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Cablegate: Tsang Policy Address Warns of Tough Times Ahead, Hang Seng

VZCZCXRO6077
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #1909 2891058
ZNR UUUUU ZZH
R 151058Z OCT 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 6024
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS HONG KONG 001909

SIPDIS

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

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: Tsang Policy Address Warns of Tough Times Ahead, Hang Seng
Falls 5 percent

REFS: A) HONG KONG 1886, B) HONG KONG 1875

1. Summary: After a strong rebound on Monday and Tuesday, the Hang
Seng Index slipped on Wednesday to close at 15988.30, down 834
points or 4.96 percent on the day. HIBOR fell slightly, but
remained high. The British government's announcement that it would
inject capital into the banking sector appeared to improve market
sentiment earlier in the week, but a similar announcement by the
U.S. does not appear to have been enough to sustain the gains of
recent days. In his annual Policy Address to the Legislative
Council (LegCo) today, Hong Kong Chief Executive Donald Tsang warned
of tough times ahead, but promised increased fiscal measures to help
Hong Kong see its way through the financial turbulence. Financial
Secretary John Tsang continued to warn of impending economic turmoil
and an economic recession in 2009. Financial Secretary Tsang and
HKMA Chief Executive Joseph Yam jointly announced late Tuesday that
the Hong Kong government would immediately guarantee all bank
deposits and provide supplementary capital to banks as necessary.
These two new measures would be effective until the end of 2010.
End Summary.

CE Tsang's Policy Address Promises New Task Forces
---------- ------ ------- -------- --- ---- ------

2. Hong Kong Chief Executive Donald Tsang's annual Policy Address
to the Legislative Council focused on steps the government would
take to protect the economy from the worst effects of the global
financial crisis. Tsang said he would chair a new task force to
monitor and assess the impacts of the financial "tsunami" on local
and global markets. Members will include top government officials,
financial experts, economists and representatives of major
industries in Hong Kong. Tsang told the LegCo that the destructive
force of the current financial crisis is greater than the 1997 Asian
Financial Crisis. In the wake of fears that AIG subsidiary AIA
might come under pressure, Tsang also proposed the establishment an
independent Insurance Authority to improve supervision of the
insurance industry. Hong Kong is one of the only economies in the
region that does not currently have an independent insurance
regulator.

3. Tsang also promised government action on the Competition Bill
and Minimum Wage proposals during the coming legislative session.
He announced that his Labor and Welfare Bureau will establish a
minimum wage commission to study the appropriate minimum wage level
that could apply across all industries. Tsang called on the Hong
Kong people to stay calm in spite of global financial volatility.
He promised that the government would intervene if the market fails,
taking remedial measures when the market is unable to resolve
disputes between "big business and ordinary citizens." Observers
took his remarks to mean the government would continue to pressure
banks to resolve claims surrounding Lehman minibonds.

Hang Seng Not Impressed
---- ---- --- ---------

4. Investors were not encouraged by Tsang's address. The Hang Seng
Index lost 4.96 percent or 834.58 points on Wednesday, closing at
15998.30 with a daily trade of HKD 49 billion. The market had
rebounded strongly on Monday and Tuesday after British Prime
Minister Gordon Brown announced plans for the UK government to
purchase stakes in British banks. The Hang Seng gained 10 percent
on Monday and 3 percent on Tuesday, when markets heard that the U.S.
would unveil a similar plan to recapitalize banks. HIBOR quoted by
Hang Seng Bank at 5:13 pm was 2 percent for overnight, 3.0 percent
for 1W, 3.5 percent for 2W, 4.5 percent for 1M, 4.35 percent for 3M
and 4.05 percent for 6M.

Hong Kong Follows UK Lead, Guarantees Deposits
---- ---- ------- -- ----- ---------- --------

5. Late on Tuesday, HKMA Chief Executive Joseph Yam and Financial
Secretary John Tsang announced that the Hong Kong Government would
use the HKMA Exchange Fund to immediately guarantee all deposits in
the banking system and would provide capital to banks as needed,
through 2010. Hong Kong previously had a deposit insurance scheme
capped at HKD 100,000 (apx. US$12,800); LegCo members have recently
called for that limit to be increased. Hong Kong banks hold HKD 6
trillion (US$ 770 billion) in deposits, well over the Exchange Fund
assets of HKD 1.6 trillion (US$ 200 billion). HKMA's Yam told the
press that the HKMA was following the lead of other governments not
because of concerns about banking system health, but to avoid
putting Hong Kong at a competitive disadvantage vis-`-vis other
economies that have provided similar guarantees. Yam reaffirmed
that Hong Kong banks are healthy and well capitalized and predicted
that the Exchange Fund resources would not be tapped.
Marut

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