11

2005 Exchange Fund Position

Press Conference

19 January 2006

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 2005

• Exchange rates:– Yen vs USD : -13.2%– Euro vs USD : -13.2%

• Equity markets:– US (S&P500) : +3.0%– Europe (MSCI Europe) : +21.6%– Japan (Topix) : +43.5%– Hong Kong (HSI) : +4.5%

• Interest rates:– USD (Fed funds target rate) : +2.0%– Euro (ECB repo rate) : +0.25%– Yen (BoJ call rate) : no change

44

Investment Income

I 2005 I 2004 2003 2002 2001

(HK$ billion)Full

year* Q4 Q3 Q2 Q1Full

yearFull

yearFull

yearFull

year

Gain/(Loss) on Hong Kong equities^ 7.0 (2.7) 8.1 5.1 (3.5) 12.0 21.2 (11.8) (27.1)

Gain/(Loss) on other equities^ 20.5 7.9 10.1 3.4 (0.9) 11.2 26.8 (22.7) (3.3)

Exchange gain/(loss) (19.5) (3.4) (2.4) (10.7) (3.0) 8.5 22.9 27.2 (13.0)

Total return from bonds, etc 30.1 5.8 3.2 15.8 5.3 25.0 18.8 54.3 50.8

Investment income 38.1 7.6 19.0 13.6 (2.1) 56.7 89.7 47.0 7.4

* Unaudited figures for 2005

^ Including dividends

55

Exchange FundChange in Accumulated Surplus

I 2005 I 2004

(HK$ billion)Full year(unaudited)

Q4 Q3 Q2 Q1 Full year

Investment income 38.1 7.6 19.0 13.6 (2.1) 56.7

Other income 0.2 0.1 0.0 0.1 0.0 0.2

Interest and other cost (7.9) (2.6) (2.2) (1.8) (1.3) (4.8)

Net investment income 30.4 5.1 16.8 11.9 (3.4) 52.1

Treasury’s share (10.0) (2.3) (4.9) (3.5) 0.7 (14.5)

Write back of revaluation loss on premises 0.0 0.0 0.0 0.0 0.0 0.9

Carry to accumulated surplus 20.4 2.8 11.9 8.4 (2.7) 38.5

Adjustment to accumulated surplus

Effect of implementation of HKAS 39(1) (0.6) 0.0 0.0 0.0 (0.6) N/A

Increase/(Decrease) in EF accumulated surplus 19.8 2.8 11.9 8.4 (3.3) 38.5

Note (1): The effect of changing from using mid-price to using bid-price for valuing securities held, and using ask-price for valuing securities issued.

66

Exchange FundHistorical Change in Accumulated Surplus

* unaudited figures for 2005

(HK$ billion) 2005* 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995

Investment income 38.1 56.7 89.7 47.0 7.4 45.1 103.8 93.8 35.6 25.4 46.7

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

Interest and other cost (7.9) (4.8) (5.6) (7.0) (10.5) (11.0) (10.0) (16.0) (18.4) (12.9) (12.6)

Net investment income 30.4 52.1 84.3 40.2 (2.9) 34.3 94.0 78.0 17.4 12.7 34.4

Treasury’s share (10.0) (14.5) (25.7) (15.6) (1.6) (18.1) (45.4) (26.0) N/A N/A N/A

Revaluation gain/(loss) on premises 0.0 0.9 (0.9) N/A N/A N/A N/A N/A N/A N/A N/A

Carry to accumulated surplus 20.4 38.5 57.7 24.6 (4.5) 16.2 48.6 52.0 17.4 12.7 34.4

Adjustment to accumulated surplus

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

Increase/(Decrease) in EF accumulated surplus 19.8 38.5 57.7 24.6 (4.5) 16.2 48.6 52.0 17.4 12.7 34.4

77

Exchange FundAbridged Balance Sheet

(HK$ billion)2005

(unaudited)2004 Change

ASSETS

Deposits 89.1 63.5 25.6

Debt securities 736.2 772.1 (35.9)

Hong Kong equities 87.9 82.4 5.5

Other equities 123.8 123.2 0.6

Other assets 31.9 20.7 11.2

Total assets 1,068.9======

1,061.9======

7.0===

LIABILITIES AND FUND EQUITY

Certificates of Indebtedness 149.3 146.8 2.5

Government-issued currency notes & coins in circulation 6.7 6.3 0.4

Balance of the banking system 1.6 15.8 (14.2)

Exchange Fund Bills and Notes 118.1 125.9 (7.8)

Placements by other HKSAR government funds 297.1 280.1 17.0

Other liabilities 52.9 63.4 (10.5)

Total liabilities 625.7 638.3 (12.6)

Accumulated surplus 443.2 423.4 19.8

Premises revaluation reserve(1) - 0.2 (0.2)

Fund equity 443.2 423.6 19.6

Total liabilities and fund equity 1,068.9======

1,061.9======

7.0===

Note (1): Before 2005, premises were stated at valuation less depreciation. From 2005, premises are stated at cost less depreciation. The revaluation surplus on premises is therefore reversed.

