VZCZCXRO2603
RR RUEHCN RUEHGH RUEHVC
DE RUEHHK #2807/01 3130853
ZNR UUUUU ZZH
R 090853Z NOV 07
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 3397
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 002807 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR LOWERY, DOHNER, 
HARSAAGER, WINTON, YANG, AND CUSHMAN, NSC FOR TONG AND 
WILDER 
 
E.O. 12958: N/A 
TAGS: ECON EFIN HK CH
SUBJECT: PREMIER WEN TOPS ALIBABA AS HK STOCK EXCHANGE 
REMAINS VOLATILE 
 
REF: HONG KONG 2742 
 
¶1.  Summary: Comments by Chinese Premier Wen Jiabao on 
preconditions for Chinese investors to purchase individual 
Hong Kong stocks drove the benchmark Hang Seng index down 
1526 points on Monday, November 5, the largest one-day drop 
in the history of the Hong Kong exchange.  Local observers 
were mixed on whether Wen's remarks spelled the end of the 
Hong Kong market's rapid rise.  Hong Kong shares rebounded 
quickly as property stocks rose sharply and Mainland on-line 
business-to-business giant Alibaba.com's initial public 
offering almost tripled in price, but failed to reach 
previous levels.  Bad news in U.S. markets and rising oil 
prices pushed Hong Kong shares down again, they fell another 
950 points on Thursday before bouncing back in Friday morning 
trading.  End Summary. 
 
¶2.  Comment: Wen's remarks temporarily threw some needed cold 
water on a market that most analysts agree is too hot. 
Demand for Hong Kong dollars to invest in stocks has pushed 
the currency to its highest level since 2005 and forced the 
Hong Kong Monetary Authority to intervene, buying US$1.2 
billion in the past two weeks.  The most recent intervention 
on October 31 pushed the Hong Kong dollar down and drove the 
Hong Kong Interbank Offer Rate (HIBOR) to its lowest level 
this year.  Skyrocketing valuations have distracted many 
observers from the Hong Kong market's increasing volatility. 
HKMA assures us that the banking system is well-capitalized 
and does not face structural risks.  Falling U.S. interest 
rates and weak U.S. stockmarket performance make investments 
in Hong Kong stocks and property attractive.  Add the 
prospect (no matter how distant) of large amounts of Chinese 
capital pouring into the Hong Kong market in search of 
"bargains" and it is difficult to see where the bubble will 
end, in spite of efforts by the Chinese government to slow 
it.  End comment. 
 
=========================================== 
Premier Wen Puts the Brakes on "Thru Train" 
=========================================== 
 
¶3.  Chinese Premier Wen Jiabao, while on an official visit to 
Uzbekistan, told Hong Kong reporters the "Through Train" 
scheme to allow Chinese investors to purchase individual Hong 
Kong stocks would be postponed while the Chinese government 
studies the risks to both the Shanghai and Hong Kong stock 
markets, increase Chinese investors' awareness of the risks 
of investing in Hong Kong equities, and prepare regulations 
to manage the program.  Hong Kong stocks fell sharply in 
Monday trading, dropping 1526 points, the largest fall since 
September 11, 2001.  Investors also cited reports that the 
China Securities Regulatory Commission (CSRC) had instructed 
Chinese Qualified Domestic International Investor (QDII) 
funds to reduce their exposures to Hong Kong stocks. 
 
¶4.  Local observers had mixed reactions to Wen's comments and 
the subsequent plunge in Hong Kong share prices.  Some, 
including Morgan Stanley's Hong Kong equity strategist Robert 
Hart, saw the drop as a much needed correction and predicted 
the benchmark Hang Seng index would continue to fall.  Hart 
claimed mainland retail investors account for more than a 
quarter of Hong Kong stock turnover and were fueling the drop 
in prices but that institutional investors were still 
receiving fund inflows to invest in the Hong Kong market. 
Others, such as JP Morgan Chase China Equities chairwoman 
Jing Ulrich said the impact would be limited as investors 
were already expecting a delay in implementation of the 
"Through Train" scheme. 
 
¶5.  George Leung, Strategy and Economics Advisor at Hong Kong 
and Shanghai Banking Corp. (HSBC), saw Wen's comments as a 
positive development for the Hong Kong and Shanghai 
exchanges.  Chinese officials are most concerned about 
avoiding instability, said Leung.  The rapid run up in Hong 
Kong market suggests that investors could be tempted to shift 
money away from Shanghai to Hong Kong, with negative effects 
for the Shanghai A share market.  Increasing A share prices 
are bolstering confidence in Shanghai's market, allowing 
small and medium enterprises to raise capital without 
burdening the banking system, he said.  Increasing flows to 
Hong Kong will boost volatility in the Hong Kong market and 
force the Hong Kong Monetary Authority to intervene in the 
currency market as the Hong Kong dollar appreciates to the 
strong end of its trading band. 
 
============================================= ============ 
Chinese Authorities Directing a Pullback from HK Market? 
 
HONG KONG 00002807  002 OF 002 
 
 
============================================= ============ 
 
¶6.  Managing Director at the Bank of China International 
(BOCI) Anthony Lok, agreed that the Chinese government was 
trying to slow growth in the Hong Kong market.  He noted that 
Wen's comments are just one part of a recent pattern that has 
Chinese authorities ordering a pull back from equity markets. 
 The Chinese National Social Security Fund (NSSF) has 
reportedly been ordered to cut its position in equity 
markets, he said.  Lok repeated reports that QDII funds have 
been ordered to cut exposure to equity markets to less than 
30 percent of their total portfolios, adding that while the 
CSRC has approved US$42 billion in eleven licensed QDII 
funds, most of these funds have not yet been allowed to 
invest.  (Note: HKMA Chief Executive Joseph Yam confirmed 
that Chinese financial regulators had told at least one QDII 
fund to decrease its exposure to the Hong Kong market to no 
more than 30%.  End Note)  Chinese officials mistakenly 
believe they can control the Hong Kong market through 
administrative controls and jawboning, said Lok.  The 
official approval of Chinese insurers Ping An and Huatai to 
invest in the Hong Kong stock market will not lead to actual 
investments in the near term, he said.  Lok added that 
Qualified Foreign Institutional Investor (QFII) funds have 
been pulling investments out of Shanghai in favor of the Hong 
Kong market. Greater transparency and liquidity in Hong Kong, 
combined with rocketing valuations, will continue to draw 
investors away from riskier Shanghai shares, regardless of 
Wen's statements and the administrative measures taken so 
far. 
 
¶7.  As predicted, Premier Wen's remarks didn't hold back Hong 
Kong shares for long.  The launch of the Alibaba.com IPO and 
buoyant property stocks led an almost 780 point rebound on 
November 6 and 7.  The highly sought shares of Alibaba.com, 
250 times oversubscribed, soared 200 percent in opening day 
trading before falling back slightly on November 7.  Hong 
Kong property shares rose strongly in response to 
international investment bank reports optimistic about growth 
prospects in Hong Kong.  Falling U.S. shares, worries about 
additional fallout from the subprime crisis, and concerns 
about the effect of the depreciating U.S. dollar on interest 
rates were blamed for Thursday's 950 point slide.  Shares 
closed Friday relatively unchanged. 
Cunningham