2009 Exchange Fund Results 28 January 2010 HONG KONG MONETARY AUTHORITY

2 INVESTMENT OBJECTIVES OF THE EXCHANGE FUND Investment objectives of the Exchange Fund: (1)to preserve capital; (2)to ensure that the entire Monetary Base at all times will be fully backed by highly liquid US dollar denominated assets; (3)to ensure sufficient liquidity for the purpose of maintaining monetary and financial stability; and (4)subject to (1) – (3), to achieve an investment return that will preserve the long-term purchasing power of the Fund.

3 MARKETS IN 2009 Exchange rates: –US dollar strengthened briefly in the first quarter but resumed its weakening trend for the rest of the year as safe haven flows subsided. Equity markets: –Major markets rebounded strongly from mid-March on positive earnings reports and more signs of economic recovery. –Local equity market gained substantially on investor’s preference towards Asian (including Hong Kong) stock markets. Interest rates: –US government bond yields, especially long-term yields, rose in the first half of 2009 on inflation expectation and concern over large increases in supply, before moving within a range as the Fed reiterated it would maintain low rates for an extended period.

4 INVESTMENT INCOME I2009I (HK$ billion) Full year *Q4Q3Q2Q1 Full year Gain/(Loss) on Hong Kong (4.2)(77.9) Gain/(Loss) on other equities^ (16.0)(73.1) Exchange gain/(loss) 9.8(3.4) (9.7)(12.4) (19.5) Return from bonds # (0.7) (3.7) 17.4 (10.8) (3.6) Investment (33.5)(75.0) *Unaudited figures ^Including dividends # Including Excluding valuation changes in Strategic Portfolio

5 CHANGES IN INVESTMENT INCOME, PAYMENT TO FISCAL RESERVES AND ACCUMULATED SURPLUS I2009I2008 (HK$ billion) Full year (unaudited) Q4Q3Q2Q1Full year Investment income/(loss) (33.5)(75.0) Other income Interest and other expenses (3.8) (1.0) (0.9) (1.2) (0.7) (6.5) Net investment income/(loss) (34.2)(81.2) Payment to Fiscal Reserves # (33.5) (7.9) (8.0) (8.5)(9.1) (46.4) Payment to HKSAR government funds and statutory bodies # (1.2)(0.6)(0.3) 0.0 Valuation change of Strategic Portfolio^ 4.3 (0.1) (0.1) (8.9) Increase/(Decrease) in EF Accumulated Surplus (43.4)(136.5) # The fixed rate of fee payment is 6.8% for 2009 and 9.4% for ^ Including dividends

6 HISTORICAL CHANGES IN INVESTMENT INCOME, PAYMENT TO FISCAL RESERVES AND ACCUMULATED SURPLUS *Unaudited figures ^Including dividends (HK$ billion) 2009* Investment income/(loss)106.7(75.0) Other income Interest and other expenses (3.8)(6.5)(10.2)(10.5) (7.6) (4.8) (5.6) (7.0)(10.5)(11.0) Net investment income/(loss)103.2(81.2) (2.9)34.3 Payment to Fiscal Reserves(33.5)(46.4)(27.6)(28.9)(10.1)(14.5)(25.7)(15.6)(1.6)(18.1) Payment to HKSAR government funds and statutory bodies(1.2)N/A Valuation change of Strategic Portfolio^4.3(8.9)4.7 N/A Revaluation gain/(loss) on premises N/A 0.9 (0.9) N/A Carry to Accumulated Surplus 72.8(136.5) (4.5)16.2 Adjustment to Accumulated Surplus Effect of implementation of HKAS 39 N/A (0.6) N/A Increase/(Decrease) in EF Accumulated Surplus72.8(136.5) (4.5)16.2

7 EXCHANGE FUND ABRIDGED BALANCE SHEET (HK$ billion) At 31 Dec 2009 (unaudited) At 31 Dec 2008 Change ASSETS Deposits (44.9) Debt securities1,638.31, Hong Kong equities Other equities Other assets (12.0) Total assets2,151.7 ====== 1,560.3 ====== ===== LIABILITIES AND FUND EQUITY Certificates of Indebtedness Government-issued currency notes & coins in circulation Balance of the banking system Exchange Fund Bills and Notes Placements by banks and other financial institutions Placements by Fiscal Reserves (27.3) Placements by HKSAR government funds and statutory bodies Other liabilities (14.1) Total liabilities1,598.41, Accumulated Surplus Total liabilities and fund equity 2,151.7 ====== 1,560.3 ====== =====

8 INVESTMENT RETURN OF THE EXCHANGE FUND ( ) 1 Compounded Annual Investment Return ( ) Compounded Annual Hong Kong CPI-A ( ) 2 1 Investment return calculation excludes the holdings in the Strategic Portfolio. 2 CPI(A) is calculated based on the 2004/2005 base new series.

9 INVESTMENT RETURN OF THE EXCHANGE FUND IN HONG KONG DOLLAR TERMS 1 Investment return 2,3 CPI(A) 3,4 Excess return over benchmark %1.7%122 bps 3-year average (2007 – 2009) 3.8%2.1%24 bps 5-year average (2005 – 2009) 4.8%1.9%N/A 5 10-year average (2000 – 2009) 5.0%0.1%N/A 5 Average since %1.5%N/A 5 1 The investment returns for 2001 to 2003 are in US dollar terms. 2 Investment return calculation excludes the holdings in the Strategic Portfolio. 3 Averages over different time horizons are calculated on an annually compounded basis. 4 CPI(A) is calculated based on the 2004/2005 base new series. 5 N/A: Not Applicable. Compilation of active returns for individual portfolios started in 2006.

10 PAYMENT TO FISCAL RESERVES AGAINST ESTIMATE

11 OUTLOOK FOR 2010 Global financial markets remains volatile, fluid and highly changeable: –Sustainability of economic recovery in developed economies remains to be seen –Uncertainties over eventual withdrawal of excessive liquidity and interest rate normalisation –Volatile capital flows

2009 Exchange Fund Results 28 January 2010 HONG KONG MONETARY AUTHORITY