2

Updates on

– Financial and Economic Conditions

– Currency Stability

– Banking Stability

– Financial Infrastructure

– Hong Kong as an International Financial Centre

– The Exchange Fund

DISCUSSION TOPICSDISCUSSION TOPICS

3

FINANCIAL AND ECONOMIC FINANCIAL AND ECONOMIC CONDITIONSCONDITIONS

4

ECONOMIC CONDITIONS INECONOMIC CONDITIONS INMAJOR ECONOMIES: REAL GDP GROWTHMAJOR ECONOMIES: REAL GDP GROWTH

Source: Bloomberg

GDP

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

2006 2007 2008 2009 2010

% qoq annualised

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8% qoq annualised

US Euro area Japan UK

5

ECONOMIC CONDITIONS INECONOMIC CONDITIONS INMAJOR ECONOMIES:MAJOR ECONOMIES:

RETAIL SALES AND PRODUCTIONRETAIL SALES AND PRODUCTION

Purchasing Managers’ Index (PMI)

Source: Bloomberg

Retail sales

20

25

30

35

40

45

50

55

60

65

2006 2007 2008 2009 2010

20

25

30

35

40

45

50

55

60

65

US non-manufacturing ISM

Euro area PMI composite

Japan PMI

UK Services PMI

-8

-6

-4

-2

0

2

4

2006 2007 2008 2009 2010

% change

-8

-6

-4

-2

0

2

4

% change

US Japan Euro area

(3-month-on-3-month) (3-month-on-3-month)

6

ECONOMIC CONDITIONS INECONOMIC CONDITIONS INMAJOR ECONOMIES:MAJOR ECONOMIES:

UNEMPLOYMENT AND LENDING STANDARDSUNEMPLOYMENT AND LENDING STANDARDS

Unemployment rate Lending standards

Note: An index reading above zero means tightening of lending standards.

Source: EcoWin

Source: CEIC

0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10

%

0

2

4

6

8

10

12%

US Euro area Japan

-20

-10

0

10

20

30

40

50

60

70

80

00 01 02 03 04 05 06 07 08 09 10

ppt

-20

-10

0

10

20

30

40

50

60

70

80ppt

US Euro area

tightening

loosening

7

ECONOMIC CONDITIONSECONOMIC CONDITIONS IN EMERGING ASIA IN EMERGING ASIA

Change in GDP

Source: CEIC

-30

-20

-10

0

10

20

30

40

2006 2007 2008 2009 2010

% qoq annualised

-30

-20

-10

0

10

20

30

40% qoq annualised

China

Korea

Taiwan

-30

-20

-10

0

10

20

30

40

2006 2007 2008 2009 2010

% qoq annualised

-30

-20

-10

0

10

20

30

40% qoq annualised

Indonesia Malaysia

Philippines Singapore

Thailand

8

90

100

110

120

130

2008 2009 2010 2011

1Q 2008=100

90

100

110

120

130

1Q 2008=100

US

Euro area

Asia (ex. Japan)

ConsensusForecasts

2012

GLOBAL ECONOMIC RECOVERYGLOBAL ECONOMIC RECOVERY

Source: CEIC, Consensus Forecasts (April 2010)

GDP

9

EUROPEAN SOVEREIGN DEBT PROBLEMS: EUROPEAN SOVEREIGN DEBT PROBLEMS: CDS SPREADSCDS SPREADS

Source: Bloomberg

0

100

200

300

400

500

600

700

800

900

1000

2008 2009 2010

bps

0

100

200

300

400

500

600

700

800

900

1000

bps

Portugal Ireland

Italy Greece

Spain

10

SOVEREIGN DEBT PROBLEMS: SOVEREIGN DEBT PROBLEMS: CDS SPREAD OF GREECECDS SPREAD OF GREECE

Source: Bloomberg

0100200300400500600700800900

1000

2008 2009 2010

bps

01002003004005006007008009001000

bps

Bankruptcy ofLehman Brothers

57 bps

End-2009283 bps

11

SOVEREIGN DEBT PROBLEMS: GREEK SOVEREIGN DEBT PROBLEMS: GREEK GOVERNMENT BOND YIELD AND GOVERNMENT DEBTGOVERNMENT BOND YIELD AND GOVERNMENT DEBT

