Cablegate: Hkg Looks to Integrate Hong Kong, Mainland Stock

VZCZCXRO7147
RR RUEHCN RUEHGH RUEHVC
DE RUEHHK #2391/01 2560932
ZNR UUUUU ZZH
R 130932Z SEP 07
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 2912
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 002391

SIPDIS

SIPDIS

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

E.O. 12958: N/A
TAGS: ECON EFIN EINV HK CH
SUBJECT: HKG LOOKS TO INTEGRATE HONG KONG, MAINLAND STOCK
EXCHANGES

REF: A. HONG KONG 2183
B. HONG KONG 2263

1. Summary: The Hong Kong Government (HKG) announced late
September 7 that it had acquired additional shares in the
Hong Kong Stock Exchange (HKEx) through the Hong Kong
Exchange Fund, sufficient to increase its holdings to 5.88%
of total shares. Financial Secretary John Tsang said the
acquisition of additional shares indicated the government's
long-term confidence in the HKEx and support for Hong Kong's
continued development as an international financial center.
Tsang also suggested that the larger HKG stake in the HKEx

SIPDIS
would facilitate closer links with Mainland stock exchanges,
including a possible share swap between the Hong Kong and
Shanghai exchanges. Local analysts and an independent HKEx
Director criticized the purchase, suggesting that the HKG's
increased stake could negatively impact HKEx's independence.
End Summary.

2. The Office of the Hong Kong Financial Secretary announced
late September 7 that the government-administered Hong Kong
Exchange Fund had acquired 5.88% of the HKEx total shares.
Investments in excess of 5% must be notified to the
government (in this case, an easy proposition) and the
public. Local press reports that the Exchange Fund spent HKD
2.4 billion (USD 312.8 million) on September 7 to increase
its stake from 2.5% to 5.88%, in the process driving the
price of HKEx shares to an all-time high of HKD 158 per
share. (Note: the Hong Kong Exchange Fund was established in
1935 to back the value of Hong Kong currency. In 1978 the
government began placing fiscal reserves in the Fund and in
1998 the Fund began to actively manage these reserves. The
Exchange Fund is managed by the Hong Kong Monetary Authority.
End Note.)

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HKG Move to Demonstrate Confidence Inspires Doubts
============================================= =====

3. Financial Secretary (FS) John Tsang, in a September 7
press release, said the acquisition would demonstrate the
government's long-term confidence in the HKEx and support for
the maintenance of Hong Kong as an international financial
center. He added that the purchase would allow the HKG to
contribute as a shareholder to the promotion of HKEx's
strategic development. The government's move was criticized
by local observers and one independent Director of the HKEx
Board. On September 10, a widely circulated Citigroup report
questioned why the government waited to disclose its interest
in increasing its holdings of HKEx and questioned the
independence of the government-appointed HKEx Chairman,
Ronald Arculli.

4. Independent HKEx Director David Webb challenged the
purchase as intervention in the Hong Kong market. He added
that although the HKG ultimately disclosed its purchase of
the shares, there was no guarantee that it would disclose
future purchases in a timely manner. The HKG currently
controls the board of the HKEx; shareholders are allowed to
elect only 6 of the 13 directors. Even without the increased
stake, "the Hong Kong Government ultimately gets what it
wants in the HKEx Boardroom," said Webb. On September 10,
Financial Secretary Tsang rejected the accusation that the
HKG was intervening inappropriately in the market through the
Exchange Fund and took full responsibility for the decision
to increase the government's stake in the HKEx.

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Promoting Integration with Mainland Exchanges
=============================================

5. In a speech at the Hong Kong Foreign Correspondents Club
September 12, Tsang said the HKG increased its shareholding
in order to promote the exchange in a "more organized manner,
and one more consistent with the PRC's 11th Five Year Plan."
He noted his intention to find ways to further integrate the
Hong Kong and Mainland share markets, including through
government-to-government cooperation, exchange-to-exchange
and shareholder-to-shareholder cooperation.
Government-to-government cooperation is already taking place
through the Qualified Domestic Institutional Investor (QDII)
scheme, the development of RMB-denominated financial assets
for sale in Hong Kong, and the recent announcement that
Mainland individual investors would be allowed to invest
directly in Hong Kong equities (the through-train scheme).

HONG KONG 00002391 002 OF 002

6. On the exchange level, Tsang offered to do more to
promote the integration of the Hong Kong and Mainland share
markets, noting the current practice by some Chinese
companies of dual-listing A shares in Shanghai and H shares
in Hong Kong. He added that information sharing between the
Mainland and Hong Kong exchanges would increase. At the
shareholder level, Tsang said that a greater HKG stake in
HKEx would allow greater flexibility in dealing with future
arrangements between the HKEx and Mainland bourses,
specifically raising the possibility of a share swap between
HKEx and the Shanghai exchange as a means of further
integrating Hong Kong and Mainland exchange operations.

7. In response to questions about why the HKG had not
disclosed its plan earlier to purchase an additional stake in
the HKEx and why it chose to do so now when prices were at
their peak, Tsang noted the government had been purchasing
shares for several years and had only made the announcement
when they had exceeded the government-mandated 5% cap
(effectively doubling their holdings) requiring public
notification. In fact, he said, the average purchase price
was far below the HKEx peak and would prove to be a bargain
for the government.
Cunningham

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