Cablegate: Hang Seng Unimpressed by Rescue Bill, Hkma Measures Push

VZCZCXRO6875
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #1833 2761028
ZNR UUUUU ZZH
R 021028Z OCT 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 5936
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS HONG KONG 001833

SIPDIS

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

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: Hang Seng Unimpressed by Rescue Bill, HKMA Measures Push
HIBOR Down

REFS: A) HONG KONG 1823, B) HONG KONG 1801

1. Summary: Though the U.S. Senate approved the market rescue bill
before the opening of the Hong Kong Stock Exchange trading day,
local investors remained cautious. The Hang Seng Index failed to
make a strong rebound. The five new measures implemented by Hong
Kong Monetary Authority (ref A) to increase the market liquidity
pushed the Hong Kong Interbank Overnight Rate (HIBOR) below 2
percent but the one month rate still topped 4 percent. Share prices
of Hang Seng Bank, a wholly-owned subsidiary of HSBC, plunged 9
percent today as the bank admitted its exposure to Washington Mutual
Bank's senior debt but refused to disclose the exact amount.

Market Rescue Bill Passage Expected

2. Hong Kong investors learned of the U.S. Senate's overwhelming
passage of the market rescue bill prior to the opening of the Hong
Kong Stock Exchange. But the Senate approval, which was widely
expected, did not lead to a strong rebound for the Hang Seng Index.
The Hang Seng Index opened 140 points lower than Tuesday's close
(Wednesday was a national holiday) and lost as much as 385 points
before rebounding. Increased buying in the late afternoon spurred
investors to speculate on further gains. At market closing, the
Hang Seng Index was up 1.08 percent or 194.90 points, closing at
18211.11. Daily trade totaled HKD 70 billion. Market gossip
attributed the increased activity to investors seeking regional
plays. With China's market's closed for one week during the Chinese
National Day, Hong Kong is the next best option.

Hang Seng Bank down 9 percent on WaMu exposure

3. Hang Seng Bank, a wholly-owned subsidiary of HSBC, surprised the
market today by admitting that it had some exposure to Washington
Mutual Bank securities. Hang Seng Bank CEO Raymond Or had recently
reassured investors that the Bank did not invest in structured
products as he found them "too sophisticated." Nervous investors
dumped Hang Seng stock when the Bank declined to disclose the exact
amount of its exposure. A bank spokesman told English-language
newspaper The Standard (October 2) that "if deemed necessary, we
will make appropriate disclosures in accordance with regulatory
requirements." Hang Seng Bank closed at HKD 131.60, down 8.8
percent. Hong Kong Monetary Authority (HKMA) officials told the
press that the Hong Kong banking sector's total exposure to
Washington Mutual Bank was about 0.05 percent of the total assets.

HIBOR softens but one and two month rates top 4 percent

4. HKMA's five new measures to increase liquidity for the interbank
market (Ref A) successfully checked the HIBOR overnight rate from
rising above two percent. At 4 pm, HIBOR, as quoted by Hang Seng
bank, was 1.75 percent for overnight, 3.00 percent for one-week,
3.50 percent for 2-week, 4.28 percent for one-month, 4.05 percent
for two-month, 3.80 percent for three-month, and 3.65 percent for
six-month borrowing. Market observers speculated that the one-month
and two month rates might ease as foreign banks, short of Hong Kong
dollars, begin to utilize the HKMA discount window. Citibank
macroeconomist Joe Lo told the press that the HKMA measures had the
potential to weaken the Hong Kong dollar exchange rate since foreign
banks in Hong Kong might no longer need to sell US dollars into the
spot market to boost Hong Kong dollar liquidity.

HKMA receives 3500 Lehman Minibond complaints

5. Secretary for Financial Services and the Treasury K.C. Chan told
the press October 2 that the Association of Banks in Hong Kong will
establish a special task force to resolve investor complaints
surrounding the Lehman "minibonds." As of October 1, the Hong Kong
Monetary Authority had received 3,500 complaints from investors
alleging they were deceived or misled about the risk profile of the
Lehman-issued "minibonds." At a meeting with Lehman "minibond"
distributors, brokers and trustees, KC Chan urged the banks to
devote additional resources to handle the complaints. Several media
outlets reported that some distributor banks, including DBS and Dah
Sing, have begun to negotiate a settlement with purchasers of the
Lehman products.
Donovan

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