VZCZCXRO6245
RR RUEHCN RUEHGH RUEHVC
DE RUEHHK #1276/01 1961102
ZNY CCCCC ZZH
R 141102Z JUL 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 5305
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHUL/AMEMBASSY SEOUL 3370
RUEHKO/AMEMBASSY TOKYO 4975

C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 001276 
 
SIPDIS 
 
STATE FOR EAP/CM, EAP/K, AND EEB/ESC; TREASURY FOR LEVEY, 
GLASER, DEGERBEDIAN AND DOHNER 
 
E.O. 12958: DECL: 07/15/2028 
TAGS: EFIN ECON MO NK CH
SUBJECT: INFLATION, BDA POSE PROBLEMS FOR MACAU MONETARY 
AUTHORITY 
 
REF: A. HONG KONG 1126 
     ¶B. HONG KONG 576 
     ¶C. HONG KONG 459 
 
Classified By: EP Section Chief Laurent Charbonnet, Reason 1.4 b/d 
 
¶1.  (C) Summary: Inflation and the future of Banco Delta Asia 
(BDA) are the Macau Monetary Authority's (AMCM) most pressing 
problems.  BDA's anti-money laundering (AML) regime has 
regressed since AMCM was forced to return management control 
of the bank in September 2007.  Controlling shareholder 
Stanley Au is "stubborn and defiant," said Teng, and will 
continue to use the courts to try to push back 
regulator-imposed restrictions on his bank operations in 
Macau and Hong Kong.  Au will not sell BDA; rumors of a deal 
with Bank of China are false, said Teng.  Aside from BDA, the 
Macau banking system is in good shape.  But rapid growth and 
rising food and fuel prices are driving high inflation.  The 
Macau government is sending mixed messages on its willingness 
to tackle inflation; moving to slow fiscal spending on one 
hand, but also promising to give all Macau residents a 5000 
pataca (US$625) bonus.  The AMCM opposes a government 
proposal to cap mortgages as a means to slow growth, 
preferring to rely on banks to practice sound risk 
management.  End Summary. 
 
============================================ 
BDA Defiant, Refuses to Address AML Concerns 
============================================ 
 
¶2.  (C) Macau Monetary Authority Chief Executive Anselmo Teng 
met with Econoff July 2 to discuss the implications of the 
U.S. decision to lift sanctions on North Korea associated 
with the Trading With the Enemy Act (TWEA) and remove North 
Korea from the list of Sponsors of State Terrorism (SST). 
Teng was pleased to understand that U.S. actions did not 
affect BDA's designation as a "primary money-laundering 
concern."  Teng noted that BDA had taken no substantive 
measures to improve its AML regime since AMCM was obligated 
by Macau law to return BDA to the control of its shareholders 
in September 2007.  At that time, AMCM presented BDA with a 
list of 23 specific measures necessary to improve its AML 
regime, said Teng.  A recently completed audit of BDA by AMCM 
bank supervisors showed that BDA had made no improvements and 
had moved backwards in several areas, he said. 
 
¶3.  (C) Instead of taking measures to address weaknesses in 
BDA's AML regime, primary shareholder Stanley Au is pursuing 
legal action against both the AMCM and the Hong Kong Monetary 
Authority (HKMA).  Au has filed suit against AMCM for 
exceeding its authority in appointing outside managers from 
2005-2007 and is preparing the same type of complaint against 
the HKMA for appointing outside managers for Au's Hong 
Kong-based financial institution, Delta Asia Credit. 
 
¶4.  (C) Au is stubborn and defiant, said Teng, and still 
considers himself a victim of American persecution.  He has 
rejected suggestions by AMCM that he consider selling the 
bank.  Teng discounted rumors that the Bank of China might be 
interested in purchasing BDA.  He noted that the 2007 
appointment of former Bank of China (Macau) Deputy General 
Manager Cai Xiao Feng as Executive Director and CEO of BDA 
had sparked this rumor, but that Bank of China (Macau) had 
publicly denied interest in BDA.  Cai has stepped down as CEO 
after less than one year, said Teng, and has been replaced by 
Michael Leung Chi-ping, formerly an independent non-executive 
director of BDA. 
 
¶5.  (C) Teng insisted that, excepting BDA, the Macau banking 
system is in good shape.  Macau's growing wealth and rapidly 
increasing money supply means that even BDA has increased its 
deposit base over the past year.  The Macanese banking system 
is dominated by international banks that easily meet global 
standards for due diligence and AML compliance.  The 
International Monetary Fund will conduct a review of the 
Macanese bank regulatory system in July, said Teng. 
 
================================== 
Macau's Mixed Message on Inflation 
================================== 
 
¶6.  (U) Inflation has become the AMCM's most pressing 
concern.  Rising food and fuel prices, combined with 
unemployment rates below 3% and massive amounts of money 
flowing into Macau's economy, have pushed prices up 8.95% 
year on year.  Because the Macau pataca is pegged to the Hong 
 
HONG KONG 00001276  002 OF 002 
 
 
Kong dollar, the AMCM has very little room to maneuver on 
interest rates.  The government has begun to slow projects 
and issue statements designed to slow the pace of investment. 
 The recent announcement limiting additional gaming tables 
and freezing development were part of this effort, said Teng. 
 
 
¶7.  (U) Local contacts report that real estate development 
approvals have also slowed dramatically.  Teng would not 
speculate as to whether that was a result of government 
efforts to slow growth or increased wariness by civil 
servants in the wake of the corruption conviction of former 
Secretary for Transport and Public Works Ao Man Long.  The 
AMCM does not support proposals to place a cap on the 
loan-to-value ratio for residential mortgages, similar to 
Hong Kong's 70% of value limit on property lending.  Macau 
currently has no administrative or statutory limits on 
loan-to-value ratios.  Banks should be free to judge and 
manage their own risk, he said.  Capping mortgages will not 
significantly slow growth and leave some worthy borrowers 
unable to purchase homes. 
 
¶8.  (U) The government has undermined its own efforts to 
brake the economy by recently announcing that it would give 
every Macau resident 5000 patacas (US$625) as a bonus after 
receiving record tax revenues in 2007.  The government 
collects 39% of gross gaming revenues; in 2007 total revenue 
exceeded MOP 40 billion (apx. US$5 billion) against 
expenditures of just under MOP 19 billion (US$2.38 billion). 
The cash rebates, which will begin to be distributed later 
this year, will help people to adjust to higher prices for 
imported food and fuel, said Teng.  The government is also 
trying to help traders find new sources for imported goods in 
an attempt to lower prices for consumers, he said. 
Cunningham