Exchange Fund Investment Limited

The Exchange Fund Investment Limited (EFIL) manages the share portfolio acquired by the Exchange Fund during the market intervention in August 1998 together with the Hong Kong equity portfolio transferred from the Land Fund to the Exchange Fund in November 1998. The Exchange Fund's investment benchmark provides for 5 per cent of the Exchange Fund to be invested in Hong Kong equities. This investment portfolio is managed by the EFIL through external managers. The remainder of the Exchange Fund's Hong Kong equity portfolio is being disposed of.

During the year, Hong Kong equities from the Exchange Fund continued to be sold to the Tracker Fund of Hong Kong (TraHK) under the Tap Facility for TraHK. TraHK is an Exchange Traded Index Fund listed and traded on the Stock Exchange of Hong Kong. TraHK's investment objective is to track the Hang Seng Index by holding a portfolio of shares substantially replicating the composition and weighting of the Hang Seng Index. Units in TraHK can be created or redeemed in kind by delivery or receipt of baskets of Hang Seng Index Shares. TraHK units can also be created for cash using the Tap Facility which allows the Manager of TraHK to use investors' cash to acquire Hang Seng Index Shares from the Exchange Fund to create TraHK units for delivery to the investors. This mechanism enables the Exchange Fund to continue passively selling more shares into TraHK in response to investor demand. A quarterly limit is placed on the amount of shares sold through the Tap Facility.

The value of shares sold via the Tap Facility during the year was $35.1 billion. By December 31, 2001, therefore, the Exchange Fund had disposed of about $118.4 billion of shares via the initial offer of TraHK and the subsequent Tap Facility.

On November 12, 2001, the second tranche of TraHK Loyalty Bonus Units was allocated to 127 813 qualified investors who were still holding their original TraHK units on that date. (The first tranche of Loyalty Bonus Units was allocated on November 13, 2000.) Loyalty Bonus Units were designed as an additional incentive for Hong Kong identity card holders who continuously held their original TraHK units for one and two years. The EFIL continues to consider further opportunities for the disposal of shares while bearing in mind its mandate of minimising disruption to the market.