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Cablegate: Lehman Trading Operations Suspended in Hong Kong;

VZCZCXRO3758
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHVC
DE RUEHHK #1719/01 2601115
ZNR UUUUU ZZH
R 161115Z SEP 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 5794
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 001719

SENSITIVE
SIPDIS

STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: LEHMAN TRADING OPERATIONS SUSPENDED IN HONG KONG;
ECONOMISTS LOOK FOR MAINLAND STIMULUS PACKAGE

1. (SBU) Summary: Hong Kong's Hang Seng Index (HSI) closed
down 5.4 percent on September 16, mirroring losses in other
major global markets in the wake of Lehman Brother's
bankruptcy. HK's market regulatory authorities suspended
Lehman's stock and option trading licenses and restricted
financial transactions by Lehman's operating subsidiaries, as
the company's approximately 1,000 Hong Kong-based employees
faced an uncertain future. The HKG's three top finance
officials sought to reassure investors, while local
economists told EconOff that the global economic crisis will
deepen. The economists believe the PRC government will use
its substantial financial reserves to cut taxes and boost
government spending, as a means to sustain a high
single-digit GDP growth rate. End summary.

=============
Market Update
=============

2. (U) Hong Kong's Hang Seng Index (HSI) lost as much as
1,333 points (6.9 percent) on September 16 -- a level last
seen in October 2006 -- before late buying enabled the market
to inch upward off its lows and close down 5.4 percent.
HIBOR short term loan rates rose sharply from the previous
trading day, reflecting market uncertainty. As quoted by
Hang Seng Bank at 1754 HRS local time, the overnight and
one-week rates both increased to 3.5 percent and exceeded the
longer term HIBOR rates for the first time in recent memory.
One-month, three-month and six-month HIBOR rates increased to
3.0 percent, 2.25 percent and 2.25 percent, respectively.

==========================================
Lehman Brothers Trading Licences Suspended
==========================================

3. (U) Following Lehman's Chapter 11 bankruptcy filing in New
York, the Hong Kong Stock Exchange (HKSE) suspended Lehman's
trading licenses in both the stock and options markets as of
September 16, and disallowed Lehman's access to the HKSE's
automated trading systems for shares and options. Hong
Kong's Securities and Futures Commission issued "restriction
notices" on financial transactions by Lehman's four major
operating subsidiaries in Hong Kong, in order to preserve the
assets of the companies and to protect the interest of the
companies' clients and the investing public. (Note: The four
entities are Lehman Brothers Asia Limited, Lehman Brothers
Securities Asia Limited, Lehman Brothers Futures Asia
Limited, and Lehman Brothers Asset Management Asia Limited.
End note.)

4. (SBU) Lehman's SVP of Corporate Communications in HK,
Matthew Russell, told EconOff on September 16 that Lehman
employs approximately 1,000 individuals in Hong Kong.
Lehman's HK staff is "greatly disappointed," he said. "We
all expected a different outcome, and we've only had a short
timeframe in which to absorb the impact." Lehman's staff was
told on September 16 that their salaries for September would
be fully paid, and that their workdays would be cut in half
until further notice.

===========================================
Soothing Words From Top Hong Kong Officials
===========================================

5. (U) Hong Kong's top three officials in charge of banking
and financial affairs -- Financial Secretary John Tsang, Hong
Kong Monetary Authority (HKMA) Chief Executive Joseph Yam,
and Secretary for Financial Services and the Treasury K. C.
Chan -- talked to the press in the morning of September 16,
in an attempt to calm nervous investors. Tsang said, "The
Hong Kong government has closely monitored the situation of
Lehman Brothers and will ensure that the operations of the
Hong Kong stock market are carried out in an orderly manner."
K.C. Chan said, "Hong Kong has a good market regulatory
system, and we have confidence that the regulatory
organizations will guarantee that the stock market will
conduct today's business smoothly."

6. (U) Meanwhile, Yam noted the obvious, telling local press
that the bankruptcy of Lehman Brothers would have "negative
impacts" on Hong Kong, and would result in market corrections
here. Yam said he foresees stability in HIBOR and the pegged
exchange rate of Hong Kong's dollar to the U.S. dollar. Yam
stated that Hong Kong would not have liquidity problems,
noting that the HKMA could provide funds to bolster the
market, if necessary. He described the U.S. markets as

HONG KONG 00001719 002 OF 002


experiencing a "serious financial crisis," and he said
developments related to Lehman Brothers in the next few days
would be crucial. He made no reference to AIG's financial
woes.

==========================
China's Benchmark Rate Cut
==========================

7. (U) Over the weekend, the PRC government announced a 27
basis point cut in its benchmark lending rate, announced as a
means to assist small and medium-sized enterprises. Hong
Kong-based market analysts agreed that the rate cut -- the
first since 2002 -- was not designed to boost declining stock
market shares. JP Morgan's Chief Economist Frank Gong
interpreted China's rate cuts as a significant change in
policy. He reiterated his opinion that a series of market
stimulus measures would be launched soon by Beijing.

======================================
Global "Armageddon Base-Case" Scenario
======================================

8. (SBU) Anthony Lok, Head of Research at Bank of China in
Hong Kong, told EconOff on September 12 that an "Armageddon
base-case scenario" is the "most likely outcome" for the
global economy over the next 12-18 months. Lok foresees the
global economy entering a severe recession that will be
exacerbated by USG actions to prop up its financial markets
by "printing money, bailing out financial institutions, and
giving tax breaks the government cannot afford." He believes
this will weaken the U.S. dollar and create upward pressure
on commodity prices and inflation, thereby forcing the
Federal Reserve and European Central Bank to raise interest
rates as residential home prices continue to slide during the
envisioned recession. In contrast to Lok,s pessimistic
outlook for the Western European and U.S. economies, he told
EconOff that the Hong Kong market will be somewhat shielded
from damage by its ever-closer economic relationship with the
Mainland.

=========================================
HK Buffered by Integration with Mainland?
=========================================

9. (SBU) According to Lok, over 50 percent of the Hang Seng
Index,s market capitalization is comprised of companies
headquartered in the Mainland, and over 60 percent of HSI
corporate revenues are sourced from the Mainland. Lok said
falling oil and food prices in the Mainland have stemmed the
PRC government,s immediate inflation concerns. He expects
the Mainland to be less severely affected than Western
markets by the coming global downturn, due to the PRC,s
ability to use its substantial financial reserves for tax
cuts and increased government spending.

10. (SBU) Lok,s comments were echoed by Grace Ng, Chief
Economist for Greater China at JPMorgan in Hong Kong. She
told EconOff on September 12 that the PRC government "is
looking at 1998 as an example of the benefits of fiscal
stimulus spending." Her 9.6 percent Mainland GDP growth
forecast for 2009 assumes US$21.9 billion (150 billion
renminbi) of tax cuts and US$36.5 billion (250 billion
renminbi) of incremental PRC government spending on
"infrastructure in major cities, and soft infrastructure
projects such as health and human services." She said the
PRC government views instability in foreign markets as a
threat to national security, and that Beijing will "use its
surpluses to boost internal demand, if we see a global
recession."
DONOVAN

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