The Hong Kong government has produced a consolidated surplus earlier than expected, its first in four years, ahead of a rare transfer into coffers from the Exchange Fund and other sources.
Wednesday’s budget pointed to fund transfers of HK$127.83 billion (US$16.35 billion) and an 11.1 per cent jump in government revenues contributing to another surplus for 2026-27, on top of the one for the 2025-26 financial year.
“We will bring back about HK$15.8 billion from funds established outside the government’s accounts, and transfer HK$37 billion and HK$75 billion, respectively, from the surplus of the Bond Fund and the investment income of the Exchange Fund to the government’s accounts,” Financial Secretary Paul Chan Mo-po said in his speech.
The move to take investment income out of the Exchange Fund – the government’s main investment arm and de facto sovereign wealth fund – was last done in 1984.
Chan proposed transferring HK$75 billion in each of the coming two financial years, or HK$150 billion in total, from the Exchange Fund to the Capital Works Reserve Fund to pay for the Northern Metropolis and other infrastructure projects.
In 1984, a HK$250 million transfer from the fund was used to compensate for the loss of revenue resulting from the removal of the tax on interest earned on Hong Kong dollar deposits, according to a Legislative Council document that year.
Asked about the U-turn from the government’s previous reluctance to transfer money out of the Exchange Fund, Chan said the decision had fully taken into account the need to maintain monetary and financial stability, adding that the amount represented about half of last year’s HK$330 billion earned by the fund.
“Putting the money into the Exchange Fund is for investment, and putting money into the Northern Metropolis is also an investment,” he said. “It is only one investment placed into another.”
He added the practice of transferring investment income from the Exchange Fund to finance infrastructure development would not be a regular move.
“The decision was made after considering the purpose, scale of the Exchange Fund and our future needs,” he said. “Our ability to weather volatility will not be impacted by simply transferring half of the investment income from last year.”
The fund achieved a record-breaking performance last year, delivering investment income of HK$330 billion.
As at the end of last year, the total value of assets under the fund exceeded HK$4.1 trillion, which would be enough to maintain monetary and financial stability in Hong Kong, Chan stressed.
The transfer would be on the premise that the fund’s function to maintain the “stability and integrity of the local monetary and financial systems will not be compromised”, he added.
The Hong Kong Monetary Authority said following the transfer to the government, the accumulated surplus of the Exchange Fund would still see growth compared with the end of 2024, rising to more than HK$780 billion.
Together with the sizeable foreign currency reserves of more than US$420 billion, equivalent to 1.6 times the monetary base, the Exchange Fund continued to serve as a solid bedrock for the Linked Exchange Rate System and financial stability of Hong Kong, the authority said.
“The Hong Kong Monetary Authority remains fully capable of and confident in maintaining the stability and integrity of Hong Kong’s monetary and financial systems in accordance with the Exchange Fund Ordinance,” it said.
A source said Chan’s proposal had to be approved by the Exchange Fund Advisory Committee, as well as the chief executive and the Executive Council at the final stage.
While it is unclear when the proposal will be approved, the source expected the first transfer to be completed by March 2027, and the second one by March 2028.
Under the Exchange Fund Ordinance, the finance chief may transfer part of the Exchange Fund to the general revenue or other government funds with the approval of the chief executive, provided that the fund’s assets remain at least 105 per cent of its total outstanding obligations.
A government insider said the transfer announced in the budget had met the legal requirement.
In the past, fees from the Exchange Fund to the government usually ranged from HK$10 billion to HK$20 billion, the source added.
Meanwhile, by the end of March, the Bond Fund’s balance is estimated to be about HK$150 billion, with an accumulated surplus of about HK$37 billion after deducting outstanding bond balances, interest payments and others.
That fund was established in 2009 with the implementation of the Government Bond Programme to promote the further and sustainable development of the bond market in Hong Kong.
The government will introduce a resolution to Legco to enable the transfer of the accumulated Bond Fund surplus to the consolidated account in 2026-27.
It will also transfer the unspent balance of HK$15.83 billion to the government’s accounts. That followed a review of 36 funds outside the government.
These include closing the Trust Fund in Support of Reconstruction in the Sichuan Earthquake Stricken Areas set up in 2008, the Hong Kong Paralympians Fund and the Arts Development Fund for Persons with Disabilities, according to a source.
The first had accomplished its policy objectives, while the latter two could have objectives met more effectively under the established funding mechanism, the budget said.
The proposal included revising the financial arrangements of four funds to bring back their unspent balances on the premise of supporting their operations in the next five years, according to the budget.
The proposal included consolidating six funds under the Sir David Trench Fund for Recreation into three for enhanced efficiency in the use of resources, according to the source.
The consolidated surplus after issuance and repayment of bonds turned out to be HK$2.9 billion in a revised estimate for the 2025-26 financial year. This surplus contrasted with the previous estimate of a consolidated deficit of HK$67 billion for 2025-26.
The surplus is also the first since the 2021-22 financial year, which recorded a HK$29.3 billion surplus, according to the 2025-26 budget briefing for Legco.
The consolidated surplus for the 2026-27 financial year was expected to jump 6.6 times to HK$22.1 billion, according to the latest budget.
A consolidated surplus occurs when total revenue exceeds total expenditure across all government accounts, funds and bond activities within a financial year, representing the financial position of the government.
Higher earnings and profits tax, revenue from land premium and revenue from stamp duties are expected, according to the budget. -- SOUTH CHINA MORNING POST
