VZCZCXRO6515
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHVC
DE RUEHHK #2183/01 2340237
ZNR UUUUU ZZH
R 220237Z AUG 07
FM AMCONSUL HONG KONG
TO RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/SECSTATE WASHDC 2673
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHOO/CHINA POSTS COLLECTIVE
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 002183 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA, NSC FOR 
WILDER, TONG 
 
E.O. 12958: N/A 
TAGS: EFIN ECON HK CH
SUBJECT: PRC TO ALLOW RMB INVESTMENT IN HONG KONG MARKET, 
HANG SENG JUMPS 
 
¶1.  The Chinese State Administration of Foreign Exchange 
(SAFE) announced August 20 that it would allow mainland 
Chinese citizens to invest in the Hong Kong Stock Market. 
Chinese investors will be required to open a special account 
through the Bank of China (BOC), Tianjin, but will then be 
able to purchase Hong Kong stocks with either Renminbi (RMB) 
or foreign exchange deposits.  A SAFE spokesman said the new 
policy would remove the yearly investment cap of USD 50,000 
and would not require Qualified Domestic International 
Investor (QDII) designation. 
 
¶2.  The Hang Seng Index moved sharply higher on reaction to 
the U.S. Federal Reserve's announcement of a cut in the 
discount rate, news that Hong Kong Shanghai Bank (HSBC) is in 
discussions to acquire Korea Exchange Bank, and the SAFE 
announcement, jumping 5.93% on August 20 - the highest one 
day increase since May 1998.  Optimism continued to reign at 
the Hang Seng's opening on August 21, with the Hang Seng 
Index shooting up 1000 points in the first thirty minutes of 
trading.  The Index eventually hit 22,616, up an additional 
4.6% before slipping back as traders took profits in the 
afternoon and the rumors of an impending People's Bank of 
China (PBOC) interest rate hike hit the market.  (NOTE: At 
6:00pm August 21, PBOC announced that effective August 22nd 
it would raise the 1-year benchmark deposit rate by 27 basis 
points and the 1-year lending rate by 18 basis points.  END 
NOTE.) The Hang Seng Index finished up 0.62% at 21,729.35 on 
a near record volume of HKD 116.8 billion.  Chinese company 
stocks (H Shares) gained strongly as investors speculated 
Chinese companies would be more attractive to Chinese 
investors.  The Hang Seng Chinese Enterprises Index rose by 
8.74% on August 20 and an additional 2.84% on August 21. 
 
¶3.  Credit Suisse Managing Director Dong Tao said the SAFE 
policy is basically a "closed door experiment" that will 
function as a swap between BOC, Tianjin and BOC, 
International.  The money will not need to move across the 
border except when settlement in needed for gains or losses. 
Tao added that he believes this experiment could help to 
relieve the appreciation pressure on the RMB.  He 
characterized the move as a landmark in Chinese deregulation 
of capital controls with significant implications for the 
Hong Kong stock market now and eventually the rest of the 
world.  This limited opening allows Chinese residents to 
participate in overseas markets without SAFE losing control 
of the foreign exchange market and gives SAFE the chance to 
suspend the scheme if it feels necessary. 
 
¶4.  BOC Executive Vice President Xie Yonghai on August 21 
told the Sing Tao Daily that mainland investors would not be 
allowed to withdraw their revenues in Hong Kong after they 
sell their Hong Kong stocks.  Instead, they could either keep 
the money in the BOC International accounts or remit it to 
their BOC, Tianjin accounts.  He noted that this is how the 
PRC can ensure that mainland capital is not allocated to 
"other uses."  Xie added that the program would not be 
limited to residents of Tianjin Binhai, but that mainland 
investors in other provinces and municipalities would be able 
to open accounts at BOC, Tianjin via their local BOC branches 
to buy Hong Kong stocks. 
 
¶5.  Cable TV Hong Kong reported from Tianjin early on the 
morning of August 21 that BOC, Tianjin Binhai branch was not 
allowing Tianjin residents to open special accounts at that 
time because the branch had not yet received final approval 
from the China Banking Regulatory Commission (CBRC).  A 
spokesman for the bank branch insisted that the bank is 
technically prepared to implement the new policy. 
 
¶6.  The Hong Kong government (HKG) claimed credit for 
successfully lobbying mainland officials to make use of Hong 
Kong as a Chinese financial intermediation center to 
facilitate the orderly outflow of capital from China.  A 
press release issued August 20 by the Hong Kong government 
said, "the Tianjin pilot scheme announced by SAFE is a 
concrete response to the HKG's recommendation.  The Hong Kong 
Monetary Authority (HKMA) has been in discussions with the 
People's Bank of China and SAFE on the operation details of 
the "free-walk scheme." (Note: the "free-walk scheme" allows 
individuals to invest their own foreign currency funds 
offshore without being designated under QDII. 
 
¶7.  Hong Kong Financial Secretary John Tsang and HKMA Chief 
Executive Joseph Yam, both just returned from meetings in 
Beijing, praised the SAFE announcement.  Tsang said, "the use 
of Hong Kong's financial platform for mainland individuals to 
 
HONG KONG 00002183  002 OF 002 
 
 
invest offshore is a clear demonstration of the 
mutually-assisting, complementary and interactive 
relationship between the financial systems of the mainland 
and Hong Kong.  It will help to enhance the status of Hong 
Kong as an international financial center."  Yam added that, 
"the HKMA will continue to work with the PBOC, SAFE, and 
other mainland authorities on measures to strengthen the 
links and interaction of the financial markets in the two 
places, thereby increasing their overall size and efficiency." 
 
¶8.  Foreign banks in Hong Kong are bullish about the SAFE 
scheme.  Jing Ulrich, Managing Director at JP Morgan said the 
pilot program "should produce an upward revaluation of Hong 
Kong shares."  A Morgan Stanley report estimated that up to 
800 billion RMB could enter the Hong Kong market if only 10% 
of the Shanghai A Share market capitalization is permitted to 
invest in Hong Kong stocks.  UBS expects transaction on the 
Hong Kong market could increase by as much as 20%.  Merrill 
Lynch recommended investors buy shares of BOC, Hong Kong 
which is expected to benefit from the scheme.  The share 
price of the Hong Kong Stock Exchange rose by 6% on August 21 
on investor optimism about its new business proposal. 
 
Cunningham