11

2004 Exchange Fund Results

Press Conference

20 January 2005

22

Investment Objectives ofThe 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.

33

Markets in 2004

• Overall performance volatile:

Q1 strong

Q2 sharp decline

Q3 moderate

Q4 strong rally

44

Exchange Fund Performance

I 2004 I 2003 2002 2001 2000

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

Gain / (Loss) on Hong Kong

equities* 12.0 1.0 (1.4) 5.5 6.9 21.2 (11.8) (27.1) (7.3)

Gain / (Loss) on other equities* 11.2 3.2 2.5 (4.7) 10.2 26.8 (22.7) (3.3) 0.5

Exchange gain / (loss) 8.5 0.6 (2.6) 1.7 8.8 22.9 27.2 (13.0) (11.2)

Total return from bonds, etc 25.0 12.0 (5.7) 11.6 7.1 18.8 54.3 50.8 63.1

Investment income 56.7 16.8 (7.2) 14.1 33.0 89.7 47.0 7.4 45.1

* including dividends

55

Exchange FundChange in Accumulated Surplus

I 2004 I 2003

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

Investment income 56.7 16.8 (7.2) 14.1 33.0 89.7

Other income 0.2 0.0 0.1 0.0 0.1 0.2

Interest and expenses (4.8) (1.1) (1.1) (1.3) (1.3) (5.6)

Net investment income 52.1 15.7 (8.2) 12.8 31.8 84.3

Treasury’s share (14.5) (4.5) 2.1 (3.6) (8.5) (25.7)

Revaluation gain/(loss) on premises affectingaccumulated surplus 0.9 0.0 0.0 0.0 0.9 (0.9)

Increase/(Decrease) in EF accumulated surplus 38.5 11.2 (6.1) 9.2 24.2 57.7

66

Exchange FundHistorical Change in Accumulated Surplus

* unaudited figures for 2004

(HK$ billion) 2004* 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994

Investment income 56.7 89.7 47.0 7.4 45.1 103.8 93.8 35.6 25.4 46.7 8.9

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

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) 52.1 84.3 40.2 (2.9) 34.3 94.0 78.0 17.4 12.7 34.4 0.9

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 38.5 57.7 24.6 (4.5) 16.2 48.6 52.0 17.4 12.7 34.4 0.9

77

Exchange FundAbridged Balance Sheet

(HK$ billion) 2004 2003 Change

ASSETSDeposits 63.9 60.7 3.2 Debt securities 771.5 761.1 10.4 Hong Kong equities 82.4 71.2 11.2 Other equities 123.0 99.4 23.6 Other assets 21.1 19.2 1.9

Total assets 1,061.9 1,011.6 50.3

LIABILITIES AND FUND EQUITYCertificates of Indebtedness 146.8 134.2 12.6 Government-issued currency notes & coins in circulation 6.3 6.3 0.0 Balance of the banking system 15.8 28.3 (12.5)Exchange Fund Bills and Notes 125.9 123.5 2.4 Placements by other HKSAR government funds 280.1 252.3 27.8 Other liabilities 63.4 82.1 (18.7)Total liabilities 638.3 626.7 11.6

Accumulated surplus 423.4 384.9 38.5 Premises revaluation reserve 0.2 - 0.2 Fund equity 423.6 384.9 38.7

Total liabilities and fund equity 1,061.9 1,011.6 50.3

88

Exchange Fund Performance Against Investment Benchmark

3.8%

0.4%

3.9%

5.7%

10.8%

4.8%

0.7%

5.1%5.7%

9.50%

5.5%

10.20%

0%

2%

4%

6%

8%

10%

12%

1999 2000 2001 2002 2003 2004(unaudited)

Investment Return of ExchangeFund's Investment Benchmark*

Investment Return of Exchange Fund*

• Investment return from 2000 computed in accordance with CFA Global Investment Performance Standards

99

2.4%

10.8%

5.1%

6.1%

12.1%

10.8%

4.8%

0.7%

10.2%

1.3%

6.6%

5.7%

5.1%

0%

2%

4%

6%

8%

10%

12%

14%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Compounded

Annual

Investment

Return

(1994-2004)

Compounded

Annual

Hong Kong

CPI-A

(1994-

2004#)

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

1010

Outlook for 2005

– US interest rate increases expected

– outlook for equities uncertain

– currencies may be erratic

1111

US interest rate increases expected

0

1

2

3

4

5

6

7

95 96 97 98 99 00 01 02 03 04

%

Fed Funds Target Rate

1212

Outlook for equities uncertain

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

95 96 97 98 99 00 01 02 03 04

200

400

600

800

1000

1200

1400

1600

1800

2000

Hang Seng Index (LHS)

S&P 500 (RHS)

1313

Currencies may be erratic

80

90

100

110

120

130

140

150

95 96 97 98 99 00 01 02 03 04 05

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

Japanese Yen to One U.S. Dollar (LHS)

U.S. Dollars to One Euro (RHS, began in 1999)

1414

2004 Exchange Fund Results

Press Conference

20 January 2005