Hong Kong's Exchange Fund, which is used to back the Hong Kong dollar, posted an investment income of HK$26.1 billion in the first quarter, a year-on-year drop of 59.78 percent.
The Hong Kong Monetary Authority said yesterday it was the worst performance in five quarters.
The figure compared with a HK$64.9 billion investment gain in the same period a year earlier, and investment income of HK$66 billion in the fourth quarter of last year.
In 2017, the Exchange Fund saw its investment income hit an adjusted record high HK$264 billion.
Income from Hong Kong equities was HK$1.7 billion in the first quarter, slumping 88.11 percent compared with a year before, while other equities saw a loss of HK$7.4 billion compared to an income of HK$24.5 billion in the same period last year. It gained HK$5.5 billion from bonds and HK$26.3 billion for forex trading.
"Last year we achieved an unprecedented high level of profits but this year we are facing uncertainties in the financial market," HKMA chief executive Norman Chan told reporters, citing interest rates rising faster than expected, intensifying trade conflict between China and the United States, and tension in the Middle East.
The HKMA is the key manager of the Exchange Fund, which is under the control of the financial secretary and invests in equities, bonds, foreign exchange and other securities and assets. Commenting on the recent capital outflow, Chan said a widening spread between the Hong Kong dollar and US dollar's interest rates attracted arbitrage.
"Capital flowing out from the Hong Kong dollar will allow Hong Kong dollar interest rates to eventually normalize like the US dollar," Chan said.
Yesterday morning the Hong Kong dollar hit 7.85, the weakest level of the trading band.
Chan said the HKMA has confidence to maintain a stable Hong Kong dollar to face the massive fund flows.
Since April 12, the authority has bought HK$51 billion, which is a normal action under the linked exchange rate system, said Chan, adding that the HKMA will continue to buy the local currency due to the weak Hong Kong dollar.
The Hong Kong dollar is pegged at 7.8 to the US dollar but can trade between 7.75 and 7.85. The authority is obliged to intervene when the Hong Kong dollar hits 7.75 or 7.85 to keep the band intact.
The money market rates should mirror those of its US counterpart, but the gap has now widened to around one percent since the Federal Reserve started raising interest rates from ultra-low levels adopted during the 2008 financial crisis.
Hong Kong is expected to launch its first public annuity scheme in July, and the total amount will be HK$10 billion. Chan said it will consider increasing the amount if the annuity is oversubscribed.