Source: EcoWin, European Commission AMECO database, and Reuters

0

2

4

6

8

10

12

14

16

18

20

* ECU before 1999

ppt

0

50

100

150

200

250

300

350

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Euro bn*

Greece outstanding government debt (rhs)

Greece 10-year government bond yields over German bunds (lhs)

19/6/00: Greece metthe requirements forjoining the euro zone

1/1/01: Greeceadopted euro

BBB

A+

downgradedby 3 notches

to BB+

Standard & Poor's credit ratings

12

SOVEREIGN DEBT PROBLEMS:SOVEREIGN DEBT PROBLEMS:GOVERNMENT DEBT IN EUROPE, US AND JAPANGOVERNMENT DEBT IN EUROPE, US AND JAPAN

Sources: IMF World Economic Outlook (April 2010), eurostat 、 European Commission AMECO database

0 50 100 150 200 250

Japan

Greece

Italy

US

Portugal

Ireland

UK

Spain

0 50 100 150 200 250

20072010 projection

General government debt (% of GDP)

13

EU/IMF MEASURES TO AVERT EU/IMF MEASURES TO AVERT A SOVEREIGN DEBT CRISIS IN EUROPEA SOVEREIGN DEBT CRISIS IN EUROPE

• Loans and guarantees up to €750 billion are provided to the EU members by the EU and the IMF (earlier EU and IMF has agreed to provide Greece with a financing package of €110 billion)

• European Central Bank to buy government and private bonds in the secondary market and provide up to 6-month liquidity to the European banking sector

• Re-open the US dollar liquidity swap facilities between the Federal Reserve and other major central banks

14

HONG KONG ECONOMIC SITUATION:HONG KONG ECONOMIC SITUATION:REAL GDP GROWTHREAL GDP GROWTH

-6

-4

-2

0

2

4

6

8

10

12

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

% point

-6

-4

-2

0

2

4

6

8

10

12% qoq

Net exports (lhs)

Fixed investment and inventory (lhs)

Government consumption (lhs)

Private consumption (lhs)

Real GDP (rhs)

2008 2009 2010

Change in Real GDP

15

HONG KONG ECONOMIC SITUATION:HONG KONG ECONOMIC SITUATION:RETAIL SALES AND EXPORTSRETAIL SALES AND EXPORTS

-15

-10

-5

0

5

10

15

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

-15

-10

-5

0

5

10

15Retail sales volume

Export volume

% change(3-month-on-3-month)

2008 2009 2010

% change(3-month-on-3-month)

16

HONG KONG ECONOMIC SITUATION:HONG KONG ECONOMIC SITUATION:BUSINESS OUTLOOKBUSINESS OUTLOOK

-60

-50

-40

-30

-20

-10

0

10

20

30

40

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

20

25

30

35

40

45

50

55

60

65

70Quarterly Business Tendency Survey (lhs)PMI (rhs)

Net balance Index

2008 2009 2010

expansion

contraction

17

HONG KONG ECONOMIC SITUATION:HONG KONG ECONOMIC SITUATION:LABOUR MARKETLABOUR MARKET

Unemployment Rate

0

2

4

6

8

10

2000 2002 2004 2006 2008 2010

0

2

4

6

8

10% of labour force % of labour force

4.0

4.5

5.0

5.5

Sep-09 Nov-09 Jan-10 Mar-10 May-10

4.0

4.5

5.0

5.5

Moderation ofunemployment

rate

% %

4.9

4.4

18

HONG KONG ECONOMIC SITUATION: HONG KONG ECONOMIC SITUATION: INFLATIONINFLATION

-2

0

2

4

6

8

10

-2

0

2

4

6

8

10

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

Rentals Non-tradables excluding rentals Tradables excluding basic food Basic foodUnderlying CCPI inflation

2007 2008 2009 2010

% yoy % yoy

19

ASSESSMENT OF RISK ON HONG KONG’S ASSESSMENT OF RISK ON HONG KONG’S FINANCIAL STABILITY: INFLATIONFINANCIAL STABILITY: INFLATION

