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Cablegate: Beijing Increases Stakes in Mainland Banks, Hang Seng

VZCZCXRO6684
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #1747 2631042
ZNR UUUUU ZZH
R 191042Z SEP 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 5833
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS HONG KONG 001747

SIPDIS

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

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: BEIJING INCREASES STAKES IN MAINLAND BANKS, HANG SENG
RISES SHARPLY

REF: A. HONG KONG 1746; B. HONG KONG 1728; C. HONG KONG 1737


1. Summary: Hong Kong's Hang Seng Index (HIS) closed up 9.6
percent on September 19 and ended the week down only 25 points
at 19,328. Market gains were heavily influenced by Beijing's
publicly announced purchase of shares in three large state-owned
banks. Short-term interbank loan rates eased and market
liquidity improved. HKG officials urged investors to calmly
assess market conditions and remember lessons learned from the
Asia financial crisis ten years ago. Analysts expected more
market stimulus measures from Beijing, and they reacted
positively to Secretary Paulson's September 19 meeting with U.S.
lawmakers to discuss the USG's next steps in dealing with
deflating property prices. End summary.

Central Government Stimulus
---------------------------

2. Hong Kong's Hang Seng Index (HSI) opened 7 percent higher on
September 19 and closed up 9.6 percent at 19,328, following the
Central Government's announcement that it would increase its
holdings in three state-owned banks -- Industrial and Commercial
Bank of China (ICBC), Bank of China (BOC), and China
Construction Bank (CCB) -- and cut share trading taxes. The
three banks rose 16-17 percent on September 19, as the HSI's
trading volume rose to US$ 16 billion (HKD 125 billion; double
the average of the past few months).

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3. Short term HIBOR rates eased and interbank market liquidity
improved, compared with the previous trading day. As of 1753
HRS local time on September 19, the overnight HIBOR rate fell a
full point to 2.5 percent, while the one week and one month
rates declined to 3.25 percent and 3.5 percent, respectively.

HKG Officials Continue to Calm Investors
----------------------------------------

4. Financial Secretary John Tsang reiterated that the Hong Kong
government has no plans to intervene in the stock market, and he
told the media on September 19 that he would brief Hong Kong's
Legislative Council members that evening about current market
conditions. He refused to comment about the Central
Government's new market stimulus measures. Secretary for
Financial Services and the Treasury K.C. Chan stated that market
sentiment would not fundamentally improve, until the USG
introduces "real measures" to save its financial market. Chief
Executive Donald Tsang said local investors should remain calm
and use the lessons learned from the Asian financial turmoil ten
years ago. Hong Kong Monetary Authority Chief Executive Joseph
Yam warned investors to take note of the change in the global
economic climate, saying three of the five top American
investment banks were eliminated by a "Financial Tsunami." See
reftels A and B for Post reporting about recent private
conversations with senior HKG officials about the financial
crisis, including a conversation on September 19 with Joseph
Yam.

More Stimulus Measures From Mainland Expected
---------------------------------------------

5. JP Morgan China Equities Head Jing Ulrich told pro-Beijing
Chinese language newspaper Wen Wei Po on September 19 that she
expects the Central Government to launch more measures to boost
the stock market, such as liberalizing stock trading
regulations. Respected free-lance local economist Andy Xie
(formerly of Morgan Stanley) dismissed the Central Government's
share purchases of the Mainland banks as a temporary expedient
that will, at most, "prevent Mainland stocks from falling too
far and too fast." Xie told the Hong Kong Commercial Daily on
September 19 that Beijing has been devising means to "rescue"
the market, but he said the measures would fail as long as the
global economic environment remains unfavorable.

Bank of East Asia Shares Unscathed
----------------------------------

6. Shares of Bank of East Asia (BEA) rose 12 percent on
September 19, as trading resumed in its shares. Trading of BEA
shares were suspended on September 18, after the company
disclosed unauthorized manipulation in the valuation of its
equity derivatives and restated its earnings (ref C).

© Scoop Media

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