetary policy one-for-one into the local rate environment.

The warning is implicitly a hedge against the optics of a 37% drop. Even as the fund's diversified equity book posted gains, the headline number will invite scrutiny of whether the Exchange Fund has the buffer to defend the currency if risk assets sell off again. For the Hang Seng — already down 11% in the first half — a fresh AI-driven correction would likely intensify the pressure on the same portfolio that already took the biggest hit in this report.