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2009 2010 2011

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Headline CCPI inflation rate -Hong Kong

% YoY % YoY

CPI inflation rate - China

Consensus forecasts

20

ASSESSMENT OF RISK ON HONG KONG’S ASSESSMENT OF RISK ON HONG KONG’S FINANCIAL STABILITY: INFLATION FINANCIAL STABILITY: INFLATION

-15

-12

-9

-6

-3

0

3

6

9

12

15

90 92 94 96 98 00 02 04 06 08 10

% yoy

-15

-12

-9

-6

-3

0

3

6

9

12

15% yoyCPI excluding rent

Retained import unit value index

Retained import prices and consumer prices

21

ASSESSMENT OF RISK ON HONG KONG’S ASSESSMENT OF RISK ON HONG KONG’S FINANCIAL STABILITY: EQUITY MARKETFINANCIAL STABILITY: EQUITY MARKET

Hong Kong and Asia Pacific equity market performance

0

50

100

150

200

250

Nov Jan Mar May Jul Sep Nov Jan Mar May

0

50

100

150

200

250

2008 2009 2010

Lehman Brothersfiled Chapter 11

Debt Standstillof Dubai World

Greek debtcrisis unfolding

Rebased to Oct 27, 2008 = 100

Hong Kong'sHang Seng Index

MSCI AC Pacific(excl. HK & Japan)

22

ASSESSMENT OF RISK ON HONG KONG’S ASSESSMENT OF RISK ON HONG KONG’S FINANCIAL STABILITY: EQUITY MARKETFINANCIAL STABILITY: EQUITY MARKET

Share of stock-market-related loans to total domestic loans

0

2

4

6

8

10

12

1997Q1

1998Q1

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

%

0

2

4

6

8

10

12

%

Non-margin lending

Margin lending

23

ASSESSMENT OF RISK ON HONG KONG’S ASSESSMENT OF RISK ON HONG KONG’S FINANCIAL STABILITY: FINANCIAL STABILITY: PROPERTY MARKETPROPERTY MARKET

Residential property prices and transaction volume

0

20

40

60

80

100

120

140

1996 1998 2000 2002 2004 2006 2008 2010

0

5

10

15

20

25

30

35

40Luxury market (at or above 100 sq. m.) (lhs)

Mass market (below 100 sq. m.) (lhs)

Total transaction volume (rhs)

Sale & Purchase Agreement ('000)Q3 1997 = 100

109.0

82.8

60

65

70

75

80

85

90

95

100

105

110

Jan Apr Jul Oct Jan

60

65

70

75

80

85

90

95

100

105

110Q3 1997 = 100Q3 1997 = 100

2009 2010

24

ASSESSMENT OF RISK ON HONG KONG’S ASSESSMENT OF RISK ON HONG KONG’S FINANCIAL STABILITY: FINANCIAL STABILITY: PROPERTY MARKETPROPERTY MARKET

Outstanding mortgage loans

*There is a break in data series at December 2000 due to an increase in the number of surveyed institutions.

-4

0

4

8

12

1996 1998 2000 2002 2004 2006 2008 2010

-4

0

4

8

12Change from 3 months ago (%) %

*

-4

-2

0

2

4

6

Jan Jul Jan Jul Jan

-4

-2

0

2

4

6

2.7

2.1

4.1

Change from 3 months ago (%) %

2008 2009 2010

25

ASSESSMENT OF RISK ON HONG KONG’S ASSESSMENT OF RISK ON HONG KONG’S FINANCIAL STABILITY: FINANCIAL STABILITY: PROPERTY MARKETPROPERTY MARKET

Mortgage repayment-to-income ratio

Note: For the luxury market, the ratio is calculated based on the 95 th percentile income of households residing in private housing. For the mass market, it is based on the median income of households residing in private housing.

0

20

40

60

80

100

120

140

160

1996 1998 2000 2002 2004 2006 2008 2010

0

20

40

60

80

100

120

140

160Luxury market (at or above 100 sq. m.)

Mass market (below 100 sq. m.)

