1. 1 2005 Exchange Fund Position Press Conference 19 January 2006

2. 2 Investment Objectives of The 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.

3. 3 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

4. 4 Investment Income I2005I2004200320022001 (HK$ billion) Full year*Q4Q3Q2Q1 Full year Gain/(Loss) on Hong Kong equities^ 7.0(2.7)8.15.1(3.5)12.021.2(11.8)(27.1) Gain/(Loss) on other equities^ 20.57.910.13.4(0.9)11.226.8(22.7)(3.3) Exchange gain/(loss) (19.5)(3.4)(2.4)(10.7)(3.0)8.522.927.2(13.0) Total return from bonds, etc 30.15.8 3.2 15.8 5.325.018.854.350.8 Investment income 38.17.619.013.6(2.1)56.789.747.07.4 * Unaudited figures for 2005 ^ Including dividends

5. 5 Exchange Fund Change in Accumulated Surplus I2005I2004 (HK$ billion) Full year (unaudited) Q4Q3Q2Q1Full year Investment income38.17.619.013.6(2.1)56.7 Other income0.20.10.00.10.00.2 Interest and other cost(7.9)(2.6)(2.2)(1.8)(1.3) (4.8) Net investment income30.45.116.811.9(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 0.9 Carry to accumulated surplus20.42.811.98.4(2.7)38.5 Adjustment to accumulated surplus Effect of implementation of HKAS 39 (1) (0.6) 0.0 (0.6) N/A Increase/(Decrease) in EF accumulated surplus19.82.811.98.4(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.

6. 6 Exchange Fund Historical Change in Accumulated Surplus * unaudited figures for 2005 (HK$ billion) 2005*2004200320022001200019991998199719961995 Investment income38.156.789.747.07.445.1103.893.835.625.446.7 Other income0.2 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 income30.452.184.340.2(2.9)34.394.078.017.412.734.4 Treasury’s share(10.0)(14.5)(25.7)(15.6)(1.6)(18.1)(45.4)(26.0)N/A Revaluation gain/(loss) on premises 0.0 0.9 (0.9) N/A Carry to accumulated surplus20.438.557.724.6(4.5)16.248.652.017.412.734.4 Adjustment to accumulated surplus Effect of implementation of HKAS 39 (0.6) N/A Increase/(Decrease) in EF accumulated surplus19.838.557.724.6(4.5)16.248.652.017.412.734.4

7. 7 Exchange Fund Abridged Balance Sheet (HK$ billion) 2005 (unaudited) 2004Change ASSETS Deposits89.163.525.6 Debt securities736.2772.1(35.9) Hong Kong equities87.982.45.5 Other equities123.8123.20.6 Other assets 31.9 20.711.2 Total assets1,068.9 ====== 1,061.9 ====== 7.0 === LIABILITIES AND FUND EQUITY Certificates of Indebtedness149.3146.82.5 Government-issued currency notes & coins in circulation6.76.30.4 Balance of the banking system1.615.8(14.2) Exchange Fund Bills and Notes118.1125.9(7.8) Placements by other HKSAR government funds297.1280.117.0 Other liabilities 52.9 63.4(10.5) Total liabilities 625.7 638.3(12.6) Accumulated surplus443.2423.419.8 Premises revaluation reserve (1) - 0.2 (0.2) Fund equity 443.2 423.6 19.6 Total liabilities and fund equity1,068.9 ====== 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.

8. 8 Exchange Fund Performance Against Investment Benchmark Investment return from 2000 computed in accordance with CFA Global Investment Performance Standards

9. 9 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

10. 10 Treasury Return Against Estimate HK$bn

11. 11 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

12. 12 Currencies 102.0 104.2 106.4 108.7 111.1 113.6 116.3 119.0 121.9

13. 13 Currencies 121.9 119.0 113.6 108.7 116.3 111.1 102.0 104.2 106.4

14. 14 Bond yields 121.9 119.0 113.6 108.7 116.3 111.1 102.0 104.2 106.4 10-year Bund yield (LHS)

15. 15 Bond yields 121.9 119.0 113.6 108.7 116.3 111.1 102.0 104.2 106.4 2-year JGB yield (RHS)

16. 16 Equities

17. 17 Equities

18. 18 2005 Exchange Fund Position Press Conference 19 January 2006