2008 Exchange Fund Results

Press Conference

21 January 2009

22

Investment Objectives ofThe 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.

33

Markets in 2008

• Exchange rates:– US dollar strengthened sharply in the second half of 2008

against euro but weakened against yen

• Equity markets:– Major markets experienced one of the worst slumps in

history – Major indices dropped around 30-50%

• Interest rates:– Aggressive easing by major central banks– Capital seeking safe haven flooded to sovereign bond

markets – Government bond yields reached historical lows in the

fourth quarter of 2008

44

Investment Income

I 2008 I 2007 2006 2005 2004

(HK$ billion)Full year * Q4 Q3 Q2 Q1

Full year

Full year

Full year

Full year

Gain/(Loss) on Hong Kong equities^@ (77.9) (21.0) (24.8) (2.1) (30.0) 55.8 35.9 7.0 12.0

Gain/(Loss) on other equities^ (73.2) (30.0) (17.8) (3.0) (22.4) 6.7 18.7 20.5 11.2

Exchange gain/(loss) (12.4) 1.4 (25.4) (0.6) 12.2 18.7 17.3 (19.5) 8.5

Return from bonds# 88.6 58.0 19.7

(14.7) 25.6 61.0 31.9 29.8 25.0

Investment income/(loss) (including HK equities)@ (74.9) 8.4 (48.3) (20.4) (14.6) 142.2 103.8 37.8 56.7

Investment income/(loss) (excluding HK equities) 3.0 29.4 (23.5) (18.3) 15.4 86.4 67.9 30.8 44.7

* Unaudited figures

^ Including dividends# Including interest@ Excluding valuation changes in Strategic Portfolio

55

Change in Investment Income, Payment to Treasuryand Accumulated Surplus

I 2008 I 2007

(HK$ billion)Full year(unaudited)

Q4 Q3 Q2 Q1 Full year

Investment income/(loss) (74.9) 8.4 (48.3) (20.4) (14.6) 142.2

Other income 0.3 0.1 0.1 0.0 0.1 0.2

Interest and other expenses (6.4) (1.2) (1.8) (1.8) (1.6) (10.2)

Net investment income/(loss) (81.0) 7.3 (50.0) (22.2) (16.1) 132.2

Payment to Treasury # (46.4) (11.5) (11.3) (11.8) (11.8) (27.6)

Valuation change of Strategic Portfolio^ (8.9) (1.2) (1.2) (1.0) (5.5) 4.7

Increase/(Decrease) in EF accumulated surplus (136.3) (5.4) (62.5) (35.0) (33.4) 109.3

# The fixed rate of fee payment to Treasury for 2008 is 9.4% and 7% (w.e.f. 1 April 2007) for 2007. ^ Including dividends

66

Historical Change in Investment Income, Payment to Treasury and Accumulated Surplus

* Unaudited figures^ Including dividends

(HK$ billion) 2008* 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998

Investment income/(loss) (74.9) 142.2 103.8 37.8 56.7 89.7 47.0 7.4 45.1 103.8 93.8

Other income 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

Interest and other expenses (6.4) (10.2) (10.5) (7.6) (4.8) (5.6) (7.0) (10.5) (11.0) (10.0) (16.0)

Net investment income/(loss) (81.0) 132.2 93.5 30.4 52.1 84.3 40.2 (2.9) 34.3 94.0 78.0

Payment to Treasury (46.4) (27.6)(28.9

) (10.1) (14.5) (25.7) (15.6) (1.6) (18.1) (45.4) (26.0)

Valuation change of Strategic Portfolio^ (8.9) 4.7 N/A N/A N/A N/A N/A N/A N/A N/A N/A

Revaluation gain/(loss) on premises N/A N/A N/A N/A 0.9 (0.9) N/A N/A N/A N/A N/A

Carry to accumulated surplus

(136.3) 109.3 64.6 20.3 38.5 57.7 24.6 (4.5) 16.2 48.6 52.0

Adjustment to accumulated surplus

Effect of implementation

of HKAS 39 N/A N/A N/A (0.6) N/A N/A N/A N/A N/A N/A N/A

Increase/(Decrease) in EF accumulated surplus (136.3) 109.3 64.6 19.7 38.5 57.7 24.6 (4.5) 16.2 48.6 52.0

77

Exchange FundAbridged Balance Sheet

(HK$ billion)

At31 Dec 2008

(unaudited)

At31 Dec 2007

Change

ASSETS

Deposits 190.4 132.9 57.5

Debt securities 1,150.8 922.9 227.9

Hong Kong equities 92.9 184.6 (91.7)

Other equities 86.1 146.0 (59.9)

Other assets 37.5 28.0 9.5

Total assets 1,557.7======

1,414.4======

143.3=====

LIABILITIES AND FUND EQUITY

Certificates of Indebtedness 176.1 163.4 12.7

Government-issued currency notes & coins in circulation 8.3 7.5 0.8

Balance of the banking system 158.0 10.6 147.4

Exchange Fund Bills and Notes 162.5 141.8 20.7

Fiscal Reserves Account 531.4 464.6 66.8

Other liabilities 40.7 9.5 31.2

Total liabilities 1,077.0 797.4 279.6

Accumulated surplus 480.7 617.0 (136.3)

Total liabilities and fund equity 1,557.7======

1,414.4======

143.3=====

88

Investment Returnof the Exchange Fund

10.2%

1.5%

6.1%5.7%

11.8%

-5.6%

9.5%

3.1%

5.1%4.8%5.1%

0.7%

10.8%

6.1%

10.8%

12.1%

2.4%

-8%

-4%

0%

4%

8%

12%

16%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

(u

nau

dit

ed)

# Hong Kong CPI-A at end-November 2008

Co

mp

ou

nd

ed A

nn

ua

l In

ves

tmen

t R

etu

rn

(199

4-2

008

)

Co

mp

ou

nd

ed A

nn

ua

l H

on

g K

on

g C

PI-

A(1

994

-200

8#

)

99

Exchange Fund Performance Against Investment Benchmark

2.9%

10.8%

4.8% 5.1%

-3.7%

10.6%

0.4%

8.9%

3.8% 3.9%

5.7%

9.5%

5.5%

-5.6%

11.8%

0.7%

9.5%

3.1%

5.7%

10.2%

-8%

-4%

0%

4%

8%

12%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008(unaudited)

Investment Return ofExchange Fund's InvestmentBenchmark

Investment Return ofExchange Fund

1010

Payment to Treasury Against Estimate

45.4

1.6

14.5

46.4

31.6

12.514.1

27.6

18.1

10.1

28.9

25.7

15.6

26.0

42.4

26.026.7

22.2

18.2

12.312.1

13.8

0

10

20

30

40

50

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008(unaudited)

HK$bn

Payment to Treasury

Treasury's estimate

1111

Outlook for 2009

Outlook for global financial markets remains cautious:

• effectiveness of monetary easing policy and huge stimulus packages by major central banks and governments to restore confidence in their respective economies is yet to ascertain

• significant decline in corporate profits and consumption

• potential overhang from the de-leveraging bank balance sheets and further write-downs of toxic assets

2008 Exchange Fund Results

Press Conference

21 January 2009