% of household income %

Mortgage rate over 10%

Mortgage rate below 2.5%

26

ASSESSMENT OF RISK ON HONG KONG’S ASSESSMENT OF RISK ON HONG KONG’S FINANCIAL STABILITY: FINANCIAL STABILITY: PROPERTY MARKETPROPERTY MARKET

• Repayment amount will rise by about 30%, assuming no change in repayment period

If mortgage interest rate rises by 300 bps,

Impact of mortgage rate increase on mortgage repayment-to-income ratio

30

40

50

60

70

80

90

100

Jan Apr Jul Oct Jan

30

40

50

60

70

80

90

100Luxury market (100 sq. m. or above)Mass market (below 100 sq. m.)

2009 2010

% of household income %

27

CURRENCY STABILITYCURRENCY STABILITY

28

HONG KONG DOLLAR EXCHANGE RATEHONG KONG DOLLAR EXCHANGE RATE

7.65

7.70

7.75

7.80

7.85

7.90HKD / USD

7.65

7.70

7.75

7.80

7.85

7.90HKD / USD

2004 2005 2006 2007 2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Spot exchange rate

Convertibility Zone

29

AGGREGATE BALANCE REMAINED HIGHAGGREGATE BALANCE REMAINED HIGH

0

40

80

120

160

200

240

280

320

360HKD billion

0

40

80

120

160

200

240

280

320

360

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

HKD billion

2004 2005 2006 2007 2008 2009 2010

30

FORWARD DISCOUNT REMAINED STABLEFORWARD DISCOUNT REMAINED STABLE

7.65

7.70

7.75

7.80

7.85

HKD / USD

7.65

7.70

7.75

7.80

7.85

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

HKD / USD

Spot

12-month forward

2007 2008 2009 2010

31

LOW DOMESTIC INTEREST RATESLOW DOMESTIC INTEREST RATES

0

1

2

3

4

5

6

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

% pa

0

1

2

3

4

5

6% pa

Overnight LIBOR

Overnight HIBOR

0

1

2

3

4

5

6

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

% pa

0

1

2

3

4

5

6% pa

3-month LIBOR

3-month HIBOR

32

CAPITAL FLOWSCAPITAL FLOWS

0

100

200

300

400

500

600

700

800

900

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

HK$ billion

Aggregate Balance Outstanding EFBN

Inflowsbetween2008Q4

and2009Q4

wereHK$640billion

Note: The Outstanding EFBN and the Aggregate Balance are quarter-end figures.

no netinflows

in2010Q1

Inflow of funds into HKD

33

CAPITAL FLOWSCAPITAL FLOWS

0

100

200

300

400

500

600

2006 2007 2008 2009 2010 Q1

HK$ billion

Note (1): Equities funds raised include IPO, right issues, placings, open offers, consideration issues, warrants exercised andshare option scheme.Note (2): 2008-2009 figures differ from those provided by the HKEx as the activities which did not involve HKD flows havebeen excluded.

Inflow of fundsinto HKD

Funds raised

Equity fund-raising activities and inflows

34

BANKING STABILITYBANKING STABILITY

35

BANKING SECTOR PERFORMANCEBANKING SECTOR PERFORMANCE

Locally incorporated AIs continued to be well capitalised

16.9%

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

%

36

BANKING SECTOR PERFORMANCEBANKING SECTOR PERFORMANCE

Liquidity ratio of retail banks remained well above statutory minimum of 25%

44.2%

20

25

30

35

40

45

50

55

Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

%

37

BANKING SECTOR PERFORMANCEBANKING SECTOR PERFORMANCE

Asset quality indicators remained at comfortable levels compared with historical standards

020406080

100

Classified loan ratioCurrrent: 1.35% (Dec 2009)Peak: 10.61% (Sep 1999)

Ratio of overdue andrescheduled loans

Current: 0.88% (Dec 2009)Peak: 8.58% (Sep 1999)

Credit card charge off ratioCurrent: 2.39% (Q1 2010)Peak: 14.55% (Q3 2002)

Number of negative equityRMLs

Current: 303 (Mar 2010)Peak: 105,697 (Jun 2003)

RML delinquency ratioCurrent: 0.03% (Mar 2010)

Peak: 1.43% (Apr 2001)

