VZCZCXRO6629
RR RUEHCN RUEHGH RUEHVC
DE RUEHHK #2827/01 3190516
ZNR UUUUU ZZH
R 150516Z NOV 07
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 3417
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 002827 
 
SIPDIS 
 
SENSITIVE 
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
SUBJECT: HKMA LAUNCHES STRATEGIC PORTFOLIO 
 
¶1.  (U) Summary:  Hong Kong Chief Executive Donald Tsang, in 
his annual policy speech October 10, announced that one of 
his priorities during his current term would be to review the 
government's role in the management of its share assets with 
an eye toward achieving higher returns and improving 
governance.  On the heels of the Hong Kong government's 
surprise acquisition of 5.88% of the Hong Kong stock 
exchange, events suggest Hong Kong is moving to establish its 
own small but actively managed sovereign wealth fund that may 
target strategic, rather than profit maximizing, investments. 
 Hong Kong Monetary Authority (HKMA) senior officials confirm 
the HKMA will begin actively managing a small portion of its 
reserve fund, with investments focusing on alternative 
investment vehicles.  End Summary. 
 
¶2. (SBU) Comment: HKMA officials have been skeptical of plans 
for the International Monetary Fund to issue best practices 
guidelines for sovereign wealth funds, arguing such funds are 
insignificant in global financial flows when compared to 
non-transparent and "under-regulated" hedge funds.  Although 
HKMA has a very strong record of transparency and openness, 
recent moves suggest the government is beginning to see 
strategic value in closer management of its reserves and may 
be keen to avoid IMF-proposed guidelines.  While we do not 
expect Hong Kong to be a large strategic investor abroad, 
HKMA investments in local entities may warrant additional 
scrutiny.  End Comment. 
 
================================== 
HK's Closer Integration with China 
================================== 
 
¶3. (U) CE Tsang's annual policy speech outlined several 
financial policies to strengthen financial market linkages 
and promote the government's goal of closer integration with 
the Mainland economy, including: promoting the Qualified 
Domestic Institutional Investor (QDII) scheme, encouraging 
renminbi (RMB) denominated transactions, improving 
cooperation with Mainland financial authorities, and 
development of an Islamic bond market.  In addition, Tsang 
vowed to enhance the efficiency of management of government 
assets to achieve higher returns and improve governance. 
 
¶4.  (U) This vow, combined with the recent purchase by the 
HKG of 5.88 percent of the Hong Kong Exchanges and Clearing 
Limited (HKEx), signifies a new investment posture for the 
HKMA.  Previously, HKMA reserves (known as the Exchange Fund) 
had been divided into two portfolios: the Backing Portfolio, 
required by law to provide full US-dollar backing for the 
Hong Kong monetary base; and the Investment Portfolio, which 
was in turn divided into fixed assets, primarily U.S. 
Treasuries, and equities.  The equity portion of the 
portfolio (approximately 23% of the total Exchange Fund) is 
contracted out to a number of professional fund managers to 
invest globally according to guidance provided by the 
Exchange Fund Advisory Committee (EFAC). 
 
============================== 
HKMA's New Strategic Portfolio 
============================== 
 
¶5. (U) HKMA Chief Executive Joseph Yam announced to the 
Legislative Council on November 8 that HKMA had created a new 
third portfolio in the Exchange Fund, called the Strategic 
Portfolio.  The Strategic Portfolio currently holds only 
shares of HKEx, purchased in previous years for investment 
purposes and recently for strategic purposes by the Financial 
Secretary using the Exchange Fund.  Profits or losses from 
 
SIPDIS 
the Strategic Portfolio will reportedly not be included in 
HKMA's normal accounting reports. 
 
¶6. (SBU) In addition, HKMA Executive Director for Research 
Hans Genburg told Consulate officials that the HKMA Board has 
agreed to set aside a small part of the Exchange Fund that 
will be managed independently of the main body of the fund. 
This special fund is envisioned to not exceed 5% of total 
reserves.  This special fund will be managed by the reserve 
management department and will be invested in alternative 
investment vehicles, much like other Sovereign Wealth Funds, 
said Genburg. 
 
¶7.  (U) Through nine months of 2007, the Exchange Fund has 
already made record profits of over HKD 114 billion (US$14.7 
billion), easily surpassing the record of HKD 103.8 billion 
in 1999 and HKD 103.7 billion in 2006.  Yam cautioned that 
the year was not yet over and given the high degree of 
 
HONG KONG 00002827  002 OF 002 
 
 
volatility in the Hong Kong share market, there was room for 
backsliding.  Still, with 23% of the Exchange Fund invested 
in global equities, the prospects for a record year are good, 
even if Hong Kong stocks fall dramatically in the fourth 
quarter.   Hong Kong's total reserves stood at US$ 140.85 
billion at the end of September, including HKD 377.7 billion 
(US$ 48.75 billion) in fiscal reserves. 
Cunningham