VZCZCXRO7147
RR RUEHCN RUEHGH RUEHVC
DE RUEHHK #2391/01 2560932
ZNR UUUUU ZZH
R 130932Z SEP 07
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 2912
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 002391 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR HARSAAGER, 
WINSHIP, YANG, AND CUSHMAN, NSC FOR WILDER AND TONG 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV HK CH
SUBJECT: HKG LOOKS TO INTEGRATE HONG KONG, MAINLAND STOCK 
EXCHANGES 
 
REF: A. HONG KONG 2183 
     ¶B. HONG KONG 2263 
 
¶1.  Summary:  The Hong Kong Government (HKG) announced late 
September 7 that it had acquired additional shares in the 
Hong Kong Stock Exchange (HKEx) through the Hong Kong 
Exchange Fund, sufficient to increase its holdings to 5.88% 
of total shares.  Financial Secretary John Tsang said the 
acquisition of additional shares indicated the government's 
long-term confidence in the HKEx and support for Hong Kong's 
continued development as an international financial center. 
Tsang also suggested that the larger HKG stake in the HKEx 
 
SIPDIS 
would facilitate closer links with Mainland stock exchanges, 
including a possible share swap between the Hong Kong and 
Shanghai exchanges.  Local analysts and an independent HKEx 
Director criticized the purchase, suggesting that the HKG's 
increased stake could negatively impact HKEx's independence. 
End Summary. 
 
¶2.  The Office of the Hong Kong Financial Secretary announced 
late September 7 that the government-administered Hong Kong 
Exchange Fund had acquired 5.88% of the HKEx total shares. 
Investments in excess of 5% must be notified to the 
government (in this case, an easy proposition) and the 
public.  Local press reports that the Exchange Fund spent HKD 
2.4 billion (USD 312.8 million) on September 7 to increase 
its stake from 2.5% to 5.88%, in the process driving the 
price of HKEx shares to an all-time high of HKD 158 per 
share.  (Note: the Hong Kong Exchange Fund was established in 
1935 to back the value of Hong Kong currency.  In 1978 the 
government began placing fiscal reserves in the Fund and in 
1998 the Fund began to actively manage these reserves.  The 
Exchange Fund is managed by the Hong Kong Monetary Authority. 
 End Note.) 
 
============================================= ===== 
HKG Move to Demonstrate Confidence Inspires Doubts 
============================================= ===== 
 
¶3.  Financial Secretary (FS) John Tsang, in a September 7 
press release, said the acquisition would demonstrate the 
government's long-term confidence in the HKEx and support for 
the maintenance of Hong Kong as an international financial 
center.  He added that the purchase would allow the HKG to 
contribute as a shareholder to the promotion of HKEx's 
strategic development.  The government's move was criticized 
by local observers and one independent Director of the HKEx 
Board.  On September 10, a widely circulated Citigroup report 
questioned why the government waited to disclose its interest 
in increasing its holdings of HKEx and questioned the 
independence of the government-appointed HKEx Chairman, 
Ronald Arculli. 
 
¶4.  Independent HKEx Director David Webb challenged the 
purchase as intervention in the Hong Kong market.  He added 
that although the HKG ultimately disclosed its purchase of 
the shares, there was no guarantee that it would disclose 
future purchases in a timely manner.  The HKG currently 
controls the board of the HKEx; shareholders are allowed to 
elect only 6 of the 13 directors.  Even without the increased 
stake, "the Hong Kong Government ultimately gets what it 
wants in the HKEx Boardroom," said Webb.  On September 10, 
Financial Secretary Tsang rejected the accusation that the 
HKG was intervening inappropriately in the market through the 
Exchange Fund and took full responsibility for the decision 
to increase the government's stake in the HKEx. 
 
============================================= 
Promoting Integration with Mainland Exchanges 
============================================= 
 
¶5.  In a speech at the Hong Kong Foreign Correspondents Club 
September 12, Tsang said the HKG increased its shareholding 
in order to promote the exchange in a "more organized manner, 
and one more consistent with the PRC's 11th Five Year Plan." 
He noted his intention to find ways to further integrate the 
Hong Kong and Mainland share markets, including through 
government-to-government cooperation, exchange-to-exchange 
and shareholder-to-shareholder cooperation. 
Government-to-government cooperation is already taking place 
through the Qualified Domestic Institutional Investor (QDII) 
scheme, the development of RMB-denominated financial assets 
for sale in Hong Kong, and the recent announcement that 
Mainland individual investors would be allowed to invest 
directly in Hong Kong equities (the through-train scheme). 
 
 
HONG KONG 00002391  002 OF 002 
 
 
¶6.  On the exchange level, Tsang offered to do more to 
promote the integration of the Hong Kong and Mainland share 
markets, noting the current practice by some Chinese 
companies of dual-listing A shares in Shanghai and H shares 
in Hong Kong.  He added that information sharing between the 
Mainland and Hong Kong exchanges would increase.  At the 
shareholder level, Tsang said that a greater HKG stake in 
HKEx would allow greater flexibility in dealing with future 
arrangements between the HKEx and Mainland bourses, 
specifically raising the possibility of a share swap between 
HKEx and the Shanghai exchange as a means of further 
integrating Hong Kong and Mainland exchange operations. 
 
¶7.  In response to questions about why the HKG had not 
disclosed its plan earlier to purchase an additional stake in 
the HKEx and why it chose to do so now when prices were at 
their peak, Tsang noted the government had been purchasing 
shares for several years and had only made the announcement 
when they had exceeded the government-mandated 5% cap 
(effectively doubling their holdings) requiring public 
notification.  In fact, he said, the average purchase price 
was far below the HKEx peak and would prove to be a bargain 
for the government. 
Cunningham