Peak Latest

38

BANKING SECTOR PERFORMANCEBANKING SECTOR PERFORMANCE

Net interest margin of retail banks continued to narrow

1.34%1.37%

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

%

39

Hong Kong-dollar loan-to-deposit ratio of retail banks rose

BANKING SECTOR PERFORMANCEBANKING SECTOR PERFORMANCE

1,000

1,500

2,000

2,500

3,000

Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

HK$ billion

0%

10%

20%

30%

40%

50%

60%

70%

80%

HK$ loans (LHS) HK$ deposits (LHS) HK$ loan-to-deposit ratio (RHS)

40

Total loans of retail banks rose in Q1 2010

BANKING SECTOR PERFORMANCEBANKING SECTOR PERFORMANCE

1,500

1,700

1,900

2,100

2,300

2,500

Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

HK$ billion

Loans for use in HK Trade finance Loans for use outside HK

41

SUPERVISORY POLICY INITIATIVESSUPERVISORY POLICY INITIATIVES

• Regulatory Capital Framework:– Basel Committee reform proposals– Amendment of Banking (Capital) Rules

• Liquidity regime:– Implementation of revised standards

• Supervisory guidance:– Guideline on remuneration issued in Mar 2010– Consultation on guidance on fair valuation practices for

financial instruments

42

DEPOSIT PROTECTIONDEPOSIT PROTECTION

The amendment bill for enhancing the Deposit Protection Scheme (DPS) was introduced into LegCo in April

The enhanced DPS (including the new protection limit of $500,000) expected to be effective immediately after the expiry of the full deposit guarantee

The HKMA participated in a tripartite working group with the central banks of Malaysia and Singapore to implement a concerted exit strategy for full deposit guarantee by the end of this year by all three jurisdictions as scheduled

43

INVESTOR PROTECTIONINVESTOR PROTECTION

• Mystery shopping programme to be implemented in the second half of 2010

Assisting the Government on establishing the Investor Education Council and Financial Dispute Resolution Centre

Working with SFC on implementation of proposed new measures to enhance investor protection, such as:

- investor characterisation process

- pre-sale disclosure of commercial interests

44

ENFORCEMENT-RELATED ISSUESENFORCEMENT-RELATED ISSUES

Over 99% Lehman-related complaints handled or resolved by end-March 2010

On 1 April 2010, a new Enforcement Department was established to ensure full-time attention for :

- handling the disciplinary process arising from Lehman-related complaints

- processing and investigating non-Lehman-related complaints

45

FINANCIAL INFRASTRUCTUREFINANCIAL INFRASTRUCTURE

46

FINANCIAL MARKET INFRASTRUCTUREFINANCIAL MARKET INFRASTRUCTURE

Development strategy:

Robust and efficient payment and settlement system is essential to monetary and financial stability – important to ensure fault-proof day-to-day operation

Business development – Hong Kong as a settlement service utility centre to attract transaction banking business in the region

47

FINANCIAL MARKET INFRASTRUCTUREFINANCIAL MARKET INFRASTRUCTURE

New developments of payment and settlement systems from February to April 2010 :

- The CMU Fund Order Routing and Settlement Service became SWIFT compatible in April 2010 to facilitate further straight-through processing and attract more potential users

- SWIFTNet migration project – System development work for Phase 2 is progressing well and user acceptance test has been substantially completed

48

GOVERNMENT BOND PROGRAMMEGOVERNMENT BOND PROGRAMME

Institutional Bond Issuance Programme: Four issues with a total issuance size of HK$11.5 billion

has been issued The tenders attracted a diverse group of end-investors,

such as investment funds, insurance companies and pension fund

Retail Bond Issuance Programme:• Necessary preparatory work almost completed and the

inaugural issue will be launched when market conditions are appropriate

49

Develop market infrastructure: Supporting the Government in drawing up legislative

proposals for modifying Hong Kong’s tax laws to level the playing field between Islamic and conventional financial products

