Cablegate: Hang Seng Plummets, Rebounds On Expected New U.S. Bailout

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RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #1823/01 2741002
ZNR UUUUU ZZH
R 301002Z SEP 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 5923
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 001823

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 Plummets, Rebounds on Expected New U.S. Bailout
Bill

REFS: A) HONG KONG 1801, B) HONG KONG 1790

1. Summary: The Hang Seng Index opened down sharply on news that
the U.S. Congress had rejected a USD 700 billion rescue plan and
word of the subsequent collapse in the U.S. and European stock
markets. The Hang Seng Index opened at 980 points or 5.5 percent
lower, and fell even further in early trading before bouncing back
at mid-day. Comments by senior Hong Kong government officials,
including the Chief Executive, early in the day reaffirming the
safety of the Hong Kong banking system and encouraging calm helped,
as did analyst assessments that the U.S. Congress would move quickly
to approve a revised plan. Shortly after markets closed, the HKMA
announced plans to enact five temporary measures to ensure liquidity
in the Hong Kong banking system. End Summary.

2. Senior Hong Kong government officials acted quickly this morning
to address Hong Kong market concerns about the U.S. Congress'
rejection of the USD 700 billion rescue plan and the record plunge
in Dow Jones Index last night. Financial Secretary John Tsang,
Secretary for Financial Services and the Treasury K.C. Chan, and
Hong Kong Monetary Authority Chief Executive Joseph Yam all met the
press separately before the Hong Kong Stock Exchange opened, calling
on investors to keep calm.

3. Yam emphasized that Hong Kong's banking system is safe and
adequately capitalized. He added that the U.S. markets are likely
to be volatile over the next several days and overseas markets,
including Hong Kong, would be impacted. He advised investors to act
cautiously and reduce risk. Financial Secretary Tsang followed
with a separate press conference where he expressed his
disappointment about the U.S. Congress' failure to approve a market
rescue plan and warned that failure to do so could have a severe
impact on the global financial market. He echoed Yam's advice to
investors to reduce risks and predicted volatility ahead for the
Hang Seng Index. Financial Secretary Tsang told reporters that he
is confident that the U.S. Congress will pass measures to address
the financial crisis.

Hong Kong Securities and Futures Commission issues warning to
short-sellers

4. The Hong Kong Securities and Futures Commission pulled out its
stick to scare speculators. In a press release issued shortly
before the opening of the stock market, the SFC warned market
participants not to abuse the use of short selling and threatened to
implement more aggressive measures toward irregular activities. The
Hong Kong regulator said "it would not hesitate to act against
abusive short selling, in addition to its decision last Friday to
uphold the up-tick rule and to double the penalties imposed by the
Hong Kong Securities Clearing Co. Ltd on failed settlement of
short-selling transactions."

Chief Executive Reassures Investors

5. Just before mid-day, Chief Executive Donald Tsang answered
questions from the press on the financial situation. He
acknowledged that the sharp drop in the Dow Jones Index overnight
would inevitably affect the Hong Kong stock market. He joined Yam
and his cabinet Secretaries in emphasizing that Hong Kong's economic
fundamentals are good and praised Hong Kong's sound regulatory
systems. He noted the Hong Kong investors have extensive experience
in crises, citing the Asian Financial Crisis and SARS, and opined
that he has confidence in the government's ability to handle the
current situation. Tsang reassured the Hong Kong people that the
government would closely monitor events and take decisive action if
needed.

6. Investors seized on the Chief Executive's remarks as well as
analyst expectations that the U.S. Congress would approve a market
rescue plan with some additional conditions to boost the Hang Seng
Index. The market climbed throughout the afternoon, finishing at
18016.21, up 135.53 points, or 0.76 percent. Market turnover was
HK$ 71.81 billion. HIBOR finished at 2.5 percent for overnight,
3.75 percent for 1-week, 4:00 percent for 2-week, and 3.65 percent
for three-month loans.

HKMA Promises Liquidity

7. Just after the market closed in Hong Kong, HKMA Chief Executive
Yam and Financial Secretary Tsang jointly announced that the Hong
Kong Monetary Authority will implement five temporary measures to
increase liquidity for the Hong Kong banking sector. HKMA will
accept approved U.S. dollar assets as security for liquidity
assistance from the HKMA discount window; the duration of liquidity
assistance will be extendable for up to three months; Exchange Fund
paper may be used for up to 100 percent of collateral for Discount
Window borrowing, up from 50 percent; the HKMA will consider U.S.
dollar swaps with licensed banks as needed; and the HKMA will

HONG KONG 00001823 002 OF 002

consider lending cash to licensed banks for up to one month, with
acceptable collateral. These measures will run through March of
2009. When asked why the HKMA was moving now to guarantee
liquidity, Tsang replied that "when you see a typhoon coming, it is
best to be prepared."
Donovan

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