Exchange Fund Results Press Conference 20 January 2005

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

3 Markets in 2004 Overall performance volatile: Q1 strong Q2sharp decline Q3moderate Q4strong rally

4 Exchange Fund Performance I 2004 I (HK$ billion) Full yearQ1 Q2Q3Q4Full yearFull yearFull yearFull year Gain / (Loss) on Hong Kong equities* (1.4) (11.8)(27.1)(7.3) Gain / (Loss) on other equities* (4.7) (22.7)(3.3)0.5 Exchange gain / (loss) (2.6) (13.0)(11.2) Total return from bonds, etc (5.7) Investment income (7.2) * including dividends

5 Exchange Fund Change in Accumulated Surplus I 2004 I2003 (HK$ billion) Full yearQ1 Q2 Q3 Q4 Full year Investment income (7.2) Other income Interest and expenses(4.8)(1.1)(1.1)(1.3)(1.3)(5.6) Net investment income (8.2) Treasury’s share(14.5)(4.5)2.1 (3.6)(8.5)(25.7) Revaluation gain/(loss) on premises affecting accumulated surplus (0.9) Increase/(Decrease) in EF accumulated surplus (6.1)

6 Exchange Fund Historical Change in Accumulated Surplus * unaudited figures for 2004 (HK$ billion)2004* Investment income Other income Interest and expenses(4.8) (5.6) (7.0)(10.5)(11.0)(10.0)(16.0)(18.4)(12.9)(12.6)(8.2) Net investment income/(loss) (2.9) Treasury’s share(14.5) (25.7) (15.6)(1.6)(18.1)(45.4)(26.0)N/A N/A N/A N/A Revaluation gain/(loss) on premises affecting accumulated surplus 0.9 (0.9) N/A N/A N/A N/A N/A N/A N/A N/A N/A Increase/(Decrease) in EF accumulated surplus (4.5)

7 Exchange Fund Abridged Balance Sheet (HK$ billion) Change ASSETS Deposits Debt securities Hong Kong equities Other equities Other assets Total assets1,061.91, LIABILITIES AND FUND EQUITY Certificates of Indebtedness Government-issued currency notes & coins in circulation Balance of the banking system (12.5) Exchange Fund Bills and Notes Placements by other HKSAR government funds Other liabilities (18.7) Total liabilities Accumulated surplus Premises revaluation reserve Fund equity Total liabilities and fund equity1,061.91,

8 Exchange Fund Performance Against Investment Benchmark Investment return from 2000 computed in accordance with CFA Global Investment Performance Standards

9 Investment Return* of the Exchange Fund # Hong Kong CPI-A at end-November 2004 * Investment return from 2000 computed in accordance with CFA Global Investment Performance Standards

10 Outlook for 2005 –US interest rate increases expected –outlook for equities uncertain –currencies may be erratic

11 US interest rate increases expected Fed Funds Target Rate

12 Outlook for equities uncertain

13 Currencies may be erratic

Exchange Fund Results Press Conference 20 January 2005