Build international links and enhance international profile: Working closely with Bank Negara Malaysia to explore

collaborative initiatives under the scope of the MoU Seeking to forge closer ties with international Islamic

organisations

Promote market awareness: Continue to participate in regional seminars and

conferences and provide training to the industry

DEVELOPMENT OF ISLAMIC FINANCEDEVELOPMENT OF ISLAMIC FINANCE

50

HONG KONG AS AN HONG KONG AS AN INTERNATIONAL INTERNATIONAL

FNANCIAL CENTREFNANCIAL CENTRE

51

INCREASING REGIONAL AND INCREASING REGIONAL AND INTERNATIONAL FINANCIAL CO-OPERATIONINTERNATIONAL FINANCIAL CO-OPERATION

• Financial Stability Board: The HKMA participates actively in the meetings and activities of the Financial Stability Board Plenary and Standing Committees. The adoption of FSB’s compensation principles in Hong Kong is a vivid demonstration of Hong Kong’s adherence to international standards.

• Chiang Mai Initiative Multilateralisation: Effective on 24 March 2010. Hong Kong participates in the surveillance discussion and follow-up work as a member of this regional financial defence mechanism.

• Monitoring of regional monetary and financial stability: The HKMA conducted analyses for EMEAP Monetary and Financial Stability Committee to assess the region’s risks and vulnerabilities, in particular those associated with exit strategies and sovereign debts in the advanced economies.

52

• On 11 February, HKMA issued an elucidation of the supervisory principles and operational arrangements regarding RMB business in Hong Kong to simplify the operational procedures and increase the room for and flexibility in developing diversified RMB-denominated financial products in Hong Kong:

– Mainland authorities and banks are responsible for verifying whether transactions undertaken by the Mainland counterparts are in compliance with the relevant rules and requirements in the Mainland, while Participating AIs in Hong Kong will process the RMB transactions in accordance with the usual banking practices in Hong Kong

With regard to the RMB funds that have flowed into Hong Kong, Participating AIs can develop RMB businesses based on the regulatory requirements and market conditions in Hong Kong

RENMINBI BUSINESS RENMINBI BUSINESS (1)(1)

53

0

500

1,000

1,500

2,000

2,500

3,000

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

0

2,000

4,000

6,000

8,000

10,000

12,000Amount of RMB tradesettlement transactions (lhs)

No. of trade settlementaccounts opened (rhs)

RMB million No of accounts

RENMINBI BUSINESS RENMINBI BUSINESS (2)(2)

RMB trade settlement gained momentum in March 2010

* The Chinese New Year fell in February in 2010, so there were fewer working days than usual in that month.

*

RMB deposits in Hong Kong increasing steadily

40

50

60

70

80

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

40

50

60

70

80

RMB billionRMB billion

54

INVESTMENT ENVIRONMENT INVESTMENT ENVIRONMENT AND PERFORMANCE OF AND PERFORMANCE OF

THE EXCHANGE FUNDTHE EXCHANGE FUND

55

INVESTMENT ENVIRONMENT IN Q1 2010INVESTMENT ENVIRONMENT IN Q1 2010

• Exchange rates: US dollar strengthened against major currencies due to faster economic recovery in the US than other major developed countries and the debt crisis in Greece.

• Equity markets: Major equity markets dropped during January as investors remained cautious in the beginning of the year due to Greece’s debt crisis and uncertainties on the eventual exit strategies of major central banks. Investors turned positive as the Federal Reserve indicated the maintenance of accommodative monetary policy. Equity markets rebounded since February.

• Interest rates: With extended period of accommodative monetary policy, US government bond yields stayed in a narrow range. Government bond yields in core European countries declined.

56

CURRENCY MARKET FLUCTUATIONCURRENCY MARKET FLUCTUATION

1.20

1.25

1.30

1.35

1.40

1.45

1.50

Jan-10 Feb-10 Mar-10 Apr-10

85

87

89

91

93

95

97

USD/Euro FX Rate Yen/USD FX Rate

Yen/USD FX Rate (RHS)

USD/EURO FX Rate (LHS)

57

PERFORMANCE OF PERFORMANCE OF MAJOR EQUITY MARKETSMAJOR EQUITY MARKETS

85

90

95

100

105

110

Jan-10 Feb-10 Mar-10 Apr-10

Hang Seng Index

DAX

S&P 500

Normalized Index Level (2009 year-end = 100)

