VZCZCXRO2603
RR RUEHCN RUEHGH RUEHVC
DE RUEHHK #2807/01 3130853
ZNR UUUUU ZZH
R 090853Z NOV 07
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 3397
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 02 HONG KONG 002807
SIPDIS
SIPDIS
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR LOWERY, DOHNER,
HARSAAGER, WINTON, YANG, AND CUSHMAN, NSC FOR TONG AND
WILDER
E.O. 12958: N/A
TAGS: ECON EFIN HK CH
SUBJECT: PREMIER WEN TOPS ALIBABA AS HK STOCK EXCHANGE
REMAINS VOLATILE
REF: HONG KONG 2742
1. Summary: Comments by Chinese Premier Wen Jiabao on
preconditions for Chinese investors to purchase individual
Hong Kong stocks drove the benchmark Hang Seng index down
1526 points on Monday, November 5, the largest one-day drop
in the history of the Hong Kong exchange. Local observers
were mixed on whether Wen's remarks spelled the end of the
Hong Kong market's rapid rise. Hong Kong shares rebounded
quickly as property stocks rose sharply and Mainland on-line
business-to-business giant Alibaba.com's initial public
offering almost tripled in price, but failed to reach
previous levels. Bad news in U.S. markets and rising oil
prices pushed Hong Kong shares down again, they fell another
950 points on Thursday before bouncing back in Friday morning
trading. End Summary.
2. Comment: Wen's remarks temporarily threw some needed cold
water on a market that most analysts agree is too hot.
Demand for Hong Kong dollars to invest in stocks has pushed
the currency to its highest level since 2005 and forced the
Hong Kong Monetary Authority to intervene, buying US$1.2
billion in the past two weeks. The most recent intervention
on October 31 pushed the Hong Kong dollar down and drove the
Hong Kong Interbank Offer Rate (HIBOR) to its lowest level
this year. Skyrocketing valuations have distracted many
observers from the Hong Kong market's increasing volatility.
HKMA assures us that the banking system is well-capitalized
and does not face structural risks. Falling U.S. interest
rates and weak U.S. stockmarket performance make investments
in Hong Kong stocks and property attractive. Add the
prospect (no matter how distant) of large amounts of Chinese
capital pouring into the Hong Kong market in search of
"bargains" and it is difficult to see where the bubble will
end, in spite of efforts by the Chinese government to slow
it. End comment.
===========================================
Premier Wen Puts the Brakes on "Thru Train"
===========================================
3. Chinese Premier Wen Jiabao, while on an official visit to
Uzbekistan, told Hong Kong reporters the "Through Train"
scheme to allow Chinese investors to purchase individual Hong
Kong stocks would be postponed while the Chinese government
studies the risks to both the Shanghai and Hong Kong stock
markets, increase Chinese investors' awareness of the risks
of investing in Hong Kong equities, and prepare regulations
to manage the program. Hong Kong stocks fell sharply in
Monday trading, dropping 1526 points, the largest fall since
September 11, 2001. Investors also cited reports that the
China Securities Regulatory Commission (CSRC) had instructed
Chinese Qualified Domestic International Investor (QDII)
funds to reduce their exposures to Hong Kong stocks.
4. Local observers had mixed reactions to Wen's comments and
the subsequent plunge in Hong Kong share prices. Some,
including Morgan Stanley's Hong Kong equity strategist Robert
Hart, saw the drop as a much needed correction and predicted
the benchmark Hang Seng index would continue to fall. Hart
claimed mainland retail investors account for more than a
quarter of Hong Kong stock turnover and were fueling the drop
in prices but that institutional investors were still
receiving fund inflows to invest in the Hong Kong market.
Others, such as JP Morgan Chase China Equities chairwoman
Jing Ulrich said the impact would be limited as investors
were already expecting a delay in implementation of the
"Through Train" scheme.
5. George Leung, Strategy and Economics Advisor at Hong Kong
and Shanghai Banking Corp. (HSBC), saw Wen's comments as a
positive development for the Hong Kong and Shanghai
exchanges. Chinese officials are most concerned about
avoiding instability, said Leung. The rapid run up in Hong
Kong market suggests that investors could be tempted to shift
money away from Shanghai to Hong Kong, with negative effects
for the Shanghai A share market. Increasing A share prices
are bolstering confidence in Shanghai's market, allowing
small and medium enterprises to raise capital without
burdening the banking system, he said. Increasing flows to
Hong Kong will boost volatility in the Hong Kong market and
force the Hong Kong Monetary Authority to intervene in the
currency market as the Hong Kong dollar appreciates to the
strong end of its trading band.
============================================= ============
Chinese Authorities Directing a Pullback from HK Market?
HONG KONG 00002807 002 OF 002
============================================= ============
6. Managing Director at the Bank of China International
(BOCI) Anthony Lok, agreed that the Chinese government was
trying to slow growth in the Hong Kong market. He noted that
Wen's comments are just one part of a recent pattern that has
Chinese authorities ordering a pull back from equity markets.
The Chinese National Social Security Fund (NSSF) has
reportedly been ordered to cut its position in equity
markets, he said. Lok repeated reports that QDII funds have
been ordered to cut exposure to equity markets to less than
30 percent of their total portfolios, adding that while the
CSRC has approved US$42 billion in eleven licensed QDII
funds, most of these funds have not yet been allowed to
invest. (Note: HKMA Chief Executive Joseph Yam confirmed
that Chinese financial regulators had told at least one QDII
fund to decrease its exposure to the Hong Kong market to no
more than 30%. End Note) Chinese officials mistakenly
believe they can control the Hong Kong market through
administrative controls and jawboning, said Lok. The
official approval of Chinese insurers Ping An and Huatai to
invest in the Hong Kong stock market will not lead to actual
investments in the near term, he said. Lok added that
Qualified Foreign Institutional Investor (QFII) funds have
been pulling investments out of Shanghai in favor of the Hong
Kong market. Greater transparency and liquidity in Hong Kong,
combined with rocketing valuations, will continue to draw
investors away from riskier Shanghai shares, regardless of
Wen's statements and the administrative measures taken so
far.
7. As predicted, Premier Wen's remarks didn't hold back Hong
Kong shares for long. The launch of the Alibaba.com IPO and
buoyant property stocks led an almost 780 point rebound on
November 6 and 7. The highly sought shares of Alibaba.com,
250 times oversubscribed, soared 200 percent in opening day
trading before falling back slightly on November 7. Hong
Kong property shares rose strongly in response to
international investment bank reports optimistic about growth
prospects in Hong Kong. Falling U.S. shares, worries about
additional fallout from the subprime crisis, and concerns
about the effect of the depreciating U.S. dollar on interest
rates were blamed for Thursday's 950 point slide. Shares
closed Friday relatively unchanged.
Cunningham