88

Exchange Fund Performance Against Investment Benchmark

3.8%

0.4%

3.9%

2.9%

10.8%

4.8%

0.7%

5.1%

5.7%

9.5%

5.5%

3.1%

5.7%

10.2%

0%

2%

4%

6%

8%

10%

12%

1999 2000 2001 2002 2003 2004 2005(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%

6.3%

3.1%

5.7%

5.1%

0%

2%

4%

6%

8%

10%

12%

14%19

94

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

200

5(u

naud

ited)

Com

poun

ded

Ann

ual

Inve

stm

ent R

etur

n*(1

994-

2005

)

Com

poun

ded

Ann

ual

Hon

g K

ong

CPI

-A(1

994-

2005

#)

Investment Return* of the Exchange Fund

# Hong Kong CPI-A at end-November 2005* Investment return from 2000 computed in accordance with CFA

Global Investment Performance Standards

1010

Treasury Return Against Estimate

45.4

1.6

14.5

31.6

12.514.1

25.7

15.6

26.0

18.1

10.012.312.1

13.8

22.2

26.7

0

10

20

30

40

50

1998 1999 2000 2001 2002 2003 2004 2005(unaudited)

Treasury's share of Exhange Fund return

Treasury's estimated return

HK$bn

1111

Outlook for 2006

Global economy - strong growth momentum but doubtful sustainability

Inflation - currently benign but expectations for increase

Oil & commodity prices

- markets remain tight with implications for inflation

Monetary policy - accommodative / neutral / tightening (?)

Global imbalance - possible disorderly adjustments

Housing market - weakening may impact on consumption and growth

1212

Currencies

102.0

104.2

106.4

108.7

111.1

113.6

116.3

119.0

121.9

1313

Currencies

121.9

119.0

113.6

108.7

116.3

111.1

102.0

104.2

106.4

1414

Bond yields

121.9

119.0

113.6

108.7

116.3

111.1

102.0

104.2

106.4

10-year UST, Bund & JGB yields

2.0

3.0

4.0

5.0

Jan-0

4

Feb-0

4

Mar-

04

Apr-

04

May-0

4

Jun-0

4

Jul-04

Aug-0

4

Sep-0

4

Oct-

04

Nov-0

4

Dec-0

4

Jan-0

5

Feb-0

5

Mar-

05

Apr-

05

May-0

5

Jun-0

5

Jul-05

Aug-0

5

Sep-0

5

Oct-

05

Nov-0

5

Dec-0

5

Jan-0

6 1.0

1.5

2.0

10-year JGB yield (RHS)

10-year UST yield (LHS)

JGB yield (%)UST & Bund yield (%)

10-year Bund yield (LHS)

1515

Bond yields

121.9

119.0

113.6

108.7

116.3

111.1

102.0

104.2

106.4

2-year UST, Bund and JGB yields

0.0

1.0

2.0

3.0

4.0

5.0

Ja

n-0

4

Fe

b-0

4

Ma

r-0

4

Ap

r-0

4

Ma

y-0

4

Ju

n-0

4

Ju

l-0

4

Au

g-0

4

Se

p-0

4

Oct-

04

No

v-0

4

De

c-0

4

Ja

n-0

5

Fe

b-0

5

Ma

r-0

5

Ap

r-0

5

Ma

y-0

5

Ju

n-0

5

Ju

l-0

5

Au

g-0

5

Se

p-0

5

Oct-

05

No

v-0

5

De

c-0

5

Ja

n-0

6 0

0.1

0.2

0.3

0.4

0.5

UST & Bund yield (%) JGB yield (%)

2-year UST yield (LHS)

2-year Bund yield (LHS)

2-year JGB yield (RHS)

1616

Equities

10000

11000

12000

13000

14000

15000

16000

Ja

n-0

4

Fe

b-0

4

Ma

r-0

4

Ap

r-0

4

Ma

y-0

4

Ju

n-0

4

Ju

l-0

4

Au

g-0

4

Se

p-0

4

Oc

t-0

4

No

v-0

4

De

c-0

4

Ja

n-0

5

Fe

b-0

5

Ma

r-0

5

Ap

r-0

5

Ma

y-0

5

Ju

n-0

5

Ju

l-0

5

Au

g-0

5

Se

p-0

5

Oc

t-0

5

No

v-0

5

De

c-0

5

Ja

n-0

6

1000

1050

1100

1150

1200

1250

1300

Hang Seng Index (LHS)

S & P 500 Index (RHS)

1717

Equities

80

90

100

110

120

130

140

150

160

Ja

n-0

4

Fe

b-0

4

Ma

r-0

4

Ap

r-0

4

Ma

y-0

4

Ju

n-0

4

Ju

l-0

4

Au

g-0

4

Se

p-0

4

Oc

t-0

4

No

v-0

4

De

c-0

4

Ja

n-0

5

Fe

b-0

5

Ma

r-0

5

Ap

r-0

5

Ma

y-0

5

Ju

n-0

5

Ju

l-0

5

Au

g-0

5

Se

p-0

5

Oc

t-0

5

No

v-0

5

De

c-0

5

Ja

n-0

6

Hang Seng Index

S & P 500 Index

MSCI Europe

TOPIX Index

1818

2005 Exchange Fund Position

Press Conference

19 January 2006