58

CHANGES IN 10-YEAR CHANGES IN 10-YEAR GOVERNMENT BOND YIELDSGOVERNMENT BOND YIELDS

2.8

3.2

3.6

4.0

4.4

Jan-10 Feb-10 Mar-10 Apr-10

1.2

1.3

1.4

1.5

1.6

US (LHS)

Japan (RHS)

Germany (LHS)

UK (LHS)

Yield (%)

2010 Q1 bond yield change (bps)

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

US Japan Germany UK

(bps)

59

INVESTMENT INCOMEINVESTMENT INCOME

2010 2009 2008 2007

(HK$ billion) Q1 * Full Year Full Year Full Year

Gain/(Loss) on Hong Kong equities^@ 48.9 (77.9) 55.8

Gain/(Loss) on other equities^ 48.8 (73.1) 6.7

Exchange gain/(loss) 9.8 (12.4) 18.7

Return from bonds# (0.6) 88.4 61.0

Investment income/(loss)@ 106.9 (75.0) 142.2

* Unaudited figures

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

60

CHANGES IN INVESTMENT INCOME, PAYMENT TOCHANGES IN INVESTMENT INCOME, PAYMENT TOFISCAL RESERVES AND ACCUMULATED SURPLUSFISCAL RESERVES AND ACCUMULATED SURPLUS

2010 I 2009 I

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

Investment income/(loss) 106.9 10.0 71.9 58.5 (33.5)

Other income 0.2 0.0 0.0 0.2 0.0

Interest and other expenses (3.8) (1.0) (0.9) (1.2) (0.7)

Net investment income/(loss) 103.3 9.0 71.0 57.5 (34.2)

Payment to Fiscal Reserves # (33.5) (7.9) (8.0) (8.5) (9.1)

Payment to HKSAR government funds and statutory bodies # (1.2) (0.6) (0.3) (0.3) 0.0

Valuation change of Strategic Portfolio^ 4.4 0.0 1.3 3.2 (0.1)

Increase/(Decrease) in EF Accumulated Surplus 73.0 0.5 64.0 51.9 (43.4)

* Unaudited figures

# The fixed rate of fee payment is 6.3% for 2010 and 6.8% for 2009

^ Including dividends

61

HISTORICAL INVESTMENT INCOMEHISTORICAL INVESTMENT INCOME

Year Full Year Q4 Q3 Q2 Q1

2001 7.4 13.6 10.4 (2.0) (14.6)

2002 47.0 26.3 (2.1) 26.5 (3.7)

2003 89.7 33.5 8.4 41.1 6.7

2004 56.7 33.0 14.1 (7.2) 16.8

2005 37.8 7.3 19.0 13.6 (2.1)

2006 103.8 36.0 37.1 12.5 18.2

2007* 142.2 33.4 61.8 26.3 20.7

2008* (75.0) 8.3 (48.3) (20.4) (14.6)

2009* 106.9 10.0 71.9 58.5 (33.5)

2010*# N/A N/A N/A N/A

(HK$ billion)

* Excluding valuation changes in the Strategic Portfolio# Unaudited figures

62

EXCHANGE FUND EXCHANGE FUND ABRIDGED BALANCE SHEETABRIDGED BALANCE SHEET

(HK$ billion)At

31 Mar 2010*At

31 Dec 2009At

31 Dec 2008

ASSETS

Deposits 126.3 172.8

Debt securities 1,637.6 1,151.3

Hong Kong equities 142.9 92.9

Other equities 214.9 103.3

Other assets 27.7 40.0

Total assets 2,149.4======

1,560.3======

LIABILITIES AND FUND EQUITY

Certificates of Indebtedness 199.0 176.1

Government-issued currency notes & coins in circulation 8.4 8.3

Balance of the banking system 264.6 158.0

Exchange Fund Bills and Notes 536.4 162.5

Placements by banks and other financial institutions 28.3 13.6

Placements by Fiscal Reserves 504.1 531.4

Placements by HKSAR government funds and statutory bodies 41.8 0.1

Other liabilities 13.3 29.8

Total liabilities 1,595.9 1,079.8

Accumulated Surplus 553.5 480.5

Total liabilities and fund equity 2,149.4======

1,560.3======

* Unaudited figures