VZCZCXRO1419
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #2156/01 3331024
ZNR UUUUU ZZH
R 281024Z NOV 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 6324
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 002156
SIPDIS
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA
E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: HK Market Update, Nov. 28 -- More RMB Business in HK?
1. Summary: In recent meetings, HKMA Chief Joseph Yam asked Beijing
officials to allow expanded RMB business in Hong Kong, but local
analysts are skeptical that Beijing will respond positively.
Standard Chartered Bank is proposing to raise HKD 20 billion in the
equity markets in a plan that could spell the end of their right to
issue Hong Kong currency. The minibond saga continues, as reports
suggest U.S. bankruptcy law may prevent Lehman Bros.'s CDS's from
being liquidated, throwing a wrench into plans for Hong Kong banks
to buy back CDS-backed minibonds. Hong Kong's Securities and
Futures Commissions defended short-selling as the Hang Seng Index
gained almost 10 percent on the week. End Summary.
Yam Advocates for RMB Business in Hong Kong
2. HKMA Chief Executive Joseph Yam, returning to Hong Kong from
meetings in Beijing with the Association of Hong Kong Banks, told
the press Tuesday that Hong Kong bankers were lobbying the Chinese
government to permit expanded RMB business in Hong Kong, including
the use of RMB as the settlement currency for Mainland-Hong Kong
trade and allowing both financial and non-financial institutions to
issue RMB bonds in Hong Kong. Bank of China (Hong Kong) Chief
Executive and Chairman of the Association of Hong Kong Banks He
Guangbei cautiously confirmed Yam's announcement, adding that
"discussions are going on and no details can be given for the time
being."
3. The pro-Beijing Hong Kong Commercial Daily on Wednesday,
November 26 quoted independent local economist Andy Xie saying he
did not expect any progress on Yam's proposal as it would require
liberalization of the Mainland foreign exchange market. Xie added
that China is not likely to make a change in trade settlement policy
in the current environment. On November 28, local press reported
PBOC officials, including Vice Governor Ma Delun and Research
Department Head Zhang Jianhua, saying they were concerned about the
impact on the Hong Kong dollar if large volumes of RMB flood into
Hong Kong.
StanChart Thinking Creatively About RMB Lending
4. Standard Chartered Bank economist Nicholas Kwan told the press
on Monday that it might be more useful to persuade PBOC officials to
allow Hong Kong banks to take the 70 billion RMB in deposits that
they currently hold and make RMB loans to Hong Kong factories in
Mainland. At present, the Hong Kong banks are permitted to accept
RMB deposits but not allowed to issue RMB loans. Kwan estimated
that Hong Kong-based borrowers market could be as much as 300
billion RMB, if Chinese officials would grant the green light.
Raising Capital, Losing Currency?
5. Standard Chartered, one of three currency issuing banks in Hong
Kong, announced this week that it would seek to raise HKD 20 billion
to strengthen its capital base through a rights issue. HKMA's Yam
reiterated longstanding government policy that prohibits foreign
governments from controlling over 20 percent of a note issuing bank.
Analysts warned that the announced terms of the offer could force
Singapore's Temasek Holdings to raise its stake in Standard
Chartered Hong Kong from 19 to 22 percent if the rights issue is not
taken up by the market. Standard Chartered Bank Hong Kong Chief
Executive Benjamin Hung assured the press that Standard Chartered
definitely wants to maintain its status as a note issuer and that he
saw no reason to believe the rights issue would not be welcomed by
the market.
Minibond Buyback Plan in Peril
6. On Thursday, November 27, local press reported that HSBC might
not be allowed to liquidate credit default swaps (CDSs) backing
minibonds issued by Lehman Bros.' in light of claims filed against
Lehman by creditors in the U.S. Lehman Bros.' is reportedly
seeking authority from the court to assume and sell off derivative
contracts it entered into before its bankruptcy. If granted, the
motion would make it illegal for Hong Kong banks to terminate credit
default swaps that underlie minibonds sold in Hong Kong.
7. Hong Kong banks' plan to compensate minibond investors requires
them to terminate swap arrangements involving the minibonds and then
sell off the minibonds' underlying assets. The US Bankruptcy Court
in New York will reportedly hear Lehman's motion on Wednesday,
December 3. A spokesman from the Association of Hong Kong Banks
told the Hong Kong Economic Journal that banks are currently seeking
legal opinions on the feasibility of the buyback plan. Financial
Secretary John Tsang said Thursday that the buyback plan remains the
best option for investors and banks.
Hong Kong SFC Defends Short-Selling
8. On Monday, November 24, the Hong Kong Securities and Futures
HONG KONG 00002156 002 OF 002
Commission participated in a telephone conference with other market
regulators, including the U.S., to discuss short-selling activities.
The Hong Kong Securities and Futures Commission argued strongly in
support of short-selling as a tool for hedging purposes. Statistics
released by the Commission indicated that the value of short-selling
transactions remained stable in recent months, accounting for less
than 10 percent of the average daily turnover of the Hong Kong stock
market.
Hang Seng Up on PBOC Rate Cut, Citi Bailout
9. The Hang Seng Index gained 9.7 percent or 1229.04 points this
week, closing at 13888.24 as investors responded positively to
Chinese interest rate cuts and news of the U.S. Government's plan to
bail out Citibank. Turnover on Friday was HKD 42.3 billion, about
60 percent less than the daily volume of HKD 104.1 billion recorded
on Nov. 28, 2007. China's aggressive 108 basis point interest rate
cut, announced on Wednesday, only pushed up the Hang Seng Index by
1.4 percent or 182.61 points on Thursday.
10. HIBOR closed Friday at 0.5 percent for overnight, 0.7 percent
for 1-W, 1.10 percent for 1-M and 1.95 percent for 3-M. Though the
cost for borrowing money from the interbank market has been sliding
down as the HKMA intervenes, business leaders in Hong Kong have
continued to push the government to increase its guarantee for SME
borrowers from 70 to 100 percent to encourage additional bank
lending to smaller enterprises. Some analysts are predicting that
25 percent of Hong Kong enterprises running factories in the Pearl
River Delta might have to close their businesses after Chinese New
Year. HKMA Chief Executive Joseph Yam is reportedly planning to
accompany the Federation of Hong Kong Industries to visit Guangdong
to explore ways to assist Hong Kong factories short of capital.