VZCZCXRO2983
PP RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHVC
DE RUEHHK #2158 2291104
ZNR UUUUU ZZH
P 171104Z AUG 07
FM AMCONSUL HONG KONG
TO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 2636
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHOO/CHINA POSTS COLLECTIVE
RHEHNSC/NSC WASHDC

UNCLAS HONG KONG 002158 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR LOWERY, SOBEL, 
HARSAAGER, NSC FOR WILDER, TONG 
 
E.O. 12958: N/A 
TAGS: ECON EFIN HK PGOV
SUBJECT: HKMA: HONG KONG'S SHARE MARKET SLIDE NOT 
STRUCTURAL PROBLEM 
 
 
¶1.  (U) Summary: Hong Kong shares dropped for the third 
straight day on August 17, falling through the 20,000 barrier 
before recovering on strong buying pressure just before the 
market closed.  The Hong Kong Monetary Authority (HKMA) is 
monitoring the market closely, but sees no evidence of 
structural weakness at this time.  One HKMA official told us 
that investors were hoping for some proactive moves from the 
U.S. and that would go some ways toward restoring investor 
confidence in Hong Kong.  End Summary. 
 
¶2.  (U) In response to concerns about U.S. dollar liquidity 
and volatile global equities markets, Hong Kong's Hang Seng 
Index has fallen by over 3000 points since touching a record 
high of 23,557 on July 26.  The Hang Seng fell below 20,000 
after mid-day trading on August 17, but recovered slightly on 
massive buying just before the market closed to finish the 
day at 20,387.13. 
 
¶3.  (U) Trading volumes early in the week of August 13 were 
low, reflecting investor concerns that sub-prime mortgage 
problems in the U.S. would spill over into Asian markets, 
despite positive statements from analysts that local 
fundamentals remained strong.  After sliding in a 
typhoon-shortened session on August 10, share prices climbed 
slightly higher on August 13 and 14.  But by August 15, 
volatile movement in the foreign exchange market, a falling 
Dow Jones Index, and dipping regional markets drove the Hang 
Seng down over 2%.  The slide continued on Thursday, August 
16 and Friday, August 17, as the index dropped 3.3% and 1.4% 
respectively. 
 
¶4.  (U) Foreign investment firms were rumored to be 
offloading Hong Kong stocks to take book profits accumulated 
in the Hang Seng's rapid appreciation over the past few 
months.  Export-oriented stocks have been among the hardest 
hit in recent days, reflecting investor concerns about the 
possibility of lower U.S. demand in coming months.  Credit 
markets appeared to be functioning normally, with the Hong 
Kong Interbank Offer Rate (HIBOR) overnight rate coming down 
from 5.7% on August 10 to 4.55% on August 17. 
 
¶5.  (U) Hong Kong Financial Secretary John Tsang, in Beijing 
for consultations with senior PRC officials, tried to assuage 
investor concerns on August 16, telling the press in Beijing 
that the Hong Kong Monetary Authority (HKMA) has been closely 
monitoring the situation and believes that Hong Kong's 
financial markets will not suffer any "system risk" from U.S. 
sub-prime mortgage exposure. 
 
============================================= ================ 
HKMA Sees No Abnormal Currency Pressures, Structural Problems 
============================================= ================ 
 
¶6.  (SBU) The HKMA's Eddie Yue, Executive Director forMonetary Management and Infrastructure, said the HMA is 
watching the situation carefully, but thusfar believes there 
are no money market concerns. There are no problems in the 
operations or settlment processes and there is no indication 
of maret manipulation.  The futures mrket is following the 
cash market and volumes are well within norms. 
 
¶7.  (SBU) Yue speculated that that investors were unwinding 
carry trades and moving out of emerging markets generally, 
but noted that there had been no abnormal pressures on the 
Hong Kong dollar to suggest investors were moving out of Hong 
Kong dollar denominated assets.  Instead, investors seemed to 
be taking earlier realized gains and parking their money in 
Hong Kong.  The Hong Kong dollar strengthened to 7.8068 late 
on August 17 and morning Hong Kong dollar bond yields were 
down slightly. 
 
¶8.  (SBU) The most important gauge of market health is 
exchange rate stability, said Yue.  He pointed to the slight 
appreciation of the Hong Kong dollar and the stability of the 
HIBOR as signs that the Hong Kong stock market decline was 
not a structural issue.  He admitted concerns that market 
fears could increase volatility and eventually lead to panic 
dumping of shares, but saw no signs of that happening to 
date.  He added that investors were hoping for some proactive 
moves from the U.S. and that such a move would go some ways 
toward restoring investor confidence in Hong Kong. 
Cunningham