Fang Hongjin: It is recommended that the Hong Kong Foreign Exchange Fund gradually purchase and hold Bitcoin for a long time

Source: Fang Hongjin, Co-Chairman of the Hong Kong Blockchain Association

It is recommended that the Hong Kong government's foreign exchange fund continue to purchase and hold Bitcoin for a long time. In view of the expectation of long-term appreciation of Bitcoin, it can become the ballast stone of the Hong Kong Foreign Exchange Fund, which can bring the following benefits to Hong Kong's financial stability and industrial development:

      1) Increase the diversification of foreign exchange fund assets, enhance the inflation resistance of foreign exchange fund assets, and increase the expectation of long-term stable appreciation of foreign exchange assets;

      2) Get rid of dependence on single US dollar assets and enhance the autonomy of Hong Kong's financial policies;

      3) Buy Bitcoin as soon as possible, lay the foundation for Bitcoin holdings, and strive for the right to speak in the international Bitcoin market;

      4) Give full play to the pledge financing characteristics of Bitcoin, and facilitate short-term pledge financing of US dollars to fight against international hot money attacks on Hong Kong's linked exchange rate;

      5) Lay a financial credit guarantee for Hong Kong to become an international Web3.0 capital.     

Given that Bitcoin is increasingly accepted by the international traditional financial industry as digital gold, the central banks of some countries will adopt Bitcoin as a reserve asset configuration.

In September 2021, El Salvador announced that Bitcoin would be positioned as an official currency anchor asset, which has long been regarded as a laughing stock by the traditional financial community; and this year, conservative and stable Switzerland has also passed a bill to configure Bitcoin as part of the Swiss National Bank's reserve assets.

At the World Bitcoin Conference held in the United States last weekend, representatives of the Republican and Democratic parties in the United States strongly expressed the need to pass legislation to list Bitcoin as a national strategic asset reserve, and the pursuit and support for Bitcoin released by Republican candidate and former President Trump in his on-site speech was even more widely spread.      

Once the United States officially includes Bitcoin in its national strategic asset reserve allocation, I believe that a number of central banks will follow suit. At that time, the main buyers of Bitcoin will become ETFs of traditional financial institutions and central banks of various countries. Bitcoin, which has a limited supply and increased mining difficulty, will soon be in short supply.

Whether it is people in the currency circle or in the traditional financial world, everyone has a consensus that Bitcoin will be comparable to or even surpass gold and become a mainstream asset in international finance.

The total market value of gold in circulation worldwide is currently about 12 trillion US dollars, and the total market value of Bitcoin is about 1.4 trillion US dollars, which is 8.6 times the difference between the two. If the market value of Bitcoin reaches the level of gold, the unit price of one Bitcoin will soar from the current 68,000 US dollars to nearly 600,000 US dollars.

As we all know, the issuance of Hong Kong dollars in Hong Kong is based on the linked exchange rate system anchored to the US dollar. The three note-issuing banks have to pay US dollars to the Hong Kong government's foreign exchange fund and then issue Hong Kong dollars at a ratio of 1:7.8. The Hong Kong Government Exchange Fund is the capital pool for Hong Kong's financial stability.

At the beginning of 2024, the balance sheet disclosed by the Hong Kong Government Exchange Fund showed that the total assets of the Hong Kong Exchange Fund were HK$4,017.8 billion, including deposits of HK$344.8 billion, debt securities of HK$2,799.7 billion, Hong Kong stocks of HK$125 billion, other stocks of HK$484.4 billion, and other assets of HK$263.9 billion.

The Exchange Fund is managed in two different portfolios, namely the Support Portfolio and the Investment Portfolio. The Support Portfolio provides support for the currency, while the Investment Portfolio protects the value and long-term purchasing power of the assets. According to the above balance sheet data, the proportion of funds used for the investment portfolio is as high as 85%.

At the beginning of 2024, the total assets of the Exchange Fund increased by HK$9.8 billion, of which the "Investment Portfolio" had a return rate of 6.4%, while the short-term US dollar bonds in the "Support Portfolio" had an increase in interest income due to rising bond yields, with a return rate of 5.0%.

According to the reference data, the increase of Bitcoin in 2023 is 158%.

It can be seen that the main investment income of the Hong Kong Exchange Fund comes from investing in U.S. Treasuries. It is also because the Federal Reserve maintained high interest rates last year to push up U.S. Treasury bond interest rates that the Hong Kong Exchange Fund has obtained good returns.

But if the Federal Reserve starts to cut interest rates and U.S. Treasury bond interest rates drop sharply, how will the Hong Kong Exchange Fund respond?

Due to the constraints of the linked exchange rate, Hong Kong's financial policy lacks independence and is forced to follow the Federal Reserve's monetary policy, making it impossible to formulate financial policies suitable for the development of local and surrounding economies.

Allocating a certain proportion of Bitcoin in the Hong Kong Exchange Fund and holding it for a long time can increase the stability and autonomy of Hong Kong's finance, and will also provide credit guarantees for the crypto industry to gather in Hong Kong.