VZCZCXRO1556
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHVC
DE RUEHHK #1712/01 2561130
ZNR UUUUU ZZH
R 121130Z SEP 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 5783
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 001712 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV HK CH
SUBJECT: PRO-BEIJING CHINESE PRESS IN HONG KONG BLAME U.S. 
INSTITUTIONAL INVESTORS FOR "EXPORTING SUBPRIME CRISIS" 
 
REF: A. HONG KONG 1679 
     ¶B. HONG KONG 1688 
 
¶1. Summary: Hong Kong's Hang Seng Index (HSI) closed slightly 
down on September 12 and lost almost 3 percent during the 
trading week.  Two local pro-Beijing newspapers blamed U.S. 
and other Western financial institutions for exacerbating 
recent downturns in global financial markets, as they 
liquidate foreign assets and retreat into their home markets. 
The dailies singled out the United States for "exporting its 
subprime crisis." Several Hong Kong financial institutions 
initiated efforts to boost their liquidity, fearing contagion 
from problems on Wall Street.  In his weekly column, Hong 
Kong Monetary Authority Chief Executive Joseph Yam explained 
that Hong Kong's mortgage market remained sound, due to 
prudent lending standards and the structural strength of the 
Hong Kong Mortgage Corporation (HKMC).  A former senior 
official at the HKMC urged Hong Kong monetary authorities to 
use turbulent global market conditions to boost Hong Kong's 
share of global bond issuances.  End summary. 
 
============================================= ============= 
Hang Seng Index Down 3 Percent For Week Ended September 12 
============================================= ============= 
 
¶2. The USG's decision to assume control over the operations 
of Fannie Mae and Freddie Mac pushed up the Hang Seng Index 
by 860 points on Monday (ref A), but the gains were wiped out 
in the following three days, as fund managers commenced a 
major sell-off (ref B).  On September 12, the HSI opened 44 
points higher, but got no support until it turned downward to 
19,158, an 18-month low.  The HSI closed at 19,352.90, down 
0.2 percent for the day.  The HSI declined 2.9 percent for 
the week and has dropped 30 percent thus far in 2008. 
 
HIBOR was quoted by Hang Seng Bank at 4:30 pm at 1.45 percent 
for overnight, 1.78 percent for one-month, 2.23 percent for 
three-months, and 2.50 percent for six-months. 
 
============================================= 
U.S. Institutions "Exporting Subprime Crisis" 
============================================= 
 
¶3. Two pro-Beijing dailies, Ta Kung Pao and Wen Wei Po, 
blamed U.S. institutional investors for "exporting the 
subprime (mortgage) crisis."  A September 12 editorial in Wen 
Wei Po said U.S. investment funds were cashing in their 
stocks and leaving Hong Kong, due to redemptions and other 
liquidity requirements in the United States.  The daily said 
their "dumping" of Mainland property, natural resource, and 
infrastructure stocks was creating "domino effects" in local 
markets.  The Wen Wei Po editorial said big local players in 
the Hong Kong stock market, who were formerly positive about 
China's economic situation and Hong Kong stocks, were forced 
to follow others and cut their holdings of shares traded on 
the Hang Seng. (Note: Tycoon Lee Shau-kee, Chairman of 
Henderson Land Development, recently admitted to the press 
that he has lost billions of Hong Kong dollars in his local 
shareholdings.) 
 
¶4. An editorial in the Ta Kung Pao daily on September 12 said 
foreign investment funds were dumping shares "in a crazy 
way," pushing the HSI lower.  A commentary in Ta Kung Pao 
warned local investors that foreign investment funds wanted 
to hold a greater proportion of cash, as a "global financial 
tsunami" might appear.  The newspaper criticized the 
withdrawal of cash by U.S. institutions from emerging 
markets, saying they were "exporting economic recession to 
the world." 
 
============================================= == 
Local Banks Seek to Boost Liquidity and Capital 
============================================= == 
 
¶5. Though some reports said the USG would consider rescuing 
Lehman Brothers from bankruptcy/liquidation as they did with 
Bear Stearns, investor confidence remained fragile, and 
bankers in Hong Kong started to exhibit signs of concern 
about liquidity.  Citigroup in Hong Kong placed a front-page 
advertisement in the Chinese language press (Hong Kong 
Economic Journal, September 10), saying it would offer 3.5 
percent annual interest on new Hong Kong dollar deposits. 
China Merchant Bank announced on September 12 that it would 
delay the acquisition of Wing Lung Bank from September 14 to 
October 27 and raise RMB 30 billion by issuing subordinated 
bonds to reinforce its capital base.  The Bank of East Asia 
took the lead this week to file court applications in Hong 
 
HONG KONG 00001712  002 OF 002 
 
 
Kong and the Mainland for the liquidation of Peace Mark, a 
locally-listed watch retailer with financial problems. 
 
============================================= === 
Senior Officials Highlight Hong Kong's Strengths 
============================================= === 
 
¶6. Responding to the poor market sentiment, Hong Kong 
Monetary Authority (HKMA) Chief Executive Joseph Yam sought 
to reassure Hong Kong investors that the problems of Fannie 
Mae and Freddie Mac would not appear in the Hong Kong 
Mortgage Corporation.  Yam said in his weekly column 
published on September 11, "Fannie Mae and Freddie Mac, with 
the help of numerous mortgage brokers, originates mortgages, 
in direct competition with the banks.  But the Hong Kong 
Mortgage Corporation does not directly originate mortgages. 
It buys mortgages from banks which want to obtain liquidity 
or reduce their exposure to mortgages.  Without competition 
from Government Sponsored Enterprises (GSE), and encouraged 
by supervisory requirements, banks in Hong Kong are able to 
maintain prudent underwriting standards, including notably 
the 70 percent loan-to-value ratio."  Yam noted that the Hong 
Kong Mortgage Corporation's (HKMC) role, operations and 
governance arrangements are very different from Fannie Mae 
and Freddie Mac. 
 
¶7. A former senior official of the HKMC, Philip Li, told 
television interviewers on September 12 that the current 
financial crisis has been developing into a confidence 
crisis, with bankers nervous and not be willing to offer 
three-month loans to each other.  According to Li, 
three-month HIBOR could no longer be treated as an indicator 
for interbank borrowings, as one week or two week interbank 
loans were long enough for many lenders.  Li, an expert in 
the debt issuance business, suggested the HKMA strengthen 
Hong Kong's role as a regional financial center by developing 
the Asian bond market, thereby providing global markets with 
needed liquidity.  He said the current financial crisis in 
the United States might provide a good opportunity for Hong 
Kong to gain a market niche in the global bond market. 
DONOVAN