Cablegate: Us Auto Bailout Drives Hang Seng Volatility

VZCZCXRO4737
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #2238 3471210
ZNR UUUUU ZZH
R 121210Z DEC 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 6444
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS HONG KONG 002238

SIPDIS

STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: US Auto Bailout Drives Hang Seng Volatility

1. Summary: The Hong Kong government's announcement that it would
greatly expand an SME loan guarantee program pushed Hong Kong stocks
higher this week, before profit taking and news that the U.S. Senate
had rejected a bill to bail out U.S. automakers drove the market
down on Friday. Hong Kong economists and bankers cited basic
economic principles as they agreed that the RMB's recent
depreciation is a short-term correction and predicted the RMB will
strengthen further as the U.S. economy weakens. End Summary.

Support for SME's Good for Hang Seng

2. Hong Kong's Hang Seng Index rose sharply this week as the
government announced that it would expand a loan guarantee facility
for Small and Medium Enterprises (SMEs) from HKD 10 billion (US$
1.29 billion) to HKD 100 billion (US$ 12.9 billion) and raise the
limit for each borrower from HKD 1 million (US$ 129,000) to HKD 6
million (US$ 774,000). The HKD 100 billion pledge commits about 25
percent of Hong Kong government reserves. The markets reacted
positively, gaining over 11 percent from the previous Friday close,
before sliding sharply on Friday, December 12.

3. The Hang Seng lost over 1000 points in Friday morning trading
before recovering in the afternoon to close at 14758.39, down 855.51
points or 5.48 percent from Thursday. For the week, the Hang Seng
Index was still up 6.6 percent or 912.30 points. Volume on Friday
was a relatively brisk HKD 58.8 billion. Market watchers blamed
profit taking and the failure of the U.S. Senate to reach an
agreement on loans to the big three U.S. automakers. HIBOR quoted
by Hang Seng Bank this afternoon stood at 0.15 percent for
overnight, 0.95 percent for one-month and 1.65 percent for three
month borrowing.

4. The SME loan guarantee proposal will reportedly be extended to
all privately held companies. If the Legco approves, commercial
banks in Hong Kong could begin to accept applications from Hong Kong
enterprises for loans up to HKD 6 million each as early as next
Monday, December 15. The Hong Kong government estimated that 10
percent of enterprises might be unable to repay loans, but judged
this an acceptable non-performing loan risk.

5. In response to the government's call to loosen credit for SMEs,
HSBC, Standard Chartered Bank, Bank of China, and Bank of East Asia
all announced plans this week to reserve a special pool of funds for
SME loans. However, the banks declined to commit to fixed low
interest rates for SME borrowers. SME loans are expected to carry
an interest rate of prime (currently 5 percent) plus one to four
percent, depending on the borrower.

RMB Depreciation Short-Term Only Say HK Observers

6. Local economists and bankers agreed that the RMB's recent
depreciation is most likely a short-term adjustment. They predicted
that the RMB would continue to appreciate against the U.S. dollar
next year as China's economy remains stronger than many others more
affected by the global financial crisis. Standard Chartered's
Senior Economist Nicholas Kwan told pro-Beijing newspaper Wen Wei Po
Friday that the RMB would not depreciate sharply, though it might
soften over the next year due to the slowing Chinese domestic
market. Kwan added that he believes the HKD will also weaken next
year. He projected Hong Kong's economic outlook in 2009 will
continue to deteriorate but that the damage will not be comparable
to the economic impacts of SARS in 2003 or the Asian financial
crisis in 1998.

7. Credit Suisse Economist Tao Dong told the Chinese press that the
current RMB depreciation is a normal correction after appreciation
of over 20 percent since the end of the peg. Tao predicted that the
RMB will continue to depreciate for another 6 months before
strengthening again. BOCHK Chief Executive He Guangbei told Wen Wei
Po that the RMB could float upward or downward in accordance with
its international trade balance. (Note: That obviously doesn't
explain why the RMB would depreciate after China announced yet
another large trade surplus. Pro-Beijing press didn't comment on
speculation that the Chinese government might consider pushing the
RMB down to promote export competitiveness. End Note.) He added
that no regulations forbid the RMB from depreciating.

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