Cablegate: Hang Seng Recovers, but Hibor Remains High

VZCZCXRO2089
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #1875 2831115
ZNR UUUUU ZZH
R 091115Z OCT 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 5985
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS HONG KONG 001875

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 Recovers, but HIBOR remains High

REFS: A) HONG KONG 1866, B) HONG KONG 1833

1. Summary: The Hang Seng bounced back by 3.3 percent in response
to the coordinated action by major central banks. Hong Kong
Financial Secretary John Tseng warned, however, that the financial
crisis had yet to hit Hong Kong. Despite central bank easing,
interbank liquidity in Hong Kong remained tight. Banks are
reluctant to approach the HKMA Discount Window for fear of looking
weak. Higher rates are likely to affect property sales, which are
already sliding. End Summary.

2. The Hang Seng Index rebounded 3.3 percent on October 9, gaining
511.51 points to close at 15,943.24, but failed to regain the 16,000
bench mark. Analysts credited the coordinated actions of major
central banks around the world to lower interest rates. Total
volume was HKD 61 billion, down HKD 17 billion from yesterday.

FS Tsang Predicts the Worst is Yet to Come

3. In response to the coordinated move by the U.S. Federal Reserve,
the EU Central Bank, the Bank of England and central banks in
Canada, Switzerland and Sweden to cut interest rates on Wednesday,
Financial Secretary John Tsang called upon the Hong Kong people to
unite to confront the financial turmoil, which he said has yet to
truly arrive in Hong Kong.

4. (Comment: Given the collapse of the Hang Seng Index over the past
several weeks, increasingly tightening interbank credit, the run on
the Bank of East Asia, and the sharp public controversy over Lehman
minibonds, Tsang's remarks lead us to question what he expects
financial turmoil will look like when it arrives. End Comment.)

5. HKMA Chief Executive Joseph Yam told the press the U.S. Federal
Reserve's rate cut would not immediately affect global financial
markets, as the value of financial assets are no longer sensitive to
changes in interest rates. Yam noted that in the current situation,
lower interest rates are unlikely to be sufficient to spur investors
to purchase financial assets.

Interbank Rates Remain High, Banks Fear to Look Weak

6. Interbank liquidity in Hong Kong remained tight, despite the
Hong Kong Monetary Authority's move to reduce its Base Rate from 2.5
percent to 2.0 percent. The HKMA move followed the U.S. Federal
Reserve's 50 basis point cut on Wednesday, October 8. HIBOR quoted
by Hang Seng Bank at 5:03 pm was 1.75 percent for overnight, down
from 2.5 percent on Wednesday; but other rates moved sharply during
the Thursday business day. 1W rates at close of business increased
to 4.25 percent from 4.0 percent at mid-day, 2W jumped to 4.75
percent from 4.4 percent, 1M went to 5.3 percent from 4.95 percent,
and 3M rates increased to 4.5 percent from 4.4 percent.

7. As HIBOR remained high, large commercial banks in Hong Kong,
including HSBC, Hang Seng Bank, Bank of China Hong Kong, and
Standard Chartered Bank, did not lower their prime borrowing rates.
HSBC, Hang Seng Bank and Bank of China Hong Kong announced this
afternoon that their prime rates would remain unchanged at 5.25
percent; Standard Chartered prime rates remained 5.50 percent.

8. ICBC Asia Director Stanley Wong explained that bankers in Hong
Kong are reluctant to borrow money from HKMA through the Discount
Window, in spite of lower longer-term rates, for fear of appearing
to be in need of capital. In the current market, driven by rumor
and innuendo, approaching the HKMA could damage a bank's credibility
and result in a loss of public confidence.

Property Market Poised to Slip Further

9. Wong added that the commercial bankers will find it difficult to
finance mortgage loans if one to three month HIBOR remains above 4
percent. Commercial banks in Hong Kong calculate interest rates on
mortgage loans as prime rate minus 2.25 or 2.50 percent. Current
mortgage rates in Hong Kong range from 3.00-3.25 percent. If HIBOR
remains at these levels, banks will be forced to increase mortgage
rates in an already sliding property market.
Donovan

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