Cablegate: Hkma Launches Strategic Portfolio

VZCZCXRO6629
RR RUEHCN RUEHGH RUEHVC
DE RUEHHK #2827/01 3190516
ZNR UUUUU ZZH
R 150516Z NOV 07
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 3417
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 002827

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR LOWERY, DOHNER,
HARSAAGER, WINTON, YANG, AND CUSHMAN, NSC FOR TONG AND
WILDER

E.O. 12958: N/A
TAGS: ECON EFIN HK
SUBJECT: HKMA LAUNCHES STRATEGIC PORTFOLIO

1. (U) Summary: Hong Kong Chief Executive Donald Tsang, in
his annual policy speech October 10, announced that one of
his priorities during his current term would be to review the
government's role in the management of its share assets with
an eye toward achieving higher returns and improving
governance. On the heels of the Hong Kong government's
surprise acquisition of 5.88% of the Hong Kong stock
exchange, events suggest Hong Kong is moving to establish its
own small but actively managed sovereign wealth fund that may
target strategic, rather than profit maximizing, investments.
Hong Kong Monetary Authority (HKMA) senior officials confirm
the HKMA will begin actively managing a small portion of its
reserve fund, with investments focusing on alternative
investment vehicles. End Summary.

2. (SBU) Comment: HKMA officials have been skeptical of plans
for the International Monetary Fund to issue best practices
guidelines for sovereign wealth funds, arguing such funds are
insignificant in global financial flows when compared to
non-transparent and "under-regulated" hedge funds. Although
HKMA has a very strong record of transparency and openness,
recent moves suggest the government is beginning to see
strategic value in closer management of its reserves and may
be keen to avoid IMF-proposed guidelines. While we do not
expect Hong Kong to be a large strategic investor abroad,
HKMA investments in local entities may warrant additional
scrutiny. End Comment.

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HK's Closer Integration with China
==================================

3. (U) CE Tsang's annual policy speech outlined several
financial policies to strengthen financial market linkages
and promote the government's goal of closer integration with
the Mainland economy, including: promoting the Qualified
Domestic Institutional Investor (QDII) scheme, encouraging
renminbi (RMB) denominated transactions, improving
cooperation with Mainland financial authorities, and
development of an Islamic bond market. In addition, Tsang
vowed to enhance the efficiency of management of government
assets to achieve higher returns and improve governance.

4. (U) This vow, combined with the recent purchase by the
HKG of 5.88 percent of the Hong Kong Exchanges and Clearing
Limited (HKEx), signifies a new investment posture for the
HKMA. Previously, HKMA reserves (known as the Exchange Fund)
had been divided into two portfolios: the Backing Portfolio,
required by law to provide full US-dollar backing for the
Hong Kong monetary base; and the Investment Portfolio, which
was in turn divided into fixed assets, primarily U.S.
Treasuries, and equities. The equity portion of the
portfolio (approximately 23% of the total Exchange Fund) is
contracted out to a number of professional fund managers to
invest globally according to guidance provided by the
Exchange Fund Advisory Committee (EFAC).

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HKMA's New Strategic Portfolio
==============================

5. (U) HKMA Chief Executive Joseph Yam announced to the
Legislative Council on November 8 that HKMA had created a new
third portfolio in the Exchange Fund, called the Strategic
Portfolio. The Strategic Portfolio currently holds only
shares of HKEx, purchased in previous years for investment
purposes and recently for strategic purposes by the Financial
Secretary using the Exchange Fund. Profits or losses from

SIPDIS
the Strategic Portfolio will reportedly not be included in
HKMA's normal accounting reports.

6. (SBU) In addition, HKMA Executive Director for Research
Hans Genburg told Consulate officials that the HKMA Board has
agreed to set aside a small part of the Exchange Fund that
will be managed independently of the main body of the fund.
This special fund is envisioned to not exceed 5% of total
reserves. This special fund will be managed by the reserve
management department and will be invested in alternative
investment vehicles, much like other Sovereign Wealth Funds,
said Genburg.

7. (U) Through nine months of 2007, the Exchange Fund has
already made record profits of over HKD 114 billion (US$14.7
billion), easily surpassing the record of HKD 103.8 billion
in 1999 and HKD 103.7 billion in 2006. Yam cautioned that
the year was not yet over and given the high degree of

HONG KONG 00002827 002 OF 002

volatility in the Hong Kong share market, there was room for
backsliding. Still, with 23% of the Exchange Fund invested
in global equities, the prospects for a record year are good,
even if Hong Kong stocks fall dramatically in the fourth
quarter. Hong Kong's total reserves stood at US$ 140.85
billion at the end of September, including HKD 377.7 billion
(US$ 48.75 billion) in fiscal reserves.
Cunningham

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