VZCZCXRO8430
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHVC
DE RUEHHK #1679/01 2531008
ZNR UUUUU ZZH
R 091008Z SEP 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 5746
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 001679 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV HK CH
SUBJECT: HONG KONG FINANCIAL COMMUNITY REACTS POSITIVELY TO 
USG TAKEOVER OF FANNIE/FREDDIE 
 
¶1. Summary: Hong Kong's financial community responded 
positively to the USG's assumption of control over the 
operations of Fannie Mae and Freddie Mac, believing that the 
announced arrangement might stabilize the stock, property and 
credit markets in the U.S. over at least the short term.  The 
chief executives of both the Hong Kong and Macao monetary 
authorities fully supported the USG's move.  One respected 
local analyst, however, publicly cautioned against 
over-optimism, saying it is too early to determine the 
ultimate scale of losses at Fannie/Freddie; he advised the 
PRC government to reduce its holdings of U.S. Treasuries as 
soon as possible.  Following Wall Street's positive but 
uninspiring performance on September 8, the HSI fell 1.7 
percent as trading opened on September 9 and closed down 1.46 
percent for the day.  End summary. 
 
============================================= ============ 
Hong Kong and Macao Monetary Authorities Welcome USG Move 
============================================= ============ 
 
¶2. Hong Kong Monetary Authority Chief Executive Joseph Yam 
told RTHK (Chinese television channel) on September 8 that he 
supported the USG's assumption of control over Fannie Mae and 
Freddie Mac, because it could ease market stresses.  Yam 
called Washington's action "unusual" and "controversial," but 
he said it was a "must-do thing."  Yam said it was important 
that the USG reassured investors that it would continue to 
back the bonds issued by the two giant mortgage entities. 
 
¶3. Macao Monetary Authority Chairman Anselmo Teng told us 
September 8 that as a regulator, he thought the takeover was 
exactly the right thing to do, and that Secretary Paulson's 
explanations would likely calm Asian markets. 
 
=========================== 
Support From Local Media... 
=========================== 
 
¶4. An editorial in Pro-Beijing newspaper Ta Kung Pao stated 
on September 8 that the USG's actions over the weekend would 
help stabilize the share prices of the Mainland Chinese banks 
which hold large amounts of debt issued by Fannie Mae and 
Freddie Mac.  Ta Kung Pao said that as of the end of June 
2008, HSBC and the six key locally-listed Mainland Chinese 
banks collectively owned at least USD 42 billion of Fannie 
Mae and Freddie Mac debt.  Share prices of these seven banks, 
including Bank of China, China Construction Bank, Bank of 
Communications, and ICBC closed 3-6 percent higher on 
September 8, although they lost a portion of those gains on 
September 9 along with the declining broader market. 
 
=================================== 
...And From Hong Kong-Based Bankers 
=================================== 
 
¶5. Standard Chartered Bank Chief Executive Benjamin Hung 
called the USG's action "a boost to the capital markets," but 
he said credit would remain tight worldwide over the near 
term, and credit ratings institutions would remain cautious 
toward risk evaluation.  Hung told RTHK that it is still too 
early to say if the USG's latest moves will resolve the 
problems of Fannie Mae and Freddie Mac, and whether the worst 
of the sub-prime crisis has passed.  He echoed comments from 
other bankers who cited concerns about the rising U.S. 
unemployment rate, saying it might reduce U.S. consumers' 
purchasing power and negatively impact Hong Kong's exports. 
Hung believes that interest rates in the States would remain 
unchanged in the next few months, and that 3-month HIBOR is 
likely to stay at 2.2-2.3 percent. 
 
¶6. Lehman Brothers' Regional Strategist in Hong Kong, Paul 
Schulte, told RTHK that the potentially heavy USG borrowing 
related to the weekend moves could ultimately hurt the US 
dollar.  However, Schulte stated that the USG's action could 
reduce systemic default risk and improve the prospects of 
other financial assets. 
 
¶7. Bank of East Asia Chairman David Li said he hopes to see a 
rebound in the market value of various mortgage-related 
collateralized debt obligations (CDOs), as the USG attempts 
to resolve the problems of Fannie Mae and Freddie Mac.  Li 
told the Hong Kong Economic Journal on September 8 that 
several investment banks had recently approached Bank of East 
Asia to acquire its CDO assets, but their offers totaled only 
approximately 20 percent of the nominal value of the paper. 
Li refused to sell at that price, and Bank of East Asia hopes 
to now benefit from the USG's moves over the weekend, as the 
 
HONG KONG 00001679  002 OF 002 
 
 
value of mortgage-related CDOs improves. 
 
¶8. Other local Hong Kong bankers were also publicly 
supportive.  Margaret Leung, HSBC General Manager, praised 
the USG's actions with regard to Freddie/Fannie, but she told 
the Hong Kong Economic Journal on September 9 that Hong 
Kong's stock and property prices would likely not recover 
prior to a recovery of U.S. property prices.  She confirmed 
that the HSI has recently not experienced significant flows 
(in or out) of "hot money" from short term investors.  Hang 
Seng Bank General Manager and Head of Insurance and 
Investment Andrew Fung said the USG's action would prevent 
Fannie Mae and Freddie Mac from falling into bankruptcy, 
relieve the pressure on the US dollar and restore the 
confidence of foreign investors. Fung told RTHK the 
assumption of government control, however, could ultimately 
lead to a large financial burden for the USG. 
 
============================================= == 
Cautionary Note from Well-Known Local Economist 
============================================= == 
 
¶9. Former Morgan Stanley Chief Economist Andy Xie, a 
well-known commentator on market trends in Hong Kong, told 
the Oriental Daily News (Chinese language newspaper) on 
September 9 that any euphoria would be premature concerning 
the USG's assumption of control over Fannie/Freddie.  He said 
no one, including officials at the U.S. Treasury Department, 
knows how large the ultimate losses at Fannie/Freddie will 
become.  Fearing that the U.S. Federal Reserve is 
"psychologically unprepared" to raise rates sufficiently to 
halt growing inflationary pressures, he urged the PRC 
government to reduce its holdings of U.S. Treasuries as soon 
as possible. 
DONOVAN