Cablegate: Hong Kong Market Report - Officials Encourage Banks To

DE RUEHHK #2129/01 3261113
R 211113Z NOV 08




E.O. 12958: N/A
SUBJECT: Hong Kong Market Report - Officials Encourage Banks to
Consider Social Responsibilities

1. Summary: Hong Kong Monetary Authority Chief Joseph Yam told Legco
members this morning that he would introduce two new measures to
encourage additional bank lending to SMEs in Hong Kong. Despite the
global financial turmoil, the HKMA managed to minimize its
investment losses. The HKMA controlled Exchange Fund has lost 5.8
percent this year, compared to losses of over 20 percent reported by
the Mandatory Provident Fund, the government-sponsored retirement
fund for Hong Kong employees. In response to HSBC's decision to lay
off 450 employees on Monday, Chief Executive Donald Tsang and
Financial Secretary John Tsang called on Hong Kong bankers to
consider their social responsibilities during times of economic
crisis. The HKMA intervened ten times this week to sell Hong Kong
dollars, allowing HIBOR to fall below two percent for three month
lending. The Hang Seng Index lost 6.5 percent this week, but was up
almost 3 percent in Friday trading. Weak volumes have encouraged
volatility in the market, with swings of over 1000 points becoming
commonplace. End Summary.

Pressure on Hong Kong Dollar Continues

2. The Hong Kong dollar remained wedged against the strong side of
its trading band all week at HKD 7.75/USD. The HKMA sold Hong Kong
dollars ten times this week, raising the aggregate balance in the
interbank market to a record high of over HKD 84 billion. HKMA
Chief Executive Joseph Yam speculated that the growing demand for
Hong Kong dollars is a result of investors unwinding long US dollar
positions and possible repatriation of funds by domestic
corporations. With the increasing supply of Hong Kong dollar
deposits, HIBOR for three-month and one-month lending fell below 2
percent and 1 percent respectively on Friday, while the overnight
rate dipped to just 0.25 percent.

HKMA Announces Two New Measures for SMEs

3. Yam told Legislative Council (Legco) Financial Affairs Panel
members Friday that HKMA will take a flexible approach to bank
capital adequacy ratios. This echoes statements Yam has been making
for several weeks, as he encourages banks to resume lending to small
and medium enterprises. Though the average capital adequacy ratio
of locally incorporated banks fell slightly from 14.2 percent by the
end of June to 13.8 percent at the end of September, Hong Kong's
banking sector remained well capitalized compared with the 8 percent
Basel II standard. Two weeks ago, Yam suggested to banks that the
HKMA would not look unfavorably on higher NPL ratios if banks were
increasing lending to SME borrowers.

4. HKMA also announced an agreement with the People's Bank of China
(PBOC) on expanding credits for Mainland branches or subsidiaries of
locally incorporated banks. Both HKMA and PBOC will accept
collateral from these banks if they apply for an increase in
liquidity. Yam told the Legco that he hopes this arrangement will
help Hong Kong's SMEs to apply for bank loans for their Mainland

Hong Kong Exchange Fund Investment Loses 5.8 percent

5. Yam also told the Legco that the HKMA-managed Exchange Fund has
lost 5.8 percent or HKD 83.3 billion (US$ 10.75 billion) in the
first three quarters of 2008. The majority of the Exchange Fund is
managed by a collection of private fund management companies, with a
small portion managed by the HKMA itself. The Exchange Fund lost
HKD 100.1 billion (US$ 12.9 billion) on its equities investments and
HKD 13.8 billion (US$ 1.8 billion) on foreign exchange investments.
But those losses were offset by a gain of HKD 30.6 billion (US$ 3.95
billion) from bond investments. Though still hoping that HKMA's
performance in 2008 would beat the market average, Yam advised Legco
members that additional losses in the fourth quarter are likely.

6. The annual performance of the Exchange Fund investment portfolio
has only a limited impact on the Hong Kong government budget, as the
Fund is committed to allocate a fixed amount of revenues to the
government based on the average yield in the past six years. With
record profits in recent years, the Exchange Fund will have to
perform badly over a period of several years to significantly affect
Hong Kong government revenues.

More Bank Layoffs

7. On Monday, November 17, local banking leader HSBC announced
plans to lay off 450 Hong Kong employees immediately from its retail
and investment banking departments, including some branch managers.
The pro-Beijing Wen Wei Po (Nov.18) editorialized that the
unprecedented move by HSBC reflects the need for commercial banks to
shift their business strategy away from high-leverage, high-risk
investments and return to their traditional lending businesses. Wen
Wei Po reported on Nov. 20 that Bank of China Hong Kong will also
cut 500 positions by the end of November. Bank of China Hong Kong

HONG KONG 00002129 002 OF 002

refused to comment. Bank of East Asia and Hang Seng Bank denied
that they would lay off workers.

CE promises No Cuts in Government Spending

8. CE Donald Tsang, in London for meetings with British Government
counterparts, told the press yesterday that the Hong Kong government
will not cut public spending. (Note: most economists expect Tsang
to announce an additional fiscal stimulus package in the near future
to prop up local consumption spending and reduce unemployment
pressure. End Note.) Tsang called on Hong Kong companies to
consider their social responsibilities during the economic downturn.
Donald Tsang noted that the impact of the financial crisis is
likely to last for some time; he advised Hong Kong people to prepare
for the worst while hoping for the best.

Hang Seng Up 3 percent On Friday, but Down 6.5 percent for the Week

9. The Hang Seng Index closed at 12659.20 today, up 2.93 percent or
360.64 points from Thursday. For the week, the Index lost 6.5
percent, or 883.46 points, from last Friday's close. The Index
opened 480 points lower in the morning, slipping to just 11,814 as
it tracked the drop in the Dow. But rumors that the Chinese
government would announce details of their RMB 4 trillion stimulus
package and the U.S. Congress would announce a program to support
the auto industry pushed the market up; it briefly topped 13,000,
before falling back slightly in late trading.

© Scoop Media

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